Andy Kessler

WSJ: Lessons from a Dow Decade

A year ago yesterday, the world almost ended. The stock market was in free fall, with the Dow Jones Industrial Average bottoming out at 6547, down from its Oct. 9, 2007 peak of 14164. Financials were in a death spiral and there was even talk of nationalization. Citigroup hit $1.05, GE traded at $7.41 and golden Goldman Sachs was given away at $73.95. A bear market extraordinaire.

http://online.wsj.com/article/SB10001424052748704784904575111652626885876.html

WSJ: Bernanke's Exit Strategy

http://online.wsj.com/article/SB10001424052748703699204575017462822204340.html

We can end bank panics forever by limiting the ability of lenders to create money out of thin air.

Last week, voting 70-30, the Senate confirmed Federal Reserve Chairman Ben Bernanke for another four year term. So now what will he do?

 Phase one of the recovery is certainly complete. Since September 2008, the Fed has bought mortgage-backed securities and Treasurys, and increased the monetary base to $2 trillion from $850 billion. The flood of dollars has bank profits booming.

Sadly, banks still have all those underwater mortgage-backed securities and derivatives, but Mr. Bernanke is assuming they will just earn their way out of this problem. Banks also are not lending enough to get the job-creation engine rolling again—though sooner or later they will, at which point inflationary pressures will build tremendously. So every currency trader, bond buyer and man on the Street wants to know one thing: "What's the exit strategy, Ben?" Raise interest rates, shrink the money supply and risk cratering the economy, or keep rolling along and risk a collapsing dollar?

My guess? Mr. Bernanke will leave the money out there but restrict banks' ability to create more out of thin air. He'll be called crazy. Crazy like a fox.

The Fed has a once-in-a-millennium opportunity to do away with banking panics. Investors will rejoice, but Wall Street firms are not going to like it one bit.

The Fed has a once-in-a-millennium opportunity to do away with banking panics

Our banking system has changed little since the days of Elizabethan goldsmiths writing more gold receipts (aka banknotes) than they had gold in their vaults. This "fractional reserve banking" system has caused every major panic in this country—I've counted at least 16 of them since 1812.

Whatever the era, the story is always the same. Banks keep small reserves, and then invest in supposedly safe "sure things" to generate profits beyond the interest paid to depositors.

Sure things can be real-estate loans, home equity, credit card and commercial debt. But bankers are terrible investors. There are no sure things.

Thus modern banking is protected by the twin pillars of the Fed and the Federal Deposit Insurance Corporation (FDIC). The Fed, founded in 1913 out of the failure of Knickerbocker Trust when it tried to corner the copper market, finally learned after the banking crisis of 1930 that it is the lender of last resort. And the FDIC was established in 1933 to insure depositors against losses in case the bank is so bad at investing that there is nothing left for the Fed to lend to.

The end of bank runs? Mostly. Panics? Hardly. And Paul Volcker's proposal to restrict proprietary trading won't change a thing. Banks write bad loans at the top and dump them at the bottom.

Here is some recent history. The 1988 Basel accords set minimum bank capital at 8%, meaning banks could leverage their capital at ratio of 12.5 to 1. As long as their investments didn't fall by 8%, they stayed solvent. In 2001, U.S. minimum capital was set at 10%, more or less, but banks were allowed higher leverage if some of their capital was AA or AAA rated mortgage-backed securities. The rationale was that these instruments could never possibly drop more than 5%, let alone 10%. Oops.

Under the 2004 Basel II accords, so-called shadow banks (which don't take deposits) with $5 billion in capital were exempt from these regulations. So institutions such as Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns regularly used 20 to 1 or even 30 to 1 leverage. This allowed these firms to effectively print money, inflate the housing bubble, and then watch those same AA and AAA mortgage securities fall by 70%-90% in value.

To sum up, the Fed creates a monetary base and the banks can create $10 for every $1 of monetary base. Wall Street firms created $20 for every Fed $1. In other words, the Fed only seeds the market. Beyond crude instruments like interest-rate policy, it has little control over how much actual money supply exists. In good times banks lend too much. And in bad times, such as today, they don't create enough money because they lend too little.

