So It Goes

Where Are the Chuck Yeagers of Our Financial System?

IN "THE RIGHT STUFF," his masterpiece of the early history of NASA, Tom Wolfe describes a certain demeanor that all astronauts -- and later airline pilots -- acquired from a model set by the great test pilot Chuck Yeager. They vocalized this attitude, Wolfe wrote, with "a particular drawl, a particular folksiness, a particular down-home calmness that is so exaggerated it begins to parody itself (nevertheless! -- it's reassuring)... the voice that tells you, as the airliner is caught in thunderheads and goes bolting up and down a thousand feet in a single gulp, to check your seat belts because 'it might get a little choppy.'"

It's the same voice of almost laughable understatement that emerged from astronaut Jim Lovell's mouth when he famously said, "Houston, we have a problem," just as he realized that the Apollo 13 spacecraft he was captaining in 1970 was on the brink of total disaster.

That voice betrays a certain calm in the face of calamity, a presence of mind to stay focused even when the body is telling you to panic, an indication that, at a moment of chaos, I am in control.That character trait, of course, is part of what Wolfe called "The Right Stuff"

In the wake of the volatile last few trading days on Wall Street, I'm beginning to wonder if we have any similar Yeager-like figures in control of the markets. I'm not talking about market leaders who merely have the voice of calm, though it would be nice to hear that, too. I'm talking about people who are really in charge and not freaking out.

As I noted in a post shortly after our financial system when into a tailspin in September 2008, I don't quite understand how those professionals who manage and trade in our securities markets every day seem to have hair-trigger nerves when problems arise.

It's even more striking because stock brokers and personal finance gurus are always telling the rest of us schleps, non-experts with our own life savings on the line, to be patient, to take the long view, to resist the natural temptation to do anything rash or dramatic. This too shall pass, they say, citing how, over time, the market will return a healthy sum and sustain us in our old age.

It's really the only thing we can do; most of us can't overnight transfer everything we've invested into a mutual fund into, say, gold or other investments that are at least stable, if not ascending. We, the mere passengers on this "choppy" flight are the ones trying to stay calm, even as our stomachs are roiling, but it seems that the pilots are the ones panicking.

That's one scenario: an enterprise in which those with their hands on the wheel are engulfed with fear and unable to resist their own natural temptation to to do anything rash or dramatic, like sell, sell, sell! Quickly, before we (the institutional investors, who really make the markets) lose our shirts, God forbid.

The second scenario, the one that seems to be the more likely -- or as likely -- behind the thousand-point drop of the Dow in mere minutes on Thursday, May 6, is that the human beings are not in control. This one is just as troubling as the first scenario.

"Traders parsing the mystery of Thursday's stomach-churning stock-market plunge are focusing on whether rapid-fire computer trading, coupled with the market's complex trading systems, triggered a free fall that appears to have begun with an order to sell a single stock," the Wall Street Journal wrote in a postmortem of that trading day.

"At a minimum, traders said, the selloff shows that regulatory oversight of stock trading has not kept up with the changing nature of trading," the article continues, adding:

"'There's no mechanism in the current system to stop an error from crushing a stock,' said Dan Mathisson, head of electronic trading at Credit Suisse. 'The regulators will need to explore restricting the use of market orders, or adding some type of circuit breakers.'"

It's another example of how computer systems have not yet acquired the judgment -- or, put another way, the heart -- that humans (and even many other organisms, which instinctually know to remove their hands or paws from a flame) uniquely possess. This is, of course, no path-breaking insight; at least since the release of "2001: A Space Odyssey," we've understood the potential havoc computers can wreak when we humans cede our control to them. And, remember, the computer aboard the spaceship in that movie actually did have something of a heart, a human-like intelligence, albeit a rather malevolent one.

But I am not railing against technology, which is like howling at the moon. And I will give the benefit of the doubt to those who programmed the trading systems (people who, like me, have their retirement savings at stake in the health of the markets) did their level best to ensure that the computer could "think" as a human might, or at least alert a human when the storm clouds appear. I'm assuming they thought through a doomsday scenario and tried to head it off in their lines of code.

But what seems to be the case is that those systems favor the big investors, whose fortunes are the first to sell off as rapidly as possible, triggering a cascade of others to do the same. And the same seems to be true even of whatever parts of the markets are under human control. The economics of a market ensure that somebody -- or institutional body -- had to have protected itself from disaster, and, if they held a short position, maybe even profited. We, the common investors, are just not in the privileged position, or so it seems. We are on the debit side of the zero-sum system. Or, until someone with credibility explains otherwise, so it seems.

The rest of us are really at the mercy of the pros. We can only hope that these same automated systems and the unpredictable, inscrutable "mind" of the market will shift and raise -- or at least protect -- our meager fortunes. But hope is all we have.

The rest of us can only keep ourselves calm by closing our ears to what sound like failing engines and ignoring what feels like a precipitous drop in altitude. We are left to silently reciting the time-tested incantation that, in the long run, the market is the best place for us to sock away our money -- even if, in the short run, we are headed for a crash from which no one can say we will recover. Meantime, the pros, the ones at the controls who have news that the plane is about to self-destruct, are frantically strapping on their parachutes and heading for the escape hatches.

I have to believe there are brave, bright and calm-voiced Chuck Yeagers running our nation's financial system, people who understand the interests of their passengers. But why don't I see any evidence of them? 

