Wednesday, 6 May 2009

The Fault, Dear Brutus ...

Today, the Center for Public Integrity, a journalistic watchdog, published the results of its investigation into the causes of the subprime mortgage meltdown which precipitated the larger meltdown. The Financial Times headline summed up the gist of the report: Few escape blame over subprime explosion. The paper went on to say, quoting the report, that “almost every US power centre had a hand in lighting the fuse to the global meltdown”, and that:
Most of the top 25 originators, most of which are now bankrupt, were either owned or heavily financed by the nation’s largest banks, including Citigroup, Goldman Sachs, Wells Fargo, JPMorgan and Bank of America. Together, they originated $1,000bn in subprime mortgages in 2005-07, almost three quarters of the total.
These supposedly hard hitting reports are a monumental waste of time. If everyone is guilty, then no one is guilty. We learn nothing from them except a back-handed confirmation of our prejudice about the human fallibility. We are being preached an antisocial sermon.

Here is what I wrote in the opening paragraph of the 10-part Credit Woes series early in 2008 that began this blog.
The events leading to this seizure have been covered in detail from many perspectives but always within the same prescribed framework: the crisis as the culmination of a series of unfortunate events set in motion by (choose your emphasis) greedy traders, irresponsible lenders, foolish borrowers, sleeping-at-the-switch rating agencies and feeble regulators.

The focus on human element makes for good storytelling and has an evangelically uplifting bend that is appealing: If only the bad guys were to be replaced with good guys – something definitely in the realm of possible – the wrongs will be set right. The fault, dear Brutus, is not in our stars, but in ourselves!

Such takes on the crisis are not inaccurate; they are irrelevant. The subject matter of finance is not people; it is capital in circulation.
Go back and read the full series again. You will notice that against a background that shattered the most cherished beliefs, it has aged well. In fact, it has even improved with time, as all its “forward looking” statements have come to pass. That is the power of a correct theory, which is derived from the power of the truth. It is that relation, that correspondence, that stands the test of time.