The Lesson of Piltown Man
During the height of the panic over Wall Street that led to the bailouts, TARP and the rest, I had the good sense to say on several occasions that while the details of the crisis were beyond the grasp of my personal ability to understand economics and finance that "either this was a monumental failure of the capital market system or the greatest hoax since Piltown Man." After all the estimated value of the shadow banking industry and its various instruments was set at a number close to the GDP of the entire planet for a year. And since it was generally agreed that these instruments had little "mark to market" value then one could ipso facto conclude that the crisis was gargantuan. I confess my caveat that it could all be a hoax was more intended to support my notion that the crisis was profound than to offer an actual alternative explanation. However I am too long in the tooth to ever completely discard the possibility that I am being duped. No great insight here of course. Recent political history makes it a droll disclaimer.
There were loose threads to the story of course and third and fourth and fifth explanations that had merit. Today I came across this summary by Mike Whitney: Lehman Died So TARP and AIG Might Live. Whitney asserts:
Lehman was a planned demolition (most likely) concocted by ex-Goldman Sachs CEO Henry Paulson, who wanted to create a financial 9-11 to scare Congress into complying with his demands for $700 billion in emergency funding (TARP) for underwater US banking behemoths. The whole incident reeks of conflict of interest, corruption, and blackmail.The details of this conclusion can be found in the article. That is not the subject of this post. My subject is about the sobering thought that in the end it could actually all be a hoax. Little stands between me and this possibility except a Liberal Arts degree from Harvard (Barnie Frank) and an undergraduate diploma in English Literature (Chris Dodd.)
A few weeks ago Paul Krugman wrote an eight page op-ed in the NYT in which he tried to describe an explanation for why economists had so totally missed the largest downturn since the Great Depression. It is somewhat contrite in tone. The op-ed meanders around the subject with just enough inside baseball references to give it the tack of substantiality but after reading it I was left without a clue as to what was his point. I am temped to say it was something along the lines of "Well Economics is unreliable but we have already printed the class schedule so we might as well continue to teach the courses. And we don't want to just add to the unemployment problem." Toward the end of his op-ed, Krugman speaks about "salt water" economists and "fresh water" economists. I did take away from this that even the most notable experts in a field like Economics or Anthropology must reduce the blizzard of details to some simple formulation for the purposes of understanding and communication. The danger of course is that "the devil is in the details."
For me then the devil has the upper hand. As someone not erudite in these fields, I can at least imitate this one practice of the cognoscente and contrive a simple formulation. To wit: This economic crisis of our time may be profound or it may be a hoax. Either way I'm screwed and should concern myself with solving the problems of my nano-economic world. I wonder how much Powell's Books will give me for my copy of William Greider's "Secrets Of The Temple"?
I had not thought of Piltdown for a long time. The creator of Sherlock Holmes was involved in much of the fraud pretending that they had found the missing link.
Of course we have found the missing link. He was our Commander-in-Chief for eight years.
Well Twain and others by the end of the 19th century and the beginning of the 20th had no trust in the science of archeology.
And we have yet to get a good CSI explanation of how our economy crashed even though Krugman and our Reich have both been fighting the good fight from the outside.
Fun post on a less than fun subject.
September 15, 2009 7:00 PM | Reply | Permalink
Ida would take offense to be compared to W.
http://news.nationalgeographic.com/news/2009/05/090519-ida-primate-fossil-link.html
September 15, 2009 7:04 PM | Reply | Permalink
Poor Ida has bigger problems than that:
No disributor for Charles Darwin movie.
September 15, 2009 7:37 PM | Reply | Permalink
Larry Kent covered this on Rachel Maddow's show last night -
funny and depressing at the same time
http://www.msnbc.msn.com/id/26315908/#32850897
September 15, 2009 7:53 PM | Reply | Permalink
Christ, what a miserable situation. Really? Only 37% believe in evolution? Does that mean 63% haven't evolved at all?
September 15, 2009 8:52 PM | Reply | Permalink
the evolutionary challenged?
then again, may be that homo sapien sapien has evolved into branches - maybe homo sapien progressive and homo sapien duh...
September 15, 2009 9:17 PM | Reply | Permalink
Narly two-thirds of our people have been Left Behind!
September 16, 2009 3:07 AM | Reply | Permalink
Gee DD, I thought Addison Graves Wilson was the missing link. Of course, there's no rule saying there can be only one. We could call the The Missing Links and make them into a comedy review... if they are trainable.
September 16, 2009 11:03 AM | Reply | Permalink
I do miss Powell's.
