Friday, October 3, 2008

The Day of Infamy: The Official End of the Free Market and the Disaster of Government Intervention

Friday will surely be remembered in history as the most tragic day in the history of the United States, the day when this country's very justification for existence died, as most of our legislators on both sides of the aisle discarded whatever ideological differences they might have, in allowing themselves to be terrorized into legislating the complete socialization of our financial system, and colluding in pushing the country a large distance toward the eventual, and possibly inevitable, complete default on its sovereign debt and the utter destruction of our currency and what remains of our economy.

I had many, many thoughts as I witnessed this past week's ugly spectacle of intimidation by lies, compromise, abject fear, and utter capitulation to the terror-mongering of Paulson and his Wall Street cronies. Why, you had to wonder, would anyone believe that the economy would completely collapse merely because Paulson, who has told us nothing but lies during his entire tenure, and the Wall Street geniuses who engineered this debacle, told us so? Yet this wild claim was taken at face value.

No matter how dismal is the current situation in the credit markets at present, this massive addition to our national debt, which is almost too large to be repaid even now, will not only not arrest the unwinding of the un-repayable debt with which our large financial firms have burdened themselves, but will spread the distress to every corner of the economy.

Given that we are headed into an economic disaster no matter what, and that the great unraveling is proceeding with great speed and is unstoppable at this point, it would seem that the most constructive thing we can do is isolate healthy institutions and activities from the spreading blight, while triaging operations that are too far gone to be salvageable. However, this massively costly intervention, which basically commits the U.S. Treasury to supporting the financial system and its major players at whatever cost to the taxpayers, on terms left to the discretion of Mr. Paulson, will most likely make it certain that the Righteous will die just like the Wicked, and that no citizen and no enterprise will be able to isolate itself from the avalanche of failure.

It's easy to blame the Republicans, for it was Bush and his appointees Paulson and Bernanke, in response to the desperate entreaties of wealthy Wall Street executives- almost all Republicans, who made hundreds of millions of dollars in fees and profits by setting this country up for the most catostrophic financial debacle in recorded history. However, the Democrats have had the major part in creating the structure of entitlements and government agencies that enabled and fueled the speculative binge of the past 10 years, while the Republicans made debt formation, calling it "wealth creation" and the "ownership society", the centerpiece of their economic policy. The public, meanwhile, was unable to pass on the good times to be had by pretending to be rich by means of virtually unlimited credit available to almost anyone.

We are all guilty, but the major responsibility attaches to the policy makers who saw clearly that a disaster of unimaginable proportions was setting up by 2003, yet said not a word in protest as the lending and spending became even more reckless and our institutions continued to layer on evermore unrepayable debt and as homebuilders and mall builders continued to build hundreds of thousands more 4000 sq ft homes in suburbs 80 miles out of the city, and condo builders threw up more and more shoddily built 50- story highrises with $400K one bed apartments in buildings with ever-shoddier construction within the speculation-crazed precincts of Miami, Los Vegas, and Chicago's South Loop.

The ugliest upshot of the collapse of our credit markets, is that the lessons contained therein are completely lost on both policy makers and the public at large, all of whom have managed to draw from the disaster the conclusion that free markets do not work and that the economy can be managed only by the heavy hand of the government.

That this debacle was created by government intervention and that the creation of the credit bubble was, in fact, a centerpiece of Bush economic policy, goes unmentioned. That the disaster that is now unfolding and cascading through our economy, toppling businesses, bankrupting unprecedented numbers of citizens, and triggering tens of thousands of layoffs, was forseen as early as 2003, and many credible experts warned of the developing catastrophe, their cogent, well-worded warnings, backed up by hard numbers, unheeded and mostly unacknowledged by Bush, Paulson, Greenspan, and Bernanke, as well as by executives at financial firms that have now collapsed under the weight of all the worthless garbage paper that they have now succeeded in offloading onto the American public. As the venerable and brilliant former Republican strategist Kevin Phillips, states in his landmark analysis of our current political alignments, American Theocracy, the creation of the monstrous structure of layered debt based on steeply overvalued assets, as a tool to drive our otherwise unproductive economy in an era of depleting resources and dependence on foriegn oil, was well underway by 2004, by which time it was obvious that the chain of utterly reckless debt creation could not possibly be sustained for much longer into the future, and that its inevitable unraveling had the potential to blow our financial system to smithereens:

"If there's a bubble, it's in this four-letter word:debt. The U.S. economy is just awash in it".
-David Rosenburg, Cheif North American Economist at Merrill Lynch, speaking in 2001.

"The United States has never run such large currrent account deficits and no single
nation's deficit hs ever bulked nearly as large relative to the global economy.
- Former U.S. Treasury Secretary Lawrence Summers in a 2004 speech.

"There are disturbing trends: huge imbalances, disequilibria, risks-call them what you will. Altogether the circumstances seem to be as dangerous and intractable as any I can remember.......I don't know whether change will come with a bang or with a whimper, whether sooner or later. But is things stand right now, it is more likely than not that it will be financial crisis rather than policy foresight that will force the change."
_Paul Volker, former Federal Reserve Chairman, The Washington Post, 2005.

