How Beatniks, Pyromaniacs and Gangsters Caused the Global Financial Crisis
By Martin Hutchinson
Contributing Editor
Money Morning
Let’s face it: The financial services sector has suffered a severe loss in popularity.
The result is that governments in both the United Kingdom and the United States are looking for lightening rods to absorb all the criticism, and bankers have made for the ideal candidates.
Now Franz Muntefering, chairman of Germany’s Social Democrats has joined the pile-on, saying that while many bankers are responsible, many others are “beatniks, pyromaniacs and gangsters.”
Muntefering has a history of doing this sort of thing. In 2005, he branded U.S. private equity firms – then threatening to take over German companies – as “locusts.” But given the below-market returns achieved by the private equity industry for its investors, and the way-above-market returns achieved by its sponsors, I’d have to say that the “locusts” comment, which looked quite silly at the time, has proved to be pretty accurate.
After all, after what we’ve seen, it now seems perfectly reasonable to conclude that the modus operandi of many private equity investors is to seize control of valuable corporations, leverage the hell out of them, strip out many of their long-term projects, and leave them horribly vulnerable to the next downturn. Like an attack of locusts, such investors may nourish themselves lavishly, but they destroy value rather than creating it – even though their objective is generally not destruction but simply rearranging that value for their own benefit.
“Pyromaniacs” basically expresses the same thought as “locusts” and is an equally fair comment. For a German socialist, the free-market Schumpeteran process of “creative destruction,” by which old businesses that can no longer compete are broken up and replaced by new businesses in high-tech sectors, is deeply threatening.
In past years, one would have sneered at such worries. It is becoming clear, however, that in the last decade, the process of capitalism has resulted in more destruction than creation.
The hedge fund Paulson & Co. Inc. Tuesday boasted of having made $420 million by short-selling shares of Royal Bank of Scotland PLC (ADR: RBS), thereby causing a run on the shares and requiring it to be nationalized by the British government. In that case, the $420 million made by Paulson is likely to be far less than the eventual cost of the deal to RBS shareholders, British taxpayers and the financial system in general.
Basically, the global economy suffered a net loss that likely stretches into the billions, so that Paulson & Co. could come away with $420 million.
“Gangsters” also seems to be a pretty appropriate term for bankers. One can imagine certain private equity investors approaching company management, and saying “Nice little company you have here… Pity if anything should happen to it,” in way that would make the Gambino crime family proud.
The tendency of the financial service industry players to hunt in packs, and to rush simultaneously into businesses that appear to promise short-term profits, whatever their long-term costs or economic damage, is every bit a characteristic of organized crime.
By and large, gangsters tend to focus one particular form of illicit economic activity at a time. Whether it’s gambling, bootlegging, prostitution or trash collection, they seek to swarm an industry and dominate it all themselves, rather than simply establishing a business bridgehead in a field dominated by non-gangsters.
If you think about it, the subprime mortgage business – with its casual disregard of lending standards, its enormously rapid expansion, and its looting of value – was a very gangster-like activity.
“Beatnik,” on the other hand, doesn’t quite seem to fit bankers.
The conventional image of the well-groomed banker in his slick Italian suit is not that of the 1950s Bohemian strumming a guitar in an espresso bar. While many 1960s hippies later grew up to become successful bankers, neatly reversing their proclaimed hostility to material goods, the 1950s beatniks were less likely to do so. In any case, given the rapid turnover in banking, any 1950s beatniks turned bankers would have most likely have left the business in about 1990, at the latest.
Then again, Muntefering may have a point, even here. The beatniks were outlaws, running against the established order, seeking to overturn it in favor of a society they preferred. Likewise, these renegade bankers sought to overturn the established economic order, replacing it with an empire of trading, in which all assets could be exchanged on a trading desk in seconds, and nothing was permanent.
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Former Enron Corp. CEO Jeffrey K. Skilling attempted to achieve the same thing in the energy business. When I saw him in 2001, before his fall, he spoke of a world in which all the complex interactions from the oil well and the gas tank could be carried out across trading desks, with intermediation costs removed and the flow of product streamlined to its utmost extent.
Skilling ended up with a 24-year jail sentence, but his essentially nihilist vision, in which trading desks would replace all those who actually built pipelines, drove trucks and manned gas stations, was an important inspiration for the mortgage disaster and the ziggurat-like liability creation of the derivatives business.
Muntefering’s solution – to increase government control and implement heavy taxes to remove the rewards from the richest bankers – is the wrong one. But his criticism of the 1995-2007 financial bubble is not entirely unfair.
We must hope that once we dig ourselves out of this economic pit, banking will return to its traditional role as a modest facilitator of economic activity, providing no home for gangsters, pyromaniacs or beatniks.
