Whenever there’s a major financial crisis, the largest commercial and
investment banks invariably take big hits. This causes them to either go bust
or go in search of a bailout. In fact, as far as I can tell there has never
been a case over the past 50 years of an elite financial institution being on
the right side of a major financial crisis. The same goes for central banks.
Judging by their words and their actions, the heads of the world’s most
important central banks have been blindsided by every major financial crisis
of the past 50 years. And yet, I regularly see blog posts, articles or
newsletters in which it is explained that the financial crises that have
occurred in the past and are going to occur in the future are part of a grand
plan hatched by the most prominent members of the financial establishment.
The idea that market crashes and crises are purposefully arranged by the
financial elite is what I’ll call the “Masters of the Universe Fallacy”
(MOTUF). For some reason this idea is very appealing to many people even
though there is no evidence to support it. Furthermore, the simple fact that
the supposed master schemers are always on the wrong sides of financial
crises is enough to refute the idea.
As far as understanding economics and markets are concerned, the current
heads of the world’s three most important central banks are complete
buffoons. Obviously, if you don’t have a thorough understanding of good
economic theory and how markets work then any strategies you concoct to bring
about specific economic and financial-market outcomes are going to fail. The
retort is that the heads of the most important central banks are just puppets
whose strings are pulled by the real master manipulators. The real master
manipulators apparently include the heads of the world’s most influential
commercial banks, such as the senior managers of Goldman Sachs and JP Morgan.
Don’t get me wrong; it is certainly the case that the government takes
advantage of crises to expand its reach and that the likes of Goldman Sachs
and JP Morgan have great influence over the actions of the central bank and
the government. This allows them to avoid the proper consequences of their
biggest mistakes, but the fact is that they keep making mistakes of
sufficient magnitude and stupidity to threaten their survival on an average
of once per decade.
Take the specific example of the 2007-2009 global financial crisis. It
wasn’t until mid-2007 that the senior managers of Goldman Sachs realised that
there was a huge problem looming for the credit markets in general and the US
sub-prime mortgage market in particular, but by then the company was so
heavily exposed to ill-conceived investments that it was too late to
re-position. If not for the combination of TARP, various asset monetisation
programs implemented by the Fed, the US government bailout of AIG, Warren
Buffett and changes to official accounting rules, Goldman Sachs would have
gone bust in 2008 or 2009.
Furthermore, having either died (in the cases of Bear Stearns, Merrill
Lynch and Lehman Brothers) or suffered near-death experiences (in the cases
of Goldman Sachs, JP Morgan, Citigroup and Bank of America) in 2007-2009, the
elite bankers of the world again found themselves in potential
life-threatening situations just 2-3 years later due to the euro-zone’s
sovereign debt crisis. This time the ECB came to the rescue.
In general, when a financial crisis happens it’s the outsiders who profit
from the calamity, not the insiders. The insiders are always up to their
eyeballs in the credit-fueled investment boom of the time. For example, in
2007-2008 it was the likes of Michael Burry, Steve Eisman, John Paulson, Kyle
Bass and David Einhorn who correctly anticipated the events and reaped the
large profits from the market action, while the likes of Chuck Prince, Dick
Fuld, Lloyd Blankfein and Jamie Dimon were forced to either exit the banking
business or go ‘cap in hand’ to the government.
It will be the same story in the next crisis. Goldman Sachs won’t see it
coming and therefore won’t be prepared, which means that it will once again
be in the position of needing a bailout to avoid bankruptcy.
So, if you want to make me laugh just send me an email explaining that the
periodic crises are all part of a grand plan formulated by members of the
financial establishment.