And now, the massive intervention, that comes at such great cost to the public till, will not only not change the destructive fiscal policies of the current administration, but will attempt to enable our financial system to do more of what it was doing that caused the problem to begin with, which is the reckless extension of credit to unworthy borrowers for fantastically overvalued assets. Accounting rules are being suspended in order to allow firms holding piles of reeking garbage debt to allow mark-to-fantasy valuations of their worthless crap. Every attempt will be made to prop up stock prices and house prices. The treasury will have unlimited power to buy whatever securities it sees fit at evaluations that may or may not have any basis in reality, for it is the task of the treasury, under this bill, to create an evaluation for the assets, whether they would fetch that in this market, or any market, or not.

FHA loan limits have been raised, as have the limits of conforming mortgages eligible for purchase by GNMA and the GSEs, Fannie Mae and Freddie Mac., what agencies were responsible for the inflation of the debt bubble to begin with, for were it not for these government agencies and GSEs whose whole reason for being is to serve as a dumping ground for risks that would be unacceptable to financial institutions were it not for the explicit and implicit guarantees of such agencies, and by the Federal Reserve. We are in our present predicament not in spite of government intervention, but because of it, for were it not for the multitude of socialized housing programs specifically designed to make housing "affordable" for high-risk borrowers, and the stated and visible willingness of the Federal Reserve to bail out failing institutions and entities on the grounds of the public interest, our institutions would trim their risk considerably, and the normal fluctuations of the business cycle, with its expansions followed by contractions, would be much milder and shorter-lived.

Worse, we will set the stage for more destructive financial binges, for it is now completely understood by all that government authorities will always step in to rescue failing business entities that are considered of key importance because of their size and their executives' connections to powerful politicians.

We will additionally continue to throw good money after bad, in supplying tax-funded support to obsolete, non-competitive "sunset" enterprises, such as our sadly incompetent and uncompetitive domestic auto manufacturers, while killing budding enterprises in promising new industries in the inception, as they are deprived of necessary capital because the tax burden has grown so large by way of supporting failure that capital is scarcer than ever, especially for the innovative and experimental industries that we will need if we are to survive resource depletion and the failure of our financial system and rebuild our economy and lifestyles on a sustainable platform.

A reader of James Howard Kuntler's blog, a citizen from Ohio, remarked that we could completely rebuild our railroads and electrify them, with service to every town with more than 5,000 people, with the money that is being allocated to the bailout of our financial system.

Worst of all, this will not be the last cash call. Expect another desperate call for another trillion dollars or so, or more, in a couple of months when it becomes obvious that this rescue attempt is not working, for $700 Billion is only a fraction of what will be necessary, given the immense exposure in structured debt instruments and other derivative instruments that grossly amplified the leverage, and risk, inherent in the mountain of overvalued mortgages and commercial loans. Commercial credit is only beginning to unwind, and there remains the mass of credit card debt overhanging the economy.

If there's anything that ought to be evident from reviewing past and present financial debacles and the depressions that resulted, it should be that the largest and most far reaching disasters result in the attempts of government authorities to "play God" with the lives and fortunes of hundreds of millions of citizens and thousands of business entities; that the economy is simply too large and too complex for any group of people, no matter how expert and educated, to predict how sweeping policy decisions made at the top will play out over the near term, let alone over decades. We should by now have learned that the policies and instruments put into place 75 years ago by well-meaning people of ability and deep knowledge, had many unintended consequences that played out and amplified over the ensuing decades, with disastrous results, such as the decision, made with the best of intentions in Roosevelt's era, to enable as many Americans as possible to afford, with government assistance, the unaffordable. Roosevelt could not have predicted that the current administration would turn these socialistic enterprises into the agencies by which his administration's disastrous fiscal policies, namely the stated intention to enable the creation of a mountain of debt as the driver of "wealth creation", could be implemented and developed with the results we have seen.

What will be the unintended consequences of this latest disastrous and most far-reaching intervention? Aside from attempting to do what no government has any business doing, which is propping up housing prices at still-unaffordable levels, and stock prices at levels unjustified by the prospects and current financial situation of the underlying companies, for the benefit of dishonest and incompetent financial firms and flagrantly imprudent and extravagant home debtors, it will take us further down the road to government insolvency, which would be the ultimate disaster, and one that no one will bail us out of.

Instead of devising evermore ways to offload the burden of malfeasance and incompetence on the next three or four generations of hapless taxpayers while freeing the guilty from responsibility, we could start the process of unwinding the structure of government agencies and entitlements designed to facilitate easy credit, while returning to lending standards reasonably designed to select for borrowers able to repay, from citizens buying homes to businesses contemplating expansion or startup. We could start the long and painful process of de-financializing our economy and founding it on manufacturing and agriculture, the only true founts of wealth creation.

A system in which your responsibility is commensurate with your liberty would work to restore equilibrium, by weeding out the irresponsible, the incompetent, and the criminal as they failed, while rewarding prudence, responsibility, worthwhile innovation, and accurate judgment. But there is no way a "free market" will work as long as players have absolute license with no commensurate responsibility for the consequences of their failures, and know that they will be rescued by the body of taxpayers whenever they produce the kind of results we are now seeing. It is like handing your manic 16-year-old an American Express card with an unlimited line of credit, while making it clear to him that he will not be held responsible for the bill, and wondering why you get a $360,000 bill in the mail, payable immediately, the following month. Therefore, we must, unfortunately, return to the stricter regulatory climate that prevailed before 1980.

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