Report from the bunker

Some disclosure: my real-world avatar is a boring banking lawyer deeply embedded in the belly of the beast.  I can therefore confidently explain what has happened to make all the major financial institutions of the world look like a fleet of Titantics ploughing dead ahead into various icebergs. 

While it may be true, as everyone seems to have concluded, that most bankers are indeed minions of beelzebub, Satan alone should not be blamed for the current mess. Unless we want to make greed a capital offence it's pretty pointless to get all uppity about avaricious bankers. After all, we were the ones who gave them the rope to hang us all with. 

It is important to keep in mind that in the parlance of our times, thanks to Reagan revolution, it has been long accepted conventional wisdom that all government is bad, and regulators are particularly bad, which I think often explained the quality of regulators I myself have come into contact with. This is not always true: some have been astute and very good – but for a long time they have been radically underpaid and maligned to the point of irrelevance. 

So why should anyone be surprised when the end result is massive and comprehensive regulatory failure? 

The financial system, though complex, can work if risks are correctly assessed. The problem is that under conditions of large liquidity, which we had when credit was cheap, the quest for “returns” encourages excessive risk taking and exposes the system’s vulnerabilities: 

Market participants that work for fees (mortgage brokers, payments receivers) don’t have incentives to monitor the quality of loans, only to increase the quantity of loans. 


The same thing happens with the credit rating agencies which supply “ratings” for the structured products and do not face any financial responsibility to cover losses from their mistakes. 


Regulatory Arbitrage: different financial institutions undertaking similar activities face different regulations (especially capital requirements). 


Principal-Agent Problem: huge disparity in traders’ maximum loss (zero bonus) vs. investors’ losses (the full capital invested). 

The job of regulators is to ensure these risks are correctly assessed and, where they aren't, the financial system is protected. 

Guess that hasn't happened.

Stick to baseball, George

So, the global restructuring and geo-strategic recalibration is well under way.  

America's, and Europe's, historic economic predominance can be expected to slip away - with inevitable consequences for the west's ability to lead and shape events on the world stage. In other words, all of this is about something much bigger than a few poorly-managed megabanks: we've seen this movie before. The British Empire effectively spent itself into oblivion as its economic might imploded.  

In recent years foreign central banks and sovereign funds have increasingly propped up the dollar and bought U.S. Treasuries. We can't expect this to continue indefinitely: China now is diversifying aggressively to hedge away from its exposure to a country with such dire long-term fiscal imbalances as the United States. Joseph Stiglitz (Nobel Prize, Economics) calculates the Iraq war will cost the US three trillion alone (all in), which puts Obama's fiscual stimulus package (roughly $800 billion) into perspective.  

In short, as a nation, we've been profligate idiots. This is more true in the U.S. than the UK (as Stiglitz himself has observed) but the UK has been far from prudent itself (as Warren Buffet has repeatedly observed since the 90s).  

Things didn't have to be this way, but, of course, rational discourse hasn't been permitted for a long time, and there certainly was no interest on the Sunday talk shows. Even today we have George Will still blathering about how the New Deal didn't work: it amazes me how many apologists for Hoover are still out there. World War II got us out of the Great Depression? Even if you concede that might be true (and I don't), it doesn't change the fact that massive public spending did the trick. Is George advocating another big war? Iraq wasn't enough?  

I laugh when I think about all those fiscal conservatives who demanded a balanced budget amendment in the late 90s, and who then promptly forgot about it with dubbya in the White House: they discovered John Maynard Keynes and suddenly deficit spending was, like, so cool! Except deficit spending as Kenyes conceived it had nothing to do with tax cuts for the rich. In contrast, fighting stupid wars that make no sense can work as a form of fiscal stimulus (as sort of a large public works project), but dubbya didn’t get the timing quite right. Yes, he’s probably the worst president we’ve ever had.  

But we, the People, put him in office, so who really is to blame?

Let me get this straight . . .

COST OF IRAQ WAR : 

• $3 TRILLION (all in) ***

RETURN ON INVESTMENT: 

• resurgent Al Qaeda 
  
• undermined multilateral nuclear anti-proliferation efforts  
• massive loss of American foreign policy and intelligence agencies credibility
• depletion of armed forces capabilities 
  
• distraction from Afghanistan 
  
• maybe someday "democracy will flower in the middle east" (like it did in Palestine, except they elected Hamas to power - oops)

REPUBLICANS OPPOSED: 

• Zero
  

-- compare and contrast with -- 

COST OF PROPOSED STIMULUS PACKAGE (Senate Version): 

• $780 billion

RETURN ON INVESTMENT: 

• Only hope for avoiding crippling global depression (tax cuts for the rich repeatedly proven ineffective as stimulus)

REPUBLICANS OPPOSED:

• All but three Senators.
  

*** see, Joseph Stiglitz, Columbia University, former chief economist at the World Bank, winner, Nobel Prize for Economics, 2001: monetary estimates may be considered in addition to 100,000 to 655,000 dead, not that many seem to care very much

Our Greatest Jurist

Why is our ever-somnolent media waking up to pay attention to what a boor this guy is all of a sudden now?

Hoover Lives!

Change most definitely has not come to the Beltway Grandees, least of all Wolfie  . . . 

Can we please, please, please have a press corps that is not entirely somnolent?  

Sigh.

Bring out your Dead!

Remember early on during the Bush years all those Republicans who suddenly threw down the mantle of "fiscal responsibility" and donned proudly the one labelled "John Maynard Keynes" as they happily pushed through Bush's tax cuts for the rich?  Yes, deficit spending was suddenly in vogue with a Republican in the White House . . . it mattered not what kind of deficit spending Keynes actually prescribed to combat a recession (needless to say, tax cuts for the wealthy were not what Keynes had in mind).  And . . . don't forget that laugher of a Laffer curve: like that unfortunate old gaffer in the "Bring out your Dead!" bit in Monty Python and the Holy Grail, that little gem of Reagonomics still is not "dead yet", despite being thoroughly discredited many times over.

I really wonder what is going on the heads of Republican lawmakers as we teeter on the precipice of Great Depression 2.0.  Marshall is losing it:

I cannot say my expectations were high. But Sen. DeMint (R) of South Carolina does seem to be an even bigger ignoramus than I'd realized. On This Week this morning he actually said: "Let's don't say it's a stimulus when it's a government spending plan." A 'Stimulus plan' is pretty much by definition a spending plan, though of course it can include tax reductions as well.

As noted, my expectations are not high. But I'm wowed by the amount of nonsense and lies that are being injected into this debate.

Also, high on the list, of course, is the fact that basically all the 'wasteful' spending that's being discussed amounts to a total of what ... maybe 2 or 3 billion out of $819 billion total? Why is this point not being made more clearly?

It's enough to make one want to swing a cat around in the middle of a medieval plague!

Conspiracy Alert

Did you ever notice that the Homeland Security Dept's terror alert color-coding system . . .

. . . corresponds PRECISELY with the colors of the characters in Teletubbies?

. . . think about it.

Homeland Security Live Alert