Chinese market concerning me perhaps more than it should, lately. Perhaps not enough. With $3 trillion in value wiped off the map and another $1+ trillion frozen at the trading desk it looks pretty bleak. And it has for a while – they’ve been spending four to six dollars for every dollar of growth created, surely a losing formula. Given how intertwined our economy is with China’s maybe it’s worth some heightened consideration.
The other night after a few hours of staring at the issue to see who would blink first (I lost) I dragged my carcass to bed tired and worried. It had been a long day and sleep sounded like a great idea. No sooner did my head hit the pillow than an idea shot into my brain and had me sitting bolt upright. It wouldn’t go away – I had to scrawl out the basics before I could settle down at all.
I found myself thinking about Bear Stearns.
Bear Stearns Companies (also known as BSC) was an investment bank, trading and brokerage firm that folded in the midst of the 2008 crisis for a whole host of reasons. The market in general a horror show, several factors worsened BSC’s position. First, two major hedge funds founded by them had just collapsed under a cloud of fraud. Second, their highest executives seemed oddly disconnected from the company at critical moments. Third, they had precious little good will in their environment after refusing to participate in an earlier industry bailout of another firm. And finally: a number of subfactors combined to create a fairly traditional run on a bank that, like others at the time, relied heavily on overnight “repo”: repurchase agreements that largely funded BSC’s daily business.
One of the contributing factors to the run manifested in a series of calls to other financial institutions from an office inside the Treasury Department, said to be the Office of the Comptroller of the Currency. In these phone calls a federal official asked how much exposure (level of financial risk) the recipient had to BSC – but followed by an entreaty to not share the nature of the phone call with the rest of the firm, especially their trading desk. The expected and inevitable happened – and everyone began pulling out of what they could with BSC and shorting BSC stock. Despite, obviously, the request otherwise.
Compare that with the moves made in China’s even more centralized market lately, which started out with money being pumped into investment firms by the government alongside a request to stop shorting the market. A request that seems to have been honored – perhaps in large part due to the real likelihood of being arrested by the CCP for failing to comply.
The juxtaposition between the two markets is interesting. The mid-crisis developed market in which good will and civic duty end up largely laughable – in which traders move in for the kill – versus the developing market that yields to government requests encouraging stability. Of course, the CCP didn’t stop there – as mentioned above, much trading has been frozen.
The principle here troubles me. The idea that a market stands proudly as more developed when it engages in predation. But while this principle isn’t friendly to our conceptions of democracy and market action, it may not be wrong. Propping up failed companies for the sake of appearance doesn’t serve a market or a country’s citizens that well, especially in the long run. We’ve seen enough evidence of that on our end. Certain “zombie banks” shamble along lonely roads on which no one joins them but for government intervention and usually which banks those are is the worst-kept secret in a financial sector. The hope in saving them from insolvency (and, not coincidentally, preserving a certain share price until stakeholders can get rid of it and leave taxpayers holding the bag) is that it will stabilize a volatile market in which rivers of credit run dry. The ultimate apocalyptic landscape for a free-market democracy.
The problem is laid bare in a blistering sun baking the scarred landscape: there’s no hiding from it, in the sense that once a firm’s liquidity is questionable enough to require intervention that firm’s been infected and well on its way to zombification itself, if it hasn’t turned already. Zombie firms spend each day automatically performing actions they remember from when they were alive, shambling up and down the road searching for someone else to give them credit or engage as a counterparty. Once the sun sets nights turn cold and empty as they try to figure out how to get through the next day without a decaying arm falling off.
My fear here is that for the sake of stability China becomes a dark economy – almost ceaselessly pumping money into market-shamblers under the cover of night. The CCP reasserts massive controls from Beijing, illegalizes most economic journalism and simply paints an acceptable picture for the next 5-10 years while no one inside or outside the system knows what the hell is really going on. It’s the only way for high-level CCP members to preserve their massive wealth and revenue generation, and short of execution they are not going to give that up. And even as a Dark Economy, China’s got so much volume that it would still be too big a pool for external investors to not dive into.
Maybe there’s a better way to put it than predation – though taking weak members of the financial herd is certainly applicable. Maybe instead it’s worth considering this part of democratic capitalism as populated by vultures. Certainly done before but usually without recognizing this: vultures are a mechanism to protect ecosystems from disease. Environments with a lack of vultures often see a catastrophic rise in feral dog populations, which are a huge ticking time bomb for rabies.
Of course our problem isn’t solved by our current market: the vultures like to turn on us as well. Far too often.
Referring to our own economy as a developed capitalism may be premature, then. Unless that predatory behavior is indeed a defining characteristic – in which case our future may lie somewhere else, far away from sharks, vultures and zombies. I can hope.