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Posted by on Feb 20, 2009 in Economy, Politics, Society | 30 comments

My Rant

Since Rick Santelli and Virg Bernero have had their chance to rant – one from the right and one from the left – now it’s my turn to rant.

I’m angry. Our whole economy is and has been little short of an elaborate Ponzi scheme since the 1980s. We have generated very little “real wealth” in over 20 years, most of it based on increasingly deceptive financial instruments designed to spread the risk into dubious nooks and crannies of the shadow banking world. It all began with the Garn-St. Germain Act of 1982 that deregulated the S&L industry and let it compete with mutual funds. Despite the disaster that befell the S&L industry in the 1980s, the deregulatory activists in the Reagan Administration, the Fed and increasingly in Congress (among BOTH parties) spread the virus of easy credit to other sectors. Finally, we “unleashed the power” of our financial markets by repealing Glass-Steagal and discouraging the SEC from poking their noses into the derivatives market. With interest rates low, and income taxes cut, the party was on.

It was all a fraud.

The Dow is now back to its 2002 low – and in danger of its 1997 level. In fact, it is very close to the point it was when Fed Chairman warned about “irrational exuberance” in 1996 – 6436.

But think a little deeper about what’s going on.

Take a look at the Dow between the early 1980s and 2006. Do you really think that America has increased its net value by 14X between 1982 and now – all the while remaining relatively stable through the great growth decades after World War Two?

Dow timeline

Does this graph reasonably reflect the value of the major companies in the United States?

No. It has never seemed right. The only reason the DOW (and the S&P and other indices) jumped so steeply after the early 1980s was the arrival of new leveraging instruments – all of which were enabled and encouraged by the Spirit of Deregulation. Feeding this virtual engine was a vast array of pension funds and other institutional investors who bet the entire world economy on the full faith and credit of Wall Street. Undergirding this great “expansion” between the early 1980s and 2006 was…a house of cards.

With one small exception – the development of the internet and the resulting net gains in real productivity – the entire boom over the last 25 years has been based on the promise of other people to keep putting money in the market. As long as new people enter the market and lend – regardless of whether or not anybody is actually making anything – the system will keep enriching those at the top. For a long time, people in the middle got a taste of the good life too. McMansions sprouted up all across the suburbs as once-middle management schlubs could now afford to live and drive in high style.

And now, like Bernie Madoff and Robert Stanford, the Great Ponzi Scheme has collapsed.

The things that we once thought were worth a lot of money we now understand to be worth very little.

I don’t pretend to be prescient, but I’ve also sensed something amiss about the nature of our “wealth.” I grew up in Northern Virginia and watched as millions of homes were built way out in the suburbs. Why would people want to live out there? The dream of homeownership! I lived and rented in DC for a few years after college and loved it…but I couldn’t afford to buy anything there. I had to buy at some point, right? To get the mortgage-tax deduction! To get “real equity”! That’s what the “responsible people” did. Move way the hell out to Prince William or Stafford County and buy some modular dump made of balsa wood because it would be worth something after a few years – never mind the fact that everybody wanted a new construction house and the quality of the homes was so poor that existing-home sales could never keep up.

Following on the exurban sprawl was the arrival of big box retailers and SUVs to carry absurd amounts of toilet paper and microwave popcorn from the Costco to the storage room in the house next to neighbors that nobody knew. It was the American dream!

Actually, it was a fake world of commercialism that fed on its own delusions. People “needed” all the things they saw on HGTV for their foyer. People “needed” all those flat-screen televisions and fancy cars. All you needed was some jive job at some office where you entered numbers in a spreadsheet and ran a bunch of calculations for some company that moved a lot of other people’s fake money around. Good times.

The reason why I think people like Rick Santelli are frauds is that they think if everybody just “took their medicine” and the government stopped “picking winners and losers,” the Great Free Market would return and lift all boats again. It won’t. The Great Free Market that enriched people like Rick Santelli for the last few decades was based on paper wealth built on phony instruments that made any “real” valuation impossible.

Rick Santelli gives his faux-populism rant but this is who he really is (from CNBC):

A veteran trader and financial executive, Santelli has provided live reports on the markets in print and on local and national radio and television. He joined CNBC from the Institutional Financial Futures and Options at Sanwa Futures, L.L.C. There, he was a vice president handling institutional trading and hedge accounts for a variety of futures related products.

Prior to that, Santelli worked as vice president of Institutional Futures and Options at Rand Financial Services, Inc., served as managing director at the Derivative Products Group of Geldermann, Inc., and was Vice President in charge of Interest Rate Futures and Options at the Chicago Board of Trade for Drexel, Burnham, Lambert. Santelli began his career in 1979 as a trader and order filler at the Chicago Mercantile Exchange in a variety of markets including gold, lumber, CD’s, T-bills, foreign currencies and livestock.

That’s right, Rick Santelli made his wealth trading in the shadow world – financial futures, derivatives and hedge funds. He is not “real America.” He made money by moving other people’s money. And now he tells us that President Obama is unfairly taking his hard-earned tax dollars and giving it to the “losers” who got foreclosed on? People like Rick Santelli built this bogus wealth world and people like Rick Santelli destroyed it. The poor fools who watch him on CNBC and channel his faux-populism are just collateral damage.

I have no idea what will get us out of this mess. I think we are still far too leveraged and housing prices will have to keep coming down. I can only hope that at that point we can start investing in real, exportable products like green energy or biotechnology and not useless financial instruments. At the very least, I know that the Big Party that began in 1983 is over and will not be revived for a long time. Rick Santelli can hold his Tea Party and his Brooks Brothers Riot with the other Gatsbys of today. The rest of us “losers” will plod on in the real world.


Let me make a few corrections to my late-night rant, thanks to the astute commenters below.

1) The chart inaccurately portrays stock market growth in the 1950s. It should be logarithmic. Point taken. Here is a more accurate graph from Mikkel’s link.

Dow growth

But Mikkel’s point about debt driving the 1980s/90s jump and real wage growth and productivity gains driving the 1950s/60s increase holds true.

2) On a related matter, Austin Roth notes that there WERE real productivity and GDP gains between 1982 and 2000, though there were very few between 2000 and 2007. That is true to an extent – telecommunications, IT and other newer industries, combined with a freer trade network overseas (post-Communism particularly) opened up real gains. But did those GDP gains match the stock market gains? Don Quijote points out that GDP grew fourfold between 1980 and 2000 while the S&P grew 10-fold. The reason for the disconnect is clearly the increasingly leveraged nature of equities markets.

3) DaGoat says I made an ad hominem attack on Santelli unrelated to his point about bailing out the undeserved. The reason I went there was that Santelli made a gross generalization in attacking foreclosed homeowners as “losers.” Yes, there are people who made stupid decisions to buy homes they could not afford. But there are also many, many people who got foreclosed on because they lost their jobs in this recession and their prime mortgaged homes have now fallen underwater because of the decisions by myriad other people. Those people do not deserve to be called “losers” by somebody who made his living in the very markets that encouraged sub-prime lending and securitizing. It’s the false-populism from Santelli that irks me more than anything else.