Jeff

"Financial Crisis for Dummies"

IF, LIKE ME, you don't have a Ph.D. in economics or finance, or experience working in a bank or as a Wall Street trader, you're probably just barely keeping up (at best) with what this whole global financial crisis is about. And, if, like me, you'd like to have a better grasp of the problem so you can evaluate the proposed solutions from our political leadership, look no further than a piece that aired this past week on the radio program, "This American Life."

In it, correspondents Adam Davidson and Alex Blumberg describe in the clearest and simplest terms the heart of the crisis. It's not exactly "Financial Crisis for Dummies," but it strips away nearly all the jargon we hear from the experts and defines what little jargon we need to know to follow the story. The piece is a work of masterful narrative, the kind that I wish we would hear more often from media and political leadership. It's even, believe it or not, rather playful along the way -- though, as I followed them from one point to the next, I got more and more depressed. That's because the problem is breathtakingly bad.

The "This American Life" piece makes a number of important points, including:

• "The taxpayer will pay one way or another" -- either through a direct rescue (the purchase of a vast sea of woefully depressed assets that will kill and our banking system if the banks can’t get rid of them), or, if the government fails to intervene, through a total collapse of the U.S. banking and economic system – which will cost us in masses of lost jobs and businesses.
• Nationalization of banks is almost inevitable. Simon Johnson, former chief economist of the International Monetary Fund, says on the program that if the IMF were called in to help the U.S., it would recommend just what it has with many other troubled countries around the world: “[T]ake over the banking system. Clean it up, re-privatize it as soon as you can.” It sounds scary, almost un-American, and there are some problems with it. But, as the radio show argues, it may be the best course, and the sooner the better. As Johnson adds. “Just do it. The longer you wait, the more you prevaricate, the more it’s going to cost you.” 
• Right now, our government hasn’t committed to buying up all the toxic assets or taking over the banks. In fact, the government has "gone out of its way to give banks money without taking control." It’s a sort of halfway fix at a time when even bolder action is necessary.
• All people (including me) frustrated that the banks that got the TARP money last fall are not loaning it out misunderstand something critical. Blumberg: Lending might be a reasonable expectation for healthy banks, but for insolvent banks it can be a disaster.... When a bank is insolvent, it doesn't have enough capital to cover its losses. In that situation, banks would actually be doing the RIGHT thing by keeping the bailout money that we're giving them…. If they loaned the money away, they'd be returning to the situation we're trying to rescue them from.”  
• The source of the problem is not so much greedy bankers and Wall Street wizards, though they should have been more careful. It is all of us. As Columbia University Business School professor David Beim says on the show, “What the banks have done is already lend too much. The name of this problem is too much debt. We have over-borrowed, and we have done that over many, many decades. And now it’s reached just an unbearable peak where people on average cannot repay the debts they’ve got. In the face of that, it is no solution to try to lend more.”

All this sounds rather scary and dire, a sentiment that President Obama’s opponents have accused him of exacerbating. If anything, I think Obama has walked a responsible and careful line between facing up to the full brunt of the problem and not causing a panic. But, as the politicians would say, “make no mistake,” the problem is staggeringly bad, and the sooner we all acknowledge that the sooner, perhaps, our political and business leaders will feel free to do the right thing.

That day can’t come soon enough. What I kept thinking as I listened to this radio piece was how so much of what passes for serious discourse about the economic calamity misses the real and most urgent issues.

Take for example, our good buddy Senator John McCain. Picking up where he so ineptly left off during his Presidential campaign, he is using up valuable time in the U.S. Senate -- let alone in many media that have covered his hijinks closely -- to rail about earmarks in the Fiscal Year 2009 appropriations bill (that's the current federal government operating budget, which should have been passed six months ago and must pass by this week).

Yes, there is a legitimate argument to make about whether or not earmarks -- appropriations directed to a specific project by a member of Congress -- are good or bad (my lay opinion: some are good, some are bad). During his campaign, earmark reform was his answer to the growing storm of financial crisis, even though they represent only about one or two percent of the federal budget. They are a sideshow to the truly disastrous financial crisis.

To hear it from others -- mostly Republicans -- the problem today is all about the soaring federal deficit, insufficient tax breaks, the evils of "big government" and the need for bipartisanship. Karl Rove squeezed nearly all these themes yesterday into the confines of a 850-word Wall Street Journal Op-Ed, in which he wrote: "Mr. Obama didn't run promising larger deficits -- but now is offering record-setting ones.... Nor did Mr. Obama run promising more earmarks.... Now he wants to wave through a $410 billion omnibus spending bill with about 8,500 earmarks. Mr. Obama devoted four times as much space in his campaign stump speech to cutting taxes as he did to talking about raising taxes on the wealthy.... Yet higher taxes are what every American is going to get.... Mr. Obama's plan will lead us to the extreme of government-run health care."

Apparently, Rove didn't have enough space to ruminate about bipartisanship, but that's okay: plenty of his colleagues have been pounding on that one in Op-Eds and on the cable talk shows like it’s life and death. Nor, in this case, did he join in that ever-so-helpful, raging debate about whether Rush Limbaugh is God or just thinks he is.

What's so maddening about all this – and why you should listen to the "This American Life" piece -- is that many (but not all) of our leaders are spending so much precious time, breath and energy on the wrong issues. It's sort of like your house is engulfed in flames, and the police are keeping the fire department from putting it out as they argue about whether the fire truck's license plate is expired.

It makes you want to bang your head against the wall.

Jeff