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Home » Opinion » Foreign Views
Shortcut to wealth can lead to a chasm
By Richard W. Fisher |
May 19, 2009, Tuesday
|
Print Edition
Print Edition
I once managed Dan Oppenheimer's personal portfolio. One afternoon in 1982, I was visiting Dan at the Oppenheimer Bank in San Antonio.
A Baptist preacher came in to ask him for a "loan." He wanted to buy some cattle. Dan was teasing him about the prosperity he had achieved while preaching from the pulpit and warned him not to count on its permanence.
"Your congregation might become as prominent as you," he said, "and then migrate to a nicer church."
To illustrate the point, he invented a story about a Baptist preacher who visited a shelter where he found a man who looked particularly downtrodden.
The generous preacher took pity upon the man. He took him to a barber for a shave and a haircut and to a store for a pair of shoes, a shirt, a tie and a new suit. The preacher then dropped the man back at the shelter, handed him US$20 and told him, "Son, you have been saved. The Baptist church is just one block away from here. I want you to come to my church on Sunday and praise the Lord."
Sunday came but the man did not. So immediately after the service, the preacher went to the shelter.
There was the man, sitting in a rocking chair, all dressed up and beautifully groomed, reading a newspaper.
"Son, I had asked you to come to the Baptist church this morning to give testimony to having been saved. Where were you?" asked the preacher.
"Pastor," the man replied, "I surely did go to church. I woke up this morning, shaved my whiskers, combed my hair, put on this beautiful shirt and tie you bought me and dressed in this new suit. I put on these fancy new shoes. When I looked in the mirror, I felt like a millionaire. So I spent the US$20 and took a cab to the Episcopal church."
I certainly don't need to tell a room full of Texas bankers what got the nation into its current economic situation.
A sudden new set of circumstances, easy money seemingly heaven-sent and the short-sighted suspension of time-tested, prudent financial practice led us on the road, not to salvation, but to economic perdition.
Allow me to address each of these individually. The new set of circumstances included the economic and financial windfalls that came from at least two major structural changes.
The first was the commercial reorientation of China, Vietnam, India and Eastern Europe, which unleashed enormous new capacity for the increased production of goods and services.
The second was the explosion of computational power and communication ease that came from technological advancement and the Internet, facilitating globalization. The world was our oyster. It simultaneously gave us new consumers and suppliers. It provided new sources of funds as well as new places to invest.
The easy money may well have been encouraged by central banks that held interest rates too low for too long. But it was exacerbated by lenders, investors and consumers who - keen on enhancing returns that seemed pedestrian with a flat yield curve anchored by low, risk-free rates - "craved" and "devoured" new risk instruments.
As a result, they came up with new "schemes" and "projects" and "fantasies" made more enticing by expanded markets and financial innovation.
The short-sightedness was manifest in the abandonment of prudential practices.
The thundering herd
For the banker and lender, the time-tested principle of "know your customer" took a back seat to the mad rush to package and sell exposure to others.
For the consumer, living within your means became a less compelling discipline in a world where a house was not just a home but a means to financial gain.
For the investor, prudence took on another dimension with the presumed ability to mathematize judgment and hedge away the risk of default.
And yet, while the world had indeed changed, the behavioral pathology documented by Mackay and Bagehot in the 19th century - a pathology based on their studies of countless debacles through history - prevailed.
A "plethora" of commercial and financial opportunity begat "speculative" excess that inevitably begat a "panic."
The thundering "herd," spurred on by "the love of gain, the necessity of excitement or mere force of imitation" and "mad" with irrational exuberance for the upside, suddenly realized in 2008 it had "devoured" more risk than it could stomach and it panicked.
The financial system seized up and the economy descended into recession.
Who is to blame? Well, if you had been listening to the radio on February 26, 1933, you would know the answer.
You would have heard a crazed Father Charles Coughlin, pastor of the Shrine of the Little Flower in Royal Oak, Michigan, rail against "the Morgans, the Kuhn-Loebs, the Rothschilds, the Dillon-Reads, the Federal Reserve banksters, the Mitchells ... and the rest of the undeserving group, who without ... the blood of patriotism ... flowing in their veins have shackled the lives of men and of nations with the ponderous links of their golden chain."
Advance the tape 76 years. If you substitute Goldman Sachs for the Rothschilds, Lehman Brothers for Kuhn-Loeb, AIG for Dillon Read, Ken Lewis, Sandy Weill or John Thain for "Sunshine Charlie" Mitchell and keep the text about Federal Reserve "banksters," you will have captured the liturgy of invective heard from Father Coughlin's contemporary secular cousins.
In my time at the Federal Reserve, starting in 2005 and working predominantly under the chairmanship of Ben Bernanke, my colleagues and I have been focused primarily on finding a way to undo past errors and mend the system.
I believe that the initiatives taken by my fellow "banksters" at the Federal Reserve prevented us from falling into the chasm of an economic depression.
