Cue Tom Petty’s Free Fallin’

Let the meltdown ensue. Well folks seemed to be holding onto the notion that the U.S. government and other world governments would be able to bail out industry the way it has done in the past. It’s not as if the governments are not doing the right things, because they are. However, what seems to be utterly lacking and utterly unaddressable is the crushed will power of people around the world. And this is the economic cost of unethical behavior. What began happening last year and is continuing to happen in spades is that corruption, long invisible, or just plain ignored, is being exposed at an ever increasing rate. The problem, as I stated in one of the earliest blog postings, is that capitalism is based on trust between parties to a capitalistic transaction. Destroy the trust and you destroy the transaction. If this happens enough then you destroy capitalism. Capitalism is all about competition, but without rules or ethics in place, competition looks like war and anarchy. None of you need me to tell you that is what is occurring right now. “But besides that Mrs. Lincoln, how was the play?”

Are there any glimmers of hope? Well of course there are. Let me enumerate the major ones:

• The meltdown is happening.

Do you remember early on in the history of the blog I said that I thought the financial bailout was a bad idea? I said this because I felt that a reckoning and rationalization of asset prices and regulatory structures was waaaaay over due. Now it seems that everyone knows that it is time to finally GET REAL. While the meltdown is a welcome reckoning and rationalization, the sad thing is all of the economic dislocation and pain taking place. It is also sad that ethics have fallen off of the radar screen of policy makers and the President.

Do you remember the three things I said needed to take place in order for confidence to be reestablished? The first was that the old institutions, the ones that have failed us, would have to be destroyed or reordered so that they reflected the new reality. The second was that the people who created and led these institutions would have to be removed and replaced. The third was that new ideas and ways of doing things would have to be put in place.

The meltdown is a categorical destruction of the old institutions. I had hoped that this process would be more graceful and less painful. Unfortunately, the people leading the institutions have been very resistant to change; think: ridiculous executive junkets to exotic places and overblown pay packages being awarded for stupid performance. The destruction of the institutions via the vehicle of the collapsed credit and asset markets is ultimately going to be a good thing, I promise.

The next important step is for the jackass leaders of these institutions to be made to pay via massive fines and painful incarceration for their continued and wanton unethical behavior.

Lastly, it is obvious that new ideas are needed because governments around the world have been applying what they feel will work to overcome financial crisis and it isn’t working. Warren Buffett is fond of saying that in the short run the stock market is a voting machine and in the long run it is a weighing machine. Well the stock market has voted and it has clearly voted to destroy old institutions and voted against old ideas.

• We have a real President in office.

Yes, Barack Obama is human and subject to all of the frailties that all of us are. However, he is obviously an outstanding human being and despite all of the crises hitting all at once, we could not have asked for a better leader to be the focal point for resolution. This is a blessing.

• People are finally paying attention.

The current crisis is one that has been 30 years in the making and can be boiled down to: “As long as I was prosperous I was only too happy to ignore the signs of corruption and disintegration around me.” This myopia has proved to be deadly. But people are finally starting to care about these core issues. Namely, the ground rules that shape the arena in which capitalism takes place.

• Businesses and individuals are rationalizing their finances to reflect the new environment.

Companies are laying off individuals and cutting the fat out of their operations. While painful for employees, this is a necessary step to GETTING REAL. Additionally, households are cutting back on their debt spending and eating out and text messaging and all of the other overextended things that they used to do. Some households are even, GASP, saving money for purchases. Again, this is good evidence of GETTING REAL.

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While I have only named 4 things above, don’t be confused by the small number. Those 4 things are absolutely FUNDAMENTAL to shifting the economy and ultimately recovering.

Separately, you might be asking yourself what I so misjudged? I think that I have misjudged two primary things:

• The enormous depth of the corruption that existed on Wall Street and in Washington.
• The enormous malaise and sense of fatalism that has taken root in the First World’s citizens.

However, despite the seeming enormity of the crisis and the seeming hopelessness of the whole thing, I am still a buyer of stocks because I have a long-term focus on these things.

*****

Let’s be careful out there!

Jason