Perhaps the lesson Mr. Bernanke drew from 2008-09 is not that we need more regulation but that financial firms should not be allowed to generate money out of thin air to write soon-to-be-bad loans. To seal his legacy, it is fractional reserve banking that he can rein in. Limit leverage and you take away the hot air from these bubbles.

Free marketers blanch at the idea of more regulation. But banking isn't a normal market. Banks create money when it did not previously exist. We've built a regulatory structure around this sleight-of-hand and each time are astonished that banks still fail. I doubt we will ever get to no leverage, a dollar loan backed by a dollar of capital, but I think Mr. Bernanke could be headed in that direction. One potential target is a 5 to 1 leverage limit—he could increase reserve requirements by 1% per year until it hits 20% by 2020. With credit dear, perhaps banks will do a better job of deciding what is a "sure thing."

You do need lending for an economy to function, but you don't need all that much leverage. Increased reserves may be the best financial reform we can hope for without politicians mucking it up. No need for pay czars and repressive rules.

Even a whiff of lower leverage and increased reserves will create a dollar rally, as inflationary fears—that banks will create too much money when the economy gets going again—subside. Oil at $50? Gold at $700?

If I'm right, banks and Wall Street are going to scream bloody murder at their new shackles. But so what, they've had plenty of time to recapitalize themselves and show record profits and compensation, a gift of Mr. Bernanke's zero-interest-rate policy.

Tighter control of money supply would mean the Fed no longer has to guess if banks are creating too much or too little. Lower leverage would keep bubbles from forming in the first place. Crazy.

WSJ: Put Down That Shovel!

Forget old-fashioned infrastructure. Here are six government projects to foster a lasting economic recovery.

The House has passed a $154 billion jobs bill, and the administration has announced a plan to spend $50 billion of repaid TARP money to "create" jobs—this time its green jobs, "shovel ready" infrastructure projects ($27.5 billion for highway construction and repair) and a tax credit for small businesses.

More infrastructure? Recycling Great Depression-era projects is lame. My advice? Put down that shovel! It's time to try something else.

We're in a knowledge economy now; we use high-tech tools to efficiently and effectively design, make, market and sell. Building roads and bridges willy-nilly won't make us more productive; and without increases in productivity and the associated corporate profits, there can be no sustainable job creation, no increase in standards of living, and no real economic recovery.

Given that real tax cuts are off the table and a new stimulus (even if it isn't called that) is inevitable, the best we can hope for is to use the power of the government to clear a path that private enterprise can't, via one-off projects that end and disband. Stop thinking concrete and massive construction projects. Think small—photons, electrons and proteins. Here are six ideas:

• Climb poles for wireless. Every street light in the country can be fitted with a wireless access point. Lots of companies, including Google, have tried to roll this out. But dealing with thousands of state and local governments to get access to poles and power is a nightmare. A stroke of the pen can create the Local Wireless Corps, with unfettered access to street lamps, telephone poles and utility sheds to create a massive wireless network to deliver Internet access—10 megabit, even 50 megabit speeds—to both homes and next generation mobile phones. AT&T and Verizon will complain about the competition, but so what—they're hardly hiring.

• Dig fiber ditches. Even faster wireless is too slow. If, as the Federal Communications Commission states, broadband is a priority, let's open up the right of way to a Local Fiber Corps to lay fiber-optic strands to every one of the 120 million U.S. residences (even the 10 million empty ones). The goal is gigabit speeds. It's attainable now. New applications like YouTube are bandwidth hogs. It's hard even to imagine the types of applications possible in a 100 meg or gigabit per second speed world. The only one way to find out? Build it. Then sell the fiber along with the wireless lamp posts to the highest bidders. More than one in each town will keep competition alive. And with so much bandwidth, arguments over things like network neutrality will magically disappear.

• Sequence proteins. In 1971, Richard Nixon declared a $100 million campaign to find the cure for cancer. We spend 5,000 times that much every year treating the disease. We may not be able to cure cancer, but we can find it much earlier when treatments are simple.

Scientists today shove cancer samples into mass spectrometers, in order to identify unique proteins for tens of thousands of types of cancer. The goal is that some day we can all be screened for those proteins as early warning signals. With so many college graduates among the unemployed this cycle, 100,000 of them can dust off their knowledge of biology and we could sequence every known cancer type for $50 billion. Medicare would save two to three times that much each year on cancer treatment due to early detection.

