Looking for a Plot…….

Like every other novel, our proposed fictional account of the present economic crisis “Follow the Money” should have a logical and concise structure. Since we haven’t yet identified our hero of the novel, last week I suggested looking at the structure of the unfolding plot to hopefully define who that person should be. Yes, I know, it’s backwards from the way I and every other novelist works.

Let’s start by looking at the simple W novel plot structure. Imagine each corner of the letter, where the lines change direction, represents a turning point in our story. The letter also has a starting and an ending point. The relative height of the turning points define whether they are ‘up’ points (high points) or ‘down’ points (disasters) – three ups and two downs.

For a comedy – using the ancient Greek definition of literature –  we need the upright W so it ends at a high point (happy ending). Following this diagram, we need to begin our comedy with the situation as good as it gets, only to be struck by some disaster – the inciting incident. Things go downhill and later it gets better … and so on. For a tragedy we must turn the W upside down so that it ends at a disastrous low point. An M is the nearest I can get to showing an inverted W with this typeset. A tragedy has to start where the situation is dire, but some manna from heaven arrives to carry the situation upwards to another turn for the worse.

Let’s look at our comedy that starts at the high point on the W – the stock markets are booming, no one’s mortgage has been foreclosed – everything is coming up roses. Ben Bernanke as protagonist surveys his world on March 17th 2007 as he prepares to make a speech at the Federal Reserve Bank of Chicago’s 43rd Annual Conference. What does he say?

“… given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.”

(Thanks to Henry C K Liu in Asia Times Online for the quote.) Wow! How could anyone be so wrong? The proverbial sh*t hits the fan three months later. That is our inciting incident – in spades.

The first turning point for the comedy comes after a steady decline into disaster, when the hero seizes control of the situation and, bit between his teeth, and drags it forward to a high point. Ben and his buddy Henry Paulson begin their disaster control control by making borrowing even cheaper, having treasury bonds pay little or no interest, and throwing the taxpayers’ money at the bankrupt banks, rescuing some of their buddies and letting others crash. This is continued after Henry sails off into the sunset with George W Bush and is replaced by Tim Geithner. Tim needs help to throw even more money down the well, because the water of hope hasn’t made an appearance yet, so Ben begins buying Treasury notes with money that doesn’t exist and pretending they both know what they’re doing. Eventually a glimmer of light appears as the water in the well swallows up all the free money. The rate of mortgage foreclosures decreases – wow, that must be good news. Not everyone in the States has lost their job – more good news. People begin buying stocks again and the Dow begins to fly. Whoopee! The crisis is going away – that’s where we sit today.

This is where, when all seems fine and the problem is solved, disaster strikes again and shoots the whole shebang into the basement. The housing bubble hands over to the credit card bubble and the banks are in trouble again because no one can pay their monthly minimums – then the bear market in stocks (which is what my experts all say it is – a false rally) collapses. Now the stock market really hits the skids as Mr Market crushes all the surviving investors and speculators under his heel. You thought your 401(k) looked bad before. You ain’t seen nothin’ yet.

This is where Hero has to make a new decision and find new courage and strength to claw back to the final high point where we find …  Triumph! What’s he going to do to reach this Nirvana? Your guess is as good as mine. What if Ben cannot pull any more strings? They’ve all been pulled. Pay magic money to people so they buy Treasury bills with phantom dollars? Uncover a huge gold mine in Nevada that can pay off all the overseas creditors who expect to have their Treasuries redeemed on schedule? Apply to the World Bank for a loan … oh, sorry, the World Bank operates on real money and it hasn’t been paid either.

I don’t think I’m going to follow Ben Bernanke as hero beyond this point. This novel may have trouble reaching the planned happy ending. Next time we will explore the tragedy, to see if it turns out any better.

One Big Crime Novel……

As I mentioned when I started these April posts, it is almost impossible for the novelist to out-do the real world events going on since the credit bubble collapsed. What happens in the plot of the potential novel “Follow the Money” that seems to be taking shape from these posts? There are millions of real victims, there are several hundred antagonists, hundreds of thousands of villains, there is an actual twisted plot that those following the story are trying to understand – the only element we lack is a protagonist.

As a novelist, I cannot resist attempting to pick a hero who might come along to save the day. Since the focus of the crisis is in the USA, it could be necessary to look first for this individual there. Most politicians and commentators outside the US are in agreement that the cause of the disaster was in Wall Street. Many knowledgeable people inside the US also accept this verdict – even the President. But don’t overlook the culpability of bankers in other places – particularly London.

So the first candidate for hero is Timothy Geithner, the Secretary of the Treasury. Do I hear sniggers in the back row? No one has been impressed by his leadership so far, and it’s widely speculated that the knives are already out for him. Back in 2007 he had the foresight to warn about the instability caused by runaway credit, but never followed up on it. What did poor Tim do wrong? I’ll quote one of the commentators who I follow to make sense of this story –

“Henry C. K. Liu – Asia Times Online April 22nd 2009 http://www.atimes.com/atimes/China_Business/KD22Cb01.html

Many economists are pointing out that the Obama bailout plan for distressed banks is too small for the scale of the problem, that taxpayer money is being misdirected to save banks without adequate control on the banks as to how to use the money to help the injured public, and that it is a hybrid solution that combines the worst aspects of nationalization and the worst aspect of private enterprise without the benefits of either.

A study, “The Pricing of Investment Grade Credit Risk during the Financial Crisis” by Joshua Coval and Erik Stafford of Harvard University and Jakub Jurik of Princeton University suggests that recent credit market prices are “actually highly consistent with fundamentals”, and that bonds and credit derivatives should have experienced a “significant repricing in 2008 as the economic outlook darkened and volatility increased”.

The analysis also confirmed that the “severe mispricing existed in the structured credit tranches prior to the crisis and that a large part of the dramatic rise in spreads has been the elimination of this mispricing.” The authors conclude that any use of taxpayer money to buy toxic assets “will simply transfer wealth to the current owners of these securities”. This conclusion has been independently reached by a large number of market participants in the past two years.”

More profit for the crooks who caused the disaster? Scratch Tim as our hero. The same goes for Larry Summers and Ben Bernanke – not quite as ludicrous in their tights, prancing across the stage waving plaster swords, but principals in the same disastrous sub-plot that threatens to pile more venality and misdirection of resources on top of the serious downward plunge of the fortunes of the good guys.

The problem with all the measures taken by the US administration – this one and the previous – is that they are all recognized to be hopeless attempts to rescue the crashed bubble economy instead of striking out with real change and a reformulation of the financial structures that caused the problem. No signs of a new model that will safeguard everyone’s future – the US, Britain and Canada fought against that at the G-20. But those failures are not a temporary glitch in the scheme of things – the crash pointed out the existence of fundamental flaws that must be removed before the world financial systems can move forward.

This is the place for a novelist to end a chapter, but I have to give readers a hint of the next direction of our search for the hero we need. I’ll point out that China shows considerable economic strength, suggesting that country could be the first out of the slump. The leaders who insisted at the G-20 that the world financial rules had to be revised before everyone could look for an economic recovery – German, Brazilian, Chinese – are likely to be among our next candidates for hero. Then there are the economists who gave ample warning and were never taken seriously.