Seeing The Elephant

Peter Marber

I heard Peter Marber speak at an HSBC conference. He is a money manager, an author of several financial books, a teacher at Columbia University and has been a guest on CNN, CNBC, etc. His title, “Seeing The Elephant”, refers to a Hindu fable in which five blind men touch different parts of an elephant and envision very different creatures, making the rudimentary point that one must see the entire elephant/picture to understand it. One of the elephants that he wants us to see is BRIC (Brazil, Russia, India and China), and the extent to which they are becoming dominant in world markets. He notes that the gross domestic products (GDP’s) of note in 2000 were: US-22%; Chinia-15%; Japan-7%; India-6%; Germany-4%. By 2050, experts now predict: China-28%; &.S.-22%; India-17%; Japan-5%; Brazil-4%.

The biggest “elephant” that Marber wants us to recognize is the need for all countries to avoid protectionism. As with authors of other current crisis-books, he warns that protectionism and tougher immigration policies threaten continued globalization and the prosperity that has accompanied it over the past several decades. He warns that the US$ cannot remain the sole or even the dominant currency much longer, as its steady depreciation has hurt too many countries who have held as their primary reserve asset; a basket of currencies will likely supplant the dollar before long.

He gives an excellent overview of the evolution of the banking and subprime crises. In 1989, interest rates were 11% but dropped to 7.25% in 1995 and continued down to 2000. These lower rates made financing homes much easier. The U.S. government urged banks, Fannie Mae and Freddie Mac to make more and more loans on more liberal terms, with little regard to credit worthiness. NINJA loans (No Income No Job No Asset) became the norm. Many homeowners borrowed against their home-equity to take advantage of the lower interest rates and spent the cash freely. Some of the loose money went into stocks, feeding the Dot Com Stock Boom of the late 1990’s. Politicians cheered, as the good times were rolling. Residential mortgages nearly doubled to $5T between 1992 and 1995. The housing boom led to booms in anything related to homes (from furnishing to autos). The debt culture flourished, along with predatory lending practices and even fraudulent mortgage applications. When the Dot Com Boom crashed in March 2000, investors pulled out their money and invested it in real estate, second homes to flip, etc., adding more air to the exploding Real Estate Bubble. Politicians continued to urge the Fed, the banks, etc. to keep the “easy credit/money” flowing. As U.S. stocks peaked, emerging-market-stocks became the rage; from 2002-2006, EM stocks jumped 400%. Banks “securitized” their loans (cutting them into small packets and reselling same worldwide), thus passing the risks to others, and banks used the profits from those sales to make longer term loans at higher rates, which fattened bank-balance sheets. When the NINJA loans began to go sour (default), the banks’ source of funds to make their higher profit long term loans vaporized, exposing the plethora of bad loans. Never in the world’s history had it witnessed such a pandemic of bad loans, which became the “toxic assets” of banks worldwide, threatening to topple the world’s banking systems, and, indeed, without massive government “Bailouts”, would likely have done so. However irresponsible and expedient Bailouts seemed, they likely saved the banking system. Bear Stearns, AIG and the big banks were rescued from the brink of insolvency. Some firms (e.g., Lehman Bros.) incongruously were allowed to fail, with far-reaching repercussions.

The banking and subprime loan crises have not been solved; they have only been arrested. That is, the toxic assets still exist worldwide. How they will be unwound without decimating the world’s economy remains unknown. Government leaders are left with the choice of feeling their way tentatively, while hoping not to fall into a financial abyss. Those seeking more insight into the world’s economic malaise in 2009 should enjoy this book. Lee Lovett 07/2009