• Lighten backpacks. My son's backpack is 20 pounds. And he's only in the fourth grade. My high school son's backpack is even heavier, loaded with textbooks and cans of Red Bull to keep him attentive as his teachers drone on. A Textbook Corps can scan these books, put them on a reader like the Amazon Kindle, link them to high-tech projectors called SmartBoards that are going into many schools. We can instantly change education, not to mention saving many sprained backs.

• Scan medical records. The administration has talked about the time and money this would save, but doctors, hospitals and insurance companies don't want to go through the expense and hassle of digitizing all of our records. Only the feds, threatening to withhold Medicare payments until digitization takes place, could ram this through. Workers would knock on the door of every doctor's office, armed with scanners and Web software.

• Require TOU meters. It's funny how the "I don't work for the electric company" trick to get our kids to turn off lights has morphed into kids shaming parents into "saving the planet." Yet we still pay flat rates, though utilities need to build plants for peak periods, usually summers from 2-5 p.m.

With price signals, households would shift electrical usage to cheaper times. The technology is starting to roll out (with some stimulus money) in the form of Time of Use (TOU) meters replacing those ugly glass bulbs with spinning disks. Coupled with wireless in-house devices that show appliance electrical usage in real time and clever software at utilities, I'd bet peak usage would drop 30% and educate a million workers on the workings of the future smart electric grid. Beats subsidies for caulking windows.

For a $14 trillion economy, each 1% in productivity is $140 billion of additional output. Forget roads and bridges and shovels. It's a virtual infrastructure of ubiquitous bandwidth and digitized information that will require permanent workers and create a sustainable growth economy, a lot faster than shovels.

Dow Jones vs. the Monetary Base Chart

Updated again: October 30, 2009 (added 2008-2009 chart to 2009 only chart)

This chart ran along with The Bernanke Market piece that ran in the Wall Street Journal back in July. I thought it was worth updating. The market seems to be following the Fed's money creation. I suspect the market will give out well before the Fed stops printing money.

The monetary base data is from this page at the St. Louis Fed. WSBASE is defined as the "Sum of currency in circulation, reserve balances with Federal Reserve Banks, and service-related adjustments to compensate for float."

 

 

Marketplace Radio: Reform won't change Wall Street pay

Marketplace Radio

12:00 minute mark.

WSJ: Bank Pay Controls Aren't the Answer

In his weekly radio address on Saturday, President Barack Obama said that "we cannot allow the thirst for reckless schemes that produce quick profits and fat executive bonuses to override the security of our entire financial system and leave taxpayers on the hook for cleaning up the mess." A day earlier, Treasury Secretary Tim Geithner told the New York Times that "you don't want people being paid for taking too much risk."

So now the administration wants to control the pay of employees of banks and Wall Street investment firms.

Kenneth Feinberg, the administration's "pay czar," is being tasked to oversee employee compensation at firms that took bailout money from the government's Troubled Asset Relief Program (TARP). The Federal Reserve will require thousands of bank holding companies and state banks to submit their compensation plans for approval.

The administration has it wrong. It wasn't reckless schemes and excessive risk that sunk banks and Wall Street; it was excessive leverage. And thanks to cheap money and twisty regulations, risk was extremely undervalued. Banks owned huge portfolios of real-estate loans and mortgages specifically because they, and regulators, didn't think they were taking much risk at all.

Outlaw pay and pay will only go to those outside the reach of the law

Populist pay limits are squarely aimed at Wall Street, not local banks, yet for the most part Wall Street doesn't take much risk. Highly profitable investment banking and sales and trading are agency businesses, doing work for customers for a fee. Of course bad trades happen, and there are the rare rogue traders like Barings' Nick Leeson, who hid losses and sunk the firm, or Jérôme Kerviel, the young trader who lost $7 billion for the French bank Société Générale. But Wall Street firms are quite good at managing day-to-day trading risk.

The unwritten deal between public Wall Street firms and their shareholders is that employees get half of revenues as compensation. Yes, half. Shareholders, after expenses of phone calls and computers, get the rest, usually around 20%. In other words, Wall Street is a 70% profit-margin business. And Goldman Sachs, with the help of 0% interest rates, continues to knock the cover off the ball.