September 15, 2009 7:01 PM | Reply | Permalink
I don't know. That damn place takes 50$ every time I walk in the door.
September 16, 2009 3:20 AM | Reply | Permalink
Rather than it being between a conspiracy or no conspiracy (since any hoax of this magnitude is going to take some serious conspiring), it was more likely the convulence of a large number of small conspiracies, overlapping and butting into one another, enhancing and undermining each other, any particular individual a willing participant in one and a dupe in two others, the outcomes unfolding and cascading, with the echo of "the fundamentals of our economy are sound" still reverberating over the seemingly chaotic ripples.
September 15, 2009 7:09 PM | Reply | Permalink
My take-away is this: It's the bubbles, stupid!
Betting on bubbles and giving them value and worth when they are naught but concoctions, is stupid.
Watching BofA swallow Merrill Lynch has made me wonder about so much more than swallowing bubbles, and the brain farts that therein may result.
Watching Obama hire the same people responsible for our financial meltdown has made me extremely gaseous.
Good thing we're all not sitting in the midst of a bubble bath, eh?
September 15, 2009 7:12 PM | Reply | Permalink
tiny bubbles!
http://www.youtube.com/watch?v=nVK5-76DItY
September 15, 2009 7:20 PM | Reply | Permalink
LOL!
Okay, if one more person here sends me a music link.....
....I'm gonna play it.
AND dance to it.
September 15, 2009 7:23 PM | Reply | Permalink
http://www.youtube.com/watch?v=S3to-I3qpeY
September 15, 2009 8:03 PM | Reply | Permalink
http://www.youtube.com/watch?v=6LowkSzt9xY
September 15, 2009 9:05 PM | Reply | Permalink
Remember Lis that thanks to Q I have a prodigious excess of celery. In fact my small apartment full of the stuff. It's hard to sleep on. So if you need a little more fibre in your diet, I'm your man.
September 15, 2009 7:51 PM | Reply | Permalink
I think I'm unclear on whether you are thinking the whole crisis was a hoax, or just Paulson's and Bernanke's solution for dealing with it. In the article you referred to, I didn't read that the whole meltdown was a hoax, just the method for how it should have been handled, meaning TARP for banks or something that would have worked better for less money.
The Fed did, however, guarantee the money market within a couple of days after its shares fell below $1.00, but before TARP passed, I think.
September 15, 2009 9:45 PM | Reply | Permalink
Ooops, the above was supposed to be a stand-alone comment and the below was supposed to be your solution to your celery crisis:
LisB just handed you the answer to your celery problem, Larry! We need to create a better market in celery, let it bubble and sell before the bubble bursts. Should be easy to do because celery is a necessity, like housing but unlike tulips, and thus subject to propaganda on its real value. If we miss our target, we can apply to the fed for a bailout.
:-)
September 15, 2009 9:50 PM | Reply | Permalink
The banks are insolvent. Of that I am certain. So there is a problem. I think Whitney's case is that it is solvable without the apocalyptic response but Bernanke et al used it instead to save their interests (Goldman Sacks and its accomplices) and let the collapse fall on others. My point is it is beyond me to know any more and prudence suggests I focus my efforts on what is salvageable which regrettably does not seem to be much.
September 15, 2009 11:17 PM | Reply | Permalink
I'll have to google Piltdown. I used to have a lot of trust in Krugman; then he was invited to the Whit House, and now he sings a different tune. Would have loved to be a fly on THAT wall!
It seems clear that Paulson let Lehman die due to personal vendetta. It is so strange to listen, one year later, to the revisionist history of the meltdown. There IS NO transparency about AIG, Fannie and Freddie. Elizabeth Warren and Sheila Bair skirmish with the White House and Fed and Treasury continually. I would guess that the Congressional Leaders called in to meet with Bernanke and Paulson (it was Bernanke by then, wasn't it?) might know less than YOU do about the financial system. And even the alleged Good Guys claiming they want reform STILL don't want to break up the Giant Banks, separate commercial from investment banks, require adequate capitalization, etc. Unless there are televised Pecora-like Commissions, the public will not demand regulation, and We Taxpayers Are Screwed. Even (ahem) allegedly benign organizations like US chamber of commerce are opposing the most modest regulations.
Thanks for addressing this; I have wanted to, acamus, and don't have the time.
September 15, 2009 7:19 PM | Reply | Permalink
Bugger all! Thanks, larry, I meant.
September 15, 2009 7:20 PM | Reply | Permalink
There is a good article somewhat on point by Glenn Greenwald, entitled: Who are the undeserving "others" benefiting from expanded government actions?
