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Feb 19, 2009

Speculator: A hair cut on Wall Street

A successful inquiry into this crisis means following the money.

As I sat having my hair cut in the salon in Grand Central Terminal recently, I asked my barber where all the affluent customers who usually crowded the place were. He reported that half of them no longer came. They had lost their jobs, and Wall Street’s haircut had translated into no haircuts in Grand Central. But what happened to the clippings? Where did the money go? Into another dimension, down a wormhole or into the accounts of the looters?

Lots of people lost lots of money by buying dubious financial instruments. But they gave that money to someone for something. Money from retail investors and pension funds went to banks and other institutions happily conspiring to take commissions and other fees as they sold duff funds or auction-preferred-rate securities down the line to the public.

So where did all that money go? The factories, stores, homes, warehouses and mines still exist. There is no real shortage of money. Indeed one of the most bizarre effects of the crisis (apart from Alan Greenspan admitting he was wrong) is that the dollar went up in value and gold went down, because people were repatriating overseas holdings and liquidating their gold stocks.

Many asset-backed instruments were deliberately complex, and buyers and sellers alike have confessed they didn’t understand them. If you were to let utility companies build nuclear power plants while confessing that they didn’t really understand them, you would not be surprised if there were a cataclysmic meltdown. And if you let uranium smugglers run the reactors, you would not be surprised if there was spillage.

Wall Street has proved what Mack the Knife rhetorically asked in the Threepenny Opera: ‘What’s robbing a bank to starting a bank?’ But the banks were robbing each other! As one Victorian mathematician, specializing in fractals rather than stock options, put it:

‘Great fleas have little fleas upon their backs to bite ‘em,
And little fleas have lesser fleas, and so ad infinitum.
And the great fleas themselves, in turn, have greater fleas to go on,
While these again have greater still, and greater still, and so on.’

There is no honor among fleas. The news that Bernie Madoff waltzed off with $50 bn of his billionaire clients’ money surprised even those of us who knew that greed and gullibility – like the best laid plans – often go awry.

Naturally, in uncharted waters, decision makers are concentrating on saving the ship. But in a country where long and detailed inquiries into presidential peccadilloes seem to be the norm, surely it is time for some serious experts to look at all the factors that contributed to this perfect storm – not only to be retributive, but also to avoid it happening again and try to make good some of the damage.

There is an old investigative principle to guide any such inquiry: follow the money. Who has it now, and how did he get it? Money works only when it is moving, and keeping it under the mattress does not contribute at all. It should be shaken and stirred, and poured in the right direction.