Terrific essay by James Grant on confidence, or the lack thereof, in capitalism:

"In disclosing plans to buy a quarter-trillion dollars of bank stock in the name of the American taxpayer, Treasury Secretary Hank Paulson harped on confidence. "Today, there is a lack of confidence in our financial system, a lack of confidence that must be conquered," he said on Tuesday.

What Mr. Paulson did not get around to mentioning was the excess of confidence that preceded the shortfall. Under the spell of soaring house prices (and before that, of stock prices), Americans trusted the things they ought to have doubted. But markets are cyclical, and there is always a new day. In compensating fashion, people will eventually doubt the things they ought to have trusted. Investment opportunity follows disillusionment. It’s complacency that precedes bear markets.

If the confidence deficit seems so high, it’s because the preceding confidence surplus was full to overflowing. People suspended critical judgment. They accepted at face value the pretensions of central bankers and the competence of investment bankers. Not one professional investor in 50, probably, doubted that wads of subprime mortgages could be refashioned into bonds that were just as creditworthy as U.S. Treasurys."

Good stuff, as always, from Grant.

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Source:
The Confidence Game
There used to be too much of it. Now there’s not enough. James Grant argues that the real lack of confidence is in Washington, with the administration losing faith in capitalism.
JAMES GRANT
WSJ, OCTOBER 18, 2008
http://online.wsj.com/article/SB122428355436946301.html

Category: Bailouts, Markets, Politics, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “The Confidence Game”

  1. Paul Jones says:

    Burn the village to save it?

    Paulson just doesn’t want the revolution of capitalism to take place. He doesn’t want those who knew what was happening to reap the rewards of that decision.

    The bulls have the government on their side; the bears have reality.

    The consumer component of the economy needs to be somewhere south of 50% for a long, long time.

    Just like a household.

  2. Gary says:

    Loss of confidence: a Chicago trader shot himself after losing millions in Wednesday’s 9% drop in S&P500.
    chicagobusiness.com

  3. And after this even the last remais of the confidence are gone: http://www.guardian.co.uk/business/2008/oct/17/executivesalaries-banking

    Bankers on Wall Street get fat bonuses at the same time as taxpayers pay the bailout.

  4. Alan says:

    Confidence and expectations are two great words that policy makers completely misunderstand.

    Bernanke and Paulson want their ever more imaginative and elaborate interventions to calm the markets, to bring confidence to the markets. In fact, it looks like they are running around with their heads cut off.

    Likewise, the gray suits on the Fed think people are listening to them and their hawkish speeches on inflation. In reality, people — even sophisticated people — are looking at the signs at the gas station and grocery store and extrapolating.

    Both confidence and expectations have more to do with the experience of the previous few weeks or months than any speechifying or engineering. How many times do you have to see a line of them trot out to the lectern before you realize they are not making any significant difference?

  5. DavidB says:

    Does that make Paulson a confidence man?

    Confidence. What an odd thing that needs to be restored. It is Orwellian. The very fact that they have to restore it implies the thing they are trying to restore confidence in in the first place is worthy of none

    This is going on my permanent database file for the torture chambers later isn’t it?

    Well, if we win, they all get wiped

    I feel like the coyote who is about six feet past the edge of the cliff. I’ll just pray I’m the road runner and you’re the coyote. Meep! Meep!

  6. David says:

    Nice spin on the WSJ teaser. Did they actually read Grant’s essay?

  7. Jus7me says:

    There is a big gap between what our crooked and corrupt regulators *think* we need and what we *really* need.

    Our corrupt regulators think that what is required is CONFIDENCE. which translates as “the belief that everything is now ok”.

    This concept is completely wrong.

    What is needed is the certainty that the market is operated in a CORRECT and TRANSPARENT manner.

    There is large gap between the belief that the market is operating correctly, and the fact that it IS operating correctly.

    Confidence simply means “business as usual”, and that is what got our whole country into the current difficulties in the first place.

    I have no confidence in “confidence”.

  8. DL says:

    Gary @ 10:34:55 AM

    A few more stories like this, and we might have ourselves a contrary indicator.

    At this point, however, it’s just a signpost along the road.

  9. DL says:

    Gary @ 10:34:55 AM

    Bear in mind that Mark Barton went on his shooting spree in Atlanta on 7/29/99, thus predating the top in Nasdaq by about seven months.

  10. b says:

    If the president keeps on saying such bullshit:

    “In the long run, … our economy will bounce back.”

    people who know their Keynes will have no reason to build confidence.

