Hindsight is a wonderful thing. Looking back at the past, with its earth-shaking (but entirely man-made) catastrophes, it's easy to say that you could have seen it coming. What's harder, in many ways, is to see the next crisis coming and be unable to stop it.
Sadly, that seems to be a frequent scenario lately, as the old adage that "bad news comes in threes" found quick fulfillment this May. On the 6th, there was Greece, its problems again spilling out into the open like so many drunken teenagers from the back of a police paddy wagon. The 10th brought news of JPMorgan Chase's
It doesn't take a prophet to understand that each of the three situations was avoidable. Commentators weighed in on each present scenario's eventuality as their antecedents played out.
Beware Greeks bearing debts
The New York Times opined in 2008, before Lehman's meltdown, that Greece was "an accident waiting to happen." It went further, predicting that Italy would be forced into the grip of recession and unemployment. Two for two: Italian GDP shrank 1.2% that year -- falling 5.5% the next -- and remains 5% below pre-crisis levels, and unemployment has steadily risen since the time the article was written, from 6% then to 9.8% now.
2009's holiday season found BusinessWeek beating drums over Greek default risks, pointing out that Greece was already, at the time, paying 2% more on its 10-year bonds than Germany. It could get worse, its writer claimed. How quaint! Greece now pays 27.6% more on its bonds than Germany (when it can find buyers). By the following March Financial Times had already given up hope that Greece could remain part of the common euro currency at all.
Dissent could be heard on the repeal of Glass-Steagall -- you might remember it from such political circuses as the Levin hearings or the Volcker Rule -- even as repeal made its way through the legislative process over a decade ago. Senator Byron L. Dorgan had impeccable prophetic timing at the time: "I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930s is true in 2010." Bit wordy, though. Maybe that's why most people ignored him until, 10 years later, they went back and saw what he said and felt kind of dumb for ignoring it in the first place.
In the aftermath of the crash, the Dodd-Frank bill and its attendant Volcker Rule were supposed to be the baby Superman hidden in the economy's smoldering crater, here to save America from itself. Representative Paul Kanjorski offered one of the best metaphors for punishing financial malfeasance that may ever be uttered in its support: "When your dog just keeps wetting the carpet, there's only one thing to do, you've got to whack him on the nose to let him know that's not what he's supposed to do. Maybe the regulators have to whack the banks a little bit to make them respond."
But warnings popped up even as the 2,300-page monstrosity lurched toward the president's desk -- that it ignored the problem of "too big to fail"; that it disregarded the complex, opaque, and undisclosed (read: "off-balance-sheet") financial information lurking behind the crisis; that its sheer size was tailor-made for the discovery of loopholes. Its lack of implementation has been pointed to as the reason for JPMorgan's trading losses, which may have a grain of truth, as only 27% of the nearly 400 required rules so far scheduled have been put into practice on time. Love-tapping a mastiff with a postage stamp doesn't have much of an effect.
On the other hand, banks as unwieldy as JPMorgan may simply be beyond effective regulation entirely. Even JPMorgan CEO Jamie Dimon seemed to recognize the sorry futility of regulatory efforts on his global firm earlier than most. In a 2009 Washington Post op-ed, Dimon said that preparing for the "orderly" (his word) implosion (mine) of major financial firms would "require effective international cooperation," a mystical paean to the sort of political harmony that's about as likely as an alien invasion.
Bouncing off the ceiling
And to top it all off, the most recent (and most ridiculous) of these manufactured crises is now poised to repeat itself, with Speaker of the House John Boehner promising to renew the same game of debt-ceiling chicken that was played last year. While the subsequent ratings downgrade hasn't hurt American borrowing costs, it certainly hasn't helped ease the sense of political paralysis that continues to hang over Washington. When the deal was signed, The Economist noted that businesses dealing with uncertainty saw little reason to change their caution, as "the polarization that made the stand-off possible [remains] as sharp as ever."
During last year's dithering, the Dow
A common thread
In the end, it all boils down to politics and the political tendency to avoid hard choices and think small, when big thinking and hard choices wind up being the least painful way out. By now we should be well aware of what's happening, despite holding little power to change course on our own. There's little reason to be surprised at the re-emergence of these dangers, nor should anyone act shocked when they play out to devastating conclusions.
Politicians have been all too happy to exploit their constituents' shortsightedness for short-term gains at the risk of long-term damage, and all too venal in attempting to moderate the financial elite's excesses to the benefit of all. Beyond our shores, expecting European politicians to suddenly come together and sing "Kumbaya" is likewise a pipe dream when many already risk or have received swift backlash from their own polarized populations while in pursuit of continental unity. It's not popular to talk about the impact of our politics on our markets, but no rational investor should ignore the shadow it casts now.
When three-quarters of America still thinks we're in a recession, they aren't wrong. We just have to shift those terms to cover our politics -- locally, nationally, and globally. There's a recession in real solutions and necessary measures, and it's made the world weaker and riskier than it has any right to be after already enduring so much recent weakness and risk. Will things rebound? I don't know. But whenever such a "rational recovery" happens, it's almost certain to be too little, too late.