Thoughts atop the cliff

In his comment here, Mike Warot encourages me — and the rest of us — to watch this video by Karl Denninger, whose blog is here.

I did. It’s good. But I’m not sure Denninger is right. Or all-right, let’s say. Just somewhat.

Here’s the problem as I currently see it. (And I’m no economist. This is just me, one citizen trying to make sense of something that I’ve hardly paid attention to in the past. So take this with an acre of salt if you like.)

Yes, the system is rigged and corrupt. Yes, the Fed and Treasury have been messing up for decades. (As Kevin Phillips will tell you.) Yes, federal power has gone over the top here. Whoever heard of the Office of Thrift Supervision before it swooped in and sold WaMu to JP Morgan Chase? At least there’s some common sense involved with banking, and “trift” (a term that now feels euphemistic in a statist way, like “corrections”). Banking got sucked into runaway shell games, in which empty vessels multiplied and divided, as whole institutions with MBA-packed buildings grew to manage and manipulate them. Solidity and liquidity were both replaced by gasseosity — but in sectors of Xtreme Arcana that nobody outside fully understood. Thus we’ve had inflation for years, and have put off facing it, because it was hidden and the System seemed to be working.

Meanwhile the whole country became infected with the sickness of making money only for its own sake, backed by little resembling work or manufacture — a trend we’ve been seeing since the Carter administration.

The “free market” in finance has always been rigged by its Alpha beasts, its lobbied legislators and its regulators, to favor growth. But lost in this long round has been elementary horse sense about what’s actually valuable, what actually produces goods and services, what’s free and what’s not. Growth in this long round has had many costs, and we’re not even close to visiting all of them.

Perhaps it’s in our nature, with economic evidence going back to tulip bulbs. But I think it goes deeper than that. Our species pestilential and rapacious on a scale the planet has never seen before. It can rationalize chewing irreplaceable valuables out of the ground and seas, using them up and spreading its wastes everywhere. This cost-blind nature — is made manifest in a financial system that best rewards games built on games that are almost nothing but rationalizations — worse, of a sort that only its rationalizers can understand. The financial sector has become a casino in which the highest rollers have bought the house and rigged every game to pay off by splitting winnings to bet on other rigged games, while the rest of us say “Great!”, because we’re in there playing too: betting on worthless stocks, buying overpriced houses on easy credit with negative equities, running up credit card bills while thinking nothing of paying monthly interest rates north of 20%.

This “free market” was a free-for-all in which even its hands-off regulators participated. All while the country went from being the world’s leading manufacturer and creditor to the world’s leading out-sourcer and debtor — with the load now running into the dozens of trillions of dollars. Remember that we voted for the people who presided over that.

It’s tempting to blame and punish, but that isn’t what we need now. What we need is for credit to keep moving while the financial sector gradually shrinks to sane dimensions, with value that rises from 1/1 relationships between reality and perception — or at least a fair chance that good ideas will turn into good business. (I don’t want to throw smart investor babies out with the dumb investor bathwater.)

I don’t know if this $.7 trillion bill will do that. I do have a strong hunch about what will happen if it doesn’t. Or if we do nothing and let nature take its course. The entire financial sector will collapse, and the government won’t be able to print enough money to pay off its own and everybody else’s creditors, starting with China. Businesses of all kinds will close, and all but a few public utilities will cease to run smoothly. With weak manufacturing, absent small farming and other graces of traditional functioning societies, we’ll fall into a depression as bad or worse than the Great one. Cities will fail and crime will go rampant. And we’ll bore our grandchildren with stories of what it was like to hike ten miles through the snow to work at the only shit jobs that were left.

I believe this is what Warren Buffett also sees when he compares the current crisis to Pearl Harbor. I believe Buffett because he got wealthy by being sensible and prudent, and very much not of a type with those that have made a mess of the financial system.

Or so it seems to me on a Sunday morning just short of the precipice.

Oh, and I don’t hear either candidate talking about what’s really going on here. Nor do I expect them to.

13 comments

  1. Richard Reeve’s avatar

    Perhaps an alternate title for this post: “One foot over the edge…”
    Thanks for taking the phony mask off this problem.

    Why does everyone pretend like citibank is on solid ground when they got a 50 billion dollar infusion from Kuwait 6 months ago. They just played their cards early, no?

  2. Mike Warot’s avatar

    Doc, this whole process stinks because of it’s lack of transparency… remember our shared cluetrain values… this closed door stuff can only result in bad news for all of us.

    We need to discuss this, and that takes time… they are trying to spend the $700,000,000,000 because they have an excuse, so they can feed on more pork.

    Life is short… spending time with my Dad today, while I still can. We’re off to see Indiana in all it’s fall glory.

    Thanks for helping to keep the discussion alive. We can fix this… but it’s going to take all of us yanking government’s leash, and doing what we want, instead of what they always do.

  3. Doc Searls’s avatar

    Thanks, Mike.

    It’s freaking complicated. We’re all complicit, we’re all to blame, we’re all looking for the easy answers, and they’re not there. So the best we can do is listen as well as we talk, and hope we make the right decisions, or at least ones that are good enough for now.

    Enjoy your weekend. Regards to your dad. Be glad he’s with you. I still miss mine, almost three decades after he’s gone.

