I have spent 12 hours a day and most weekends engulfed in thought and opinion surrounding this current financial crisis. I have listened to and interviewed economists, congressmen and congresswomen, senators, administrators, regulators and CEOs.There is only one conclusion I can come to. It is clear that nothing is clear ... to anyone . There has been enough finger-pointing to fill a century of political opinion. Banks blame lenders, lenders blame regulators, regulators blame politicians, and politicians, being the carnivores they are, blame each other. It has gotten to the point where, if I am interviewing someone and he or she starts the interview with a line about how we got here, I stop them mid-thought and ask, "We all have our own ideas about how we got here, now... can you offer any help going forward?" I have spent some time with my mentor on this crisis. He is a Wharton graduate and a brilliant guy. We have tossed ideas around, and he is very pragmatic when it comes to this crisis. He and I completely agree on the "how we got here" theory. The sleazy subprime lending, the levering up by households (buying too much and too many homes, and credit-card and auto debt) and businesses, and Wall Street's repackaging of those mortgages into derivatives that can be traded and leveraged like a Ponzi or pyramid. Guess who got caught when the pyramid unraveled as they always do? All of the above. Mark and I also agree that the long-term fix is to solve the credit crunch. We need to get money flowing from central banks through the finance industry and ultimately to businesses large and small and to individuals. That will spark economic activity, which seems to be frozen at the moment. It should be a worldwide effort coming from central banks from all countries, not just the G-7 or G-20.
Here is where we differ, however. I think a big part of the freeze is the stock market. I think banks have seen Bear Stearns, Fannie ( FNM) and Freddie ( FRE) and AIG ( AIG) stocks getting systemically decimated and have tightened their lending. Then Lehman was allowed to fail, and they froze all unnecessary activity. When WaMu and Wachovia came within hours of failing (and remember those were after Lehman went belly up), there was little anyone could do to convince lenders to lend. Lenders became hoarders. Cheap money wasn't going to help. Lowering fed funds, opening the discount window wider, paying interest on collateral left at the window, even offering $700 billion to take "toxic" derivatives off balance sheets wouldn't do the trick. Not when a bank might see its stock getting destroyed in the matter of a few hours. My idea. I think solving this crisis in confidence relies on the markets' ability to stop the free fall. I believe that if the central banks would buy equity in the top 200 companies on their own stock exchanges, these markets would stop falling. There would have to be agreement that the central banks would buy ample shares in their best companies. It should also be known that these shares would be set aside and available for sale at any time. They would not be put to the market, but if the market demanded them, they were to be sold back at a time when the world economic picture stabilizes. They would be nonvoting preferred shares that would eventually come off the government books.
Recall, the real estate market was starting to show signs of a heartbeat just as the equity markets started their massive unwinding. If we instilled some sort of base in equities, I believe confidence may begin to trickle back into the system. Confidence is the missing ingredient, and confidence in the stock market begets confidence everywhere: in real estate, in employment, in spending and most importantly now, in lending. I am not a Harvard economist, senator or a Treasury Department analyst, but I see the picture from the ground up. I am sure some will say that I am being self-serving in my solution. I am not. I told you that I am almost fully in three-month Treasury bills and some N.J. bonds. The total of my equity position is less than 5%. I am truly concerned about our wonderful country and our wonderful way of life. With all the very intelligent fixes (which haven't helped so far), I offer a relatively simple solution. Too simple? Perhaps, but I am a simple guy and simple has served me well. Washington might take a dose of simple. What they are serving up (complicated stew) doesn't taste too good. Trade with your head, not over it.