Victor Davis Hanson: Wall Street 101

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

[neverdem]

---

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.

[durasell]

And your point is?

[neverdem]

VDH PING

[razorback-bert]

I was brave enought to look at my 401k, it is down 31%.

It will take years to recover, just the value I paid in.

[bronxboy]

The point is we are in for some rough times. Also, education and common sense do not always go together. I’ll be praying for this country, I suggest all of you do the same.

[durasell]

True that...what I have a problem with is the idea that folks are genuinely shocked that there is greed on Wall Street.

[neverdem]

And your point is?

I like the author's observations. I thought the author made quite a few trenchant ones. I thought this was the best:

"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."

[durasell]

Nobody ever said they were the brightest. They’re just guys who want to make a buck.

[cricket]

And your point is?

Guess you missed the 'widsomspeak' here. Or, perhaps you just don't like VDH?

[cricket]

Greed on Wall Street; and unfricking amounts of arrogance in Washington. . .and the ‘hallowed halls’ of Congress. Am surprised that Barney has not has HIS nose bloodied yet. . .

[Travis McGee]

Around the corner, we shall meet the past.

"The crisis of the abuses of banking is arrived. The banks have pronounced their own sentence of death. Between two and three hundred millions of dollars of their promissory notes are in the hands of the people, for solid produce and property sold, and they formally declare they will not pay them. This is an act of bankruptcy, of course, and will be so pronounced by any court before which it shall be brought. But cui bono? The laws can only uncover their insolvency, by opening to its suitors their empty vaults. Thus by the dupery of our citizens, and tame acquiescence of our legislators, the nation is plundered of two or three hundred millions of dollars, treble the amount of debt contracted in the Revolutionary war, and which, instead of redeeming our liberty, has been expended on sumptuous houses, carriages, and dinners. A fearful tax! if equalized on all; but overwhelming and convulsive by its partial fall. Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper, as we were formerly by the old Continental paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burthen all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs. Prudent men must be on their guard in this game of Robin's alive, and take care that the spark does not extinguish in their hands. I am an enemy to all banks discounting bills or notes for anything but coin. But our whole country is so fascinated by this Jack-lantern wealth, that they will not stop short of its total and fatal explosion."

~~Thomas Jefferson to Dr. Thomas Cooper, 1814

[who_would_fardels_bear]

"Nobody ever said they were the brightest. They’re just guys who want to make a buck."

Every shill on these boards for the crony bastardized version of the Free Market we have today has pretty much said that:

1) The people who run Wall Street deserve whatever they can get

2) We are too stupid to fully understand the intricacies of all that is done on Wall Street

3) Without leveraging and derivatives certain "investments" would not make sense, but since one of these masterminds thought it up we need to allow leveraging and derivatives in order for it to happen.

Wall Street, Government, the Media, liberal community organizers, etc. all contributed to pounding the average American with the message that we would be stupid if we didn't leverage as much of our wealth as we could by buying large homes, getting HELOCs, putting most of our 401k into stocks, etc.

I realize that ultimately each individual is responsible for his own welfare, but if every major institution is yelling at us 24/7 to borrow, borrow, borrow then it is no surprise that a huge percentage of the American population went out and borrowed.

The people who the community activists wanted to help the most ended up being the ones who are currently in the worst shape: they got invited to be the base of the Ponzi pyramid.

Of course they will be saved by the well-meaning nimnolds in government, but those of us in the middle will end up being squeezed once again.

[Jacquerie]

Financial/Wall Street panics are as American as baseball. We are a nation of go-getters, always looking for better ways to make a buck. That we still have the courage to take risks distinguishes us from many other countries.

That our government tries to dump the risk on taxpayers does not bode well for future enterprise.

[durasell]

Greed on Wall Street? Arrogance in Washington? Are you sure? I find it hard to believe.

[PISANO]

Just about all of our nation’s problems can be EXPLAINED by the DEATH OF COMMON SENSE and the dearth of individual responsibility!!

[gogogodzilla]

If you can’t figure it out... then you are part of the problem.

[durasell]

There’s a problem?

[JoeFromSidney]

Okay, the market value of someone's house is now less than what they owe on it. Does that mean they should just walk away? After all, the house is still providing shelter. If they can still make payments, they're not going to be turned out. For someone who bought a house with the intention of living in it and paying it off, the current market value is irrelevant.

Only for someone who is forced to move because of a job change does the current market value become relevant. They will lose the difference between the remaining amount of the loan and the current market value. However, those situations represent only a small fraction of those who are "under water."

I think we need to quit focusing on those who are "under water" and focus on fixing Fannie and Freddie (and maybe Sallie).

[cricket]

You obviously do not want to talk about. . .

Is it, that you have 'other issues'?

[cricket]

Good one! And ‘thank-you’ Mr. Jefferson. . .