Wall Street Throws A Tantrum

From Newsweek.
by Daniel Gross

Monetary policy, the management of global companies and the workings of Wall Street are indisputably the realms of the mature: one searches the gallery of Federal Reserve chairman portraits in vain for a full head of hair. At the World Economic Forum in Davos, I realized I hadn't seen so much silver hair since the 5 p.m. early-bird special dinner at Le Rivage in Boca Raton, Fla. The presence of all these wizened professionals should instill a good deal of confidence. When you're trying to bring a massive tanker to port amid stormy seas, the last thing you want to see is a 12-year-old apprentice steering the tugboat.

Yet in these turbulent times, Wall Street traders are the infants and toddlers. They're the tykes who stage public tantrums, screaming and yelling and writhing on the floor until they get what they want. Since the markets began to buckle last summer, what traders want is interest-rate cuts and other government measures to bail out banks from reckless and disastrous lending and investment decisions. In response, Federal Reserve chairman Ben Bernanke has done what any exhausted parent does when a child screams for three hours straight: he gives in. In the past two weeks, the Fed cut interest rates sharply twice, taking the Federal Funds rate down from 4.25 percent to 3 percent.

Of course, "giving in to a tantruming child just reinforces the demand," says Dr. Wendy Mogel, a clinical psychologist in Los Angeles and author of the wildly popular parenting tome "The Blessing of a Skinned Knee." And each time you cave to a screaming child, it buys you less quiet. The Federal Reserve's latest attempt to calm the market's tantrums—the half-point interest-rate cut on Wednesday—bought about 90 minutes of market silence. Within hours, as poor economic news continued to materialize, the clamor for further rate cuts began to rise. Mogel puts it in starkly financial terms: "Indulge tantrums and you get short-term gains and long-term loss."
If traders are the toddlers, investment bankers—and the CEOs they report to—are the tweens of the system, plagued by attention-deficit disorder. As we speak, your typical Wall Street managing director is glancing at CNBC in his office, intermittently checking six computer screens, thumbing out e-mails on his BlackBerry, barking out orders to a personal assistant—all the while furiously working out on the elliptical machine. Merrill Lynch, Morgan Stanley and Bear, Stearns take great pains to distinguish themselves from one another. But they all lurch together from hot financial trend to hot financial trend the way tweens ditch yesterday's pop stars for today's (goodbye, Britney; hello, Hannah Montana). Like proto-teens, bankers are incapable of exercising independent judgment. Which is why every bank—from the staid Swiss to the sharp trading houses on Wall Street—got caught up in the subprime debacle. Alan Hilfer, a child psychologist at Maimonides Medical Center in Brooklyn, N.Y., notes that investment bankers behave like kids in a candy store. "The candy is money. And when they see an opportunity to get more of what they want, they go after it without considering the consequences." The financial system has an upset stomach today precisely because every large financial institution gorged on subprime candy.

If Park Avenue bank headquarters are like middle school, Davos, which attracts truly senior bankers and financial statesmen, is like high school. It' got the jocks (the heads of state and CEOs), the cheerleaders (journalists), the cool guy in the garage band whom all the girls love (Bono) and a lot of math and science geeks (Bill Gates, economists, technology evangelists). As in high school, the culmination of the year is the big dance (the Google party). Two weeks have passed, but I still can't shake the vision of talking head David Gergen's getting down—it's available on YouTube if you dare.

There's a final, telling way in which the markets exhibit childlike behavior. Children typically display an unwillingness to reckon with the fallout of their own actions. They look to parents to pick them up when they fall, and spare them from the consequences of their own behavior. And parents will go to great lengths to insulate their offspring from the jolts the world can deliver.

The same might be said about Washington's current economic ministrations. The nation is now nursing a seriously skinned knee because of reckless behavior in housing and credit. But rather than force consumers, borrowers and bankers to face the consequences of their own actions, Washington is functioning as a helicopter parent. Harvard economist Ricardo Hausmann, who characterized America as "whiner of first resort," believes the rush to stimulus is being led more by a concern for Wall Street than a concern for Main Street. Rather than take their lumps after several years of exceptional returns, the banks are furiously lobbying for help. They're getting it.

Instead of looking to the Federal Reserve or Congress to bail them out, the people who dominate the global economy should engage in some introspection—to evaluate what they did wrong and how they could avoid screwing up in the future. As Wendy Mogel puts it: "Good judgment comes from experience and experience comes from bad judgment."