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American banking titans Citigroup (C, news, msgs), Goldman Sachs (GS, news, msgs) and Morgan Stanley (MS, news, msgs) are each down 30%-plus this month despite emergency rescue efforts by two branches of the federal government and the infusion of tens of billions of taxpayer dollars.
They are down 75% for the year despite executives' protests that business is fine. They are down despite massive job cuts and asset sales to save costs, and the personal endorsement of everyone's favorite rich uncle, Warren Buffett. They are down even though they have plenty of cash flow and millions of customers, many of whom are the envy of other banks the world over.
Investors must be nuts, right? I mean, they must not have gotten the message that the Treasury and the Federal Reserve will use all means at their disposal to recapitalize the banking system. They didn't see the memo that says the feds have never failed in their efforts to pump the system full of money until it bursts like a piñata, spilling profits in every direction.
Yet according to research by Niall Ferguson, a Harvard professor of economic history, there is ample reason for investors to thumb their noses at the conventional wisdom: All that taxpayer money is acting more like embalming fluid than artificial respiration, he says, keeping the banks looking eerily lifelike while they stiffen.
Turning Japanese
"You can stick money into every orifice of the big banks -- their mouth, their nose, their ears, wherever -- but if they can't make loans because they have to reserve against future losses, and if they won't make loans because there's a recession, it won't do any good," Ferguson says. "If they can't lend, there's no money multiplier -- they're stuck, they're zombies. It's Japan all over again."That sounds about right. It's the night of the living dead on Wall Street these days, a few weeks past Halloween, as the horror of asphyxiated credit that has plagued Japan since a debt bubble burst in 1990 is playing out all over again here. While it's bad enough that our banks aren't lending and private fund managers are shunning corporate bonds, it's doubly concerning because U.S. policy experts have sworn they would never repeat Japan's mistakes.
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Ferguson, a fellow at Stanford and Cambridge universities when he's not lecturing at Harvard, is not surprised to see this fate befall U.S. banks because he has documented a similar set of circumstances that played out in a dozen financial crises of the past 10 centuries. In his new book, "The Ascent of Money," he tells how the bipolar moods of the credit cycle -- the expansion and contraction of money and lending -- explain much of the political history that is more widely studied.
Every time governments and bankers figure out how to create money from thin air -- or out of the ground, for that matter -- they get carried away, running a thousand miles an hour until they hit a brick wall. Then the old world of finance shatters into a thousand pieces, and despite the best efforts of the smartest minds at the time, it takes many years, at best, for institutions and psyches to heal.
It happened in the 15th century after Spain discovered silver in South America and used it to finance endless wars that ended in ruin. It happened in the 1870s when U.S. banks suffered a depression after railroad and agricultural financing went bust. And it happened in Japan in the 1980s when loans on real-estate speculation went bust.
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Saving the auto industryBail out the Big Three? Let them go out of business? There's a third option, says Jim Jubak: a pre-packaged bankruptcy that gives them room to restructure while saving taxpayers from simply rescuing the companies' failed management.
Ferguson observes that the experts of each era swear they will never repeat their predecessors' mistakes, yet they always end up making new errors of hubris and find that some old missteps are unavoidable. The U.S. Treasury and the Fed both know, for instance, that one key error made in the 1930s was the passage of a set of protectionist laws that prevented a free exchange of goods among countries, and they have overtly sworn to prevent that from happening. Yet at times of stress, new populist leaders always emerge, and they find it politically useful to blame foreigners for the country's economic problems and try to protect jobs in the homeland.
Continued: A global race to the bottom
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