"The people who win whenever the federal government expands its power are the ones who, through their massive resources and lobbyists armies, control what the government does: the richest and most powerful corporations. And yet -- in an extreme paradox --those are the people who are venerated by the Right: they simultaneously spew rage at what's happening in Washington while revering and defending the interests of the oligarchs who are most responsible.
It wasn't the poor or illegal immigrants who were the beneficiaries of the Wall St. bailout; it was the investment banks which, not even a year later, are wallowing in record profits and bonuses thanks to massive taxpayer-funded welfare. The endlessly expanding (and secret) balance sheet of the Federal Reserve isn't going to fund midnight basketball programs or health care for Mexican immigrants but is enabling extreme profiteering by the very people who, just a year ago, almost brought the global economic system to full-scale collapse. Our endless wars and always-expanding Surveillance State -- fueled by constant fear-mongering campaigns against the Latest Scary Enemy -- keep the National Security corporations drowning in profits, paid for by middle-class taxes. And even health-care reform -- which supposedly began with anger over extreme insurance company profiteering at the expense of people's health -- will be an enormous boon to that same industry, as tens of millions of people are forced by the Government to become their customers with the central mechanism to control costs (the public option) blocked by that same industry. That's why those industries are enthusiastically in favor of reform: because, as always, they will benefit massively from it."
For the complete essay, click here.
ex animo
davidfarrar
September 15, 2009 7:21 PM | Reply | Permalink
I'm going all stream of consciousness here. Like
DickDay I hadn't thought of the Piltdown man in ages: almost since I invented him.
But what I was really reminded of was PT Barnum, huckster extraordinaire, who before he went into the circus business had a "museum" in NYC. He learned a lesson--don't make your exhibits too attractive or the suckers (you know, one born every minute) won't leave and make room for new suckers. So he reportedly had a a sign or series of signs prominently posted saying "This way to the egress," finally a closed door with a sign, "THE EGRESS" Through the door, and one was out on the street.
Not entirely unlike economics, I guess. Nice Post.
September 15, 2009 7:45 PM | Reply | Permalink
Except they've figured how to put in a egress utilization fee as well as a street usage fee that will appear on your next statement.
September 15, 2009 8:07 PM | Reply | Permalink
This is strange, amike. Earlier I was thinking of San Francisco due to 1849's blog, and one of the things I was remembering was the old Sutro Baths out by the Cliff House, which burned to the ground in 1966.
http://en.wikipedia.org/wiki/Sutro_Baths
Among the losses was the exhibits from P.T. Barnum's collections that you speak of. And they weren't all that attractive either. I remember the mummified mermaid - quite piltdownish - half a monkey sewed onto half a fish. The featured display was Tom Thumb's wardrobe. What a loss - part of Americana we have forgotten. P.T. acquired many of these "curios" after the decline of American Burlesque Theater. In it's heyday, the Burlesque Theaters sported curio museums in the foyers - part of the entertainment package. They were the direct ancestor of the amusement park, as well as the comic strip.
September 15, 2009 9:19 PM | Reply | Permalink
I was sitting up on Mt. Tam drinking wine the afternoon that Sutro Baths burned down, a Sunday I think. It was a clear day and it sent a plume of smoke almost as high as where we were lounging. We knew instantly what was burning. It had closed by then and was scheduled for demolition so I always thought it was arson since it was sitting on cliffs and the demolition job would have been a bear.
I remember all the tawdry exhibits you recall too. The nickelodeons were pretty special. You are right about it being a real loss of history, like the Fox theater on Market St.
September 15, 2009 11:25 PM | Reply | Permalink
I had completely forgotten about the Fox - what a magnificent place. I saw the SF premier of Lawrence of Arabia there. At the intermission everyone was dying of thirst, but all the drinking fountains were shut off with "out of order" signs on them. But they were selling orange juice at a dollar a glass - big money in 1961.
And Playland...
September 16, 2009 1:13 AM | Reply | Permalink
Ah yes . . .
The Cliff House, the baths and the USS San Francisco Memorial at Lands End.
We make a yearly trip to the memorial in memory of those who served and died aboard the ship as fellow sailors, Marines and shipmates of my Father who was ships company from 1936 until 3 months before my birth in 1946. It truly is hallowed ground. It is the only place I ever saw my Father totally breakdown.