[Editor's Note: Overcoming the global-financial-crisis damage that Money Morning columnist Martin Hutchinson describes in this commentary won’t be easy; the damage is deep and is certain to last for years to come – years during which uncertainty will hold sway.
But what if you knew – ahead of time – what marketplace changes to expect? Then you'd be in the driver's seat - right? You'd know what to anticipate, could craft a profit strategy to follow, and could then just sit back, watching and waiting - and finally profiting from - the very marketplace events you anticipated.
R. Shah Gilani - a retired hedge fund manager and a nationally known expert on the U.S. credit crisis - has predicted five key financial crisis "aftershocks" that he says will create substantial profit opportunities for investors who know just what these aftershocks are, and how to play them. In the Trigger Event Strategist, Gilani uses these “trigger events," as gateways to massive profits. To find out all about these five financial-crisis aftershocks, and about the trigger-event profit strategy they feed into, check out our latest report.]
News and Related Story Links:
- Financial Times:
SPD chief attacks financial ‘gangsters’
- Money Morning:
How Subprime Borrowing Fueled the Credit Crisis
- Wikipedia:
Joseph Schumpeter.
- Wikipedia:
Creative Destruction.
- Money Morning:
How Deregulation Eviscerated the Banking Sector Safety Net and Spawned the U.S. Financial Crisis
- Wikipedia:
Jeffrey K. Skilling.
- Money Morning:
Only Tighter Regulation Will Stem this Crisis of Confidence.
- Wikipedia:
Social Democrats of Germany.
Comment by rod king on 29 January 2009:
general electric capital falls into which of the above categories? mr. immelt has not been transparent regarding earnings.
Comment by Richard Williams on 29 January 2009:
The point you seem to have taken very long to grasp is that deregulation, laissez-faire, free-market economics, etc. have never functioned. Free trade is a British hoax used to plunder its colonies. Adam Smith was recruited by Lord Shelburne to concoct the Wealth of Nations as a means of discrediting the American System, which has always been the adversary of the British System, the one that is now collapsing. Smith argued that individual selfishness and greed leads to the common good. In fact, national governments are the sole guarantors of the general welfare. Perhaps you ought to read Alexander Hamilton.
Comment by robertsgt40 on 29 January 2009:
Good story until you mention “digging ourselves out of the economic pit”. That’s not going to happen, and by design. The planet is bankrupt. There is not enough money in the orld to pay for the losses. This is how you transfer wealth of many into the hands of a few. It’s no accident.
Comment by jim on 29 January 2009:
The LIB DEM IDIOTS like ole barney, dodd, schumer, kerry, slick n hil, the obamination and their cronies are the REASON we are in this financial MESS!!! Let’s tell it like it is!!! NOW thanks to the MORONS who voted for them, they are now in CHARGE!!
Comment by Mannstein on 29 January 2009:
We’ve had 8 years of Republicans and now these same numb skulls are trying to blame the new Administration for the financial mess they created. Give us all a break!
Republicans are forever blaming others for their short comings. Palin claims CBS anchor Katie Couric did her in because she, Couric asked some pointed questions during an interview. Who are the real morons?
Comment by Kevin Beck on 29 January 2009:
I wonder how many gas tanks Mr. Skilling expected to fill with his paper? Or how many homes he expected to heat? It was not anything political that crushed Enron; it was the fact that it did not operate with a viable business plan. Enron’s executives got what they deserved. The company’s stockholders and bondholders got a horrible surprise they did not deserve. The world has to get back to where producers get rewarded and flim-flam artists get shafted. As far as I can tell, fraud is not legal in any country or language–yet this is what causes government to flourish (not the prosecution for fraud, but the continuation of fraudulent activity of no economic value).
Comment by Cee Howard on 29 January 2009:
poor jim (above comment)….who does he imagine was ‘in charge’ during the past eight years? from someone so ill-informed ‘lib dem idiot’ is high praise.
to Money Morning editors: thank you for your thoughtful, informative work. I do wonder about putting “sponsored content” as your lead article, both because it snares the unwary who then feel taken advantage of and because it is not necessary to gain readers or advertisers this way. I believe that is not the best financial journalism and that you will succeed on your merits. so far, I keep coming back. thanks for all you do.
Comment by Mike Shirk on 29 January 2009:
The villian is really the FED and fiat money and it has lasted through many administrations. If government had to actually do something (dig it out of the ground) to create money we wouldn’t be in this mess. People would act to conserve their resources and care about wise investing.
I don’t see the Fascism or Socialism proposed by either the -R’s or -D’s ever solving anything. They are both problems…do we die to lions or parasites? Either way we are dead. Less government would = less area for lobbyists and special interest to try to carve out their piece of a pie at our expense.