    In the long run …

  11. RemyPynch says:

    Grant’s previous article in the Journal some weeks ago is the more incisive: “Where is the Outrage?” I recall a cartoon from my high school history book regarding a 19th century financial catasrophe: “Who stole the people’s money?”–with a dozen high-hat dufuses pointing their fat index fingers at each other. What happened here in the last 25 years is massive fraud inflicted by the rapacious sharpies on the foolishly naive Ivy-educated dumbasses who run our financial institutions. Finnegan at Chubb tossed out all credit derivaties at a loss as soon as he became CEO–and this was years before AIG realized it had a problem. Who stole the people’s money? And what do we do to these assholes?

  12. AGG says:

    October 14 – Dow Jones (Patrick Fitzgerald): “Petters Co. Inc. filed for bankruptcy protection Saturday amid allegations of massive fraud involving company founder Thomas Petters, who was arrested earlier this month on federal charges of mail and wire fraud, money laundering and obstructing justice. Petters Co., the venture capital arm of Thomas Petters’ group of companies, filed for Chapter 11 protection Saturday… listing debts between $500 million and $1 billion. Federal authorities raided Petters’ Minnesota headquarters last month seeking evidence of a Ponzi scheme orchestrated by Petters, who is accused of bilking individual investors and hedge funds out of as much as $3 billion… Based in Minnetonka, Minn., Petters Co.’s investments include Fingerhut, Polaroid and Sun Country Airlines.”

    Petters, the new Peter Principle. A man after Paulson’s heart. Yes, it certainly is all about CONfidence.

  13. Crank Yankee says:

    Con game? This isn’t news to anybody here is it?

    Fractional reserve shell games, paper money, a (foreign) private banking cartel we call “the FED”, insurance (don’t even get me started on the ultimate “rich mans game”).

    A couple of things that get me…. “In God We Trust” is printed on “our” money…which God I wonder? I wonder how fast Andrew Jackson is rotating in his grave to know that he graces a “FEDERAL RESERVE” “note”?

    Oy Vey, life is full of endless contradictions…it would be much better if some weren’t so purposefully deceptive as to imprison mankind into an endless run on a hampster wheel.

  14. Spud says:

    Securities Analysis is my (investing) bible too. Mr Grant is a very talented writer, and this was a great piece.

  15. Douglas Tuttle says:

    We have known for a very long time that unregulated free markets are about as stable as the Eiffel tower balanced on its tip. The solution developed throughout the nineteenth and twentieth centuries was to regulate free markets, especially financial institutions.

    After the Great Depression (AKA the first depression), many laws and regulations were enacted to prevent another one. Glass-Stiegel, etc.

    It was exactly this kind of instability that had led Karl Marx to write Das Kapital. That was a bit of an over reaction. Eventually, we realized that simply regulating capitalism would work far better than anything as draconian as communism. Indeed, as much as conservatives hate labor unions, they obviate any need for communism, allowing capitalism to function without essentially enslaving their workers in abject poverty, as was so common in the nineteenth century.

    Eventually, we ended up with the most prosperous middle class in history, and not coincidentally, the most prosperous society in history.

    Then beginning with Ronald Regan and Mararget Thatcher the neo-conservative brain trust (an oxymoron if ever there was one) decided to disassemble all the protections conceived to protect us against boom and bust cycles. This holy quest was completed in 1999 by Phil Graham and pals and signed by Bill Clinton.

    Most of these neo-cons turned out to be C students from mediocre colleges, and had never heard of history, let alone George Satayana: “Those who ignore history are doomed to repeat it” (sic).

    The rest is history as they say.

  16. the0ther says:

    when i figured out a few years back that the “con” part of “con man” comes from the word “confidence”, that was when i decided that confidence in all its forms is worthless. this has had a terrible impact on my love life, but has been terrific for my sense of ethics.

  17. Dan W says:

    Lessons from Gandhi…and Billy Ray Valentine (Capricorn)
    Dear Fellow Victims:

    Together, daily, we share news of the latest in the greatest financial ripoff in the history of history. Billions—literally—of human beings left to suffer and freeze and starve over the next 5-10 years, as the Plutocrats and Kleptocrats hunker down with their riches, their mansions, their Lamborghinis, etc.

    Well, I take my lessons from 2 sources: Mohandas K. Gandhi and Billy Ray Valentine. Gandhi you know, I hope. Valentine, played gracefully by a young Ediie Murphy, was the guy in TRADING PLACES who goes from being poor to rich, at the expense of Winthorp, played gracefully by a skinny Dan Aykroyd. ANYWAY….

