October 09, 2008

Economics One Oh No

I saw "President" Bush yesterday in the Oval Office, after a meeting with the Slovakian president, answering a few questions about his riveting encounter with the Central European.  Bush had apparently assured the visiting dignitary that the "president" & his crack crew of economic advisors were coming up with something, in coordination with other countries around the globe, that would be "as best as possible."  That's certainly reassuring.  The Dow Jones has lost about 2,00 points over the last week since the current plan went into effect.  Why come up with anything new that's less than "as best as possible?"

I don't have a degree in economics or really much of anything in the way of formal training on the subject.  Alan Greenspan does have such credentials, but his ideological bent (he thought he should take his cues from the fiction of Ayn Rand) made him oblivious to the perils of unregulated derivatives trading, which lie at the root of much of what is going on these days.  I'm more objective; I don't have a religious faith in the "Free Market" as some sort of omniscient decision-maker for all things economic.  My commonsense take is that business is run by human beings, and humans tend to push things to the outer limits of the prudent and ethical unless there is some kind of arbiter and rule-enforcer.  We keep seeing that throughout history.  It's in the nature of competition: if you think you can't compete without cheating, then you are forced to a decision.  Either get out of the business or do as the cheaters do.  I find it interesting (as the "president" would say) that Congress is all for clamping down on major league baseball because of steroid use but doesn't see that this is simply the sports business version of regulating competition.  If the ball players think they can't compete with the players who are using steroids, then they'll find a way to use them too or quit the game.  Only a regulator can level the competition to get rid of the problem.

George W. Bush, Phil Gramm, John McCain, Grover Norquist, Ronald Reagan -- all have been idiots on this fundamental question of regulation.  It's not surprising, in Bush's case certainly, that mental habits engrained in religious thinking would slop over into his view of the business world.  In place of Divine Providence, he and his fellow Christers substitute the Free Market, and they accord the same mindless reverence to this fictitious "control" over outcomes. It is a form of Magical Thinking, and it connotes an extremely unrealistic view of human nature. This approach has now brought us to the edge of systemic financial collapse.  Without regulation (or even quantification) of credit default swaps and the other arcana of modern finance, no one can now say just how bad the situation really is.  Banks all over the world are failing, insurance companies are tanking, America's few remaining investment houses are on life support, and the U.S. Treasury is running out of options as fast as it's running out of money.  The "credit crisis" is mainly a function of incomprehension: no financial institution can accurately assess the situation to determine the solvency of any other financial institution.  And now General Motors, the fortunes of which determine what's good for the country, according to ancient wisdom, trades for five bucks a share.

This gargantuan mess was built up, piece by piece, byte by byte, by individual actors making decisions which were uncoordinated and unregulated by any government oversight.  The profit motive drove each decision and action, using the wide latitude available under a free market ideology.  Potentiated by computer speed and complexity, the deals were fed into complex algorithms and then elaborated through ancillary financial setups "derived" from some species of underlying equity asset.  All kinds of Casino Capitalism games were played using all of the complex interrelationships in Acronym World: MBS, CDS, CDO, all of them shorted, played long, tranched and sold all over the world.  All of this "costly nonsense" (Charles Dickens: Bleak House) was carried on in a mad frenzy, and the players who were best at the games made billions.  Every branch of the American financial world, representing 22% of American GDP (the largest sector of the economy), became intricately involved, from home mortgages to insurance companies to the mega-big investment banks, all as permitted by the repeal of Glass-Steagall, that archaic (and eminently sensible) regulatory framework from the Depression era, and the enactment of the Financial Services Modernization Act around the turn of the Millenium, which might be subtitled the Chaos & Financial Free-For-All Act of the New Gilded Age.  

So when the Ship of the American Economy went down, it took everything with it. Characteristically of a Gilded Age, it became conventional wisdom that greed was good in and of itself and no one need inquire about the social utility of all these rackets.  Bush seems now most determined to restore, or at least to do "what's best as possible" to reinstate, the system exactly as it was before the Crash of '08.  I think it's natural for humans to cling to the familiar when in a state of shock; it's the mind's first defense, to deny the reality of what's right in front of you.  But I don't see how anyone can put Humpty Dumpty back together again.  America's "prosperity" under "President" Bush was built on a Consensus Hallucination, the housing bubble made possible by one-time conditions that are not going to recur in our lifetimes.  The big investment banks are gone, either bankrupt or parted out to banks who want some of their lines of business. Lehman, Merrill, Bear Stearns had all gotten involved in the mortgage-backed securities hustle because the old bread and butter game of investment "advice" to the common person had died a slow death from Internet competition. Many commercial banks are going to fail and those which don't will become wholly owned subsidiaries of the United States Department of the Treasury, a form of "sovereign wealth fund" right here in the United States.

The U.S. trade deficit is shrinking, but that's because our consumption of imports is declining. And that leads to a reduction in dollars recycled to the U.S. Treasury from abroad, putting a dent in the Fed's ability to finance our "recovery."  As consumerism tanks, unemployment will rise.  The strains on the pension funds of state and local governments will become unsupportable without some high-yield investments to make their Ponzi methodology work.  Real property taxes, the bulwark of much of state and local government financing, will head south as millions of Americans with vanished equity seek reassessments.  That will lead to government layoffs and municipal bankruptcies.

There will be no quick fix, not at all.  Bush doesn't actually know what he's talking about, but if he did, he would realize there cannot be a return to "normality," only to a state of basic functionality commensurate with America's diminished wealth.  When the carnage is complete and the thrashing of the economy in its death-throes finally stills, I imagine we will see that the net asset value of the United States is about 60% of what it appeared to be at the height of the Bubble.  This is not a cyclical "correction;"  this is serious Attitude Adjustment.

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