psst! wanna know a secret? we were never in danger of another great depression.

Welcome to my new blog. I’ve been managing money successfully for three decades now and I’ll be posting regularly about investing and finance. I’ll probably spend a good amount of time complaining about my industry, too. What can I say? I’m kind of an odd bird–I’m an investment manager who despises just about everything about the investment business and Wall Street in general. With that in mind, I’ll start things off with a post on what you might call an “oldie but a goodie”—the infamous Wall Street bailouts of 2008, and something almost nobody understands about them.

David Stockman wrote something very true and yet very taboo recently. In a New York Times piece published last week, the former congressman and Reagan budget director argues persuasively that, despite what just about every pundit and politician has been saying for five solid years now, those bailouts did NOT “save us from the next Great Depression”:

There was never a threat of a Great Depression 2.0 or of a financial nuclear winter.

Stockman calls this doomsday prediction of massive economic collapse, which conveniently solidified into a universal consensus just as Congress was debating the bailouts, “The Great Fear” and he traces its origins to—surprise!—the very people who created the crisis:

The Great Fear … was purely another Wall Street concoction. Had President Bush and his Goldman Sachs adviser Henry M. Paulson stood firm, the crisis would have burned out on its own and meted out to speculators the losses they so richly deserved.

The question is: How was it so easy for the major Wall Street players and their political allies to convince the nation to subsidize their own multi-trillion dollar losses? Easy. They played on most people’s fundamental ignorance of the financial world by cleverly lumping both investors and depositors together whenever they discussed bailing out the banking system.

Here’s what I mean:

Congress definitely should have protected the funds of individual depositors in troubled banks. But, at the same time, it should have let the investors and bondholders in those same banks eat the losses “they so richly deserved.” Instead, our political leaders—cowed by the Great Fear of another depression–bailed out both depositors and investors, and demolished any notion that we are living in a truly free market economy.

As Stockman argues, if we had simply bailed out depositors in the banks, as well as money market account holders, the vast majority of Americans would have weathered the crisis with little or no disruption. But that would have meant the affluent investors in those institutions would have seen their stakes wiped out as the banks were either nationalized or went through bankruptcy reorganization. In other words, they would have done what investors who have made poor choices with their money have done for time immemorial—lost their asses. That’s, you know, what’s supposed to happen to people who put their money into bad companies. But, of course, these folks don’t play by the normal rules. (Losing money is so déclassé!) So they concocted the Great Fear and used it to push through the massive bailouts that, theoretically, made both depositors and investors whole. Take it away Mr. Stockman:

Washington, with Wall Street’s gun to its head, propped the remnants of this financial mess in a panic-stricken melee of bailouts and money-printing that is the single most shameful chapter in American financial history.

That was bad enough. But, in reality, the way those bailouts have been accomplished is even more shameful.

The dirtiest secret of this sordid story, which Stockman hints at but doesn’t discuss in detail, is that individual depositors have actually paid for the bailouts of the banks’ wealthy stock and bondholders. In the name of spurring economic recovery, the Federal Reserve dragged interest rates to zero. This has allowed the banks to line their balance sheets with as much free money as they want while crushing the returns individual depositors in those banks make on their accounts! In other words, the little guys have paid twice—once with trillions in their tax money and, again, with the interest they earn on their savings.

Can you see why I am so ashamed of my own industry? Unfortunately, there are many, many more reasons I feel that way, and I’ll be getting into them in the coming days and weeks. (Though I promise I’ll talk about other stuff, too!) Please stay tuned, and please feel free to comment below or contact me at scott@scottfearon.com. Thanks for reading!

 


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