(The author is president and CEO of Federal Reserve Bank of Dallas, San Antonio, Texas. The article is adapted from his remarks before the 125th Annual Convention of the Texas Bankers Association. The views are his own.)
A Baptist preacher came in to ask him for a "loan." He wanted to buy some cattle. Dan was teasing him about the prosperity he had achieved while preaching from the pulpit and warned him not to count on its permanence.
"Your congregation might become as prominent as you," he said, "and then migrate to a nicer church."
To illustrate the point, he invented a story about a Baptist preacher who visited a shelter where he found a man who looked particularly downtrodden.
The generous preacher took pity upon the man. He took him to a barber for a shave and a haircut and to a store for a pair of shoes, a shirt, a tie and a new suit. The preacher then dropped the man back at the shelter, handed him US$20 and told him, "Son, you have been saved. The Baptist church is just one block away from here. I want you to come to my church on Sunday and praise the Lord."
Sunday came but the man did not. So immediately after the service, the preacher went to the shelter.
There was the man, sitting in a rocking chair, all dressed up and beautifully groomed, reading a newspaper.
"Son, I had asked you to come to the Baptist church this morning to give testimony to having been saved. Where were you?" asked the preacher.
"Pastor," the man replied, "I surely did go to church. I woke up this morning, shaved my whiskers, combed my hair, put on this beautiful shirt and tie you bought me and dressed in this new suit. I put on these fancy new shoes. When I looked in the mirror, I felt like a millionaire. So I spent the US$20 and took a cab to the Episcopal church."
I certainly don't need to tell a room full of Texas bankers what got the nation into its current economic situation.
A sudden new set of circumstances, easy money seemingly heaven-sent and the short-sighted suspension of time-tested, prudent financial practice led us on the road, not to salvation, but to economic perdition.
Allow me to address each of these individually. The new set of circumstances included the economic and financial windfalls that came from at least two major structural changes.
The first was the commercial reorientation of China, Vietnam, India and Eastern Europe, which unleashed enormous new capacity for the increased production of goods and services.
The second was the explosion of computational power and communication ease that came from technological advancement and the Internet, facilitating globalization. The world was our oyster. It simultaneously gave us new consumers and suppliers. It provided new sources of funds as well as new places to invest.
The easy money may well have been encouraged by central banks that held interest rates too low for too long. But it was exacerbated by lenders, investors and consumers who - keen on enhancing returns that seemed pedestrian with a flat yield curve anchored by low, risk-free rates - "craved" and "devoured" new risk instruments.
As a result, they came up with new "schemes" and "projects" and "fantasies" made more enticing by expanded markets and financial innovation.
The short-sightedness was manifest in the abandonment of prudential practices.
The thundering herd
For the banker and lender, the time-tested principle of "know your customer" took a back seat to the mad rush to package and sell exposure to others.
For the consumer, living within your means became a less compelling discipline in a world where a house was not just a home but a means to financial gain.
For the investor, prudence took on another dimension with the presumed ability to mathematize judgment and hedge away the risk of default.
And yet, while the world had indeed changed, the behavioral pathology documented by Mackay and Bagehot in the 19th century - a pathology based on their studies of countless debacles through history - prevailed.
A "plethora" of commercial and financial opportunity begat "speculative" excess that inevitably begat a "panic."
The thundering "herd," spurred on by "the love of gain, the necessity of excitement or mere force of imitation" and "mad" with irrational exuberance for the upside, suddenly realized in 2008 it had "devoured" more risk than it could stomach and it panicked.
The financial system seized up and the economy descended into recession.
Who is to blame? Well, if you had been listening to the radio on February 26, 1933, you would know the answer.
You would have heard a crazed Father Charles Coughlin, pastor of the Shrine of the Little Flower in Royal Oak, Michigan, rail against "the Morgans, the Kuhn-Loebs, the Rothschilds, the Dillon-Reads, the Federal Reserve banksters, the Mitchells ... and the rest of the undeserving group, who without ... the blood of patriotism ... flowing in their veins have shackled the lives of men and of nations with the ponderous links of their golden chain."
Advance the tape 76 years. If you substitute Goldman Sachs for the Rothschilds, Lehman Brothers for Kuhn-Loeb, AIG for Dillon Read, Ken Lewis, Sandy Weill or John Thain for "Sunshine Charlie" Mitchell and keep the text about Federal Reserve "banksters," you will have captured the liturgy of invective heard from Father Coughlin's contemporary secular cousins.
In my time at the Federal Reserve, starting in 2005 and working predominantly under the chairmanship of Ben Bernanke, my colleagues and I have been focused primarily on finding a way to undo past errors and mend the system.
I believe that the initiatives taken by my fellow "banksters" at the Federal Reserve prevented us from falling into the chasm of an economic depression.
(The author is president and CEO of Federal Reserve Bank of Dallas, San Antonio, Texas. The article is adapted from his remarks before the 125th Annual Convention of the Texas Bankers Association. The views are his own.)
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