Wealth of Nations and the Wizard of Oz Guest Contribution in The Gloom Boom Doom Report I recently learned that

The Wizard of Oz was written as a satiric commentary on the financial crisis of 1893. I am not sure if Frank L. Baum did mean to write his book for that reason. However, the idea that there are people who believe they can lever the machinery of markets has not disappeared. Today, the curtain behind which these wizards used to stand is now very transparent. Recently, a very renowned wizard held tenure at the Fed beginning with the crash year of 1987, departing just before the collapse of the subprime bubble. The collapse was, however, not in just one single class of speculation, but rather an entire edifice of debt created over the last 100 years. In the history of boom and bust, he and his cohorts hold the not so glorious record for the greatest intervention the world has ever known. At one time the machinery of banking and finance was housed inside a rather closed shop. Only your broker or your banker held the keys to the City. This speech by Michael Burry, delivered to the 2012 graduating class in the Department of Economics at UCLA (www.youtube.com/watch?feature=player_edbedded&v=1CLhqjOzoyE), reminded me just how much has changed over the years, especially in the way the market makes its decisions today. I remember how difficult it once was to obtain corporate filings or to see a chart showing the history of a companys price. Just these two seemingly unimportant data points might take days or weeks to uncover. Today, it is very simple to find them at www.sec.gov or www.stockcharts.com, even as the exercise has fundamentally changed from parsing complicated P&L and balance sheets, to some all-encompassing Risk-on or Risk-off. The panic of 1893, and the crises of 1907, 1923, 1929, 1933 and the others occurring along the path to 1987, 1998, 2000, 2003, 2007, share many similarities, clearly booms and busts, with much doom and gloom before the next boom, and like today, the rocky calm following. We ask ourselves will the cycle break to another bust, another boom, or some kind of gloom this time. In 1893 the railroads were over-built, cotton over-planted, silver over-mined, and bank reserves weak; the latter circumstance made quite clear, once depositors made the all too familiar run for their money. In the aftermath, speeches like this were made: The Constitution of the United States guarantees to all citizens the right to peacefully assemble and petition for redress of grievances, and furthermore declares that the right of free speech shall not be abridged. We stand here today to test these guarantees of our Constitution. We, choose this place of assemblage because it is the property of the peopleHere rather than at any other spot upon the continent it is fitting that

we should come to mourn over our dead liberties and by our protest arouse the imperiled nation to such action as shall rescue the Constitution and resurrect our liberties. Upon these steps where we stand has been spread a carpet for the royal feet of a foreign princess, the cost of whose lavish entertainment was taken from the public Treasury without the consent or the approval of the people. Up these steps the lobbyists of trusts and corporations have passed unchallenged on their way to committee rooms, access to which we, the representatives of the toiling wealth-producers, have been denied. We stand here today in behalf of millions of toilers whose petitions have been buried in committee rooms, whose prayers have been unresponded to, and whose opportunities for honest, remunerative, productive labor have been taken from them by unjust legislation, which protects idlers, speculators, and gamblers. We come to remind the Congress here assembled of the declaration of a United States Senator, that for a quarter of a century the rich have been growing richer, the poor poorer and that by the close of the present century the middle class will have disappeared as the struggle for existence becomes fierce and relentless. -Jacob S. Coxey, Address of Protest, on the steps of the Capital from the Congressional Record, 53rd Congress, 2nd Session (May 9, 1894), 4512. The conversation then, like today, included a debate over the devaluation of the gold standard. There were accusations of rigging the silver ratio in the bi-metal backed currency of the time. That world economy, whose goods traveled along the routes of the soon ending empires of the prior 100 years, was measured in the current accounts of nations by the amount of gold accumulating in country vaults, and, when not in balance, by a corresponding pile of grain, or cotton, or steel, sometimes thrown off balance by price collapse in one or the other, or when the paper currency became so dear, demand overwhelmed supply, or when the amount of currency was found to be out of alignment with the convertible standard in bricks of gold. When the bust occurred, thousand upon thousands of miles of rail track became suddenly redundant. Many miles of rail has been laid only to claim land and market share, for which there was no other purpose, or the revenue to support them. The cotton market collapsed because of over-planting and the flood of Egyptian cotton crashing the price. As the calls on deposits and on loans went out, they radiated across the nation, from the land to the banks, to England, Australia and Europe. Then finally the malinvested capital was wiped clean, and the investments reorganized into a proper natural size and function. Today we call it contagion, though without reorganization. Some 535 U.S. banks were

