Victor Davis Hanson: Wall Street 101

National Review Online ^ | October 09, 2008 | Victor Davis Hanson

[neverdem]

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October 09, 2008, 0:00 a.m.

Wall Street 101
If a promised return on an investment seems too good to be true, it probably is.

By Victor Davis Hanson

Until the past few weeks, the financial panic was still mostly far away on Wall Street. But not now.

Car loans, mortgages, and college financing are suddenly harder to come by. Millions are stuck in houses not worth what is owed on them. Cash-strapped consumers are cutting back. The economy is slowing. Jobs are disappearing. Who wants to open quarterly 401(k) statements only to learn that everything they put away in retirement accounts the past two or three years is gone?

There is plenty of blame to go around. Greedy Wall Street speculators took mega-bonuses even when they knew their leveraged companies were tottering — and someone else would pick up the tab. Crooked or stupid politicians allowed Fannie Mae and Freddie Mac to squander billions, as they raked in campaign donations and crowed about their politically correct support for millions of shaky — and now mostly defaulting — buyers.

The new national gospel became charge now/pay later and speculate, rather than put something away in case of a downturn. To provide more goodies that we hadn’t earned, politicians ignored soaring annual budget deficits and staggering national debt and kept spending.

But amid the gloom, there are some valuable lessons that we can take away from the Wall-Street panic.

First, cash really is king. For all the talk of a trillion here or billions there, when the crunch came, many of these investment houses and their once-strutting managers found themselves with a minus net worth. They were desperate to find liquidity — any money anywhere they could find it. Pedestrian passbook savings accounts proved wiser investments than all the clever hedge funds, derivatives, and sub-prime schemes put together.

Second, wisdom and blue-chip college educations are not quite the same thing. The fools in Washington and New York who blew up Wall Street had degrees from our finest professional schools.

The most chilling example, at the very beginning of this ongoing mess, came in 2003 during the House Financial Services Committee’s hearing on Fannie and Freddie. At one point, Harvard Law School graduate Rep. Barney Frank, (D., Mass.), asked Fannie Mae CEO and fellow Harvard Law School graduate Franklin Raines — who took millions in bonuses even as he helped bankrupt the once-hallowed institution — whether he felt the mortgage giant had been “under-regulated.” Raines answered him under oath, “No, sir.” Then overseer Frank announced, “OK. Then I am not entirely sure why we are here.”

If these guys are our best and brightest, then it is about time we rethink what constitutes wisdom, since an Ivy League law degree certainly seemed no proof of either intelligence or ethics.

Third, we as a nation need to relearn the old notion of shame — as in “shame on you!” Firms like Lehman Brothers and Bear Stearns were once responsible Wall Street institutions, built up over decades by sober men. But their far-lesser successors in just a few months have bankrupted these venerable brokerage houses — with seemingly no shame at what they have done to the image of Wall Street.

Americans used to pay their debts. Somewhere in all the blame-gaming about the crooks and liars in New York and Washington, we never hear that real people borrowed real money that they should not have. And they then defaulted on what they owed to others. Walking away from debts may have been understandable, but it was also a violation of trust — and wrong.

Finally, what one makes is no proof of his worth. Almost every head of a Wall Street firm took tens of millions of dollars in bonuses these past few years, as they posted phony profits by borrowing ever more with ever fewer assets. But if financing facilitates the American economy, we should remember that less exotic and remunerative construction — such as farming, manufacturing, and mining — is what really powers America.

Recently, Americans built a new bridge across the Mississippi River in Minneapolis to replace the older one on I-35 that collapsed last year. It was finished three months ahead of schedule, and the industrious construction team that worked 24/7 to make thousands of commuters safer is now eligible for up to $27 million in well-earned incentives. Meanwhile, Franklin Raines at Fannie Mae made nearly twice that sum in bonuses — leaving behind nothing much at all other than billions in other peoples’ debts.

How odd that all those boring lessons from our grandparents turn out to be true in the globalized, hip 21st century: Save your money. Don’t borrow what you can’t pay back. Look first at a man’s character, not his degrees. And if a promised return on an investment seems too good to be true, it probably is.

— Victor Davis Hanson is a senior fellow at the Hoover Institution and a recipient of the 2007 National Humanities Medal and the 2008 Bradley Prize.

© 2008 TRIBUNE MEDIA SERVICES, INC.

[magellan]

VDH was in the studio last night with Hugh Hewitt. I really think he is the smartest, most astute observer of society and humanity who exists today.

He is the only person I have heard to point out the west's war against radical Islam is a battle between The Enlightenment and The Middle Ages.

[durasell]

I just find it frustrating that folks suddenly realize there is greed on wall street or arrogance in politics.

[cricket]

I just find it frustrating that folks suddenly realize there is greed on wall street or arrogance in politics.

Do not think anyone here is 'discovering' either one. . .and sense a bit of that same 'arrogance' perhaps; in your imagining such. This can be a 'choir. . .preaching' - so to speak...a 'misery-loves-company'; and/or just a venting here. It is as well a huge sharing of information, meant to inform. . .and meant to be shared with the 'less informed'. Wherever they are.

