Three and We Are All OUT! : Lessons Not Learned

Our Society Appreciates “Three and Out”

The 2017 American baseball season is underway.  Our great history includes baseball as an American past-time.  Just like other countries, Americans will look for ways to judiciously apply the law to their citizens in a similar fashion to sports games.  In California years ago, the state implemented a “three strikes and your out” law for convicts.  We do not need to know this law in detail for the purposes of this blog but you get the point.  Sports games and rules are a part of our psychological state and law making to the point where legislators will draw upon sports games to prove their point.

Baseball’s “three and your out” rule is a rule that permeates throughout our society.  Our school system uses a three and out philosophy to decide upon expulsion of students.  Our judicial system has three and out laws.  Numerous businesses have three and out policies to evaluate their employees.

The 1930’s Lesson Not Remembered

Great Depression Memorial

In the 1930’s the United States went through a great depression due to a weak banking system that allowed commercial banks to lend aggressively on stock and real estate investments.  The stock market went through the roof and crashed.  The recovery took over a decade and after World War II the economy was better again.  The lessons learned from the 1930’s are obviously not remembered as generations passed.

Strike One

In 1999, almost no one was talking about great depression on the horizon as Alan Greenspan, fed chairman at the time, called the increase in technology stocks a meteoric rise due to irrational exuberance.  Alan Greenspan remembered the 1930’s great depression and tried to stave off a financial catastrophe by raising interest rates rapidly.  This was not good enough as easy lending to tech companies and a flood of individual investors into the stock market ballooned the stock market that eventually caved in.

Alan Greenspan and his Fed colleagues did not know how to handle the issue of the late 1990’s.  History tells us that fed interest rates must increase larger than the existing rate of interest to stave off a bubble.  Alan Greenspan in an

Alan Greenspan

attempt of desperation increased interest rates larger than the existing rate when the situation was at extreme levels.  Even expert economists do not know how to tame irrational exuberance.

The stock market crashed and in 2001 there was a military-like attack on the World Trade Center.  We went to war again. We can also note that the bubble and the irrational exuberance of the late 90’s uncovered the worst accounting scandals in U.S. history.  The largest was Enron. Enron’s CFO, Andrew Fastow was named “CFO of the Year” several months before the Enron collapse occurred. Fastow went to jail on charges of conspiracy, wire fraud, securities fraud, false statements, insider trading, and money laundering.

What we can learn from the 2001 crash is that the lending practices were out of control for tech companies and that there were serious accounting and corporate oversight issues that needed attention.  Sarbanes Oxley was passed in 2002 within distance of the Enron hearings.  This new law was to protect investors from poor oversight committees, bad auditors, and financial fraud.  Basically, new laws were necessary to babysit corporations and to prevent them from ruining our financial system.

To pull our country out of depression, Alan Greenspan in 2001 lowered interest rates to low levels.  The extremely low interest rate policy encouraged investors to invest in real estate in 2002.  Re-financing and mortgage lending companies became the hot new industry with the boom and bust tech industry still popular.  Real estate investments and prices went on a historic bull run that lasted from early 2002 to late 2008.  This historic bull run ended in a collapse of mortgage lending businesses due to poor lending practices.

Strike Two

In 2007 to 2009 there was a subprime mortgage lending crisis that pushed the U.S. and the world into global recession.  The easy money policy injected into the economy during the 2000s to bring us out of the stock market crash started another boom and bust.  The stock market crashed due to poor lending practices.  This time stock portfolios took an estimated 60 to 70% drop.

At that time, President George Bush called military and political leaders to get advice on whether there should be plans for martial law.  Martial law was not necessary but the economy got worse

2008 Stock Market Crash

as foreclosures increased to record levels pushing housing prices to all-time lows.  Places where housing prices are expected to go up every year, like southern California and New York, had their first home equity drop.

New Fed chairman, Ben Bernanke, unleashed the largest quantitative easing program in world history.  Quantitative easing programs by governments are programs where the central bank of the government is told to increase the money supply of their country by printing money and making the money easily available to banks.  These banks then lend the money at low interest rates to businesses and consumers.  In effect the monetary easing programs are supposed to prevent deflation, increase jobs, and increase wealth again.

This new program was in the 100s of billions and there was mass speculation that the program itself could damage the dollar.  Damaging the dollar’s worth is good for gold and silver.  Once the quantitative easing program began, gold and silver shot to record highs showing economists how fragile the U.S. dollar is becoming.  The problem with quantitative easing is that if the easing is done too many times we could be like a country like Japan where the currency is so devalued that the people have lost their faith in the stock market as a retirement tool.  If you do not believe me, look at the Nikkei stock exchange history.

The Re-emergence of Bad Lending and Oversight

Recent developments make wise investors believe that there is turmoil around the corner.  Donald Trump is our new president and the congress is mainly republican.  Republicans are very business friendly and there are rumors spreading that the oversight restrictions that have been placed in the past on major corporations are being ignored.  You can enact a law but if the law is not enforced then the law is just a statement.

For example, the independence accounting rules are being relaxed and not enforced.  Auditors and oversight committees of major corporations include people that share the socio-political beliefs of the company.  This is not independence.  Accounting firms should hire people that are opposite to the socio-political beliefs of the company that they are auditing so that society can gain independence of the company’s financials.  Basically, minorities are having difficulty finding accounting jobs in a hot accounting profession that is hiring.

The reemergence of accounting scandals are beginning.  The collapse of Arthur Anderson and Enron was due to executive leaders that put money first over doing what is right.  Andrew Fastow and other Enron executives are out of jail now.  Andrew Fastow was seen speaking at major private universities in 2016.

In April 2016, I got a chance to sit down and watch Andrew Fastow speak in front of a crowd of Chapman University students.  Fastow did not teach us about what is wrong with the system but instead proclaimed to be innocent.  He showed us the performance of similar companies to Enron.  He argued that there are other “trading” companies out there that have dropped tremendously in value but there were no federal charges against their executive management.  Fastow also basically stated that you can unethically manage earnings without the audit firm’s knowledge.

Strike Three! : Where Did All of The Investors Go?

The recipe for future financial apocalypse is being prepared.  Executives and accounting firms that do not take the rules seriously, poor teachings from people like Fastow, bad easy money lending practices, and disregard for history are being put into place.

Quantitative easing, if used again on a massive scale, could send the dollar’s value to all time lows spurring on a currency crises.  In 2008 through 2011, the quantitative easing had an effect on the stock market.  However, this is not guaranteed to have the same effect again.  When quantitative easing happens again and the stock market does not respond, there could be blood in the streets.

Economic and financial calamities are supposed to be rare.  The events of 2001 and 2008-9 should not happen within a close timeframe.  This gives further believe that our nation’s financial leaders are tinkering with the system.  When strike three occurs you should be ready in case of martial law.

Financial Survival Video

I encourage you to watch the video in the link below from Steve Robertson (Economist and Researcher) to gain more insight on financial survival.

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