Speculative Orgy Gone Bust: Bogle and Noland

This morning on NPR, John Bogle, founder of The Vanguard Group, said that we have a "Speculative orgy like nothing we've ever seen before in the history of the United States. … We've become a market dominated by speculators not by investors.

"I don't know if [the bailout] can succeed. I mean Goldman Sachs collecting deposits from investors, putting an ATM on every corner. I can't imagine it. … I worry about mixing banking — commercial banking — and investment banking, just like they worried about when they put in the Glass Steagall Act back in1933 or 1934."

Meanwhile, Prudent Bear's Doug Noland weighs in, particularly on the over-leveraged nature or our system:

The Wall Street Bust, 10/02: … It is today impossible to comprehend the full ramifications from The Bust in Wall Street Finance. Yet we can be rather certain that for the foreseeable future much less Credit and liquidity will be directed to the asset markets. And, at the same time, there will be significantly less Credit Availability for riskier loans of all varieties — for the household, business, financial and the government sectors. Few appreciate that these dynamics are extremely problematic for the U.S. Bubble Economy — an economic system that had come to a large extent to be governed by asset-based and high-risk lending. These dynamics are at the heart of today's Acute Financial and Economic Fragility and the resulting imploding markets.

The leveraged speculating community played such an integral role in the overall Credit Bubble and, more specifically, to the Bubble in Wall Street Finance. They were instrumental in both spurring financial sector Credit creation/leveraging, while directing this Flood of Finance to the asset markets. And the more the leverage and the greater the Flow to inflating markets, the higher the returns generated by this expanding pool of speculative finance. And the greater the returns, the more robust the "investment" flows into the hedge fund community — spurring more leverage and more potent fuel for additional self-reinforcing asset inflation. Well, this historic speculative Bubble is now in the process of blowing up. One of the greatest manias ever — surely The World's Greatest Episode of "Ponzi Finance" — is absolutely coming apart. And the wreckage is accumulating in all markets — everywhere.


Here at home, our maladjusted economic system will only be sustained by somewhere in the neighborhood of $2.0 TN of new Credit. It's simply not going to happen. The $700bn from Washington would seem like an enormous amount of support. In reality, it's nowhere even close to the amount necessary for systemic stabilization. To the $2.0 TN or so of new Credit required this year (and next) add perhaps as much as several Trillion more necessary to accommodate speculative de-leveraging (liquidations forced by huge losses). Importantly, the Bust in Wall Street Finance has ensured that insufficient liquidity will be forthcoming to maintain inflated asset prices and sustain the Bubble economy — creating catastrophe for the leveraged speculating community.

The "Freidmanites" thought they understood the (post-crash) policy mistakes that led to The Great Depression. They believed the "Roaring Twenties" was the "Golden Age of Capitalism." The great bust could have been avoided with a simple ($5bn or so) banking system recapitalization. As we are witnessing today, the issue is not some manageable amount of new "capital" to replenish banking system losses. Instead, the predicament is the massive and unmanageable amount of new Credit necessary to, on the one hand, sustain a mal-adjusted Bubble Economy and, on the other, the Trillions more required to accommodate a gigantic speculative de-leveraging. I have a very difficult time seeing a way out of this terrible mess.

I too have a difficult time seeing a way forward. It looks like we will have to do what Sweden did, but on a far larger scale — nationalize our financial system for a time — that either will bring hedge funds under the regulatory umbrella along with commercial banks, kill hedge funds outright, else ensure that hedge funds individually or collectively can't themselves be the next too-big-to-fail excuse for yet another government bailout. And let's hope that we get rid of the idea of Government Sponsored Enterprises (GSEs) and either keep Fannie Mae and Freddie Mac as government entities, else (not my preference) privatize them.