Friday, February 5, 2010

Dark clouds over America - Captain Bernanke and the Navy Rule

I recently read Paul B. Farrell’s article Warning: Captain Bernanke sinking the USS Titanic just before the reconfirmation of Ben Bernanke as Federal Reserve Chairman. Farrell compares Bernanke to Captain Queeg in the film ‘The Caine Mutiny’. I’m not familiar with the film but I can imagine Captain Queeg has some issues.

Worse, Obama's giving ol' Capt. Ben a second chance to pilot into new icebergs dead ahead. The Economist calls them "asset bubbles." Problem? Capt. Ben can't see through his ideological Greenspan/Reaganomics goggles, clouded by his obsessive allegiance to Wall Street's "fat cat bankers."
Nothing new: He failed to see warnings of "icebergs" back in 2007. Yes, and he'll miss any new icebergs, sink the global economy and plunge the world into the eerie depths of the Great Depression 2.

Farrell goes on to quote Jeremy Grantham in his recent letter to investors ‘Lessons Not Learned: On Redesigning Our Current Financial System.’

"Imagine the company representatives on the Titanic II design committee repeatedly pointing out that the Titanic I tragedy was a black swan event: utterly unpredictable and completely, emphatically, not caused by any failures of the ship's construction, of the company's policy, or of the captain's competence. 'No one could have seen this coming' would have been their constant refrain.'"
Sound familiar? You bet. Capt. Ben's "Titanic II design committee" would include his ol' buddies, Alan Greenspan, Henry Paulson, Lawrence Summers and Tim Geithner. "Their response would have been to spend their time pushing for more and improved lifeboats," says Grantham.

I have liked Jeremy Grantham ever since I saw him in this far-reaching interview at Wealthtrack after the meltdown last year (which I encourage you to watch in its entirety to get valuable insight into what has happened in this crisis, including utter condemnation of Greenspan and his protégé Bernanke). My favourite Grantham quote from the interview is this:

Interviewer: New rules of investing: is permanent bullishness about equities out?

I certainly hope it’s out. I like to say that in the short term we learn an enormous amount from these crises, and in the intermediate term we learn a little, and in the long term we learn absolutely nothing.

So a ‘nearly dysfunctional Congress’ dominated by special interests has plucked the Captain of the Titanic from the sea and has promptly given him command of a new ship. ‘Is that wise?’ you may ask. By pure coincidence I came across the following from (Warren Buffet’s partner) Charlie Munger’s book ‘Poor Charlie’s Almanac’:

I like the Navy’s system. If you’re a captain in the Navy and you’ve been up for twenty-four hours straight and have to go to sleep and you turn the ship over to a competent first mate in tough conditions and he takes the ship aground – clearly through no fault of yours – they don’t court-martial you, but your naval career is over.
You can say, ‘That’s too tough. That’s not law school. That’s not due process.’ Well, the Navy model is better in its context than would be the law school model. The Navy model really forces people to pay attention when conditions are tough – because they know that there’s no excuse.
It doesn’t matter why your ship goes aground, your career is over. Nobody’s interested in your fault. It’s just a rule that we happen to have – for the good of all, all effects considered.
I like some rules like that. I think that civilization works better with some of these no-fault rules. But that stuff tends to be anathema around law schools. ‘It’s not due process. You’re not really searching for justice.’
Well, I am searching for justice when I argue for the Navy rule – for the justice of fewer ships going aground.

Well, in the case of Captain Bernanke the Navy rule would doubly apply: the Captain was at the helm of his ship the whole time and was fully responsible for running the ship aground. The Captain would have been court-martialed, found guilty and dismissed the service. Next case. Instead, here we are again with the same captain, doomed to live through the whole scenario again. As Grantham points out, in the long term we learn absolutely nothing.

Image from Jeremy

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Discover The Tale of Genji, the 11th Century classic of Japan (click image)

Discover The Tale of Genji, the 11th Century classic of Japan (click image)
Kiyomizudera Temple has a large veranda looking out over Kyoto and beyond