  4. Don Marti’s avatar

    I feel guilty about having too much crap, and especially too big a house, too.

    But this is not a case where the only two choices are “do nothing” or “give $700 billion to assholes.” Who made those the only two choices? There are other possibilities out there — see this Chris Mayer op-ed for some good ideas.

    More background: Smaller Banks Thrive Out of the Fray of Crisis (via Marginal Revolution)

    A Bailout We Don’t Need

  5. Karl Robillard’s avatar

    > “What we need is for credit to keep moving while the financial sector gradually shrinks to sane dimensions, with value that rises from 1/1 relationships between reality and perception”

    How will enabling the criminals cause them to scale back on their operations? We need to move away from a debt-based economy – scrap the Federal Reserve and fractional reserve banking. Then you’ll get your 1/1 relationship. I doubt this will come to pass until our economy lies in ruins and the citizens rise up against this nonsense.

    > “The entire financial sector will collapse…”

    Many economists are firmly against continuing to prop up these jokers and realize a market correction is needed. If things get really bad it would be an opportunity for the changes I mentioned above. But the powers that be want to avoid that at any cost, thus the fearmongering coming from the Treasury and Whitehouse.

    > “Oh, and I don’t hear either candidate talking about what’s really going on here. Nor do I expect them to.”

    So I expect you will not be voting for either of them, right Doc?
    McCain was just shown on CNN saying that housing prices have dropped too low. F#?%ing idiot. Another item on America’s TODO list is the breaking of the Republicrat duopoly. You can start helping with that this November.

  6. Karl Robillard’s avatar

    > “What we need is for credit to keep moving while the financial sector gradually shrinks to sane dimensions, with value that rises from 1/1 relationships between reality and perception”

    How will enabling the criminals cause them to scale back on their operations? We need to move away from a debt-based economy – scrap the Federal Reserve and fractional reserve banking. Then you’ll get your 1/1 relationship. I doubt this will come to pass until our economy lies in ruins and the citizens rise up against this nonsense.

    > “The entire financial sector will collapse…”

    Many economists are firmly against continuing to prop up these jokers and realize a market correction is needed. If things get really bad it would be an opportunity for the changes I mentioned above. But the powers that be want to avoid that at any cost, thus the fearmongering coming from the Treasury and Whitehouse.

    > “Oh, and I don’t hear either candidate talking about what’s really going on here. Nor do I expect them to.”

    So I expect you will not be voting for either of them, right Doc? McCain was just shown on CNN saying that housing prices have dropped too low. F#?%ing idiot. Another item on America’s TODO list is the breaking of the Republicrat duopoly. You can start helping with that this November.

  7. Mike Warot’s avatar

    There is a working system of Government in place to handle this type of problem, on a smaller scale… the Bankruptcy courts. They should get the backing they need (staff, etc) to dive into this mess, and get things out into the light of day. It’s a trust issue, no sane person is going to trust some new committee anywhere near as much as a known stable system.

    The only big thing I would do otherwise is to backstop the FDIC for up to $100,000 per US Citizen or otherwise legal depositor, with a maximum of 5 accounts total. (To get around these twits who spread 50 million across 500 banks, which might be part of the problem with the FDIC in the first place).

    We need transparency, and a system we can trust. This new bailout is worse than giving Diebold an exclusive nationwide contract for voting machines!

  8. Mike Warot’s avatar

    Scratch the 5 account idea… just make it $1,000,000 per person and be done with it.

  9. Richard Bennett’s avatar

    If this is the Karl Denninger I think it is, he’s best ignored. There was a crackpot of that name in the fathers’ rights movement in the 1990s, and all he did was run around the Internet threatening people and playing god. A very sad man, with deep emotional problems. His assertion that the economy has low self-esteem made me laugh. Karl Denninger almost certainly has no more grasp of the financial markets than he does of family law or human relations.

  10. Mike Warot’s avatar

    Richard, did you at least watch the video?

    Ad hominem attacks might let you discount the messenger, but the message still has value, regardless of your choice to ignore it.

  11. lurkerfan’s avatar

    Thanks, Doc, for expressing so well what so many of us feel and think intuitively, especially this:

    “The “free market” in finance has always been rigged by its Alpha beasts, its lobbied legislators and its regulators, to favor growth. But lost in this long round has been elementary horse sense about what’s actually valuable, what actually produces goods and services, what’s free and what’s not. Growth in this long round has had many costs, and we’re not even close to visiting all of them.”

  12. Richard Bennett’s avatar

    Yes Mike, I watched the video, and wasn’t impressed: Karl babbles. If you can produce an authoritative critic it would be helpful, because in cases like this, where I don’t know the subject matter, the credibility of the source is everything.

    I don’t think the economy is suffering from low self-esteem, as Denninger says, but I’m no expert on it.

  13. Mike Warot’s avatar

    Self-esteem? It’s a matter of trust, and the actions our government take show the rest of the world how much they can trust us to continue to live by our own rule-set (the one they invest in every time they opt to use a Dollar instead of some other currency).

    If we start acting like the homeless person on the train, randomly shouting and getting abusive… they will all back away, and we’ll be left with only our Gold reserves to spend for strategic needs.

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