Fall 2006
The first year of banking went by as smoothly as one can expect when working almost 70 hours a week.
At least on the Sales & Trading desk we didn’t have to work 90 hours like the M&A guys. Jason, Eric and I started getting invited to more and more events with leadership so we figured we were doing something right. We worked our asses off on most days, but made it a point to come in late and hungover just so often as was conceivably acceptable. I remember it stemmed from a drunken conversation at Fraunces Tavern in the Financial District, the pre-Revolution establishment famous for being the venue of peace negotiations between George Washington and the British.
“Pretty nice in the office these days. About time we got some leeway.” Eric said.
“Yeah,” I replied between sips, “and let’s not lose it. We gotta start being more careful.”
Jason chimed in, “Seriously, we should cool it for a little bit. We’ve been the first ones out, past three days in a row.”
“You guys are such chicken-shits. If we keep doing good work, with the way banks are hoarding analysts these days, no way we get fired. The minute they say something, we’ll reel it in.”
They never did, so we kept it up. I’ll spare you the details of our partying because it was nothing wilder than what you’ve probably already read or heard about. The sheer insanity of the drug-binge parties described by Jordan Belfort in his memoir The Wolf of Wall Street, was not something we came anywhere close to witnessing, let alone imitating. Still, our own social life was nothing to scoff at. The booze and cocaine flowed aplenty, but Adderall was the real driver of our pedal to the metal ways. Eric had a prescription so he started selling them to his inner circle. Naturally, we'd sell the excess to our own friends at a premium. It beat the hell out of bartering with drug dealers.
And so it went, until the next summer, when we received the first hint that life wouldn’t always be cupcakes and rainbows. The come-to-Jesus moment arrived when housing prices declined nationally for the first time in decades. Something economic wizards of no less stature than Alan Greenspan, Ben Bernanke and Paul Krugman said wouldn’t happen. We should have known to at least ignore the New York Times’ champion of circular logic, but we didn't. As an aside, Krugman is famous for having said, “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”
It wasn’t until two straight months of negative House Price Index data that the first murmurs began. We were told not to worry, that “transitory” economic headwinds were to blame. And we believed it. Until one morning, I’d just grabbed a bagel and was setting my bag down, when Eric pinged me a link. I saw it was for a video and clicked, expecting some funny clip of a man being thrown around by a wild ape, or something of that nature. Instead, it was a clip from Kudlow & Company, with Michelle Caruso-Cabrera mediating a debate between Peter Schiff and Art Laffer. I’d never heard of Peter but I remembered Laffer from a college economics course. He first came to the scene as a member of Reagan’s Economic Policy Advisory Board (we’ve all heard of the brilliant success that was Reaganomics), but his real claim to fame is his eponymous curve . The Laffer Curve basically claims that there is a perfect level of taxation at which government’s maximize their collected revenue. Any lower or higher rates would result in less revenue, if you remember limits of the curve from calculus, this is that same concept applied to taxation. It sounds reasonable enough. At least it's far less fallacious than the Phillips Curve (the disproval of which has earned multiple economists the equivalent of a Nobel) which is still bandied about by central bankers to justify their policies. But before we get bogged down in theory, I’ll return to the matter at hand.
Peter came out swinging, “The problem with the US economy is there’s too much consumption and borrowing and not enough production and savings, and what’s gonna happen is the American consumer is basically going to stop consuming and start rebuilding his savings, especially when he sees his home equity evaporate. And when you have an economy that’s 70 percent consumption, you can’t address those imbalances without a recession. You know, rather than the recession being resisted, it should really be embraced” he said, receiving a gasp from Michelle. “The disease is all this debt-financed consumption, the cure is that we stop consuming and start saving and producing again. And that’s a recession.”
It almost made too much sense. Since my first economics lesson I was always taught that the American consumer drove the economy; but here was a guy who said the economy wasn’t driven by consumption but rather by production. What a novel concept, how had I never thought of it before? Simply because I had heard the opposite my whole life? But of course, when people consumed more there had to be more production, which meant more jobs, which allowed for even more consumption. Right? Back me up here Art.
“What he’s saying is that savings are way down in this country… but wealth has risen dramatically. The United States economy has never been in better shape. There is no tax increase coming in the next couple of years, monetary policy is spectacular, we have freer trade than ever before, and not only that but there’s no income policy and things here.”
What a letdown, but could I really have expected more from a former government advisor? He just mentioned four ways that public policy was going to drive the economy, by lower taxes, lower interest rates, lower trade tariffs and no price or income controls. Nothing at all about the strength of the economy itself.
In response, Peter went on, “It’s not wealth that’s increased in the last few years, we haven’t increased our productive capacity, all that’s increased is the paper values of stocks and real estate.” I couldn’t argue with that, all my wealth was unrealized paper gains too. He continued, “when you see the stock market come down and the real estate bubble bursts, all that phony wealth is gonna evaporate, and all that’s gonna be left is all the debt we accumulated to foreigners.”
Art’s laughable response was to bet him a penny on the outcome. Wonder if Peter ever collected.
My head was spinning as I messaged Eric:
Rohan: Who is this guy?
Eric: He’s at some firm called Euro Pacific, crazy right? Totally destroyed that guy Laffer Rohan: What if he’s right? Chuck was just saying how this would only be a small dip in house prices to allow income and GDP growth to catch up. If the housing market collapses we’re fucked. Our whole job is based on selling mortgages.
Eric: You act like I don’t know that. That’s why I’m getting out. Already spoke with an MD that manages a high frequency trading team. I met a guy in the option pricing group that went to Cornell and he recommended me.
Rohan: You sand-bagging son of a bitch, what the fuck? When were you going to tell us?
Eric: I told you just now and I told Jason last week.
Rohan: This is not happening.
That night we got piss drunk at my apartment and forgot all about Peter Schiff, Homebuilder’s Confidence, interest rates and coincident indicators. Jason and I were bummed that Eric would be leaving our team, but he was still at the bank and we always knew he would eventually make the move anyway. It still felt like an ending of sorts, and we never needed too big of an excuse to hit the town.
Austin came over without any girls for a change and we lined up glasses to quickly finish the open bottle of Rye. Austin answered our unasked question by producing a bag of shrooms. So that’s why he came unaccompanied.
“Where’d you get those?” Jason asked, clearly filled with trepidation.
“Why’s it matter? I got a half so we should all be good.”
Jason, of course, replied, “Uh... yeah, I’m good.”
“Quit being a little bitch, Jason,” Eric said as he grabbed for the bag and shoved a handful into his open mouth, passing the bag to me. We all took our share and rushed out in our excitement to see a new New York.
If you’ve never done shrooms, I highly suggest you don’t go to Times Square the first time you do some.
Especially not the same day you have your economic worldview shaken by a talking head on CNBC, though it’s probably safe to assume that's not a major issue for most people. High out of my mind, I did a 360 in the middle of the square surrounded by a horde of tourists. All around me the gleaming signs screamed at me to buy t-shirts, energy drinks, plane tickets, watches, movies and albums. The images held me in a trance as they spun all around me. They yelled and I heard the message loud and clear, there was no such thing as excess, we need more! Buy more, produce more, and grow more. Always growth, and more growth, for without it there was nothing.
Were we destined to forever be captives of our own growth, which could only be sustained by even more? Would society never stop to take a breath, think over the course it was heading down? And if it ever did, then what?