Finlay Macdonald: National's economic manifesto sounds like reckless leveraging we need to be wary of

"Being moneymen, of course, Wall St's nudists are probably still comparing the size of their financial instruments"

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LESS SURPRISING than Michael Cullen scoring points off John Key for being a former Merrill Lynch employee is that Key himself hasn't had anything interesting to say about the current crisis in the American financial system.

Here's a real insider, a deal maker from the golden age of Enron and the savings and loan scandal, and he doesn't seem to want to volunteer much about it.

Who could blame him? Even people directly responsible for the mess don't really seem to understand what's been going on. If they genuinely did know anything now then they'd have known something earlier and some of the present unpleasantness might have been avoided.

In truth, there have been voices raised in warning for some time and not all of them lefties, radicals or anti-capitalists. Take US multibillionaire investor Warren Buffett; in 2003 he famously described the kind of insanely complex financial instruments and derivatives now falling to pieces as "financial weapons of mass destruction".

Even more presciently, in 2001 he wrote in one of his famous chairman's letters to shareholders of his firm Berkshire Hathaway, "You only find out who is swimming naked when the tide goes out." He trots this one out regularly, and added in August this year, "We found out that Wall St has been kind of a nudist beach."

Being moneymen, of course, Wall St's nudists are probably still comparing the size of their financial instruments. One of the crucial factors in the behaviour of these markets, all too often ignored in the pretence that something more scientific is going on, is the rampant egomania driving them.

To understand this you could do a lot worse than track down a copy of Michael Lewis's classic 1989 book about Wall St, Liar's Poker. Lewis was a bond salesman for Salomon Brothers, the big investment bank subsequently subsumed inside the Citigroup conglomerate. But it might as well have been Lehman Brothers, Bear Stearns, Merrill Lynch or any of the other shonky edifices of finance capital now tottering (more will fall for sure).

As a study of the pathology of Wall St, Liar's Poker is perhaps matched only by Barbarians at the Gate, the story of the leveraged buyout of RJRNabisco in the 1980s that lumbered that company with ridiculous levels of debt.

But Lewis is more entertaining for his eyewitness depiction of the feral, puerile, venal manufacturers of Buffett's financial weapons of mass destruction.

Apart from the schoolboy personalities of his fellow traders they like to hook phone sex calls up to the company intercom and seem to be compulsive gamblers by nature Lewis portrays levels of personal and collective greed staggering even to a jaundiced observer of capitalism red in tooth and claw.

The form this takes is a general contempt for any commercial orthodoxy beyond "screw the other guy faster than he can screw you", and a willingness no, an appetite for exploiting the weaknesses of others, be they individuals or institutions.

Lewis dubs it the law of the jungle, but it's actually far meaner and, more pertinently, far less sustainable than that.

Lewis sheeted home the savings and loan fiasco of the 80s and 90s (dwarfed by the present meltdown, by the way) to Wall St's savage hubris. But the fact is, nothing really changed. Super-deregulated markets in make-believe financial products flourished.

The obscene remuneration packages bankers paid themselves and the financial incentives offered them to take greater and greater risks with other people's money were more than just partly responsible for the massively debt-driven system that is now imploding.

My favourite quote of the past week is this from a financial writer in the US: "The funny thing about capitalism is that you need capital to play."

Bear Stearns, one of the first to go down, was leveraged at a ratio of 26 to one; Mortgage giants Fannie Mae and Freddie Mac were at 80 to one.

They were borrowing to cover the loans and the investments were rubbish. Lehman Brothers was essentially trading on trust alone by the sounds of it misplaced trust as it turned out.

The "smartest guys in the room" have now put the whole US financial system at risk, forced Washington to virtually nationalise the housing market, sent the greenback into a dive and potentially pushed the already debt-stricken and itself highly-geared US economy towards the kind of downward spiral everyone is so frightened of giving its traditional name. As another commentator put it, "This is not the financial position of a superpower."

Of course New Zealand isn't immune from this. It's the global economy, stupid.

If Michael Cullen wants to exploit that misfortune for electoral gain he should stop playing word association games with John Key and Merrill Lynch and simply point to National's entire economic manifesto: election bribe tax cuts, overseas borrowing, a big spend-up on feel-good infrastructure projects, reduced regulation to facilitate the crony capitalism of public-private partnerships ... sounds just like the kind of reckless leveraging that current events warn against, and that a truly prudent government wouldn't countenance in these circumstances.

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