    So, here’s the point:

    1. Gandhi organizes a day of “fasting and prayer” to protest British rules in India. Of course, a day of fasting and prayer also means 500 million Indian workers off the job: no trains, no buses, no public works—which effectively leaves 100,000 British ex-pats in India totally cut off from the world. A bad day for the Brits, to say the least.
    2. Billy Ray Valentine (Capricorn) points out to Lewis Winthorp–as Winthorp cleans out his shotgun barrel in preparation, one can only assume, for a knee-cap shattering meeting with The Dukes brothers (Randolph and Mortimer Duke, of Duke and Duke Commodities, INC.)—that the way you really get a rich person back is NOT by shooting him, but instead by making him poor.

    OK, you with me so far?

    Now for the union of Gandhi and Valentine.

    It seems to me that the real criminals in all of this are the bankers, the folks in the financial industry, the Paulsons and Bernankes and Fulds and all of the folks who have become wealthy on the backs—and on the debt—of the rest of us. This system of FRACTIONAL RESERVE BANKING, a system in which money = debt, this system can only function and make millionaires of a few while leaving the rest in the dust if and only if the rest of us choose to play.

    Look, what terrified Paulson more than anything—and then he convinced Bush to be terrified, and he convinced the scumbags in Congress to be terrified—-was the idea of a financial system, whose very existence is dependent upon growth and therefore upon more and more debt, collapsing because the borrowing cycle had been shut down.

    These total assholes admitted it, and they assumed the rest of us wouldn’t really get it. They said, flat out, that we are risking a systemic financial collapse unless we can get the credit markets working again.

    Look, I want you to PLEASE watch this video RIGHT NOW. Afterwards, come back to my post.

    http://video.google.com/videoplay?docid=-9050474362583451279

    OK, now…here comes my thesis…well, not really…ummmm….more like my proposal.

    Let’s stop playing! I say, get together with people in your community and come up with a plan so that (a) everyone can eat and (b) everyone can stay warm and (c) everyone has water to drink and (d) EVERYONE STOPS PAYING FOR THINGS THAT ARE MAKING THE MOTHERFUCKERS RICH!!!

    To hell with paying taxes! Think about taxes for one second. All of our taxes have to go up, because we have, to this point, lent the FED over a TRILLION dollars—and Scumbag Paulson is giving all of OUR money (money that we have earned through our hard work as teachers, and carpenters, and farmers and police officers, etc.) to the banks so that the credit market will loosen so that the banks will loan us back our money…at interest!!! I say, no more!!!!!!!!!!

    I say we need to come together in our communities and protect each other and help each other and go on strike from giving our hard earned money away so that amoral scum like Henry Paulson can make millions more dollars off of us. I am done with that shit!

    We cannot do this alone. Alone we are pariah who get nicked by the FBI and thrown in jail and called extremists. I say, this needs to be a mass movement. A mainstream movement of protest against a financial system that CAN ONLY SURVIVE on the growing debt burden of the ordinary folk.

    I may not be William Wallace, and while I like Mel Gibson as an actor I find some of his views about religion rather abhorrent…but I will say this: It is time to claim…OUR FREEDOM!!!!!!!!!!!!!!!!!!!!!!!!!

  18. jack Bowley says:

    That’s what I have been telling people for the last year. The only difference between us and the banks is the fact that they are all on the same team. We need to stop spending even more than we are. Stop driving to nowhere (it is killing the oil prices and driving the world crazy. They raised the price of oil the other day because they may cut production. Let them cut it in the meantime everytime they raise
    the price cut back on your traveling and let’s see who wins. Let it fall and we will start over its better than slow death.
    And it will weed out the banks that have tried to monopolize at out expense.

  19. Bill G says:

    Anyone with better than a 3rd grade education would have realized you can’t transform these crap mortgages into anything but crap. There is simply no excuse for what as done in the real estate market by everyone in that food chain.

  20. fresno dan says:

    Love James Grant – we need less confidence and more big stinky farts at the garden parties. People need to believe brokers, realtors, CEO’s, and CNBC less and just remember what these people were saying 6 months ago. If they couldn’t figure it out than, why would anyone believe they can figure it out now???

  21. Mark M. says:

    A topical examination of history shows a major retrenchment every fifty years or so since Industrialization.

    Each is the result of excessive credit tied to the end of a wave of technology where there is nothing new to buy (to include guns as well as butter).

    At any rate, such unabashed exuberance cannot continue unabated anywhere in nature, much less in human behavior, but the result of each progressive run up in over consumption, unlike what is seen in nature, leaves humanity far better off in terms of aggregate materialism.

    1880, 1940, 1980, 2010, would each previous economic period not look to the next with awe and admiration of the ensuing progress that was ultimately accomplished after a precipitous decline?

    From trains, to electricity, to plastic, to computers (to name but a few), each era has created an enormous resurgence in material accumulation that has benefited all of developed humanity.

    What’s next? What technological development will jump start demand and take us to the next level? It’s not the I-Phone or the Wii.

