More About Money

While flying cross country today, I got fully engrossed in The Ascent of Money by Niall Ferguson, still determined to know enough about what a credit default swap is to be able to explain it in less than a paragraph.

I'm not there yet, although I do understand that "they" are the reason for the collapse of the global financial markets, and perhaps, if one is as pessimistic as Barbara Ehrenreich and Bill Fletcher, Jr. in The Nation, March 23, 2009 issue, the end of capitalism.

Credit default swaps were as phony as the ENRON scheme, creating something to sell out of nothing, with no independent evaluation, no collateral, no reserves, no nothing. As I said, I'm still am not quite sure what "they" are.

ENRON like the Madoff investments, was all glitter and not much else, although as a cautionary note, by the end of 2000, just a year before it collapsed, ENRON was the fourth largest company in the US, employing 21,000 people.

However, Ferguson does explain five stages of a financial cycle, and we need to learn about these so that we don't get tricked again.

1- Displacement: Some change in economic circumstances creates new opportunities for profit, like technology innovations, energy discoveries, deregulation that permits new forms of "securities" to be devised by wicked and clever lawyers and folks with MBA degrees.

2- Euphoria or overtrading: rising expected profits lead to rapid growth of share prices, like the insanity with IPOs in the dotcom era and ENRON, and now with these risky mortgages that got bundled with more secure ones and sold, and AIG agreed to insure.

3- Mania or bubble: easy capital gains attracts first time investors, people who are not regulars in the stock market, but who are lured there, often by unscrupulous brokers, by the idea of making a quick profit.

4- Distress: insiders understand that the end is near and pull out from the market. In the months before ENRON's collapse, the insiders--Ken Lay, Skilling, et al. sold millions of dollars of ENRON stock. Bernie Madoff's wife withdraw millions from his supposed legitimate investment company just weeks before he confessed.

5-Revulsion or discredit: and it all falls down.

NEWS FLASH: Today the NAACP filed suit against Wells Fargo and HSBC banks for racial discrimination, for selling mortgages, often sub prime mortgages, that charged African Americans higher rates.

Greed, Greed, and More Greed

In trying to understand this world financial crisis, I'm paying more attention to financial reporting than ever before. I am reminded of Bethany McLean's statement on The Daily Show a few weeks ago. It went something like this: If you don't understand how it's making money, it probably isn't.

That's the way I feel about money generally.

Although in reading The Ascent of Money by Niall Ferguson, (you can watch the entire two-hour documentary on pbs.org for free) I did learn today that one makes money in the bond markets not by buying bonds at face value and holding onto them, waiting for the corporation to pay the stated amount of interest.

No, one makes money in the bond market by buying bonds at depressed prices, below the face value of the bond, which still pays the stated interest.

That was news to me.

This evening, before chancing upon the Chris Botti Concert on Thirteen, featuring Yo Yo Ma, John Mayer, Sting, and Josh Groban, I read Bethany McLean's piece in this month's Vanity Fair. It's called: Over the Hedge.

Wouldn't you read an article that starts off this way? It used to be that to become a billionaire, rather than a mere millionaire, you had to inherit money, or build an empire that would last for a long, long time. But in the era that has just ended, you could become a billionaire just by managing other people’s money. You didn’t have to do so for very long—and, maybe, you didn’t even have to do so very well.

She was smart enough to unravel Enron. She's unraveling the collapse of Wall Street in very accessible ways. Although the question remains whether we can be rescued from Wall Street's greed.

Creating Community in the Time of Crisis

Eight out of ten Americans feel extraordinary stress during this time of financial crisis and uncertainty. Extended periods of stress have physical consequences: depression, illness, and isolation. Losing a job, a home, status--especially in American culture--carry shame and stigma. "What did I do wrong?" "Why was I dispensable?"

Shame and stigma too often result in withdrawal and isolation at exactly the moment when we need each other, we need community.

So how do we create community in this time of crisis?

Krista Tippett is the host of American Public Media's Saturday morning show, Speaking of Faith. She began this non-denominational show after 911 and it went weekly. Now she is doing a series on the moral and ethical consequences of the economic crisis. The series is called Repossessing Virtue.

This morning she continued her interviews with prior guests--spiritual leaders, poets, neurologists, philosophers--to explore how we are reacting to this insecurity and how we might take this challenge to convert our lives. Take a moment to explore the website dedicated to this venture. I only heard half of the program: Praghu Guptara, Sharon Salzberg, Martin Mary, and Esther Sternberg. By building community, by helping others, by changing our expectations of wealth and success we can transform this time from one of individual isolation into community building. These very wise guests have a lot to offer us.

Crisis, change and the feeling of uncontrollability are the products of the global financial crisis--eight months ago over 100,000 million people were thrown into poverty. Many more have joined them by now. With unemployment rising and the spectre of GM going under, we must consciously build connections to others, we must consciously take control over the details of our lives.

We have no control over the world financial markets. According to Niall Ferguson, professor of history at Harvard University, and the author of The Ascent of Money, in 2006 "the measured economic output of the entire world was around $47 trillion. The total market capitalization of the world's stock markets was $51 trillion, 10% larger. The total value of dometic and international bonds was $68 trillion, 50% larger. The amount of derivatives was $473 trillion, more than ten times larger." That's an awful lot of credit for not that much output. Where did all of the money go?

Derivatives--contracts derived from securities, such as interest rate swaps or credit default swaps, have grown so fast, that the value of all derivatives by the end of 2007, was just under $600 trillion. Here is an interview with Ferguson that explains some of these concepts. Thanks, Naneen!

We became greedy gamblers, living on credit collateralized with ahistoric beliefs that business isn't cyclical and nothing much else. Many of these transactions, too, were "off books" so we didn't see how many corporations were using them as another way to make money. We might not have control over what Citigroup or Bank of America do, but we have control over how we interact with people daily, how we approach our homes, families, and children. Whether we act intentionally in everything we do.

How do we interact with those who are suffering, especially when we are, too. American culture has always avoided suffering. Now we have to accept the consequences of our actions and form communities, not to ride out the storm, but to change our way of living to sustainable, respectful, and geared more towards the collective and less to the individual.