run into closure or suspension. The call on the currency was so great, certificates were issued in lieu of cash. In the election year that followed in the choppy wake, the mass populations representatives wrote and spoke: There is to be a presidential election this year; in view of which it may be well to remarkThat working men will not be taxed less under a Republican president than they have been under a Democrat. That there will be no more opportunities open to labor in the next four years than there have been in the past four. That it will be just as difficult to make ends meet in the four years coming as in the four years going. That there will be no more flour in the bin with a McKinley in the White House than there has been with a Cleveland. The concentration of wealth will rather be accelerated than otherwise by the change. That the election of a Republican or Democrat as president of this republic will have no more effect on invention and the use of more machinery, than the kick of a gnat on the Rocky Mountain. We admit that this is rather a gloomy forecast; but experience warrants it and events will justify it. -The Coming Nation, March 21 1896 After 1893 and thereafter, the crisis of 1907, in the United States we, the people, and the habitually overstretched banks, were partially indemnified with deposit insurance, and by the bank of banks known as the Federal Reserve. The bank of banks became the ultimate backstop along with all kinds of government mandates for the people, beginning with Social Security, such that today, nearly any speculation gone wrong is made right. Of course, this magical guarantee is not extended to you or to me. We, you and I land in the poorhouse, or jail, because we, you and I are not too big to fail. Our risk is not transferable. In the last 100 years a system devolved ever so slowly to replace the penance one was once upon a time required to pay when ignoring mortal hazards, contract law, or the duties required of any fiduciary officer, let alone a bad investment. Today, between the

central banking Put, government guarantees and debt spending, in lieu of spending that is productive, markets are bound to these programs. Unfortunately, there is no longer the ability to pay for this Paradise Lost. And yet there is an unwillingness to reorganize the great experiment. We wander like Samson, powerless and blind, asking for some, as yet invisible, guiding hand to solve this crisis without equivocation. Meanwhile, the bankers and the sovereign leaders would like to borrow even more of what remains of their citizens wealth (not to save it, but to spend it). The debt mountain continues to grow; the wizards engineer elaborate schemes and anything that will avoid, for the moment, the undoing of multi-generational malinvestment along with all of the guarantees taken so lightly for granted over these many years. The great maestro, who once lectured his junior central bankers the world over, knew a thing or two on how to regulate the market mysteriously. Once retired, he was replaced by a successor with vast knowledge of only one crisis. This younger man, and all of the current brethren in the industry of guaranteed spending and riskless malinvesting, probably did not quite understand they were charged with a credit account gone well past a sustainable limit. Business would be as usual, so they thought. For four years, they have lurched awkwardly from solution to solution while diluting the last of the wealth that supports what is left of confidence in all things commerce. Their machinations have distorted not only their supposed mandate, but ours, as investors, while the weight of debt and unsupportable spending handicaps their every decision and ours too. The famous Put has become the nightmare that drives what was once a market of decision makers. The zero cost of capital, easy money, and the guarantee offered by the Put has made the market as dependent as any retiree on social security. Take it away, the market falls. Offer it again, the market rises. Governments have devolved to act in kind, just as tied to the Put as they are to all of the promises made to voters to spend what they do not have. We know more and more, much wealth is on the move and very frightened. It is moving from investments that might support innovation, real products, employment, and tax receipts, to dormancy in bricks of cash, 60 million dollar single works of art, in agricultural land, ingots of gold, diamonds, guns, and prime real estate. These are longterm, illiquid investments. They are not meant to preserve, as best they can, merely the principal amount. This wealth is threatened by the slow piling up of laws which seek to make everyone equally vulnerable to a process which continues to avoid the reorganization of badly run banks, social programs, and nations. These laws do nothing other than feebly attempt to keep the Put in place on the assumption that somehow the great malinvestment, our great depression, will in time, go away. It is the nature of these institutionalized guarantees that when the reorganization does inevitably occur, the institutions themselves will no longer exist in the forms we recognize today. No only are wealth and its capital threatened, but it and the body of law

once serving to protect it, the ideas of contract and ownership, are being abridged and abrogated in this process, killing the patient it once so highly esteemed, Free Enterprise. Our current central banker, who holds the renowned chair once kept so mysterious, has sought a new transparency. He speaks plainly. He allows a question and answer session four times each year. His board members speak publically and often, sometimes daily. So do all the other central bankers of the world, and the sovereign leaders, and more and more, all of the people they represent via twitter, web page, and cell phone. No one, however, discusses even mysteriously, the Great Foreclosure once the Great Malinvestment is seized, and the Great Reorganization is allowed to begin. What has happened in nearly every past crisis is a second round, where prices fall, one way or another, to some natural place, the second often more severe recession/depression, once the malinvested capital is finally clearing. Nobody then knew where the natural place was going to be and there is no one yet who knows now what it will be. As every vested interest, which is everyone, clamors for what is left of the severely damaged Put, the Great Malinvestment will continue to erode fundamental confidence required in sustainable and free enterprise. It will drain productive capital as surely as pools of wealth attempt to hide in any place they can find outside the broken system they fear. I believe the second act of the Great Malinvestment purge will soon begin to emerge. One should prepare accordingly, as best one can; stay focused; refrain from listening too closely to the words of central bankers and sovereign leaders until that day comes when they honestly recognize what, in fact, they cannot change. Beware of wizards, even transparent ones.