I love this statement:
Muntefering’s solution – to increase government control and implement heavy taxes to remove the rewards from the richest bankers – is the wrong one. But his criticism of the 1995-2007 financial bubble is not entirely unfair.
If he isn’t right, what is the proper course of action? I say take banking back to a time when a dollar would actually get you a finite amount of gold or silver.
Comment by michael on 29 January 2009:
altho bush was reluctantly complicit in this housing mess, if you don’t recognize that the “community restoration” act was a democrat initiative originated by jimmy carter, activated by bill clinton and then perpetrated by b. frank, dodd and several others, i just wonder what planet you’ve been living on…..
Comment by Milan on 30 January 2009:
It looks like nobody anymore remembers what Capitalism means, and how it functions. The good old capitalism can function only in society with moral standards. You know the ones which built the Western civilization. Our present problem is all and I mean all multinational businesses are run by people without any standards – lefty liberal darwinist types – morons in other words. Their business models have absolutely nothing to do with capitalism, it is an economical model of Soviet union they subscribe to. Soviets were masters of “power and greed” model, government and business leaders/gangsters together. The Ultimate power. Total disregard for a real creation of wealth. That would be what the real Capitalists do. One has to remember that majority or rather all CEOs were indoctrinated by our lefty universities, they know that there is no ultimate truth, no moral standards, everything is relative. That is why we are in this mess, that is why we have Enrons, that is why our economy collapsed and entire Western civilization will follow in the short order. Not to wory, messiah Obambi will save you all.
Comment by gainwinner on 30 January 2009:
This is the most appropriate and honest article and criticism against the parties that created the financial losses and suffering that our whole world is bearing! Very nice to see people with guts and integrity to write something like this and share with us. Send your messages and comments to the world so that people around can learn how to change it to make it a better place to live in!
Comment by masiha.ahmed on 1 February 2009:
It is an eye opening article very lucid,qualitatively well balanced,thanks Martin.I am thinking it is a good message for third world countries to reconsider their ambitious plans and not to follow the big boss US.In the third world it is a fashion to give example of America,to praise their high standard of living,now this crisis has given a new dimension to reconsider and reshape our economic doctrines.
Comment by Peter M. Olsen on 2 February 2009:
I hope we can dig ourselves out of the mess that Wall Street has got us into but I sort of doubt it! We have let the FEW rule over us too long! There is no such thing as the “American Dream”! That was something long ago, when an individual, whether born here or elsewhere, wanted a roof over his head and food on the table. Now it is a world just for the ‘Princes of Avarice’. They control and we lose! I don’t believe any amount of praying will help either. Like Rome,Egypt, Greece and the others, we are headed the same way.
Comment by Aroleflin on 20 February 2009:
The truth is that government intervention has caused this debacle. Two years ago we had a thriving economy, not perfect, but humming along. Then people wanted change, change, change. We got stuck with a Democratic Party controlled congress. For nearly a centry, lending to home buyers has been very profitable to both lender and buyer. That is, until Jimmy Carter and his crony socialist mindset invented the Community Reinvestment Act. Do you people realize that this Act required banks to lend 12% to 28% of the loans that they packaged to people in the bottom 1/6th of wage earners!!!! Clinton just greased the Act more and Barnie Frank, Dodd and the rest of these incompetitants resisted any growing fears of what this represented and encourage more of the same disasterous ACORN inspired socialist ideaologic strategy. Unless we remove these people and the Kenyan president we have in office, things are going to get much worse.
Pingback by Why the U.S. Government Should be Cut Off Like a Subprime Borrower on 18 March 2009:
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Comment by Willi Scherer on 18 July 2009:
This is the end result of the mediocrity that so called checks and balances represents within the U.S. government. This hypocrisy is indicative of the double standard that exists within our borders. The electorate that put these preditory creatures in place are directly responsible for the mess we are all now in. When you have an elected system of representatives in place that is bought and payed for by lobbies and thier associated slease this is what you get, i.e .the government you truly deserve….We pay huge taxes to elect officials who’s agendas are tailor made not to serve the public but themselves. These beatnik slease balls need to be identified and branded for what they really are which is, opportunists and social vandals…Acorn et al. Why are these slime balls on federal tick anyway. I didn’t know that they were a part of any Federal appropriation…Eliminate this sleaze from the federal budget please…any one…We as a people need to vote out any and all incumbants to serve notice to these creeps that they can no longer make a career at the expense of the public purse. This could serve immediate notice to the lobbies and politicos that this could be very costly and in fact bankrupting to most of these parasites.