Planet Ponzi

by Mitch Feierstein

  And that, truly, is the nub of the issue. If the old Keidanren philosophy is permitted to linger‌—‌if companies resist change, if banks are content to make losses, if bureaucrats block vigorous action, if government debt continues to sidle upwards, if secretive obstruction continues to be preferred to openness and change‌—‌the country will hit a tipping point, and an Italian-style credit crisis will ensue. Japan’s leaders are not as laughable as those in Italy, not as openly rancorous as those in the United States. But in some ways laughable is good, openly quarrelsome is good: at least it makes the problem visible. Japan’s core problem is a kind of ghostliness, an invisible decay. In Spain, crowds of young people‌—‌los indignados, the indignant ones‌—‌have taken to protesting in public squares.11 Japan’s voters need to find some of that spirit for themselves‌—‌the willingness to challenge authority. The old ‘more of the same’ philosophy is killing the country. More of the same is strangling its firms. More of the same means a leaderless nation, aimless elections, and ever-increasing debt.

  More of the same means a van getting stuck on the way to Fukushima and nobody doing anything about it.

  20

  The man who ate a supermarket

  Thus far, our discussions have, in a strange way, rendered people themselves invisible. It’s all very well to calculate debt ratios, examine growth statistics, and suggest policy prescriptions, but all these things can feel far removed from voters themselves, like a parent talking to a doctor while the little six-year-old patient is left to swing her feet and wonder why she feels bad.

  Yet in the end, governments can’t accomplish anything at all if they lose popular consent. Last year, in 2010, the then deputy prime minister of Greece, Theodoros Pangalos, said: ‘My friends, we all ate together.’ I think he was trying to say that everyone helped create the problem and everyone will have to help resolve it. But that’s not how Greeks themselves see it. In the protests this year, protesters have been shouting: ‘You lying bastard! You’re so fat you ate the entire supermarket.’1 It’s all very well for European politicians to meditate solutions, all very well for the IMF to require austerity and budgetary reform, all very well for think-tanks to suggest ways to revitalize the Greek economy. The simple fact is that if voters lose their patience, none of these things will happen, or at any rate not the way the IMF would like them to.

  And the voters are right; the voters are always right. It’s all very well for outsiders (like myself) to comment that the Greeks spent ten years living high on the fruits of a eurozone Ponzi scheme. It’s true; they did. But that’s not quite the point. No Greek voter ever had the choice fairly put to them. ‘Hi, Agamemnon (or Bellanca or Christoforo or Demetria), would you like to live beyond your means for ten years, knowing that at the end of the decade your country will be plunged into an appalling recession and probable bankruptcy, your kids will lose their futures, and you will lose your pension?’ No voter in the world, let alone in Greece, has answered ‘yes’ to that question. Right at the heart of Planet Ponzi there lies‌—‌well, lies. Untruth. A refusal to be honest. Government accounts that aren’t truthful. Accounts of major financial institutions which routinely conceal losses and even insolvency. Credit ratings that are overblown. Central banks extending cheap loans against collateral which they know to be rotten.

  Also, there’s a lack of accountability and transparency. An unwillingness to face up to big issues and deal with them directly. You see that everywhere. Politicians choosing to dodge the financial consequences of their actions. Regulators unable or unwilling to do their jobs. Bank bosses who trash their institutions but still, somehow, seem to come away with hundreds of millions of dollars in ‘compensation.’ Bailout money that surges out of the government’s coffers and somehow seems to end up sticking to the same people who caused the problems in the first place.

  Lies, lack of accountability‌—‌and a torrent of fake money. Securities mis-sold at wrong valuations to stupid investors. Government debt that trades as high-quality investment grade when in reality it’s junk. Government debt shooting up. Pension liabilities and other off-balance-sheet debts shooting up. Central banks printing money. Banks taking on ludicrous degrees of leverage.

