As the destruction of the past decade begins to pile up and we get a chance to look back and try and figure out how everything could have gone so wrong, the prevailing sentiment seems more and more to be, how could we have been so stupid.
Consider Felix Salmon’s post on the demise of Stuyvesant Town and Peter Cooper village projects. He adroitly sums up the faulty logic that drove this investment and then concludes:
Political and legal risks are hard to price or to hedge, of course, but it really seems in this case as if none of the investors in the deal even tried. If you’re betting billions of dollars on your ability to navigate the legal system, you have a fiduciary obligation to at least think about the possibilities that (a) you’ll lose, despite your best efforts; or that (b) the law itself might change. But that’s the problem with the whole credit bubble, in a nutshell: people just stopped thinking.
Or consider John Carney’s post on the lunacy that drove Dubai to the brink of default. He concludes:
As we’ve said before, Dubai was such an obvious bubble it’s hard to believe anyone missed it.
And lest you think that the madness has abated, the WSJ has an article today on the struggle to complete City Center in Las Vegas. It’s a tale of excess, corporate egos running wild as they spend other peoples’ money and failure to conceive of any scenario other than success. In this case, it appears as if the managers lost their grip on reality entirely:
MGM Mirage touts CityCenter, a cluster of skyscrapers, casinos and shops nearly six years in the making, as “the evolution of Las Vegas into a sophisticated, multidimensional city.” Its 67 acres feature a central boulevard that’s the width of New York’s Park Avenue and sculptures by the likes of Henry Moore and Maya Lin. “We view ourselves as patrons, like the Medicis,” Mr. Murren says.
One wants to hope that at least some bankers somewhere knew of Mr. Murren’s delusions regarding arts patronage and rethought their loan commitments but the evidence that occurred has so far not arisen.
When faced with this sort of thing, I’m inclined to fall back to John Carney’s thesis that the people charged with sorting through risk and making rational decisions simply failed in that task. Not to put too fine a point on it but they were essentially incompetent. How else would can one explain what should have been pretty easy lending decisions?
And so now we have our President summoning the CEOs of the nation’s largest banks to demand that they lend and then lend some more. Tellingly, three stood him up and I suspect the rest listened respectfully and then muttered about things going where the sun doesn’t shine as they made their exits. Whether they are any brighter now or simply scared little rabbits that have decided to hole up in their burrows, they have thankfully sworn off for the time being from extending any more bad money.
Paradoxically, that might be the best thing they can do as data is starting to indicate that the lack of credit is not of paramount importance to business, particularly small business. The WSJ reports on a Deutsche Bank survey that showed the following:
“Within the NFIB survey, respondents are asked to identify which among 10 general categories is the single most important problem they are facing. ‘Poor sales’ are cited most frequently, garnering 33% of the tally. High ‘taxes’ are second at 20%, and the ‘government requirements’ category is third at 13%. The ‘financial and interest rate category,’ which is where issues surrounding credit would be grouped, totaled just 5%,” LaVorgna writes.
The administration seems desperate to seize on any strategy that might result in some movement forward for the economy. The reality is that it’s going to take years to dig out of this hole, a hole that was largely caused by excessive credit extension by the banks. Prescribing a dose of the same virus that caused the disease hardly seems like the right course. Thankfully, the banks appear as if they won’t cooperate.
A timeout right now isn’t such a bad thing.