Middle Israel: What is Wall Street telling America?

The Protestant ethic of financial prudence is screaming from the bowels of Ground Zero.

By AMOTZ ASA-EL
amotz asa el 88 (photo credit: )
amotz asa el 88
(photo credit: )
At this writing, Wall Street is ablaze. What began a year ago with a crisis in a little-known corner of the housing market has since mushroomed into major mayhem. Last week this produced the bailouts of two major mortgage banks, and this week, in what looked like a metastasizing germ, it spread to the thick of the financial industry. There, it plagued venerable investment banks Lehman Brothers and Merrill Lynch and mega-insurer AIG, as hundreds of bankers, accountants and lawyers spent the weekend in their Manhattan skyscrapers, never turning off the lights. Clearly, something larger than all of them combined is well under way, and it isn't pretty. In fact, what Wall Street is experiencing these days is but an extension of America's post-9/11 perplexity. WHEN THEY arrived in the US as the Civil War approached, the Bavarian Jewish Lehman brothers had no reason to believe they would give rise to a major investment bank, or that one of them would give birth to a future New York governor and US senator. Even so, such speculation would have sounded less outlandish than the thought that their firm would some day generate history's worst bankruptcy and shock the world. Some, of course, would say that this is but another aftermath of Jewish money's intricate ways, in this case a plutocratic octopus that emerged haphazardly from a dry-goods store in Alabama that morphed into a cotton brokerage that represented Southern traders in New York. Middle Israelis won't bother with these charges, other than to remind those making them that it's been 40 years since a Lehman headed Lehman Brothers. If anything, Lehman was a symbol of caution and wisdom, unlike Bear Sterns, the investment bank that had a reputation for adventurism before it went under in the spring. And Lehman was also certainly no Fannie Mae or Freddie Mac, the mortgage financing institutions that were semi-governmental and, for better or worse, tied by the umbilical cord to the American housing industry. In fact, Lehman's collapse is so odd that some ascribe it to the role of the individual, fingering its longtime chairman Richard Fuld. The charismatic banker who had restored Lehman's independence after its purchase last decade by American Express was now too slow to respond to the rapidly unfolding events. Had Fuld been agile enough, goes this critique, he would have done what his peers at Merrill Lynch did, and allowed a takeover when Lehman still had viable suitors. Others point to poor timing and bad luck. Had Lehman's collapse taken place several months earlier, it may have been bailed out by the government, the way Bear Sterns and the two mortgage banks were. Still, such apologetics would not explain why the collapse happened in the first place, why it is so sweeping and simultaneous and, most importantly, what it means in terms of where America is coming from and going to. Technically, the eye of the storm is in the housing market. What began in the subprime markets, the part of the American housing sector that offered long-term loans to lenders that the established banks found lacking repayment ability, soon proved to have involved many more people, institutions and dollars than was initially assumed. This meant that the original demand had been unnaturally high, because many people who were buying houses actually could not afford them and soon began to falter on their mortgages. The more this market failure unfolded, the more demand for housing dropped and supply rose, as defaulting buyers were being evicted and their homes boarded up and put on sale. Last year this added up to 1.3 million foreclosure procedures, and nearly $0.5 trillion in lost debts for assorted financial institutions, both within and beyond the US. This meant that even institutions that did not extend one penny of a subprime loan, like Lehman, were nonetheless affected, as they were shoulder deep in the housing market; hence the series of institutional dramas to which we were witness in recent weeks. And yet, there was more at play here than merely one bad moment in one wild industry. FOLLOWING 9/11, the Bush administration's challenge was twofold: strategic and economic. Economically, the supreme aim was to prevent the kind of negative mood, and consequent recession, that such external blows are prone to cause. This was delivered superbly by Federal Reserve chairman Alan Greenspan, who gradually reduced interest rates that fall from 3.5 percent to 1.75%, a 40-year low that indeed prevented a recession. However, the strategic choice at the same time was to wage two wars, and they demanded money, a lot of money, money that even mighty America did not have. Fighting was, of course, a justified and plausible choice, but the thought that it could be done quickly, cheaply and without demanding sacrifices from the people was absurd. Yet the Bush administration nurtured among the people a general attitude of business as usual. That is why Bush cut taxes while he refrained from cutting spending, a sure recipe for ballooning deficits under any circumstances, but even more so at a time of war. That is also why Greenspan in '04 ignored signs that the economy was overheating, and instead of raising rates to reverse the macro-economic trend, he cut them further, all the way down to 1%. And so Bush is now bequeathing his successor a record $0.5 trillion budget deficit, and well more than $9 trillion in overall national debt, nearly twice its size before 9/11. Faced with a jolt as massive as that America was dealt in September '01, making demands on the people - to serve, volunteer and pay - was crucial regardless of the situation's financial constraints; it was necessary for the sake of making people feel that they, too, not only their government, were in America's war. Instead, America made the war the private business of its volunteer army, where most Americans have no first-degree relatives or close acquaintances. The result was a general atmosphere of eat, drink and be merry. If the government can spend so much more that it earns, and in fact continuously borrow - money, people and time - why shouldn't everyone else? Curiously, the Islamist attacks on America stripped it of its time-honored Protestant ethic of financial caution. That is what the lenders and borrowers in the subprime market saw, and subconsciously emulated. Lehman's own response to 9/11 coincided with the general zeitgeist. The attacks caught the firm well within the World Trade Center campus, which obviously compelled it to quickly relocate thousands of employees on both sides of the Hudson. That was done with remarkable speed and efficiency, and while at it served the American interest in its defiance of terror. However, eventually Lehman decided, unlike some of its competitors, to relocate in midtown, a decision that soon proved controversial, as many thought the firm should make a point of returning downtown. But Lehman, like Bush, Greenspan and the subprime protagonists, wanted to add its voice to the Greek choir that was singing "war is war and business is business." Well, now the White House, the Fed and Wall Street surely all realize that business after 9/11, just like war, could not possibly be what it was before it. www.MiddleIsrael.com