  Forgive me if I’m wrong, but I don’t think any voter ever voted for any of this. (Well, OK, a few Wall Street bosses probably did, but I’m talking about the kind of voters whose liquid assets don’t run into eight digits.) That’s why I’ve got sympathy for the man in the street, the Greek protesters, the Spanish indignados, the American Tea Partiers. These popular movements are howls of rational protest against the irrationality of their rulers. If I were a Greek protester, I’d probably figure it wasn’t me that ate the supermarket. If I were one of the 46% of Spanish young people without jobs, I’d be occupying the public squares too.2

  The more voters distrust their governments, the more belligerent those protests are likely to be. Why would Italians be willing to accept the necessity of austerity, when their prime minister loads his budget with cuts for them, money for him? What would you feel as a French voter asked to take some pain, when you read that former president Jacques Chirac and former prime minister Dominique de Villepin have been accused of accepting huge bundles of cash from African leaders?3 (Both men deny the charges, which are unproven, though they do come from a well-placed source. Both men have also faced‌—‌or are still facing‌—‌a variety of other corruption charges.) Why would you, as an American, listen to men like Treasury secretaries Robert Rubin and Henry Paulson, who have earned countless millions on Wall Street and whose policies have systematically tended to boost Wall Street’s Ponzi-ish profits?4 Why, for that matter, would you listen to academic economists like Larry Summers (another former Secretary of the Treasury and more recently director of President Obama’s National Economic Council), when Summers was paid over $5 million from a hedge fund in the space of little more than a year?5 Or take advice from Obama’s chief campaign strategist, who has taken received income of $1.5 million and a buyout pot worth over $3 million, through offering services to such patriotic organizations as the Association of Trial Lawyers of America?6 Heck, you can’t even have much faith in the regulators when one of them‌—‌the SEC’s Eileen Rominger‌—‌reported $57.5 million in income from Goldman Sachs in 2010/11 (prior to her shift to the SEC)‌—‌and that’s not counting her multi-million-dollar investment earnings.7

  The bottomless gulf between the lives of ordinary people and those of the individuals in charge of decisionmaking is even more extreme when we turn from government to Wall Street. The CEO of Citigroup, Vikram Pandit, seemed all set for Wall Street sainthood when, acknowledging that his firm had received the most government support of any bank, he offered to accept a salary of just $1 for his labors. That sounded great‌—‌the guy was only going to be overpaid by $1‌—‌except that a dollar doesn’t mean the same thing on Wall Street as it does to you or me. In July 2011, Bloomberg commented:

  Pandit’s $80 million is the last of the $165 million New York-based Citigroup agreed to pay for his share of Old Lane [a hedge fund] four years ago. The bank has since awarded him compensation, including stock and options, worth about $63 million when he received them. This includes a $1.75 million salary he got in January, replacing the $1 he told Congress he would take in February 2009 until the bank turned a profit. In May, he entered into a company profit-sharing plan which will give him an additional $25 million if the company meets analysts’ estimates.8

  If you think that Pandit’s grateful shareholders wanted to reward him for creating huge value for them, you probably want to refresh your memory of the Citigroup stock price. Take a look at figure 20.1. If you performed that badly, you’d be fired.

  Figure 20.1: How to reward your shareholders: Citigroup stock price, 2007–2011

  Source: ThomsonReuters (data widely available online).

  These things aren’t restricted to American firms. Bob Diamond, the CEO of Barclays, snapped at a British parliame
ntary inquiry:

  I really resent the fact that you refer to this as blackjack or casino banking or rogue trading. It’s wrong, it’s unfair, it’s a poor choice of words. We have some fantastically strong financial institutions in this country and frankly they deserve better.9

  Would those, I wonder, be the same fantastically strong financial institutions who cost the country at least £850 billion?10 Would Mr Diamond’s own bank be the same one that has seen its share price slump by four-fifths since early 2007?11 And yet, somehow along the way, Mr Diamond has collected more than £50 million in salary and other payments.12

  Such sums are so utterly remote from most normal people’s lives that it’s impossible to read stories like this without a by now familiar mixture of feelings: shock, disbelief, outrage, anger‌—‌and a kind of weary fatalism. Voters have come to realize that they’ll take the pain for someone else’s gain, while the gainers will be left remarkably untouched. Those gainers will, frequently, have done the exact opposite of what they were paid to do (destroyed their firm instead of preserving it, wrecked profits instead of boosting them, accumulated rotten assets instead of good ones)‌—‌yet somehow those things deserve a ‘performance-related’ bonus.

