Glimpsing the Genius of Capitalism, and Leverage

Galbraith writes:
As noted, at some point in the growth of a boom all aspects of property ownership become irrelevant except the prospect for an early rise in prices. Income from the property, or enjoyment of its use, or even its long-run worth is now academic....

Such is the genius of capitalism that where a real demand exists it does not go long unfilled...

The machinery by which Wall Street separates the opportunity to speculate from the unwanted returns and burdens of ownership is ingenious, precise, and almost beautiful. Banks supply fund to brokers, brokers to customers, and the collateral goes back to banks in a smooth and all but automatic flow...

Wall Street, however, has never been able to express its pride in these arrangements...

Wall Street, in these matters, is like a lovely and accomplished woman who must wear black cotton stockings, heavy woolen underwear, and parade her knowledge as a cook because, unhappily, her supreme accomplishment is as a harlot.

Whoa! Where do we, in the midst of the Panic of 2008, start looking for rhymes? Somehow the Time Magazine cover of February 15, 1999, comes to mind when I think of Mr. Galbraith's stunning harlot metaphor. It shows a happy troika of Messrs. Rubin, Greenspan, and Summers, looking for all the world like true financial statesmen with the utmost gravitas. Time Magazine does not reveal that less than a year earlier these three had concocted, along with Arthur Leavitt of the SEC, to prevent Congress and the CFTC from seriously considering applying some kind of regulatory oversight to the budding Credit Default Swap business. Instead it applauds them for pulling together a temporary coalition of self-interested banks to prevent the 1998 collapse of Long Term Capital Management from toppling many other banks and financial companies.

Natural are analogies to a similar effort by JP Morgan himself to staunch the panic in 1907. But sadly missing in the 1999 Time paean to the troika's genius is an awareness that these gentlemen had put a band-aid on the problem at hand while aggressively sawing off the only limb in the body politic that might have saved the patient -- they killed regulation of OTC derivatives so decisively that no one could stop Enron, and then AIG and the banks, from their appointed rounds with destiny.

And Mr. Galbraith's admiration for the beautiful flow of collateral in support of speculation, written in 1954 about the rather simple stock-margin machinery of 1929, could with almost no adjustment apply happily to the CDO, CDS, CLO, ABCP, MBS, CMBS etc. machinery of our time. Was Mr. Galbraith so prescient? Were our financial leaders and regulators so dumb? Or is it just a matter of finding ourselves, once again and this time with a real pounding hangover that won't go away, to have been charmed by the harlots in the black cotton stockings?