Fix Dollar, Markets Will Follow
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
When he was still running Goldman Sachs, Henry Paulson, now the Treasury secretary, would regularly talk to the classes of incoming associates about what kept him up at night. His answer was the same every time, and it had to do with Goldman’s rising employee head count. With it impossible to monitor the activity of every employee, surely there were a few bad apples doing things that could break the bank’s sterling reputation.
Another somewhat unique cultural aspect of Goldman Sachs (this writer worked in Goldman’s private client group between 1997 and 2001) was that new associates were presented with a deal “tombstone” from decades past. The point of the latter exercise was to show how few investment banks survive over the long haul.
This is all relevant now given the events of the past week. Indeed, had anyone said just one year ago that alongside 5% unemployment Wall Street was on the verge of overseeing possibly $1 trillion of losses and the failure of three major investment banks, they would have been laughed out of the room. Reputation on Wall Street has once again told the tale in that both Merrill Lynch and Lehman Brothers were seen to varying degrees as too risky to re-capitalize or do serious business with as stand-alone entities.
Commentary since has touched on overpaid executives overseeing a business model that is broken. Wall Street has seen the enemy, and supposedly that enemy is Wall Street.
That’s true to a degree in that a uniquely American optimism often has those on and off the street of the view that trees do grow to the sky. Maybe so, but investor optimism or “greed” does not explain what has and continues to unfold.
More realistically, strong markets never die of old age, but instead are grounded by policy failure. Remarkably, as the markets crater, we’re being told by both presidential candidates that the Washington that got us into this fiasco will somehow get us out of it. The political class’s hubris is boundless.
As opposed to a broken business model, Wall Street, and the American economy in general, suffers from a broken floating currency model — the gyrations of a dollar issued by our federal minders always foretelling pain in the future.
Think of it this way: while we could still build houses if the length of a foot changed with regularity, it’s a certainty that we’d build fewer homes while making far more mistakes in the process. Looked at in dollar terms, when the unit of account around which the world economy revolves is unstable, the potential for investment mistakes is magnified greatly.
Nearly 10 years ago to the day, Lehman Brothers was similarly thought by some to be on the verge of collapse. The underlying miscreant then was a rising dollar that took out a major hedge fund in concert with broken foreign-currency pegs to the dollar around the world. Had the greenback been stable then, the distant memory of what is now termed the “Asia Crisis” would never have been.
Fast forward to this decade, the weak dollar policies of the Bush administration have led to similar investment errors. An economist, Ludwig Von Mises, used to say that when a currency weakens there’s a “flight to the real,” and sure enough the falling dollar drove all manner of investment into housing and mortgages such that a correction of some kind was inevitable.
It’s easy now to blame something opaque like Wall Street’s “business model,” but absent the illusions wrought by monetary debasement, it’s safe to say that investment would have been far more rational such that any mistakes would have been easily contained.
Put simply, the answer to today’s problems does not lie in more regulation or taxpayer bailouts, but instead could be solved if Washington communicated to the markets a credible desire to stabilize the measuring rod of value that is the dollar. Rep. Ted Poe’s legislation to define the dollar as 1/500th of an ounce of gold would for now and in the future constitute the ultimate form of stimulus for our economy and the world’s.
Lastly, when we contemplate the sad sight of various Lehman employees exiting the bankrupt firm’s headquarters with their belongings, there’s hopefully another lesson to be learned. While employment on Wall Street has long been seen as the easy path to riches, the risk required to create that wealth has at times been ignored. Needless to say, the banks over the years that have failed or been swallowed shows the flipside of big paychecks. High pay is merely the seen.
Far from overpaid individuals who’ve lucked into the earnings bonanza that is an investment bank, employees of the latter are to those who know them some of the hardest working people in the world. And when we consider that nearly every form of financing for businesses and mortgages has a Wall Street provenance, we should say that far from being overpaid, these people are heroes for constantly seeking to move capital to where it can be deployed most profitably.
So yes, banking types are handsomely compensated, but the harsh tradeoff is long hours doing the kind of work where mistakes of the individual or companywide variety can take one from a large paycheck one day to the rolls of the unemployed the next.
Going forward, readers should expect lots of strident commentary about how Wall Street has failed Main Street. At the least, they should know that an unstable dollar, not the actions of “greedy” bankers, explains the various investment mistakes that regularly harm companies and the good name of capitalism itself.
Mr. Tamny, editor of RealClearMarkets, is a senior economist with H.C. Wainwright Economics and a senior economic advisor to Toreador Research and Trading.