Jewish World Review Dec. 16, 2008 / 19 Kislev 5769
To fix economy Obama needs someone fluent in banks
By Jonathan V. Last
http://www.JewishWorldReview.com | "You can take Hollywood for granted like I did, or you can dismiss it with the contempt we reserve for what we don't understand. It can be understood, too, but only dimly and in flashes. Not half a dozen men have ever been able to keep the whole equation of pictures in their heads." - F. Scott Fitzgerald, "The Last Tycoon"
On Jan. 20, the day of President Obama's inauguration, the Dow Jones industrial average stood at 7,949. Since then it has dropped roughly 9 percent. If you look back to Nov. 4, when the market first began reacting to Obama's election, the Dow has dropped almost 25 percent. Correlation is not necessarily causation. But it would be difficult to deny that Obama's failure to address successfully the banking crisis has been a large factor in the collapse of the stock market.
At the heart of the current turbulence is the mortgage meltdown, which created a number of problems for the economy: a weakened housing sector, declining consumer confidence, enormous destruction of personal wealth for many homeowners. But the biggest problem is that the bad debt from the subprime mess had been leveraged - that is, separated into tranches, regraded, and then sold and resold - so that it contaminated a large portion of the banking system, upon which credit and the rest of the financial markets are entirely - not partly or mostly - dependent.
So why has Obama babbled away about health care and energy reform instead of fixing the banking industry? There are only two possible explanations, neither of which is reassuring.
The first - and unlikely - possibility, is that Obama does not actually understand the centrality of the bank problem. He has no experience in finance or economics and his few stray attempts to grapple with the subjects - "the stock market is sort of like a tracking poll in politics" - suggest a deep unseriousness.
Again, this seems unlikely because whatever Obama's intellectual blind spots might be, he is (I hope) listening to the wisdom of people outside his administration. And every economic observer in America, from David Smick to Andrew Grove to Warren Buffett, has been shouting from the rooftops about the need to put the banks in order.
So the alternative is that the administration is paralyzed because it is confronted with what Donald Rumsfeld would call a "known unknown": The global financial system is so big, and complex, and opaque that no one - literally, not one single person on the planet - knows for certain how it works.
Which means that fixing the banks isn't a question of simply finding the political will to push Button A. Rather, no one knows if pushing Button A - or flipping Switch B or pulling Lever C - will remove bad debt from troubled banks. Or cause a cascade of credit default swaps. Or trigger a run on the FDIC. Because the entire system has essentially become a black box.
It sounds slightly preposterous from a systems-engineering point of view. How could a thing built by human hands be beyond human understanding? Well, it turns out that institutional knowledge can be fleeting.
Consider the programming language COBOL. Developed in 1959, COBOL was used in mainframes and large institutional computers. Over the years it was replaced by other languages. The thing is, COBOL is still out there, running billions of lines of background code, like one of those archaeological sublayers underneath a modern city block. It supports things going on above it, but no one is quite certain exactly how. Some specialized programmers still study it, but it's something of a lost language.
Then there's the Trident missile. Built in the 1980s, the Tridents are submarine-based nuclear missiles. Recently the Navy tried to refurbish the missiles, but ran into a slight problem: The Trident contains an essential component code-named "Fogbank" (the New Scientist speculates that Fogbank is a type of foam) which nobody knew how to manufacture anymore. The refurbishment plans were put on hold; teams of experts are trying to reverse-engineer the stuff. Imagine that: a key piece of strategic weaponry and nobody really understands how to make it work.
The NSA charmingly refers to the Fogbank dilemma as "lost knowledge." But knowledge gets misplaced more often than you'd think. How long, for instance, would it take NASA to put another man on the moon, something we did as a matter of routine 35 years ago? When President George W. Bush called for a new moon shot five years ago, the space agency wasn't even sure it could make a Saturn V rocket anymore.
In the end, we may be lucky if the banking system is only as complicated as Fitzgerald's Hollywood, because that would mean that somewhere out there are a half-dozen men who can grasp the workings of this contraption. Let's hope they exist and that Obama finds them.
Jonathan V. Last is a columnist for the Philadelphia Inquirer. Comment by clicking here.
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