Easy Question, But A Quantum Physics Answer

Tuesday, September 16, 2008 at 06:54 PM

As one of the "old farts" of the firm, a young person approached me today and asked, "What's causing these banks to go bust?"

I made such a face. "Do you understand how a helicopter can move laterally?"


I snort. "The helicopter issue is much easier....."

Sadly, there is no easy or pat answer as to what's causing major banks like Lehman, Merrill Lynch and others to poop themselves into insolvency. Lee, Rogers, me, we've done our best to keep track of this entire mess.

But, an easy answer? There is no such thing: Our economic Pripyat didn't take place overnight, and blame it on Bushwhack if you like, but...he's just one idiot in a chain of them.

A very long chain, and perhaps my analogy of nuclear may work, eh?

Years ago, following a huge financial meltdown called The Great Depression, Franklin Roosevelt and congress went to work to attempt to put into place many safeguards, control mechanisms and regulations to prevent a return to a runaway finanical warhead. They must've worked, because as of those regulations, laws, combined with strong unions, America had a pretty darned nice economy from 1945 onwards.

Except, some wiseacres started griping. The Money People, for lack of a better term, and from FDR's death up until this year, they ain't stopped griping. Slowly, over time, they bitched and whined and moaned and peed in their pants that "we can't make money with regulations and taxes in our way!"

The first "control rod" removed, methinks, is Nixon's idiotic move to take America off the gold standard, replacing it with the oil standard. Lovely move, it allowed millionares to become billionaires, but made the dollar worth even less, pushing it into "true" fiat status, that is, it became only worth whatever the markets said it was worth.

A small number of "rods" were yanked when a shitty actor became president, and his team of goons decided it was time to commit to an untested theory: Supply-side economics. The theory works...but only in Fantasyland. The idea is simple: Allow the rich to get richer, the goodies will "trickle" downhill.

One big control rod yanked was called Deregulation. Deregulate airlines, banks, stocks, you name it. Hire regulators who don't. Fire regulators who do. Replace regulators with industry hacks. Fire chairman of the Fed and replace with...a deregulator. Starting to make sense now?

Next control rod to yank: Jobs. Start allowing jobs to go overseas, as labor is expensive, and unions suck the life blood out of...profits. Yes, anothe whining excuse, of course.

Then comes Clinton, who pulls more rods, mainly, signing off on Nafta.

Last stop in the failure mechanism: Point failed mama's boy into White House and turn him and his cronies totally loose, deregulate even more, rewrite bankruptcy laws to favor Visa and Mastercard, and oh, yes, act like a fucking communist and promote Globalism.

Wait and watch reactor...the economy...run away and then blow.

See, the 2001 recession never really recovered: The housing "bubble" was a scam to cover up the horror: Jobs going overseas, so? Charge it. Let Big Finance replace manufacturing as the economic engine. And Big Finance did just that.

Except a law of Financial Physics leapt into play: "Who the hell's gonna pay for it all????"

And like the market crash of 1927, it snowballed into SCRAM mode slowly, but SCRAM it did:

Jobs go overseas. Unions are decimated. Workers lose jobs, but still attempt to buy houses, cars, clothes and food. Workers get shit jobs, which do not pay anything like old jobs, so.......something's gonna give, right?

Yet, Big Finance had a clever scam: "Let's hand out shitty loands to those who can't afford them, then, we'll repackage those loans as AAA investments to dopey schmucks overseas!" We can call this the Positive Void Thingie, yes.

So, homeowners start defaulting. Housing values tank. Suddenly, all that leveraged cash...imaginary money invented on loans...disappears into The Nothingness. Banks start to collapse. Economy slows. More jobs vanish...

..and the economy behaves like an RBMK reactor, catches fire and all of us stand around and go "Holeeeeeee shit!!!!!!!!"

Who's to blame? Why, the banks, of course, as they were the whiners who wanted deregulation to begin with, demanded new bankruptcy laws that favor them, and yes, free market opium coupled with sending jobs overseas. Pour into blender, add idiotic voters who vote for this crap, and presto!

Now, the world sits back and wags their fingers. One economist, over at HuffPo says "this is to market fundamentalism what the Berlin wall was to communism."

Nope. This is financial Chernobyl, which just goes to show what happens when you deregulate, allow crooks to run things, and the radioactive financial fallout...is as deadly. Wall Street now glows at 5,000 roentgens/Hr.

