How Mumbo-Jumbo Conquered the World: A Short History of Modern Delusions. Francis Wheen

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СКАЧАТЬ at a profit. As it transpired, this owed less to the mysterious arts of ‘arbitrage’ than to old-fashioned insider-trading: Dennis Levine, a broker at the Wall Street firm Drexel Burnham Lambert, was tipping him off about imminent mergers or acquisitions in return for a percentage of Boesky’s spoils. Meanwhile Levine’s colleague Michael Milken was pioneering the use of high-risk, high-yield ‘junk bonds’ – essentially a means of converting equity into debt – to finance the merger mania. In May 1986 Boesky gave the commencement address at Milken’s alma mater, the Berkeley business school at the University of California, and won loud applause when he said: ‘Greed is all right, by the way. I want you to know that. I think greed is healthy. You can be greedy and still feel good about yourself.’ Six months later he was indicted for illegal stock manipulation and insider dealing, charges that eventually landed him in Southern California’s Lompoc federal prison. By 1991 Milken was also in a Californian jail, having incurred a ten-year sentence and a $600 million fine for fraud and racketeering.

      As with ‘junk bonds’, almost all the macho financial neologisms of the 1980s were euphemisms for debt in one form or another. A ‘leveraged buyout’, for instance, involved purchasing a company with borrowed funds. More often than not, the security for these loans would be the target company itself, which would thus have to repay the debt from its own profits – or from the sale of assets – once the deal had gone through. Then there was ‘greenmail’, a technique pioneered by corporate raiders such as T. Boone Pickens and Sir James Goldsmith who would acquire a menacingly large stake in a company and then terrify the firm’s owners into buying it back at a premium in order to avoid a hostile takeover. This reaped huge rewards for the predators but left their victims fatally indebted or dismembered: when the Goodyear Tire and Rubber Company fell prey to Goldsmith and his associates, it had to spend $2.6 billion paying off the greenmailers.

      Where once businesses made products, now they made deals. As more and more money was borrowed from abroad to cover the difference between what Americans produced and what they consumed, a few voices began to question how and when the IOUs for this bogus prosperity would be honoured. ‘This debt is essentially the cost of living beyond our means,’ the economist Lester C. Thurow warned in the late summer of 1987, when the US trade-account deficit reached $340 billion. ‘If the money we were borrowing from abroad all went into factories and robots, we wouldn’t have to worn’ because the debt would be self-liquidating. It’s the fact that we are using it entirely for consumption that makes it a serious problem.’

      As any three-card-trick hustler knows, legerdemain depends for its success on fooling all the audience all the time: any members of the crowd who point out that the entire operation is a con must be silenced at once, or else punters will be markedly more reluctant to hand over their ten-dollar bills. So it was with the stock market in 1987, after five continuous years of giddy ascent. John Kenneth Galbraith, the grand old man of American Keynesianism, can probably claim the credit for being the first observer to state what should have been obvious: that Wall Street prices no longer had any relation to actual economic conditions. Writing in the January 1987 issue of the Atlantic Monthly, he argued that the market was now driven solely by ‘a speculative dynamic – of people and institutions drawn by the market rise to the thought that it would go up more, that they could rise up and get out in time’. It had happened before, in the months preceding the Great Crash of 1929, and as the historian of that disaster Galbraith was struck by several other parallels – most notably the faith in seemingly imaginative, currently lucrative but ultimately disastrous innovations in financial structures. ‘In the months and years prior to the 1929 crash there was a wondrous proliferation of holding companies and investment trusts. The common feature of both the holding companies and the trusts was that they conducted no practical operations; they existed to hold stock in other companies, and these companies frequently existed to hold stock in yet other companies.’ The beauty of this exaggerated leverage was that any increase in the earnings of the ultimate company would flow back with geometric force to the originating company, because along the way the debt and preferred stock in the intermediate companies held by the public extracted only their fixed contractual share. The problem, however, was that any fall in earnings and values would work just as powerfully in reverse, as it duly did in October 1929. Nearly sixty years on, Galbraith wrote, leverage had been rediscovered and was again working its magic in a wave of corporate mergers and acquisitions, and in the bank loans and bond issues arranged to finance these operations.

      The Atlantic magazine was the perfect pulpit from which to deliver such a sermon. Three years after the 1929 débâcle it had published the following mea culpa, written by an anonymous denizen of Wall Street, which now reads like a pretty accurate history of the 1980s as well:

      In these latter days, since the downfall, I know that there will be much talk of corruption and dishonesty. But I can testify that our trouble was not that. Rather, we were undone by our own extravagant folly, and our delusions of grandeur. The gods were waiting to destroy us, and first they infected us with a peculiar and virulent sort of madness.

      Already, as I try to recall those times, I cannot quite shake off the feel that they were pages torn from the Arabian Nights. But they were not. The tinseled scenes through which I moved were real. The madcap events actually happened – not once, but every day. And at the moment nobody thought them in the least extraordinary. For that was the New Era. In it we felt ourselves the gods and the demigods. The old laws of economics were for mortals, but not for us. With us, anything was possible. The sky was the limit.

      It is a familiar delusion, the conviction that one has repealed the laws of financial gravity. (Even Isaac Newton, the man who discovered physical gravity, succumbed. ‘I can calculate the motions of the heavenly bodies, but not the madness of people,’ he said, selling his South Sea Company stock for a handsome profit in April 1720 before the bubble burst; but a few months later he re-entered the market at the top and lost £20,000.) Writing of a Wall Street boom at the very beginning of the twentieth century, Alexander Dana Noyes recalled that the market ‘based its ideas and conduct on the assumption that we were living in a New Era; that old rules and principles and precedents of finance were obsolete; that things could safely be done today which had been dangerous or impossible in the past’. Days before the crash of October 1929, the Yale economist Irving Fisher (himself an active share-buyer) pronounced that ‘stock prices have reached what looks like a permanently high plateau’.

      All the familiar portents of disaster – swaggering hubris, speculative dementia, insupportable debt – were evident by 1987. ‘At some point something – no one can ever know when or quite what – will trigger a decision by some to get out,’ Galbraith predicted. ‘The initial fall will persuade others that the time has come, and then yet others, and then the greater fall will come. Once the purely speculative element has been built into the structure, the eventual result is, to repeat, inevitable.’ He added, however, that there was a compelling vested interest in prolonging financial insanity, and anyone who questioned its rationale could expect rough treatment from the spivs organising the three-card trick, just as the eminent banker Paul Warburg had been accused of ‘sandbagging American prosperity’ when he suggested in March 1929 that the orgy of ‘unrestrained speculation’ would soon end in tears. Galbraith’s own article in the Atlantic had originally been commissioned by the New York Times but was spiked because the editors found it ‘too alarming’.

      Its eventual publication did nothing to puncture Wall Street’s exuberance, at least for a while. (‘Galbraith doesn’t like to see people making money’ was a typical reaction.) On 8 January 1987, a few days after the professor’s gloomy New Year message, traders on the floor of the stock exchange were cheering and hurling confetti in the air as the Dow Jones industrial average broke through the 2,000 level for the first time. ‘Why is the market so high when the economy continues to be so lacklustre?’ Time magazine wondered. ‘Considering such questions mere quibbles, many optimistic analysts are convinced that the crashing of the 2000 barrier is the start of another major market upsurge that might last anywhere from two to five years.’ By the end of August the Dow had climbed to 2,722.42, the fifty-fifth record high achieved СКАЧАТЬ