  But at some point, voters will react. If governments are to step from Planet Ponzi into reality, they’re going to have to make tough, unpopular decisions. They’re going to have to copy the Brits in cutting back some government departments’ budgets by 20% or 30%. They’re going to have to watch taxes rise, banks lose headcount, businesses struggle, unemployment rise. These things are the consequences of any Ponzi scheme played out on the scale and duration of this one, but they’re inevitably unpopular. And at some point, in some countries, given the scale of insult they’ve had to endure, voters will dig their heels in. They’ll throw the brakes on government reform plans. Things that need to be done won’t be done.

  It’s impossible to predict precisely where that protest will take place or what form it will take. In Britain in September 2000, a bunch of people got angry at the huge taxes their government was imposing on top of a surging gasoline price. Some lorry drivers started to blockade the ports and refineries that brought oil into the country. Pretty soon, garages in London and across the country were running out of fuel. The country came to a standstill. The government backed down.13 That protest had little to do with Planet Ponzi, but it shows the essentially random nature of these things‌—‌and that protest unfolded in a country noted for its normally phlegmatic and uncomplaining people. What happened in Britain during a time of plenty will certainly be repeated in numerous countries during this time of arduous sacrifice and absent growth. We’re already seeing something similar in the United States in the guise of the Occupy Wall Street protests, which are currently spreading from New York to a reported 146 other cities across the US.14

  Those protests are utterly understandable‌—‌and may also be utterly disastrous. If a given government’s debts are supportable, but only just, a mass protest movement could tip the country over into insolvency. At the same time, popular protests levy a kind of uncertainty tax across a nation‌—‌and the world. The absurd, staged, artificial confrontations between congressional Democrats and Republicans over the 2011 debt ceiling vote frightened investors and made the US economy a less certain place to do business. If you were a CEO contemplating whether to approve a major investment in the US, that political charade would have tilted you away from doing so. If you saw fuel protesters blocking refineries or city squares crowded with angry youngsters, you’d feel that bit less inclined to hire staff, invest money, bet on growth.

  And, of course, this atmosphere of protest is not confined to the Western world. The Libyans toppled a dictator by force of arms. The Egyptians did so by force of will. Through 2011 we have also witnessed dissident action in Syria, civil war in the Yemen, Saudi troops in Bahrain, angry protests in Iran, a continuing battle against Islamic militancy in Saudi Arabia itself. Iraq continues to be deadly and unsettled. Israel has seen Turkey, once an ally, turn against it. Violent protests forced it to evacuate its embassy in Cairo.15

  Many of these developments betoken good things. I’m hopeful that Libyans and Egyptians are to enjoy freely and openly elected governments. I’m hopeful that Syrians will soon win the same freedoms for themselves. Yet financial markets are unsentimental. They don’t care about freedom; they do care about oil. And the oil market is very delicately balanced at present. Saudi Arabia claims to maintain a cushion of 3–4 million barrels a day of idle capacity, yet the stark truth is that demand for oil is exceeding the current supply and oil prices are acutely vulnerable to supply shocks.16 All it would take for oil prices to explode would be a terrorist strike on a Saudi pipeline or an Iraqi port‌—‌or an Israeli attack on Iran‌—‌or unrest in the northern Arab emirates17‌—‌or, indeed, any one of a hundred of other nightmare scenarios, each of which is highly possible. US foreign policy in the Middle East has been persistently naïve, and the well of hatreds and suspicions has only gotten deeper.

