Tuesday, October 18, 2011

Wall Street Protests

“Wall Street indices predicted nine out of the last five recessions!”
-Paul A. Samuelson
Spengler at http://pajamasmedia.com/ notes that America household's and bankers got rich from the housing bubble and that they have forgotten that bubbles are the exception, not the norm.

Wall Street Protestors Have Met the Enemy and It Is They

That is why the Wall Street protesters are foolish and petulant. American households levered a $6 trillion net inflow of foreign savings during the decade 1998 through 2007 into a bubble that benefited them far more than it did Wall Street. The impact of the bubble on the household balance sheet exceeds the growth in real-estate assets, moreover, because most small business expansion followed the housing bubble.

For fifteen years we rode a tsunami of foreign capital pouring into American markets. We didn’t save a penny. Why should we? Our home equity was our retirement account. Our smartest kids got MBAs and went to Wall Street derivatives desks. Engineering was for dummies. Home prices rose so fast that local governments swam with tax revenues and hired with abandon. Everybody went to the party. Now everybody has a hangover, especially the bankers. We thought we were geniuses because we won the lottery. Now we actually have to produce and export things, and we have to play catch-up. Our kids are competing with Asian kids who go to cram school and practice the violin in the afternoon. This isn’t going to be easy, and the sooner we decide to roll up our sleeves and get back to work instead of looking for bankers to blame, the better our chances of coming back.
Bottom Line

Whom did the housing bubble help the most? According to Spengler, it was households, not banks,
Household real estate wealth remains 70% higher than it was in 1998, even after the crash in home prices. Bank stocks, by contrast, are worth half of what they were in 1998. Many of the big banks are much worse off. Bank of America is trading at less than a third of its 1998 price, and Citigroup is at barely a tenth of its 1998 level.
I recall about 3 years ago that Citigroup stock was hovering around the $1 mark. People forget that Wall Street is really a lottery. There are some big winners but many losers. We see the big winners and give them credit for being smart when really it's mostly luck. What is pathetic is the big bucks paid to investment bankers for playing with other's people money when studies show they rarely, if ever, do better than the market average.

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