News & Insights
The End of Finance
Professor Francis Fukuyama in his 1992 essay "The End of History" postulated that the fall of Soviet Communism atthe end of the Cold War cemented western style liberal democracy as the final and highest form of human government. Some thought that "Mr. Gorbachev, tear down this wall!" marked the end of history's struggle of ideologies. Democratic capitalism would increasingly govern more and more of the world's people until tyrants and autocrats were something we studied in history books. It didn't quite work out that way. We are reminded by premature "Mission Accomplished" signs that tyrannical regimes still thrive and grow in this post-historical world. Freedom, both economic and real, still requires vigilance and hard work for which our leaders currently seem ill equipped to handle.
There is a financial system analog. Since World War II, and accelerating in the past ten years, we have become increasingly dependent on and developed an unhealthy confidence in our financiers' and policy makers' ability to engineer a happy ending to any financial crisis. Probably the high water mark of this kind of thinking was Bob Woodward's biography of Alan Greenspan "The Maestro". He spun the life story of a mediocre dissembling business economist and government bureaucrat, an uber-nerd devotee of the half-baked theories of Ayn Rand, into that of a 21st century Colossus and the public wanted to believe it. If we get in trouble, our brilliant crazy uncle Greenspan will fix it. There will be no more depressions or recessions. Brilliant financial minds will save us. Finance as we knew it is over.
Wouldn't it be convenient if a bureaucrat in a D.C. office building could always make the bad consequences of our economic behavior go away? We were prosperous not because we are blessed with great resources, have great workers, great universities, innovators like Bill Gates and Steve Jobs, and great products, but because we had good bankers. At one point in early 2007, the financial sector of the S&P 500 represented over 24% of the index. Did the money changers and usurers really represent a quarter of our economy? Were last century's Thomas Edisons, Henry Fords and Andy Groves (of Intel fame) really just a prelude to the brilliant contributions of Greenspan, Blackstone's Steve Schwartzman and the other faceless hedge fund managers and private equity princes which sit amid the
Forbes 400? Of course not. Moving money around is not a productive activity in the way that inventing useful machines and building successful businesses is. Somehow we confused the scorekeepers and equipment managers with the athletes. Wealth is created by innovators and risk takers who solve humanity's problems, not by sharp operators who package somebody's bad loan into a "junk" bond or strong arm some weak minded investors and bankers into underwriting such promising investments as Cerberus' takeover of Chrysler Motors. "Let's buy an almost bankrupt manufacturer of third rate SUV's just before an oil crisis."
In our view, the silver lining of this financial crisis is the near exhaustion of the financial engineers' ability to postpone a day of reckoning. Within the next ten years, there will be a financial crisis and all the King's horses (the Fed) and all the King's men (Congress) will not be able to prevent the unwinding of the "bubble of the moment." This will bring discipline to the capital markets and prices of stocks. Good ideas will be funded, bad ideas will fail.
Our global economy's current problems are well catalogued. There are increasing energy and food demands from developing economies, and the world needs more fresh water, new roads and new bridges. The firms and entrepreneurs that address these problems effectively will likely be the wealth creators of the future.
The Altavista Investment Team - Summer 2008