2008: The Goldman Drain

Like making a list of everything...

IF I HAD known then, in September 2008, what I know now, in September 2018, I would have felt differently about Congress' "rescue" of the banking system, writes Tim Price on his ThePriceofEverything blog, recalling his thoughts amid the Lehman's crash.

I would now have more sympathy for the sentiment expressed by Matt Taibbi when he wrote in April 2010 that:

"By now, most of us know the major players. As George Bush's last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street.

"Robert Rubin, Bill Clinton's former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup – which in turn got a $300 billion taxpayer bailout from Paulson. There's John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multi-billion-Dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain's sorry company.

"And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden-parachute payments as his bank was self-destructing.

"There's Joshua Bolten, Bush's chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board.

"The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York – which, incidentally, is now in charge of overseeing Goldman – not to mention..."

But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything.

What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain – an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.

In most other respects, I stand by every word written 10 years ago.

From an asset allocation perspective, of course, the game has changed. Having been artificially inflated by the forces of QE and ZIRP, bonds are no longer – in our view – remotely investible.

But we continue to see merit in the capital growth and portfolio insurance potential of sensibly priced 'value' stocks, uncorrelated funds (especially systematic trend-followers) and precious metals.

Ten years on, it seems increasingly likely that governments and their economic agents, the central banks, will respond to any future major crises with the same inflationary impulse, so we continue to see inflation protection (by way of pragmatically chosen real assets) as more important than insurance against outright deflation.

Either way, if in doubt: diversify.

It now seems abundantly clear that the politicians of 2008 and its aftermath achieved very little from the most aggressive monetary stimulus in history – other than sowing the seeds of political discord that are now starting to germinate with a vengeance.

Turns out that pumping a few trillion Dollars into the financial markets buys you a bit of time (10 years' worth, and counting), but not much else of practical value.