Reconciling Shirky, Noonan, Glassman, a Marine, and two Op-Eds

A redeeming thing about a crisis is that it brings out good things in people. The debt crisis has delivered an onslaught of good writing made particularly visible by the coincidental and exponential development of Internet publishing. Having enjoyed the luxury of time to read some of it the past few days and having personally joined the Internet publishing world, I’m drawn to comment.

Thursday I had lunch with a Marine who has since departed for his second tour of duty in Iraq. Friday Clay Shirky blogged about the Black Swan that ate newspapers. Saturday’s Peggy Noonan column in the Wall Street Journal was darker than her usually inspiring prose. Sunday I apocalyptically Facebooked — yes, a verb! — with James Glassman about the future of capital markets. And Monday I enjoyed Shelby Steele’s prose about conserving individuality and James Freeman’s brave challenge to conventional wisdom with the case against “saving” Bear Stearns.

The sum of it all is there was too much pessimism floating around for what was a sunny 67° 31% humidity Monday afternoon here in the County of San Diego.

Perhaps Peggy Noonan is correct and complex derivative creators were on drugs when they cooked the books that gave trichinosis to the global economy. Maybe James Glassman and PIMCO’s Bill Gross, the Facebook source, are right to fear the “three horsemen of the apocalypse” — deleveraging, reregulation, and de-globalization.

Here’s what I think:

• Just as the top-down social media model — newspapers, network news — is being replaced with a bottom-up model, so too will the top-down finance model be replaced with one that is bottom-up. Unlikely? Read Clay Shirky and understand that newspaper executives and media observers didn’t see it coming either. Society doesn’t need newspapers, Shirky says; we need journalism. Society doesn’t need complex derivative instruments; we need capital and simple risk management.
• Derivative derivers will mostly get a pass for financing under the influence, but the universe will get justice by finally subjugating its conceited “masters.” Wall Street players did fine for themselves on the way up, and many did fine on the way down, but that was their last hurrah. I wish the transaction fees for creating, squaring, and cubing CDO’s could be clawed back, and I wish federal guarantees of AIG CDS positions could be revoked, but that’s a bitter flavor of what my old Professor Ben Stein called magical thinking.
• The Black Swan of market discipline is circling the Leviathan of ham-fisted GOSBANK-style top-down command and control of national and global financial management. The Swan has sharp teeth, and will attack sooner and harder than conventional wisdom knows.

Shirky’s blog and my lunch with the Marine are among the reasons I’m thinking like this.

From Stocktwits to Quicken’s new online investment tool I tripped across Monday to peer-to-peer lending to business processes that are merely the glimmer in the eyes of dreamy entrepreneurs, the handling of information in the financial markets will soon follow the way of the handling of information in the news market. Information does want to be free, or at least dramatically cheaper than it was under the investment bank’s third strike model. (Selling equities, now the vital but pedestrian function of discount brokers, was strike one; mergers and acquisitions, which also became a competitive field devoid of economic rents, was strike two.)

Retail investors are fast learning the tricks of the so-called sophisticated Wall Street bunch (as much or more London than New York, it turns out), only doing it more efficiently. Now that any investor can easily buy an ETF to leverage a short position, is it any wonder the “sophisticated” bunch (“sophisticated investor” — an oxymoron of the decade!) now wants to restrict others who may wish to invest in both directions? My goodness, if that market got competitive too, where would we find our rents then? Permit investors to control their own content? Ugh, that sounds like letting newspaper readers get their news when they want it and how they want it without slogging to the curb to pick up a soggy pound of newsprint. Stop the travesty!

Mere efficient trading wouldn’t be sufficient to generate joy. No, there’s more to it. Trading achieves capital allocation and capital allocation is better done by markets than by individuals. Period. End of paragraph.

With the cult of investment banks dissolved and discredited, that leaves genuine competitive markets to fill the gap. When unleashed, genuinely competitive markets, in which information is free, simply do not fail.

There’s more still. As big government aims at big banks and inevitably pulls them into the morass of collective decision making, nimble smaller banks and angel investors will compete with each other to use streamlined and innovative processes to allocate capital to its highest and best uses. Many local bankers are doing just fine, thank you, and are happy to keep it up. The cash withdrawn from public markets the past six months as fears of socialism drove them down is there to fund the future.

James Freeman documents the obsession by sophisticates of the term “fragile” to describe American prosperity in Monday’s Wall Street Journal. Fragile? Hardly. In the real world, Americans are hardy and hearty. They’re fast tiring of their income being triple tithed and writhed away on the basis of fear mongering. Up with it they will not put much longer. The points at each end of the New York-DC axis are so weakly connected with most other points on the globe that the daily scripted and clichéd news events seem almost unreal to normal observers.

So of Pestilence, War, Famine and Death, I wondered Sunday which of the Four Horsemen Gross omitted from his list of three? Since he still wants to sell bonds, probably Death. I have a personal preference for optimistic equity over apocalyptic debt — perhaps like the Four Horsemen of Notre Dame rather than of the Apocalypse. How about the Four Horsemen of Global Growth: Open Standards, Transparent Markets, Competitive Finance, and Informed Investment. They’re undefeated against pestilence, war, and famine — and have even slowed down death.

Stories of large and small technology companies teaming up to bring Web 2.0 to the financial world are spreading. New opportunities abound to replace mere financial leverage with a combination of financial and personal leverage. Personal leverage and knowledge capital can support returns on investment infinitely more positive than mere financial leverage. Even at the extraordinary rates of 30, 40, and 100 to 1, investment banks can’t approach the leverage of the entrepreneur, who can create 50 or 500 or 10,000 jobs from his or her own personal capital. Leverage from productive enterprise, not leverage based on depreciating property, is the leverage that builds nations.

As nice as cash is, personal capital, knowledge capital, information capital, and integrity are many times more valuable. My lunch with the Marine, who was embarrassed by a mere hint of gratitude for his service, reminded me of that. It won’t be possible to securitize his mortgage three times over? Ha! That is simply not a problem unless you’re the one not getting paid to push the pointless paper to do it.

Instead of bank worship, Shelby Steele wrote on Monday in praise of “the discipline of ordinary people rather than the virtuousness of extraordinary people,” and called for “a little pride in the way we flail away at problems with an invisible hand.” Right on. We keep flailing, and some of those hands will do more than any of us can imagine.