. . .think the 'above' explanation is just a venting; because I am sure you 'know this'.

[goodnesswins]

I’ve hidden our financial accounts from my husband.....and I’m contemplating looking at them.....

[neverdem]

Thanks for Jefferson’s quote.

[durasell]

Look at the above story. The writer is shocked there is greed on wall street. He’s shocked the rules were bent. He’s shocked folks acted in an unethical manner to secure fortunes that will carry forward along and support their families for several generations.

[mhx]

If I look at the current market value of my stock, it’s way down.

But the way I figure it, I still own the same percentage of some pretty good companies that I used to own before the market tanked. The companies aren’t going out of business. They are still going to be the highest quality companies around when things come back.

I could alternatively give my stock to someone else who would get to pick it up at a really low price, and I would be unlikely to get it back again at that price (because there’s no way I would buy it back at the bottom, I would hold out until I was sure the market was going up again, of course.)

[cricket]

Have to say; 'in the mind of the beholder'; but do not see that VDH is 'shocked'. . .

I do share your frustration inasmuch as there ARE too many people out there who are either 'shocked' or simply 'not shocked' at all, by the truths unfolding per this crisis; nor shocked by what they must consider as no more than 'inconvenient facts' - and so, are blindly, STILL committed to voting for Obama.

The red flags are everywhere; the warnings. . .and yet; I see the homes where 'boy scouts/girl scouts' live; where the parents are hard-working; America-loving - and Educated. but they have an Obama sign in their yard; or decal/bumper sticker on their car. . .

THAT shocks ME - and makes me crazy!

[durasell]

have to say the economic crisis is working in favor of obama.

[cricket]

. . .have to say the economic crisis is working in favor of obama.

Yes, it is; understandable; and it is not surprising that Obama would capitalize here; moreso; given neck-deep involvement of his own Party/Demrat 'Leadership' and his own 'Fannie/Freddie' associations - add to that the level of abuse here and the consequences; it is almost 'amazing to behold' just how brazen; just how cunningly dishonest these practiced liars are.

Worse, their gaining/taking the high-ground here was so predictible! Obama constructed his story; with himself as the hero; and the Repubs as the 'evil-doers' while McCain immersed himself immediately in the problem. Obama attacked and has not stopped. As have the practiced liars, Pelosi/Reid/Frank. . .and the 'rest of them'.

[exhaustguy]

When this started I was about 60% cash and 40% stock. I have since gone to 80% cash and 20% stock (from losses and conversions on the way down). The market has dropped over 10% since my last sale so I figure I won’t get whip sawed too badly now (always a danger when you get out like this).

Looking back at historical daily percentage changes (both highs and lows) you see many bounce backs right after a big loss (especially 1987 for example). We have not seen very many bounces in this drop.

The most frustrating thing is that I could have paid off my house with the money that I have lost this year, and I know that I am in better shape than a lot of other people.

[durasell]

see the kissinger interview with fallaci in the early 70s, to paraphrase, “americans want the hero to ride in on a white horse...”

[Clemenza]

I just count myself lucky that I am 32, and still have a few years to make up my losses (keeping in mind inflation).

[Patriotic1]

Only for someone who is forced to move because of a job change does the current market value become relevant.

And the prices for rents in the area matter too. I could get a whole lot less space for the same amount of money in my area.

[Tolik]

    Victor Davis Hanson Ping ! 

       Let me know if you want in or out.

Links:    FR Index of his articles:  http://www.freerepublic.com/focus/keyword?k=victordavishanson
                His website: http://victorhanson.com/
                NRO archive: http://www.nationalreview.com/hanson/hanson-archive.asp
                Pajamasmedia:   http://victordavishanson.pajamasmedia.com/

[GOPJ]

How odd that all those boring lessons from our grandparents turn out to be true in the globalized, hip 21st century: Save your money. Don’t borrow what you can’t pay back. Look first at a man’s character, not his degrees. And if a promised return on an investment seems too good to be true, it probably is.

Wonderful post, neverdem.

[GOPJ]

It's not “greed” that's the problem - it's stupidity.

Incentives from hell - derivative traders skimming off more money than exists off silly subprime loans - donations to banking committee members knowing changes would cause long term disasters in spite of short term gains. Just stupidity and arrogance.

[ProtectOurFreedom]

The Democrat socialists/communists engineered this financial downfall. Then they nominated a communist for POTUS. About half the people in the US are fearful of a communist take-over; the other half welcome it as they never experienced the cold war and have never been taught or experienced the evils of communism. As the communist candidate gets closer to winning, people are panicing and selling which accelerates the downward spiral. As asset values collapses, people are going to demand socialism/communism in the US to offer some level of protection and safety net. Obama gets elected by a fearful electorate seeking stability of socialism. America may be lost by this cooked-up crisis.

[durasell]

I agree with that — stupidity and its first cousin, a short time horizon. Perhaps there was just too much money to be made to take the long view.

[AndyJackson]

It’s different this time. They hadn’t invented derivatives them.