As competition and electronic trading ate into the agency businesses and profits in the early 2000s, the firms redirected their capital to invest in mortgage-backed securities, pocketing the 2%-3% difference between mortgage rates and their cost of short-term capital. This was the easy trade, the safe trade—not a "thirst for reckless schemes."

Bear Stearns, Lehman Brothers, Morgan Stanley, Citigroup, Merrill Lynch, Goldman Sachs and others believed the mortgage-backed security was the low-risk investment, and so it couldn't hurt to use leverage—i.e., borrow far more than the capital they had on hand, 20 times or even 30 times as much, to make additional investments in these securities. The firms raised huge sums of money—from other banks, money-market and mutual funds—so they could multiply 2%-3% gains into those large 70% profits and compensation. It wasn't risk but leverage that did in the financial system. Without that leverage, we'd have had an investment-banking profit crisis, not a credit crisis.

Yet if politicians still insist on limiting pay, there are only a few ways to do it:

• Limit risk? Good luck defining it. Great traders know that what looks low risk is often the scariest trade. You can't legislate market smarts.

• Pay Caps? So do you limit executive pay to $250,000? $1 million? $100 million? Who picks, how, and what are the effects? Not all Wall Streeters are equal. If oil trader Andrew Hall can't get paid $100 million after making Citigroup shareholders money, he is going to set up shop across the street and do it himself. Sure, he'll have to scrounge for his own capital, and maybe not borrow as much. But to evade the regulators' pay handcuffs, people will simply not work for a regulated company. Outlaw pay and pay will only go to those outside the reach of the law—whether they move to a hedge fund in Greenwich, Conn., or to an investment banking firm in London.

• Raise the cost of insurance? After overextending themselves with excess leverage while doing supposedly low-risk trades, Wall Street firms and banks got bailed out by a combination of low-cost capital from the Treasury, guaranteed debt by the Fed, and deposit insurance by the FDIC. It is clear in hindsight that Wall Street and banks have been underpaying for the twin pillars of the Fed as lender of last resort and the FDIC to limit bank runs. And so, yes, it is time to find a formula that adequately values that risk and charges Wall Street firms for this bailout insurance. There are market mechanisms today, in the form of derivatives, that price the risk of doing business with specific firms. Transparency is what will let the Fed and the FDIC use the market to protect the market. If done right, the increased costs will eat into the employees 50% take and therefore limit compensation.

But the knee-jerk reaction—to squeeze "greedy Wall Streeters" who nearly sunk the economy—is misguided.

Forbes: Lehman and Meritocracy

 

http://www.forbes.com/2009/09/14/lehman-brothers-goldman-sachs-bankruptcy-anniversary-opinions-contributors-andy-kessler.html

Part of the charm of Wall Street, and what scares most reasonable people away, is that it is as close to a meritocracy as exists on this earth. It's dog eat dog. It's sink or swim. You do a trade and it makes money, then you're a hero (for a moment anyway) and deserve a bonus. You bring in a deal, you get paid. You lasso more clients' assets under your firm's roof, you're a hitter. I once discovered some good news on the stocks I followed before the rest of the Street, and mentioned it to the sales force at a morning meeting and moved markets in New York, Tokyo and London. I had the head of global equities pat my head on the elevator ride up the next morning. Pat my head! I was told he never does that.

The flip side, of course, is what makes Wall Street so dangerous. You lose money for the firm and you're a heel. Do it again and you don't get paid that year. Do it a third time and you're out of a job. Just like that. Gone. I've seen it happen to friends and acquaintances at just about every firm up and down Wall Street. There is no tenure on Wall Street, no job security, no long-term guarantees. Ten- and 20-year careers end in a flash. Happens all the time, and everybody who works in the business knows this.

That's one reason why everyone is paid so well. Think of it as combat pay. But the other reason compensation is many, many multiples of the average wage in this country is that trading stocks, doing IPOs, merging companies, managing money is a very lucrative business. Not everyone can do it. It looks easy, football-field-sized trading rooms jammed with adrenalin-rush maniacs sitting in front of huge LCD screens. It might as well be a call center in Mumbai. But it's hard. Really nasty hard. Wall Street hires in that 99 percentile zone. And then they make your life miserable hoping you'll quit before they break you. Or hoping they break you before you lose money for the firm. It's not WalMart or General Motors or even Pfizer or Intel. It's trial by fire.