~OGD~
September 16, 2009 4:10 AM | Reply | Permalink
From the very beginning, I did not understand a dang thing about this economic disaster. There were a thousand explanations. There were a thousand predictions. I understood nothing except what I could actually see happening to the people around me, losing jobs, homes, businesses. Not the big guys this was happening to. Just the little guys.
A year later, nobody was right....yet nobody was wrong, either.
I still don't get it.
It shouldn't be that hard to figure out, should it, Larry? I mean, shouldn't the experts have figured out what happened and printed out an explanation in plain English to the great unwashed?
Maybe there aren't really any economic experts.
Maybe it was a hoax.
September 15, 2009 8:05 PM | Reply | Permalink
Well, I listened to this guy tonight on Marketplace.
At fiirst I was cursing a blur streak, and then I really listened to what he was saying:
Scam? Oh yez. Oh yez indeed. Seems to me if anti-trust laws were less concerned with intention and more geared to results, there would be less opportunity for this crrrap.
September 15, 2009 8:19 PM | Reply | Permalink
Krugman's piece was an embarrassment. It said nothing. That US economics got narrowed down to salt water vs fresh water pinheads is bad enough, between them they cover about 3% of the landscape, but then for Krugman to eat up ink describing the difference as though they're SIGNIFICANT?
He's got his trophy now. Time to hit the pasture. See ya, Paul.
September 15, 2009 8:34 PM | Reply | Permalink
But now we get to see him on This Week with George Snuffle-upagous. Remind us why we care what Krugman has to say about Beltway Politics? Shite.
September 15, 2009 9:09 PM | Reply | Permalink
I can safely say that it wasn't a hoax. Iceland doesn't go overnight bankrupt over a hoax.
The road to ruin was long and clear and anyone could see the essential real estate bubble. There were certain sanguine minds, such as Buffet, who actively pointed out the instrument that exploited the bubble: derivatives. Buffet's businesses assiduously avoided derivatives.
The entire story is there in all its detail. The fact that Krugman has a fuzzy recall says more about him than I would like to admit.
The collapses were quite real, and we are still pouring trillions down the rabbit hole. AIG is still soaking up money, foreclosures are continuing to generate toxic derivatives that are piling up unpaid IOUs, and Fanny/Freddie are still a 200 billion dollar stewardship experiment.
I think the Piltdown Man aspect are the derivatives combined with the rating agencies that polished trillions of dollars of turds. That this hoax was perpetrated with only a handful pointing out the absurdity of insuring what you don't own (with a counter hedge against your insurance on what you don't own) is the real story.
That and reapected liberals like Frank and Dodd kissing Wall Street ass during the panic.
September 15, 2009 8:35 PM | Reply | Permalink
I highly rec your comment. The causes of the crisis have not been addressed. In fact, what has been done by Paulson, Bernanke, Geithner, Summers, et.al. have exacerbated it. Hoover was perhaps a fool in how he dealt with the depression, but he was patriot enough not to turn the keys of the nation over to a bunch of private bankers and financiers who caused that collapse. Which is what we have done. Its been a long process of about 40 years in destroying the regulatory framework created in the 30's to rein in the depravations private capital gone amok and free trade.
Whereas FDR or a reasonable modern facsimile of him would have used the precedents of the past to freeze foreclosures, used the FDIC (pumped up on steroids) to put the insolvent banks thru bankruptcy proceedings and reinstated Glass Steagal, instead we've printed up $24 Trillion out of thin air and given it to these mofos. We've essentially given away our national sovereignty and mortgaged our future on a gambit that will not work; no, is guaranteed not to work, at least not in the national interest and only in the very short term for the financial oligarchy. Their system is still bankrupt and cannot be bailed out because the bad paper is still orders of magnitude beyond that mere $24 trillion. Think Weimar Germany printing money to pay the Versailles reparations. We have been duped into paying reparations to the oligarchical owners of the vast rigged casino who created the problem. Tragic, treasonous stupidity of almost unimaginable proportions and ramifications.
Obama actually thinks the worst is behind us, or so he has been convinced by his incompetent economic advisors. The worst, much worse, is yet to come. Volker at least shows he has some grasp of the problem, but he has been shunted to the side. Its hard to see how the world will avoid a systemic collapse of the entire world monetary edifice with such compromised dunderheads running the show.
September 16, 2009 12:32 AM | Reply | Permalink
What really bothers me is that the insurance these major players bought was to cover the failure of something that can be set up to fail! When there are gorillas like the ones we have now throwing millions of dollars from one fund or another at or away from an entity, those funds have extraordinary influence. What is to say they did not, or would not, faciliate a collapse? Someone knew the turds were being polished. Either this was a set-up, or the natural revelation of Wall Street's competitive tendency, to tell bold face lies to their fellow investors and sell them crap, but they were all doing it at once? They generated, or degenerated into a circular firing squad?
