May 03, 2013
Stockman's provocative point is that it was completely unnecessary to bail all these casinos out. The crash of Lehman Brothers (you might think of it as maybe the Flamingo, as opposed to JP Morgan Chase's MGM Grand and Goldman's Bellagio), a mid-sized gambling hall which made all the same stupid bets as its larger Mob Brethren, was simply another bankruptcy. The Wall Street meltdown was self-contained. It would have burned itself out "in the canyons of Wall Street," as Stockman puts it.
This viewpoint is not part of the official Manufactured Consent, of course. Yet it holds up well under scrutiny. The detonations on the Strip in southern Manhattan mainly concerned the lousy deals ("shitty deals," as Senator Carl Levin called them in Senate hearings when he grilled Goldman execs) put together as subprime mortgage-backed securities (MBS). These, however, were a fairly small part of the overall mortgage market, the "private label" MBS that were too flaky even for Fannie and Freddie to underwrite as GSE-backed loans. Since Goldman and the other gaming establishments were so highly leveraged (at about thirty to one), even a small decline in the value of these shitty deals spelled doom, funded as they tended to be with "hot money" (short-duration overnight loans from the shadow banking system - yes, it's a labyrinth, America's Underworld of arcane finance). If you've seen the movie "Margin Call," you get a sense of how all of this works. Outside investors such as the preternaturally brilliant Michael Burry (lionized in Michael Lewis's The Big Short), Kyle Bass and John Paulson made fortunes betting against the stupid bets made by the likes of Bear Stearns and others. AIG's "Financial Products" division allowed the casinos to hedge their bets with side deals (CDS, or credit default swaps) on the mistaken premise that housing prices (the collateral for all those subprime loans) could only go up and never down. Thus, when AIG-FP failed, Treasury Sec Paulson kindly directed a ton of money to AIG which it could use to pay off the CDS "insurance" to Goldman, the BofA, Wells Fargo and the rest of the bankster-roulette players. This was the infamous "backdoor bailout." All in all, the whole fiasco was an Inside Job.
The effects on the broader economy in America were derivative; the failure of subprime mortgages caused a lot of houses to sink beneath their loan levels (go underwater), and the distressed properties in overbuilt America, suddenly released onto the real estate market, exerted downward pressure on prices, reversing some of the meteoric rise of prices during the Bubble Years (180% between 1996 and 2007). There were heavy casualties in the housing industry, of course, both in finance and construction, and particularly in industries related to housing, massive job losses began in late 2008 and continued to the spring of 2009. And then, by June, 2009, the recession was declared officially over.
The knock-on effects of the deflating housing bubble mainly arose from the end of the House-As-ATM era, the "mortgage equity extraction" process which had dumped about an extra $1 trillion per year into the American economy between the turn of the Millenium and 2006, when the Bubble reached its apogee. Since America is primarily a "service" and "consumer" economy, the effects on manufacturing, agriculture and mining were not significant. It's just that the Planning & Tanning Economy took a massive hit in the chops, as Americans once again faced the tough question in America: what the hell do I do now? And where do I get the money to do it?
Looked at this way, the BlackBerry Panic was simply a round trip. As noted yesterday, the country's economic fortunes have been on a gradual decline for about 40 years, except for that sliver of aristocrats who can leverage world trade or dominate one of America's monopolies. For the Booboisie who must compete with the world's labor market, it's a different story. Occasionally, the fecund American mind conceives of a way to break the monotony by producing Bubbles: Internet IPO offerings (Dot.Com) followed by the housing bubble. These are enabled, as Stockman notes, through a combination of (a) ultra-low interest rates by the Fed married to (b) the dollar as the world's reserve currency, which supports, for now, our periodic indulgences in faux-wealth creation. The actually wealthy, the Dons of Wall Street, can meanwhile manipulate the federal government (and American public opinion) and convince us that their setbacks are our own.
Viewed in this way, we can see that Ben Bernanke's main "policy corrective" of Quantitative Easing, buying up, among other things, a lot of MBS and Treasury bonds with hallucinated money (almost all of which winds up on bankster ledgers as "excess reserves") is just more of the same. It supports "asset prices," stocks, bonds and, to an extent, housing. Pew Research has demonstrated that since this money-printing began in 2009 the top 7% of America's pyramid of wealth have seen their portfolios increase about 28%; the Booboisie (the rest of us at lower sedimentary layers), the leftover 93%, have lost about 4% of our net worth. Same, that is, as it ever was.
Who cares if it don't work (to quote Lamont Shadowskeedeboomboom in Mad Magazine)? Ben Bernanke works for a banking cartel, and he's nursed the survivors from the 2008 Putsch back to opulent wealth. The rest of us can go screw ourselves, as we are wont to do. Noted New York Times columnist, and Chief Carnival Barker for the Status Quo, Paul Krugman, runs cover for his Princeton colleague. Krugman likes our Bubbles (he famously called for one in the early 2000's as a means of recovering from the Dot.Com bubble - Krugman is the Lawrence Welk of public intellectuals). Look, Paul, why don't we just thank our lucky stars we're out of the recession, we're bumping along, and let it go at that? Stop the QE and let the stock markets and the Casino Managers take a hit, for once. Join us down here on the abbatoir floor, where the fun is.
Posted by Harry Willis at 7:55:00 AM