You would think that would make the entire workforce afraid to do anything for fear of being tossed out on their can, back into the cruel, cruel averagely paid world. But a meritocracy works in the opposite way. You have wicked smart people trying to prove to each other that they are smarter than everyone else. Unlike acing a chemistry final or even nailing your ACT tests, the score is kept with real money--how much your trading desk makes for the firm--how big a chunk of the bonus pool you command for your do-or-die heroics day in and day out.

Another not-so-secret revealed--it ain't fun, that's what Harry of Hanovers or Ben Benson's are for after 4 p.m. Pour a stiff one and recall sticking the guy at the First Bank of Neenah for a teenie (I'm dating myself talking about 16ths of a dollar) or bagging the OpenTable IPO or whatever the next deal is.

I'm reminded of all this because September 15, is the one-year anniversary of Lehman Brothers heading off to the great trading room in the sky. The debate will rage on for decades whether Paulson and the Treasury or Bernanke and the Federal Reserve should have saved them from failing. There is no good answer. Bear Stearns was bailed out six months earlier. Bank of America with the Merrill Lynch anchor around their neck was bailed out maybe four months later.

But the crude reality is that Lehman Brothers is a classic Wall Street story. Inside and outside, it was a meritocracy. They wanted to one up on Goldman Sachs, generate as good a return on equity and earnings growth so they could win the meritocracy game and get paid in spades. How dare Bear Stearns' CEO make more than ours! Let's lever this sucker up with mortgage-backeds and create a trillion-dollar balance sheet. If not us, who? And by the way, very few people at Lehman really understood how upper management was playing this meritocracy game with the rest of Wall Street with the rank and files' careers.

When that trade went south, and their creditors pulled their short-term financing, (OK, Jamie Dimon at JP Morgan was particularly egregious pulling a $5 billion plug), the ugly side of meritocracy reared its head. You lose money, you're out. Goodbye. It was nice knowing you. Every single person working at Lehman knew this personally, or should have known. That's the giant sword hanging over everyone's head, the stench of fear, that keeps the game going and going. I've got to use my 99 percentile smarts and win. If I don't, I'm toast, so I'll work harder, think harder, and of course play harder with my winnings that everyone else. The outside-meritocracy downside became the inside-meritocracy homicide.

Lehman is gone, sure, but Wall Street and the meritocracy lives on.

WSJ: Why AT&T Killed Google Voice

Earlier this month, Apple rejected an application for the iPhone called Google Voice. The uproar set off a chain of events—Google's CEO Eric Schmidt resigning from Apple's board, and the Federal Communications Commission (FCC) investigating wireless open access and handset exclusivity—that may finally end the 135-year-old Alexander Graham Bell era. It's about time.

With Google Voice, you have one Google phone number that callers use to reach you, and you pick up whichever phone—office, home or cellular—rings. You can screen calls, listen in before answering, record calls, read transcripts of your voicemails, and do free conference calls. Domestic calls and texting are free, and international calls to Europe are two cents a minute. In other words, a unified voice system, something a real phone company should have offered years ago.

 Apple has an exclusive deal with AT&T in the U.S., stirring up rumors that AT&T was the one behind Apple rejecting Google Voice. How could AT&T not object? AT&T clings to the old business of charging for voice calls in minutes. It takes not much more than 10 kilobits per second of data to handle voice. In a world of megabit per-second connections, that's nothing—hence Google's proposal to offer voice calls for no cost and heap on features galore.

What this episode really uncovers is that AT&T is dying. AT&T is dragging down the rest of us by overcharging us for voice calls and stifling innovation in a mobile data market critical to the U.S. economy.

For the latest quarter, AT&T reported local voice revenue down 12%, long distance down 15%. With customers unplugging home phones and using flat-rate Internet services for long-distance calls (again, voice is just data), AT&T's wireline operating income is down 36%. Even in the wireless segment, which grew 10% overall, per-customer voice revenue is down 7%.

Wireless data service is AT&T's only bright spot, up a whopping 26% per customer. How so? As any parent of teenagers knows, text messages are 20 cents each, or $5,000 per megabyte. After the first month and a $320 bill, we all pony up $10 a month for unlimited texting plans. Same for Internet access. With my iPhone, I pay $30 a month for unlimited data service (actually, one gigabyte per month). Is it worth that? The à la carte price for other not-so-smart phones is $5 per megabyte (one-thousandth of a gigabyte) per month. So we buy monthly plans. Margins in AT&T's Wireless segment are an embarrassingly high 25%.