September 16, 2009 3:17 AM | Reply | Permalink
Of course Krugman the Bastard leaves out the one school who predicted that Greenspan's free-money policies would cause a bubble and a collapse - the "no water" economists (aka the Austrian School).
The source of this disaster was the easy money policies of the 2000s, and the fact that we never let the recession of 2000-2001 take its course.
(Austrian economics is the "no water" school because one of its biggest proponents, Murray Rothbard, taught at the University of Las Vegas, in the desert - the "fresh water" economics refers to the Chicago school (on Lake Michigan) and "salt water" to the Keynesian school (located in Boston). For a deeper explanation, read here.)
September 16, 2009 12:38 AM | Reply | Permalink
Piltdown Man - a paleontological hoax, consisting of the lower jawbone of an orangutan that had been deliberately combined with the skull of a fully developed modern human, presented as the evolutionary missing link between ape and man.
Financial Crisis 2008 - a financial hoax, consisting of collateralized debt obligations in which risk and uncertainty about the value of the underlying assets within the financial vehicle were far more toxic than what the rating told and were sold as secured finanical instruments to the public.
Yeah ... I'll by your comparison.
September 16, 2009 8:07 AM | Reply | Permalink
If all economists were laid end to end, they would not reach a conclusion.
- George Bernard Shaw
Irish dramatist & socialist (1856 - 1950)
September 16, 2009 10:59 AM | Reply | Permalink
Speaking of fossils, I don't understand why oil isn't cited as a big factor in the meltdown? I'm challenged as a economist, but I'm an expert oil conspiratorialist. Ha. It just seems that the "money" lying around to lend to banks in order to help them exceed their capital base 10x and more came from the upward spiraling price of crude during the Bush years. Am I wrong? OPEC and Greenspan both said during this period that traders were driving up the oil prices. An excess of Petrobucks floating around seems to be toxic for the world's economy. Didn't we learn anything in the 70s and early 80s?
Seriously, I think my idea is wrong, but I don't know why.
September 16, 2009 11:07 AM | Reply | Permalink
It's not.
Please feel free to correct my history here, but the rapid rise in oil prices began roughly WHEN the FED opened the discount window in 2007, as the first hints of the disaster began to stir. Soon after, oil and food commodity prices began to skyrocket, while the bottom fell out of the housing market.
Prices continued to go up until Lehman when bankrupt. Then, when there was no longer any gambling money left lying around, the prices on "peak" oil collapsed.
September 16, 2009 11:41 AM | Reply | Permalink
In the end, it was the middle class that was strangled by the oil prices. The yuppies with their distant suburban homes, young families, and SUVs could not keep up with having their fuel costs in a gas hog double and triple. ITheir budgets imploded. EVERYTHING cost more because every aspect of the economy depends on fuel, even food.
September 16, 2009 1:20 PM | Reply | Permalink
It was more than just yuppies... it was Venezula, Russia, and Iran that suffered as well.
September 16, 2009 2:45 PM | Reply | Permalink
I think gross incompetence and miscalculation are far more likely to be at the bottom of this particular well than some diabolically brilliant plot. If Hank Paulson had the brains people seem to want to ascribe to him, we'd've been lucky for it.
September 16, 2009 12:52 PM | Reply | Permalink
If it was a hoax, why not wait till after the election? The meltdown put Obama from behind to ahead of McCain, McCain never recovered, his 'canceling his campaign to save the economy' notwithstanding. If you look over Mike Whitney's stuff he is a bit out there in his theories.
Agree that gross incompetence was involved, joining a prolific list of similar failures by the Bush administration. The greed to kill Lehman to benefit Goldman was just knee jerk reaction to a Republican like Paulsen, who likely couldn't resist doing it regardless of the effect on the broader economy or McCain.
The delicious irony is that the death of Reaganism, represented by the catastrophic result of Republican deregulation policies, and 'unfettered capitalism' that the Wall Street collapse embodied, came while George W. was still in office to top off his 8 years of ignominy by putting his stamp on it all and to personally send the Republican Party into the wilderness with a one way ticket.
September 16, 2009 6:15 PM | Reply | Permalink
http://seekingalpha.com/article/160619-the-coming-consequences-of-banking-fraud?source=article_sb_popular
September 16, 2009 1:41 PM | Reply | Permalink