  Nor is it as though the oil-producing world beyond the Middle East is safe and stable. Russia, let’s remember, is still facing low-level war in the Caucasus.18 Nigeria is facing a serious and rising threat from Islamic militants, to add to an age-old problem in the oil-producing delta region.19 Violence in Mexico has become worse, just as oil production has declined and investment collapsed‌—‌so much so that the country may cease to function altogether as an oil exporter.20 Venezuela, the world’s eighth largest oil producer, has so badly managed its natural riches that there are widespread fears the country will go bankrupt, while its chief oil firm has witnessed an abrupt fall in production.21 Of course, none of this means that there will be some kind of disaster which forces oil prices through the roof, but you’d be crazy to bet against it.

  Thus far in this chapter, I’ve dealt only with dangers arising directly from human action, yet there are indirect dangers too. I’ve spent a portion of my professional life working in environment-related fields, creating the Voluntary Carbon Standard and helping to develop the markets that have resulted. You can’t be in that field and not be highly aware of the looming environmental costs facing the planet. For example, as the planet warms, hurricanes‌—‌which gain their power from warming seas‌—‌are expected to become more frequent and more intense. Hurricane Katrina cost the US federal government some $105 billion in repairs and reconstruction.22 Timber damage alone cost perhaps as much as $2.4 billion.23 The oil price also spiked, following an unprecedented degree of destruction inflicted on rigs, pipelines, underwater installations, and refineries.24

  So when you think about the future, you need to make allowance for the potential costs of more storms and other climate instabilities. Then too there are the wars and civil unrest so often associated with those instabilities.25 Nor should you ignore the consequences of rising food prices, water shortages, and the proliferation of extremist ideologies and cheaply available weapons. If you add to all these things those natural disasters (like the recent Japanese tsunami) which don’t have any link to climate warming but are still violent, tragic, and destructive, you are looking at financial contingency costs running into the hundreds of billions of dollars.26 Indeed, if a natural disaster were to be implicated in interfering with oil production or some other highly valuable commodity, the costs of disaster could easily run to many hundreds of billions.

  The failure of the nuclear reactor at Fukushima shows how close a major industrial country can come, not merely to human tragedy, but to profound economic turmoil. When the nuclear catastrophe first hit, the Japanese prime minister was looking at worst case options which would have involved the evacuation of 30 million people from the Tokyo area. Prime Minister Kan commented in an interview: ‘It was a crucial moment when I wasn’t sure whether Japan could continue to function as a state.’27 Kan’s understated concern contrasts with the continuing feebleness of TEPCO’s efforts to control its damaged reactor. According to a
recent report in The Economist,

  in the crucial hours after the tsunami, TEPCO failed to add water to cool the reactor cores. It was unable to restore steady back-up power until days later and inexplicably delayed venting a build-up of pressure that eventually led to hydrogen explosions. As if that were not bad enough, TEPCO withheld information from everyone, including the then prime minister, Naoto Kan, who stormed into its headquarters yelling: ‘What the hell is going on?’ A meltdown began several hours after the tsunami struck, but wasn’t officially disclosed until nine weeks later.28

  I’ve talked enough about the problems of obstructive secretiveness in Japan already, but the economic costs of natural disaster require further comment. It remains probable that there is, in the words of one expert, a ‘massive problem’ with contaminated water at the stricken site. Current estimates put the cost of dealing with that water at over $500 billion, but since every estimate has been underweight to this point, it would arguably be safer to double that number.29 And that’s not to count the cost of the evacuations, the damaged farmland, the uncertainty over power generation, the disruption to supply chains, or‌—‌most worrying of all‌—‌the sense that TEPCO and the various government bureaucracies are more slothful, more feeble, more timid than the courage and endurance of the Japanese people deserve.

  I don’t want to overplay these things, because they’re possibilities, not certainties. Nevertheless, they serve to emphasize a point I made earlier about the necessity of low government debt. If a nation is not facing an existential threat, it should be seeking, little by little, to reduce its national debt to zero, or even (like Sweden and Norway) to accumulate national assets. When unforeseeable disasters happen‌—‌when Katrina hits, when the tsunami strikes, when the oil price soars‌—‌governments in a strong financial position have the ability to respond decisively, in whatever way makes most sense. The financially constrained governments of today have lost that flexibility. If the world stays cool, that loss may not directly matter. But ours is not a cool world.