A Mockery of It All: Wall Street, The Joke’s On Us

Here I am, late at night reading accounts of the implosion on Wall Street. We are sufficiently past the peak of the crisis that we now have a few good books that explore or describe in detail what went on. They penetrate deep into conversations and exchanges that took place at the epicenter of the disaster.

And I am stunned by the arrogance, stupidity, cluelessness, and outright willful lack of ethics.

More to the point I am overwhelmed by the total abrogation of economic theory. Everything we know as standard economics is wrong. Totally and completely.

And I must admit, I love the idea of having to start over. There is nothing more exhilarating than learning. And boy do we all have a lot to learn.

Wall Street, hallowed as it is to market magic theorists was a demented fools game, rigged and self-serving, and completely beyond anything resembling what we read in economics text books. It was a colossal failure as a market. It was inhabited by people who had no idea what they were doing: bankers, lawyers, and accountants who were so incompetent that they genuinely believed in the inanity. They misled each other. They lied. They spoke in jargon in order to cover up the fact they didn’t understand even that most basic of banking rules: get your money back. They fell prey to the laudatory sewage published in the financial media, whose depth of analysis was so shallow that I doubt that even today, with the benefit of hindsight, that the commentators we see there actually have a clue as to what happened.

What we have just witnessed, folks, is a collapse of an entire elite. Wall Street has been exposed as an intellectual fraud of epic proportions.

Deals were made with the full knowledge that the paper being exchanged had no value. banks with sterling names and reputations were inhabited by idiots and dolts who sold assets they knew were valueless and yet swore up and down that those same assets had enormous value were they still on their own balance sheets.

We witnessed CEOs who knew little or nothing about the details of deals sufficiently large to sink their banks.

We saw risk management systems replete with elaborate math and sophisticated models, whose sole purpose was to obfuscate and hide the lie long enough for it to be traded to some other sucker.

We watched as traders larded their own bank accounts while not caring a jot about the bank where they worked. And we watched as the supporting cast of ‘professionals’ sliced and diced the legalese so finely that no one knew anything about reality.

The deal became the driver and be all of life. Anything more substantial, sensible underwriting for instance, became seen as retro and passe. Risk was something to be traded away not managed. Everything, absolutely everything, revolved around the next bonus. And since the next deal was the source of that next bonus, the deal became the reason for being. Shareholders, responsibility, longer time frames, and even the truth itself were tossed overboard in pursuit if the next deal. Quantity of effort dominated quality of effort. Mediocrity could masquerade as brilliance as long as it put in the hours.

The mockery this makes of standard economic theory is difficult to describe to anyone who isn’t familiar with the details of that theory.

It destroys it.

It is a total repudiation of everything we learn in introductory economics.

The market, and remember the money market is always held up as the closest approximation we have to a text book market, was a shambles. It was so far from the perfection we read about that it seems almost surreal when people who still advocate market magic theory try to defend it. I have to pinch myself when I hear anyone mouth a defense of free market economics. Exactly what about the implosion do they not understand? Markets, it turns out, are riven through with inconsistencies, errors, and foibles. They are not the perfectly smooth all knowing, infinitely adjustable, and hyper sensitive mechanisms for exposing the ultimate truths of an economy. On the contrary they are murky, dark, and dingy places full of mistakes and misalignments.

Free market economics has always been more an ideology than a science. To make the models work in order to defend the notion that markets are better at asset allocation than anything else they have to be so perverted as to be utopian and almost mystical.

The greatest of the free market advocates: Hayek, Friedman, and others worked very hard in order to avoid taking into account the real world. They cut away vast swathes of reality from their modeling in order to distill the ‘essence’ and explore the efficacy of the unreal world of their ‘perfect markets’.

Generations of students have been taught free market economics subsequently, but few have been told the exact nature of the sham it represents. The American population at large has been persuaded that markets work magically in ways that other forces – usually the government – cannot. Somehow the market achieved mythical status, and to attack it was to expose your ignorance or lack of sophistication.

And always Wall Street and its heroic denizens, those multi-millionaire whiz kids and their super suave managers, were held up as the epitome of the truths embodied in free market economics.

Well no more.

They are incompetent fools with very limited ability and even more limited ethical standards. They may make fortunes, but they make those fortunes by rigging and twisting the market not because they inhabit or understand the market’s magical forces.

There never were any magical forces.

It was all an illusion.

An illusion inside people like Hayek’s and Friedman’s minds. An illusion they forced into existence in order to justify their political views rather than to provide a scientific explanation of reality.

The big banks would not make a penny were it not for our subsidy of them. None of them. Not Goldman, not Citi, not JP Morgan Chase, not Wells Fargo, not Morgan Stanley, and not Bank of America. They all rely on us, and in particular our guarantee that they will not fail.

Don’t believe the hype: none of these organizations is well run or sophisticated. They are all a sham. They would all crumble back to a much more humble level were it not for our constant support.

The sad part, the truly sad part, is that most of them don’t realize the mockery they have made, not just of decades of economic theory – that is way too abstract for them anyway – but of themselves.

They have become a caricature. Like the grotesque figures of Hogarth’s satires, they are exposed as deluded, corrupt, and venal. They are cartoons to laugh at as they continue their incompetent ways.

Even worse, they continue. And this is, perhaps the biggest mockery of all: their ability to continue and make fortunes as they wallow in blissful ignorance, safe in the knowledge that we will bail them all out again, mocks our intelligence. It is a slight to all those who try to do the right thing, or who try to work honestly. It is an insult to those who seek to learn and apply knowledge diligently in the hope of a fair reward. And it is a total mockery of the notion that the American economy rewards those with the most merit or those who work the hardest. they are the exact opposite of the story book reward for hard work. They are being rewarded despite their continuing incompetence.

Wall Street, as we now know it, is a ship of fools.

They mock us. They mock economics. They mock themselves.

Truly: they made a mockery of it all.