The trick in any communications and media business is to own a pipe between you and your customers so you can charge what you like. Cellphone companies don't have wired pipes, but by owning spectrum they do have a pipe and pricing power.

Aren't there phone competitors to knock down the price? Hardly. Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s. That all gets passed along to you and me in the form of higher fees and friendly oligopolies that don't much compete on price. Google Voice is the new competition.

By the way, Apple also has a pipe—call it a virtual pipe—to customers. Its iTunes music service (now up to one-quarter of all music sales, according to NPD Market Research) works exclusively with iPods and iPhones. The new Palm Pre, another exclusive deal, this time by Verizon Wireless Sprint, tricked iTunes into thinking it was an iPod. Apple quickly changed its software to lock the Pre out, and one would expect Apple locking out any Google phone from using iTunes.

It wouldn't be so bad if we were just overpaying for our mobile plans. Americans are used to that—see mail, milk and medicine. But it's inexcusable that new, feature-rich and productive applications like Google Voice are being held back, just to prop up AT&T while we wait for it to transition away from its legacy of voice communications. How many productive apps beyond Google Voice are waiting in the wings?

So now the FCC and its new Chairman Julius Genachowski are getting involved. Usually this means a set of convoluted rules to make up for past errors in allocating scarce resources that—in the name of "fairness"—end up creating a new mess.

Some might say it is time to rethink our national communications policy. But even that's obsolete. I'd start with a simple idea. There is no such thing as voice or text or music or TV shows or video. They are all just data. We need a national data policy, and here are four suggestions:

• End phone exclusivity. Any device should work on any network. Data flows freely.

• Transition away from "owning" airwaves. As we've seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other. Let new carriers emerge based on quality of service rather than spectrum owned. Cellphone coverage from huge cell towers will naturally migrate seamlessly into offices and even homes via Wi-Fi networking. No more dropped calls in the bathroom.

• End municipal exclusivity deals for cable companies. TV channels are like voice pipes, part of an era that is about to pass. A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don't like one service blocking apps, use another), thus one less set of artificial rules to be gamed.

• Encourage faster and faster data connections to our homes and phones. It should more than double every two years. To homes, five megabits today should be 10 megabits in 2011, 25 megabits in 2013 and 100 megabits in 2017. These data-connection speeds are technically doable today, with obsolete voice and video policy holding it back.

Technology doesn't wait around, so it's all going to happen anyway, but it will take longer under today's rules. A weak economy is not the time to stifle change.

Data is toxic to old communications and media pipes. Instead, data gains value as it hops around in the packets that make up the Internet structure. New services like Twitter don't need to file with the FCC.

And new features for apps like Google Voice are only limited by the imagination. Mother-in-law location alerts? Video messaging? Whatever. The FCC better not treat AT&T and Verizon like Citigroup, GM and the Post Office. Cellphone operators aren't too big to fail. Rather, the telecom sector is too important to be allowed to hold back the rest of us.

Forbes.com - Thankfully, That's Not The Way It Was

http://www.forbes.com/2009/07/20/walter-cronkite-obituary-media-opinions-contributors-mediocrity.html

I've always had a problem with Walter Cronkite. He had this mind-meld grip on the brain of everyone, including me, who came of age in the 1960s and 1970s, with his subliminal promotion of mediocrity and complacency that kept an entire generation in the doldrums. And no, I'm not talking about his views on the Vietnam War and LBJ's line "If I've lost Cronkite, I've lost middle America." That was just noise.

Look, the guy could read the news okay. It's not rocket science. "Uncle Walter" had the anchor seat on the CBS Evening News from 1962 to 1981, back when people actually watched the news on television. How quaint. Seven o'clock, right after the local news. Like clockwork, finish dinner, put on Cronkite. And he was good--heck, he was the master. He taught himself to speak slowly, with a half regal, half Midwestern accent, so he could penetrate American minds, and infect them with his mystical powers of persuasion.

