Here’s a WSJ article by James Grant, for your reading pleasure…
The Confidence Game
Excerpt: "There used to be too much of it. Now there’s not enough. James Grant argues that the real lack of confidence is in Washington, with the administration losing faith in capitalism.
In disclosing plans to buy a quarter-trillion dollars of bank stock in the name of the American taxpayer, Treasury Secretary Hank Paulson harped on confidence. "Today, there is a lack of confidence in our financial system, a lack of confidence that must be conquered," he said on Tuesday.
What Mr. Paulson did not get around to mentioning was the excess of confidence that preceded the shortfall. Under the spell of soaring house prices (and before that, of stock prices), Americans trusted the things they ought to have doubted. But markets are cyclical, and there is always a new day. In compensating fashion, people will eventually doubt the things they ought to have trusted. Investment opportunity follows disillusionment. It’s complacency that precedes bear markets...
Federal Reserve Chairman Ben S. Bernanke and his predecessor, Alan Greenspan, were fine ones for believing impossible things. They propounded them, too. Never mind asset bubbles, they said. Not only can’t you predict them, but you can’t even recognize them after they’ve swollen to grotesque maturity. Better just to tidy up after they burst. Now Mr. Bernanke is likening our present troubles to those of the 1930s. The comparison is more confidence-sapping than he seems to realize. From peak to trough, 1929 to 1933, the gross domestic product was almost sawed in half, before adjusting for changes in the purchasing power of the dollar. No such mitigating fact helps to explain today’s set-to. It’s a crisis of competence of our financiers, of bankers and central bankers alike.
To the self-satisfied elders of the Fed, the past 25 years were a sweet validation of the art of central banking and of the efficacy of paper money. "The Great Moderation," some of them called this interlude of low inflation and subdued economic activity — neither too boomy on the up side nor too recessionary on the down side. For these manifold blessings, the officials thanked, in good part, themselves, i.e., "the credibility of monetary policy," as the president of the Federal Reserve Bank of San Francisco, Janet Yellen, put it earlier this year...
The modern financial economy requires a certain minimum leap of faith. The paper dollar is an example. There is nothing behind it except the government’s good intentions, yet we hoard it as if it were gold. However, we collectively outdid ourselves in credulousness in the runup to the financial crisis…
….In investment markets, confidence and coherence tend to restore themselves. The hardy souls who lead the way back derive their confidence not from the Treasury Secretary but from the pages of "Security Analysis," by Benjamin Graham and David L. Dodd, the value investor’s bible.
But these are frightening times, and there is no very large constituency favoring the natural restorative processes of free markets. "A new form of capitalism is needed, based on values which put finance at the service of business and citizens, not vice versa." Nicolas Sarkozy, the president of France, recently said that, but the sentiment is on the lips of heads of state the world over…
Destroying confidence, however, is what governments do best. And the confidence they can restore is usually the kind that got us where we are today. Inflation and moral hazard led directly to the immense overvaluation of equities and residential real estate — and of the bloating of the leverage that sustained those prices. Yet, to cure what ails us, credit creation and the public guarantee of banking liabilities are the policies today most favored…
And the opportunities? For the first time in a long time, stocks, tradable bank loans and mortgages are becoming cheap. The bear market is truly a value restoration project. Wall Street will be going on sale — if the government will let it. For the entrepreneur, the silver lining in the federalization of finance is obvious. Start a bank or broker-dealer to compete with the institutions that will soon be smothered in Mr. Paulson’s quarter-trillion dollar embrace. There’s oxygen, still, in the free market."
Full article here.
James Grant, the editor of Grant’s Interest Rate Observer, is the author of the forthcoming "Mr. Market Miscalculates: The Bubble Years and Beyond."