  22. rspitu says:

    What you guy think of the bottom analysis at article below (pick it from DB and find it solid)?

    It called correctly the bottom of October 10, and of October 16, with such a precision that tells me that markets are not really random.

    October 16 real time call:

    http://www.marketwarnings.com/2008/10/dow-sp500-bottom-october-2008-october.html

    Bottom analysis from

    http://marketwarnings.blogspot.com/2008/10/dow-sp500-october-2008-bottom-buying.html

  23. Art S. says:

    My response to the interviews yesterday in Washington, D.C. with FDIC Chair Sheila Bair…
    I was refinance customer (a typical American)not a real estate flipper or any such non-sense in 2005. The broker advertised in Chicago on the radio on Saturday mornings. I was with Countrywide no problem thank God with them at the time
    with a fixed 30 year loan. I called Countrywide listened to them as to what they could do to finance home
    improvements on my house. I called the broker from the radio program which is still on the air only under a different
    title and listened to what they had to offer. The rates were better from the broker as he suggested that he had a
    product that would extend the duration of the loan by 10 years and it would be flexable and to come in to learn more
    and bring check stubs and tax returns. So why not? I went in to speak with him. I was gainfully employed, never
    missed payments on ANYTHING and had a excellent dredit rating. He told I will tell you this is an ARM loan, I said I
    haven’t heard anything good about those loans. He emphatically explained that it was differnt from those I have heard
    of and this was a special “new” product and has many satisfied people. He said since I was going to stay in the home
    at least another 10 years it would be ideal for me and it would be better than anything Countrywide could do. So he
    set up a day after my verifications were made and of course I was more more than qualified. To make a long story short, when I got my statements in the mail I almost had a heart attack. If you read the paperwork it did not reflect anything what I was seeing or hearing. (later the statements got worse, almost doubling my payments. So I called to see if I could fix this crap. 18 months of phone calls to no avail. I was givin the runaround to people that did not want to discuss anything or said they were not able to or qualified to discuss it in depth. The broker was fired 2
    months after the loan, I called his cell and he said sorry but he is no longer with the company and could not help me. The loan was sold off to a place in Arkansas. I was able to find out that the underwriting bank was in Florida and was in some kind of trouble from doing the type of loan I was in. Back then a couple of years ago it was hard to find any pertinent information on the web. The new servicing company said they could only refinance if were to give
    them over $9,000.00 as a penalty. Or foreclose if I would like. I asked a specialist in real estate Attorney firm to see my docs and they found it to be totally fraudulent in many ways. They said it was in my best interests to pursue something I had never heard of…a rescission. So criminal are criminals are criminals. I am prosecuting these criminals. Why not? Or can I walk in to the bank sit down and talk nicely to them and ask if they could PLEASE PASS THE CASH DRAWER? Thank you see ya !!!later! HUH?
    But can you trust the Judicial System? Will I get justice? I’ll tell ya later…I just can’t trust anymore I am sorry.
    After being served with valid rescission by the attorneys, they broke the TILA Act again.

    They retaliated against me for the nerve of getting an attorney, and put a default on my credit report. Then proceeded
    to foreclose on our home. In Du Page County court the forclosure was CANCELLED! And referred to the Federal Court for
    action against them. I expect I will have go to civil court also. So as far as I am concerned They were fraudulent ripoff
    artists to both customer’s AND investors. Nobody could know the mechanics of these greedy schemes. They were
    designed to do nothing but steal money and property from customer’s, period.
    The government authorities looked the other way for the reciept of contributions and kickbacks. So don’t give me any
    jibber jabber about how the homeowners were stupid_BS. They made a vicious money game out of the economy and
    played with other peoples lives and money through pure fraudulent and deceptive practices, and everybody knows it
    now. Some will defend this slime to the grave because they are slime themselves. NO MORE BS! Period. The FED
    bailout is upside down! It should restore the customers (American People) or commonly called…taxpayers, that were
    defrauded first and foremost, then prosecute and fine and imprison the offenders, COMMONSENSE! Anybody have
    that anymore? Greedy filth CEO’s and CFO”s of these excrement mills call BANKS! They have the profits safely put
    away and live the life better than kings (uneffected personally by the crisis we the people are in, while the Bank
    Corps. get taxpayer infusions of money so those entities continue after the mass destruction that they caused to U.S.
    Economy and homeowners and families. They inflicted irrepairable harm and fear of our home loss to I and my family, so we are stupid…yea sure,rediculous!…sure whatever you say!

    Bunk! Mass Preditory Lending for a greedy system of corruption. Fight for the people!
    Thank you.
    Art S. in Lombard, Illinois