Am I talking about liberal media bias? No. C'mon, stay with me here. Every night, right after the news stories and vignettes on acid rain and student protests and Dan Rather in the jungles of Vietnam and crumbling cities and heroin epidemics and exposés on Watergate and fraud and corruption and burning slums, Walter Cronkite would turn to the camera, and with almost undisguised smugness, tell me, right to my face, "... And that's the way it is."

Liberal schmiberal. That was a cover. He was the voice of the establishment, The Man trying to keep us down. And there's nothing we could do about it because that's the way it is. And I believed him. We all did. A conspiracy by advertisers on his show? Who knows, but it took me a long time to break out of his trance.

The 70s were a smog-filled haze. Upward mobility was a pipedream. Stock markets stagnated and all the moon-walking Space Age dreams of the 60s were shattered with layoffs and plant closings and Rust Belts and urban unrest. You were told to do well in school and maybe you could get an entry level job at a big company and wear a white short-sleeved shirt and work your way up over twenty or so years, so you could buy that little house in the suburbs and squeeze out 2.3 kids and afford a station wagon and … well, that's the way it is.

Someone else has all the money and you don't. That's the way it is.

Unknown forces control your life. That's the way it is.

Governments are corrupt. That's the way it is.

Society is divided into classes, and you're stuck in yours. That's the way it is.

The American Dream is dead. Go back to work, you sorry little cretins.

Fortunately for me, for you, for everybody almost everywhere, Walter Cronkite was wrong. "Most trusted man in America"? No way. That wasn't "the way it is." Not even close.

In fact you couldn't rely on anyone else--no school, no company, no institution, no company, no industry, no media, nobody was going to raise you up. The trick was to destroy each and every one of these existing systems. Blow it all up. Invent the future by destroying the past.

Not blow it up literally. Abbie Hoffman was a bozo. The Black Panthers were terrorists. It wasn't civil unrest that created change. That was a sideshow. It wasn't hippies or free love or exotic drugs (too bad, all that was kinda fun). All these things destroyed lives and never built anything new. Same for every beneficent government program and professor's teaching. Worthless.

Instead, what it took was a few little microchips (Ted Hoff at Intel), and a couple of funky pieces of code (Bill Gates at Microsoft) and a few smart people (Steve Jobs at Apple and Larry Ellison at Oracle and thousands of others), who weren't content working for The Man. Each of them dislodged "the way it is" and got a few people asking "why is it this way?" and declaring "think different" and "eat my dust," and bang, the status quo crumbled. You could create your own future. Power shifted out of the hands of conglomerates like Gulf & Western and Engulf and Devour and away from centralized bureaucrats running faceless government operations. Instead, power ended up in your hands, my hands, all of our hands. To do what we wanted.

Computers escaped air-conditioned rooms and ended up on our desks. Banks gave way to mutual funds. The New York Stock Exchange gave way to Nasdaq. Brokers gave way to Web-based trading and on and on.

So what did we want? To change the world, for the better, increase the size of the pie, bring the rest of the world onto our wealth grid. And not by building huts in Costa Rica but by taking down those obstructing progress, those leeching off the rest of us, holding us back, milking the present for their own benefit rather than standing aside and letting wealth-creating innovation increase everyone's living standard. Those "that's the way it is" types needed to move over. But they didn't move on their own, so we either had to wait for them to die or just destroy them. Seek and Destroy. Music companies. Travel agents. Insurance brokers. And we're not done--the hard work has just started.

It took me a long time, well into my life, to get Cronkite's words out of my head and realize that not only is anything possible (thank you Kevin Garnett), but that I was the one that had to make it happen. There were no gifts, no trailblazers to follow. We all have to invent the future by destroying the past.

Sadly, the old mentality is back. Citibank is too big to fail. That's the way it is. The government needs to bail out the automakers. That's the way it is. Taxes are going up. That's the way it is. Carbon dioxide will boil the oceans so we need to live in cities and walk to work. That's the way it is. Elites like Robert Reich and Paul Krugman and Al Gore will tell you what you'll be paid, how much health care you'll get, how much risk you can take, what kind of car you can drive, how much water you can use to flush your toilet, because … That's The Way It Is. He may have passed away last week, but Walter Cronkite will never die.

WSJ: The Bernanke Market

http://online.wsj.com/article/SB124762005061042587.html

I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.

The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.

In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.

Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.