This past week, the great and famous Alan Greenspan came perilously close to committing what is probably the most cardinal of sins among the Masters of the Universe: he very nearly admitted that the models were wrong.
Instead, he took the easy way out and tried to explain it away as saying that the wrong data had been keyed into the models. Very funny, this matter of reducing to a mere clerical error the matter of crashing viturally the entire global economy. (Maybe his inspiration for saying it that way came from the movie “Brazil”?)
What Greenspan and Bernanke and Paulson have done is no less an act of wanton cluelessness than repeating the by now well-known “success” of LTCM, only this time with the fortunes of whole countries up in the air instead of the well-being of just one measley little holding firm staffed by snotty know-it-alls who didn’t, and with similar results.
Simulations & models can be very useful in terms of figuring likely subsequent scenarios, but /only/ when the models are constantly tuned and tweaked to keep them as accurate as possible ~ and when the users realize that reality has the upper hand in deciding what happens next. A really good model will sometimes show odd behavior that has a pseudo-randomness about it often seen in the real world, such as the behavior and trajectory of a flock of birds cavorting above the rubble of a cleared cornfield. By replaying the action on a low level and forensically applying game-theory math methods, it is possible to work out a set of rules for some of the obverved flock-bevior issues.
What’s happening now is a sharp break from the predictive models used in finance & treasury. The flock has just taken off (or landed) unexpectedly. Despite a cheapening of motor fuel, people are not rushing out to buy guzzlers. Despite ridiculously low interest rates, people are generally not enticed to buy things on debt right now, at least not at the frenzied levels of purchasing activity seen back in 2004-2005. Instead of living for the moment, people are hanging onto more of their money in apparent anticipation of possible rainy days approaching.
What our grid-modeling overlords never apparently took into account was any fluctuation in (much less outright reversal of) the willingness on the part of people to whoop it up, on credit or cash, whenever the opportunity presents itself. The great spending pullback now visible today in fact began sometime back in 2007, but was not commented on as such except on the more asute blogs like the HBB. (Ben, you are the Man ~ kudos!) In terms of sales trends for big-ticket items (houses and cars) it was visible even before then. Again, it was amply covered on the HBB.
As full of bullshit as ever, Alan Greenspan is trying to palm off the fiction of the establishment’s very-faulty models as being a matter of the data put into them and not the models themselves. The truth in the matter is that guaranteed returns are a myth. Larger events and trends are not really modelable in any sense of the word. (Or if you prefer the simpler form of this rule, Shit Happens.)
What Greenie apparently said, back in the heyday of the bubble, was that every investor could put one buck in and get two bucks out, as reliably as the spinning of a planet, all due to the magic of prosperity. The less gullible among us will of course know this is a fiction ~ because after all, the system is more like a poker game, with money flowing from the less-skilled or less-lucky to their betters ~ but we know well our minority position in the game, and avert our eyes when we hear standard NAR lines like “real estate always goes up” etc.
But now an even deeper and more noteworthy event has occured: ordinary people are getting a very personal lesson in the poker-game nature of the stock market as they see their life savings in 401(k) accounts evaporate by double-digit percentages ever quarter. Had we stuck to the old system of company pensions, this lesson might have been lost on most people, but no, our “free market uber alles” leaders said to just put everything into the market and count on unfettered greed-is-good capitalism to set free all that latent value.
Some free market. All you can say about its “distance” (haha) from government now is that it generally asks for less freebie bailout money when the bubbles are expanding madly, and always asks for it when things are going down. The relationship of the free-market-espousing protagonists to bailout desperation is the same as the obnoxious lifeguard coach telling everyone on the cruise ship to ignore their life vests, but then shrieks like a cheerleader to be tossed a lifejacket as soon as he falls overboard.
Considering the nature of this lesson about the free markets, now being given to people everywhere, it’s worth wondering where people will put their savings in the coming months and years. How much smaller would the market be if 401(k) accounts went common to uncommon over the next two years? Will it go into paying down existing debts and then scrupulously avoiding any further entanglements with debt? Will it go into certain classes of, ahh, non-standard investment vehicles, some of which get discussed here?
One of my deep moles at an un-named major credit card company told me last week that people in general have switched to charging far less and paying down their balances far more slowly. Interesting stuff .. meaning that the debt load exposure is being capped by many, and people would rather pay a balance interest penalty just to remain cash-heavier in the short term.
One thing is clear from this: the private prison industry will be booming the next few years from the cost of institutionalizing all the obviously guilty players in this giant financial sh!tstorm of a mess. That for instance that one guy, already known to the FBI, who said in an email something like “Let’s hope we’re long gone before this scam is discovered”. He, and perhaps another hundred thousand like him, will be turned into examples. Personally I hope the perp gets a small cell with a really big ethnic guy in it called “Bubba”.
There were many that committed crimes like this and left a paper trail that even Helen Keller could follow. Look at the string of prosecutions in the mortgage-fraud racket in Florida. The enforcement organs are now under enormous pressure to look like they’re hunting down bozo fraudsters like that. It will of course need to be a very public affair. Maybe America’s Most Wanted will spin off a sub-show specializing in mortgage fraud or investment fraud. Folks will be encouraged to report who was wallowing in cash, bimbos, and new Porches back in 2003-2006 and who’s now trying to lay low.
Meanwhile, let’s enjoy the sights and note the events. It’s not often that you see such a collapse of such a large socio-economic edifice as the Infallibility of Investment coupled with the end of the Nonstop Shopping Lifestyle.