MonkeyBusinessBlog: Sometimes You Need to Just Step Back and Admire How Perfectly We Blew Ourselves Up!

Have you gotten sick, where you feel like you definitely have to vomit but you can't? That happens to me about once a year.

Around noon I start feeling ill;
By 2 PM I'm in bed whining how sick to my stomach I am;
By 5 PM my wife gets sick of hearing me whine;
by 7 PM I'm just praying to puke;
And finally, around 9 PM the blessed event occurs and its over.

This is how I felt this morning thinking about what to write about. How many times can you write about Lehman's pathetic lap dance for KDB? How many times can you opine on the fact that Freddie and Fannie are screwed or that we are nowhere near the end of our banking system's "death by a thousand writedowns"? This morning I read articles that highlighted the oncoming CMBS disaster, British banks tapping the BOE emergency funding line to the tune of $354 billion and Barclays needing to raise $13 billion and I didn't seem to care. I think what is happening to me is the equivalent of the ritual "puke-watch" that I engage in once a year. Don't you feel like you just want this entire system to stick its finger down its throat, puke it all up so we can get on with the future? I know I do.

Then I took a step back and sort of admired just how spectacularly we've destroyed our financial system. Every player in the line up contributed too! Think about it. For this disaster to have happened EVERYBODY had to screw up so completely to get it to this level. The financial system is a lot like New Orleans. It is surrounded by dangerous forces that can build up to catastrophic levels, especially when everything seems to be fine on the surface. It relies on its own system of dikes, dams and pumps to keep it from failing. Some of these systems are;

A regulatory system that can spot potentially dangerous conditions in the banking and financial system. A Federal Reserve, a Treasury Department and a SEC that uses common sense and natural inquisitiveness to gauge the forces that are driving assets and the economy higher and higher.
Competent management of major banks, insurance companies and Government Sponsored Enterprises (GSEs), including not only proper risk management but also a management interested in building long-term shareholder value.
A media that would or could use its own inquisitive powers to do more than just play up the dangerous myths of superb management by the banks and regulators who were actually driving us toward disaster.
Institutions responsible for rating the risk of securities having the knowledge and incentive to properly gauge and rate risk
A system of insurance and re-insurance that is properly capitalized to be the last line of defense and head of catastrophic failure.

If we could magically transport ourselves back to early 2006 we would see than none of these bulwarks and shock absorbers were functioning. They were either asleep, incompetent or non-existent. Risk management and measurement were dangerous myths. The media was little more than a cheerleader, usually lacking the knowledge necessary to find problems and ask proactive questions. The Federal Reserve was basking in its glory, blissfully unaware that the economy's circulatory system was about to seize up. It was like that beautiful Sunday morning on December 7, 1941. Despite all the warnings and all the things that, on close inspection, didn't add up, we sat fat and happy. We counted our bonuses, watched our homes increase in value by the minute. We opened new Bed, Bath & Beyonds and built housing developments in the middle of nowhere for people who couldn't pay for them.

This was the new reality. Prices of things we own only go up, prices of things we need to sustain ourselves only go down. The world's economies had become diverse and hence less risky. If the United States slowed down, no worries because Asia or Central Europe or South America would pick up the slack. Just like Alan Greenspan told us all real estate was local, all economies are local too. The odds of the whole world going down the toilet at the same time had decreased dramatically.

And then something happened because something ALWAYS happens. The engine that was powering the world economies, the engine that fed off the worlds eagerness to feed it imploded. Suddenly everyone realized that the world's prosperity hinged on a guy with a mortgage he couldn't possibly pay. There were millions of these guys and they might as well have had all the same first and last names. A drunken giant awoke from his stupor to find himself in a town he didn't remember going to, in a strange hotel room with a guy named Bill, his clothes and wallet gone.

You really have to step back and just admire how making a loan to a guy that couldn't qualify for a Discover card could have f**ked things up so completely. It's really awe inspiring.