Part of the revisionist history of the financial crisis that is driving me nuts is the Lehman Brothers bankruptcy. If you listen to the media, the financial crisis was caused by somebody buying a home in Detroit they couldn't afford and Lehman declaring bankruptcy. The financial meltdown in 2008 was the result of reckless behavior by everybody; big spending fiscal policy, incredibly bad monetary policy, reckless borrowers and lenders and incompetent regulators all compounded by Wall Street greed. It was a lethal brew. The Government could have just as easily let Morgan Stanley or Goldman Sachs go out of business as opposed to Lehman. I am not defending Lehman in any way and I believed they deserved to go under. It was the way they were allowed to close that created the subsequent problems in the market especially for commercial paper. By the time Lehman went belly up, Bear Stearns was long gone, Countrywide and Merrill had been absorbed by Bank of America, Fannie Mae and Freddie Mac had been nationalized because of insolvency, IndyMac Bank had been closed, the US Treasury was pumping money into AIG like it was a second job, and Washington Mutual and Wachovia would be gone in the next two weeks. Everyone of these institutions were guilty of too much leverage with a rapidly declining balance sheet. Lehman was the poster child for this problem but it was not an orphan.

Decisions matter. Because this is a presidential election year there is concentrated focus on economic issues. As the public debate rages I think it is important to remember that the country is facing choices in its fiscal policy and these choices will matter. The next administration will be faced with the choice of stimulating the economy or cutting the deficit. It is important to note that not only the policy direction but the implementation of the policy is important. If the policy is to reduce the deficit, it does no good to cut social programs if you concurrently increase defense spending. If you wish to stimulate the economy through tax cuts it matters which segment of the population gets the tax cut. The financial meltdown of 2008 was the direct result of bad choices, it did not have to happen. Hopefully the country will learn from past mistakes, certainly there is no evidence that Wall Street has learned anything i.e. JP Morgan, MF Global, and Knight Capital.

Knight Capital now takes its place in the long line of Wall Street failures. If you think that Washington, the SEC, FINRA, the Federal Reserve, or the banking industry have learned anything from the 2008 meltdown, you must be in a parallel universe. One would think that after Lehman Brothers, Bear Stearns, Wachovia, Washington Mutual, Merrill Lynch etc. went out of business and the world wide banking system was a heartbeat away from total collapse that the survivors would be more careful in their actions. Instead we have had in quick succession MF Global, JP Morgan and now Knight Capital. The common theme is the boys have no idea what they are dealing with in terms of risk. Stop the madness!!

Just to recap
MF Global allows the head of the firm (who is in fact the risk control officer's boss) to trade an enormous position. Who is going to tell him to stop?

JP Morgan loses 5 Billion dollars in a department that the senior management encouraged to take huge positions. The bank's position is" we are big and we can absorb the loss easily". The loss is still 5 BILLION  DOLLARS.

Knight Capital in a rush to meet a deadline introduces an automated trading interface with the NYSE without proper safeguards. The system cannot handle the trading and they lose 400 million in about an hour.

We will now witness the usual Congressional inquiry, the usual SEC promise to do something and the usual talking heads on TV huff and puff about how this never should have happened.

All this begs the question "What's next"? It is illogical given recent history to not expect there are other events already set in motion that will wreak havoc in the future. There is absolutely no evidence that anything has changed since 2008. In fact the recent events are all the more egregious because with a little analysis they are all preventable. Keep your helmet on, the next preventable financial disaster is lurking.

Things have occurred this week which makes me think we are through the looking glass:

Moody's Investor Service has downgraded the US banks. Moody's announced in February they were going to downgrade the banks, in effect stating their conclusion before they did their analysis. During their "comprehensive review" they missed the JP Morgan debacle thereby putting to rest any claim to actually understand these financial institutions. Leading up to the financial meltdown of 2008, Moody's and Standard & Poor's were selling their ratings for money to Wall Street firms who were slapping their AAA's on absolute junk mortgage bonds. Today Moody's does not have a clue about the financial health of anything and the sound you hear after their latest pronouncements is laughter.

