How to avoid another day like Thursday, when, at one point, the Dow lost almost 1,000 points? On Monday, SEC Chairwoman Mary Schapiro met with the leaders of the major stock exchanges and the Financial Industry Regulatory Authority to discuss implementing new protections to avoid repetitions of Thursday’s nosedive. Randall Lane on the dangerous joint addiction that governments and markets have developed.
The most telling moment of the financial crisis: President George W. Bush, the Cabinet, congressional leaders, and both presidential nominees huddled desperately at the White House on September 25, 2008, to hammer out a Wall Street bailout package, all watching Treasury Secretary Henry Paulson, the former Goldman Sachs chief, get down on one knee to literally beg for Nancy Pelosi’s support.
A consummate Wall Street creature, the pathetic, groveling Paulson knew what would happen without a bailout. When Congress rejected it, the Dow sank 778 points, the largest one-day drop ever. Only then, as the markets sent the world into full freak-out mode (“this sucker could go down,” Bush warned famously, with typical elegance) did a $700 billion package pass.
It used to be said that if America sneezes, the world catches cold—now it’s just as likely to come from the other direction.
Yesterday felt like déjà vu, with a European twist. An economy undermined by junky debt (Greek, rather than subprime) that threatened to prove contagious. Markets fresh from meting out the price of inaction. And then finally, the bailout: $1 trillion worth of “shock and awe” courtesy of the EU and the International Monetary Fund, which prompted American stock indices to soar 4 percent yesterday, a glorious trading session that more than offset Thursday’s harrowing loss. This European saga even featured moments of Paulson-style groveling (as France’s Nicolas Sarkozy presented a “fait accompli” to Germany’s Angela Merkel, “she looked like a boxer who had been punched in the chest") and a Bush-style warning (President Obama lobbied Merkel at length about the dangers of inaction, presumably with more polish than “this sucker could go down,” even if the message was inherently the same).
• Randall Lane: How a Typo Crashed the Market The dynamics driving yesterday’s market response were pretty simple. “Markets hate to worry,” one Wall Street executive explained to me, as we watched prices for global stocks and the euro soar. “The EU took our worries off the table for a day.”
And that sentiment, in all its brevity, summarizes the perpetual dilemma we face right now. The supposedly free market is addicted to the idea that government can and will allay its worries when necessary. Meanwhile, Western governments feel the need to do so, rather than risk punishment—and endanger the nascent recovery—from what the Swedish finance minister dubbed the “wolf pack.” Government policy and market stability have become intertwined, and the latticed nature of the global economy now forces Greece’s problems to become ours. It used to be said that if America sneezes, the world catches cold—now it’s just as likely to come from the other direction.
More ominously, listen again to how our Wall Street executive explained yesterday’s euphoria. “The EU took our worries off the table for a day.” Ultimately, what the great European bailout of 2010 proves is that the world still hasn’t learned its lesson from the great American bailout of 2008. Both rescues were, sadly, necessary (a fun remake of It’s a Wonderful Life might feature a Tea Party convention transported to a version of America that didn’t approve the 2008 package they so loathed). But unless the U.S. and Europe make fundamental reforms to both Wall Street and government, they are just one-day fixes that will need to be repeated.
Long-term, the markets remain a casino—or, still worse, a slot machine, where money disappears into an electronic box. The scariest part of Thursday’s insane trading session remains what we don’t know. Specifically, how the Dow Jones Industrial Average instantaneously dropped 1,000 points, how the stock prices for Procter & Gamble and 3M were decimated, how Accenture’s price dropped to a penny. Investigators now discount the idea of a “fat finger” mistake—an emerging theory instead holds that different markets, seeking speedbumps during an already-chaotic day, automatically shut off or slowed down at different times, causing order imbalances. But that remains theory—five days later, Wall Street’s best minds still can’t provide a definitive answer, which just strengthens the larger point: Our computerized exchanges have become so complex that the machines sometimes control the humans. That must be cured.
Also long-term, while traders applauded Europe’s new round of debt, which will go to cover old rounds of debt, such fixes don’t address the fundamental problem of governments that don’t bring in enough money to pay for the services they provide. Sure, the markets felt good yesterday, but I’m not convinced that a rally based on such thin gruel will even last into today. Without fiscal reform, in conjuction with Wall Street reform, it will just be a matter of time before some other government official will have to again get on bended knee.
Randall Lane is the former editor in chief of Trader Monthly, Dealmaker, and P.O.V. magazines, and the former Washington bureau chief of Forbes. His book, The Zeroes: My Misadventures in the Decade Wall Street Went Insane, will be published in June.