Riches to Rags

by Byron King

Bernie Ebbers, we are told, started out his rise to fame by re-selling used phone equipment.I never met the man, but I would wager that he was probably a darn good phone equipment re-seller.He probably could, just as easily, have been selling any manner of patent medicine or snake oil, and people would have bought it from him by the gallon.

And then as the 1990s wore on, and not unlike the proverbial “few pain pills” prescribed by the dentist for a bad toothache, came the easy credit from an economy on steroids, courtesy of the U.S. central bank.As the tide of liquidity rose, Bernie Ebbers began to make his acquisitions and roll-ups.And then came more of that easy credit, and more, and more… and what followed was similar to what is clinically known as “drug-seeking behavior.”Bernie began looking for the easy credit, to fund his efforts to grow his own version of an empire of business.And like drugs in the hallways of an upscale suburban high school, the credit was there.

Unlike Mr. Frick, however, Bernie Ebbers and his business ambitions dug no new mines.Unlike Mr. Carnegie, he built no mills. Unlike Mr. Rockefeller, he found no way to rationalize a chaotic industry and deliver a standardized product at an affordable price.Unlike Mr. Edison, he neither made nor patented any new invention.Bernie merely went to his friendly investment bankers, and signed a few papers and promissory notes, and mimicked the creation of something great.And the crowd roared at the spectacle.

But without the oceans of newly-minted dollars flooding through the U.S. economy of the 1990s, Bernie’s life story could very well have been another fine Great American Tale of “Rags to Middle Class,” or maybe “Rags to Upper-Middle Class.”He would have found a path; I do not doubt, to any small comfort in his life, just not one that led to ephemeral riches and now to historical ruin.

With a bit of luck and some hard work, but without the credit bubble let loose by the Fed, Bernie Ebbers would have lived like many other successful business-owning suits.He would have dwelt in a nice McMansion on the golf course of the gated community, far from the other side of the tracks whence he came.He’d have driven his Cadillac to cocktails at the country club on Saturday evening, and squired his pretty wife around to greet all of the other upstanding club-members dining ensemble on the Pink Terrace, or in inclement weather in the Mauve Salon.He would never have lacked a healthy Florida tan, even in the depths of winter.Being Bernie Ebbers could have been very sweet.

But take a look now, and reflect on what too much of that False FED Elixer can do to a man.All those excess dollars, courtesy ofthe Maestro Central Bank Chairman led directly, I truly believe, to that verdict of “guilty on nine counts.”And Bernie, the dumb schmuck, did not have a clue.In this latter respect, he was no different than most of the other corporate big shots of that ilk during the roaring ’90s.Bernie thought that he had greatness coming to him, just because he was the yard-boss and had the legal authority to spend funds that were not his, to buy things that he could not afford and did not understand.The New York Times writes that a business associate recalled meeting with Mr. Ebbers when WorldCom was still flying high.When the meeting was over, “the associate handed Mr. Ebbers his business card. Mr. Ebbers used it to pick his teeth.”How rude, how ugly, how disrespectful to a fellow biped.That is what too much easy liquidity will do…rot a man’s soul.

Absent Mr. Greenspan’s monetary largesse, we would all live in a different world.We might recall the recession of the 1990s, when rising interest rates pulled the air brakes on an overheating economy, and in the process reminded another generation of citizens and politicians about the virtues of thrift and hard work.

Absent excessive creation of credit and currency by the Fed, we would associate the rising interest environment of the 1990s with a time when Americans placed their funds into bank savings accounts.We would remember when Wall Street had to make its profits the “old-fashioned way,” if you know what I mean, and not by selling “pigs-with-lipstick” stocks and calling them “investments.”We would look at charts showing how the formerly rising price of housing leveled off, even in the Golden State of California.History might record that consumers shunned the malls and eviscerated the business model of the Big Box Retailer because times were just too tight.We would live in a nation where tens of millions of drivers had given up navigating around in cars and trucks that were too big, and that burned too much gasoline.We would be thankful that people insulated their houses, to save on the gas bill during the winter.Ours might be a land where businesses could still afford to manufacture things, and where factories were being built, not closed.The oceans would churn less violently, because fewer ships would be making wakes from China, laden with goods that most people don’t really need, paid for with funds that they don’t really have.

Yes, it could be a different world, absent excessive creation of currency by the Fed for the past decade.And actually, one of these days, we will probably live in that different world.It is just that it’s going to be a long and rocky road to get there.

And Bernie Ebbers can watch it all from his cell window.He is 63 years old, looking at 85 years in prison.Hmmm…you do the math.I guess he will just have to do the best that he can.

The Daily Reckoning