And it's far from over. More reactors are going to go critical. And what can we do? So far, nothing.

Well, we can hope for another FDR. I'd like that myself.

Class dismissed!


I believe that Hoover, of all people, said that "The problem with capitalism is capitalists; they're too damned greedy." True then, true now, true so long as there are people to ask what's true.

I agree with you on the interplay of job loss/income reduction and inability to pay off a mortgage. And mortgage loans were being given to everyone who breathed, and half those who had stopped breathing. In many instances, the borrowers didn't even fill out the aplications---that was done by fraud-loving "brokers" who made mmoney only if the loan was approved and knew which lies to tell in order to get approval.

Amazingly, some of the "investment banks" themselves invested in these "securitized" mortgage loans, despite all the evidence that they were risky as hell. The big boys drank their own kool aid and proceeded to bamboozle themselves almost as bad as they always bamboozle the public. (Hint to whoever--whenever you see money people throwing around phrases like "securitized" and "triple subordinated super-return debenture-backed stock variants" grab your wallet and run as far and fast as possible).

And let's not let Clinton off the hook for repealing the Glass-Steagall Act's prohibition against banks undertaking other financial business like insurance and seurities dealing (I'm pretty sure it was Clinton, tho he may have simply bowed to Republican pressure as he so often did).

But the real culprit, the infection in the bone of the American economy, is the 1980s and Ronnie from Hell. Reagan set the final tone, consisting of that unique mixture of fantastical beliefs and incredible greed. That tone has ever since produced ever stronger vibrations which have now caused fractures in the very foundation of the economy.

If not for the economic safeguards built in by the New Dealers, the collapse would have happened some time ago. Even with the safeguards...................

I still stick to my guns on the issue of employment, as it is the sole topic NOBODY has addressed since 1-1-2001. Nobody. Not even the darling media, and as Fritz said to Bill Moyers, nobody dares, those who have the campaign gold won't allow for it.

The math is simple: Bob and Sally both work, Bob makes cars for Ford at $28.50 an hour, Sally is a legal secretary and makes $21.24 an hour. Both lose their jobs. Bob gets new job at $12, Sally at $7.50.

It doesn't take having a Vulcan science officer around to figure where that goes, but I saw it personally, and so did a few million more like me: You CANNOT continue onwards when your paycheck is cut in half. The media has NOT mentioned that a lot of foreclosures are NOT sub-primers, they are legit ones that are now and still falling apart due to job losses due to shit trade deals and shit economic theories and a shit government.

I fully agree, we are still seeing the effects of Raygun and his tampering, and I can say it, yes, job losses to overseas began on his watch. He allowed Japan to import crap-grade electronics as cheap as possible, in order to make Japan happy, so we could have a nice island on which to base our radar systems to watch Ivan. That's where the electronics industry of America...began to take the first hit. Others have followed. Thank you, dead actor.

We're being told repeatedly that loans and credit run industry. This is a hard, cold fact. Nobody opens theirs doors without a line of credit. You don't buy a home without one of your own.

But, the point? If you've an economic system based solely on Big Finance...who the hell pays for this? Someone...someone..has to work, generate LABOR...and generate enough income to PAY off such loans, whether it be Bob, Sally, GM, Boeing, HP, or whomever.

If you cannot pay the loan, the loan goes into default, if any merchandise is attached, it's up for collection, but, multiply this over and over, and you then see the real headache appear:

Someone MUST work, someone MUST generate a decent paycheck, so they CAN have a house, a car, put the kids to school, etc. No income? No payback. Economy slows, stalls, falls, zero, call the tower, and roll the foam trucks, dudes.

FDR and his crew did very well, it's just since his death, our greedy banks and others have worked overtime to undo it all, and now look at the results: It's 1927 all over again.

Boy howdy, indeed.

This is a great summary of how we got into this mess. I can't think of a more disastrous policy for a large economy than to let its biggest ventures engage in high-risk practices because they think they're too large to be allowed to fail.

Ron Paul had a nice line about this in a recent commentary: "This is how government grows -- by claiming to correct the mistakes it earlier created, all the while constantly shaking down the taxpayer. The market needs a chance to correct itself, and Congress needs to avoid making the situation worse by pretending to ride to the rescue."