The other day I saw Alan Greenspan on television talking about the US economy. Alan who is vying with Arthur Burns for the title of Worst Fed Chairman Ever, did not understand how the economy was doing when he was privy to all the information at the Fed's disposal. Is the media so desperate for content they have to drag out the former chairman, whose policy decisions would have to rally to get to disastrous? We are still paying the price for his incompetence and will be for another 5 years.

I am sure both Barack Obama and Mitt Romney are smart guys .Mitt Romney's current economic suggestions for the US are a combination of the worst of the previous administration, that lead to the financial meltdown in 2008, combined with all the policy mistakes Europe made post meltdown, which are pushing their economies into recession. The Obama administration seems uncertain about which course they should pursue, one day leaning towards stimulus and the next day flirting with austerity. The voters need better than this. The economy is a serious issue and deserves a serious discussion. 

"The best lack all conviction, while the worst

 Are full of passionate intensity." - WB Yeats

This quote neatly summarizes the current state the world. Whether it is politics, investments or economic policies nothing seems to be related to anything else.  Normally an investor can relate various events to other occurrences and draw some rational conclusions about market direction or make an economic forecast. In today's world there are no rational conclusions to be drawn. Historical relationships between investments, patterns, co-relations, etc do not make any sense in today's environment. Buyer beware!  

Europe is approaching their problems like a group of firemen trying to put out a house fire one room at a time. Unless the Europeans admit the whole house is on fire and work on a total solution, there will be no resolution. Today China and Indonesia were telling the Europeans that enough is enough, quit pretending Spain / Greece / Ireland / Portugal etc. are isolated events. 

Certain things about the current European situation are obvious. The Spanish banks hold billions of euros worth of bad real estate loans. The Government has arranged for the banks to receive billions of euros of money so people will be confident that they will be able to meet their obligations. Meanwhile the Spanish government pursues austerity measures guaranteed to make the economy (and the bad real estate loans held by the bank) worse. Where do they think this will end? Is there an alternative system of math that allows this to all work out? You can't contract your economy to get out of a recession.

Up next on our European Financial crisis hit parade: Italy followed by France.

There is an article this morning about Morris County NJ. Morris County is an affluent county in an affluent state and the article points out the use of food stamps is up 240% since the start of the recession. Economics is more than just numbers, in this silly season of overheated political rhetoric we should keep in mind that all our political/economic choices affect real people. If we decide to cut state employees we should realize someone just lost their job. This does not mean we shouldn't make these choices but we should be aware of the human cost involved.

It is the end of May and the world seems headed off an economic cliff. A few months ago I said that I expected one more "safety trade" when all the liquid money in the world would be invested in either US Government bonds or London real estate. I don't know anything about the London real estate market but the US government market is on fire.

Elsewhere, undeterred by either facts or experience;

The Europeans still act like there is a solution the Greek situation,.

US bankers still believe they understand the complex financial instruments they have created and continue to trade.

Investors still think tech stocks must go up and if they don't it merits a congressional investigation

Finally, US Investment Banks are awaiting the latest pronouncement from Moody's about their credit rating. Moody's who missed the recent JP Morgan debacle expects people will still believe they have a clue. I cannot say for certain whether the US Banks are either good or bad, all I know is they are in better shape than a year ago. Consequently if Moody's lowers the ratings they will be admitting they had no idea a year ago about the financial condition of the banks.

Forget the regulatory questions, forget the political fall out, forget the Volcker rule debate, how the hell can the management and board of Directors at JP Morgan allow a trading position at risk to create such a large loss? After 2008 when the effects of unbridled leverage and unchecked risk devastated the worldwide financial system it is beyond irresponsible to do it all over again. Have they learned nothing? It would be better if the two billion loss (and counting) was caused by a rogue trader in Hong Kong. This group was the pride and joy of the bank and had the expressed blessing from top management on down. Stop the madness! Throw the bums out! "Too big to fail", how about" Too Dumb to Let Live"? The bank can absorb the loss relatively easily but that is not the main point, the focus should be on the inability of the people in charge to make intelligent decisions about their business and their company. We are only three and a half years removed from the financial crisis and if you don't understand the lessons of 2008 you should not be allowed near the live ammo.

The corollary to this is once again the regulators, rating agencies and banking authorities had no idea; thereby cementing their place as part of the problem.