Business as usual on Wall Street and political posturing in Washington

In 2007, a credit crisis centred in the US subprime market began. It metastasised into a monstrosity of epic proportions that led to the worst and only synchronized global downturn since the Great Depression three-quarters of a century ago. The result was a massive bailout of the largest financial institutions in America and around the globe.

Incongruously, Wall Street has quickly returned to business as usual, handing out record bonuses and resuming their leveraged bets in global markets which is the lions share of profits in firms like Goldman Sachs. Meanwhile, in the US employment as calculated is near 10%, and underemployment is near 17%. Foreclosures are at a record high.

Clearly, there is something seriously wrong with this juxtaposition and politicians know this. This is one reason Goldman Sachs executives were lambasted in yesterday’s Senate subcommittee hearings.  Senators wanted Americans to see their righteous indignation on Television so that, when polling time comes in November, Americans will know who is fighting for them.

Yet, I can’t help but notice that financial reform is having a very difficult time making it through Congress. Are the Senators talking the talk? Yes. Are they walking the walk though?  Clearly, no.  My suggestion is you watch who votes for financial reform and send a message by voting or not voting accordingly in November.  Forget about the Goldman hearings. It is a dog and pony show. So much bread and circuses for the unwashed masses.

Below is what I had to say about them on the BBC yesterday night.

  1. Element says

    There is one answer to this complacency, and it will change it all Ed.

    Ed, your update on 19 MAR 2010 to the November 2008 post “A New World Order”, was surprising. I had thought you were keen on fiat money, given the airing at Credit Writedowns of the high deficit spend option.

    But you wrote;
    “…What the world needs now
    We need an end to fiat money. Fiat money is what has caused the U.S. to inflate. And it is what has caused a massive super bubble and build up in debt. … In order to promote stability, money must be backed by something of value … This makes a gold standard rather untenable. … And, if we want a new world order, it likely will need to be based on another tradeable asset in limited supply besides gold.” – “A New World Order”, by Ed Harrison, Mar 19th 2010.

    I agree. Gold is not ideal, but it has a history as dough and I think it’ll become a default medium (at least initially, and no I don’t own gold or intend to buy any). And yes, a big change is required to get from where we are now to where we will need to be, implying system collapse which is proceeding despite all attempts to wish it away.

    Mish Shedlock also clearly ‘gets it’ as within this excerpt from his recent response to Richard Koo’s video on what the rest of the world can learn from the Japanese plight (i.e. what to not bother doing, because it solves and fixes nothing. Frankly, when in a hole, first, stop digging.

    “…The reason the recession is different is this is credit bubble busting depression not a recession. The effects are masked because of food stamps, unemployment insurance, and because of foreclosure policy. Unlike the soup lines in the 1930’s which were very visible, Food Stamp Usage at a Record 39 Million, 14th Consecutive Monthly Increase is not visible.

    Record Unemployment
    Likewise, 14 million unemployed are not readily visible because of unemployment insurance and because many are living in their homes for free courtesy of banks that have not foreclosed long after people stopped paying their mortgage. That is the extent of my agreement with Koo.

    Koo blames cutbacks in fiscal stimulus in 1999 and 2001 as the reason Japan remains mired in deflation. I do not buy it. Arguably Japan picked two of the worst times to get fiscal religion (heading right into a dotcom bust and headed into the 911 attack). However, Japan is deep in debt to the tune of 200+% of GDP and two short cutbacks in spending and stimulus (both aborted) certainly did not cause that problem.

    Real Lesson of Japan’s Lost Decades
    The real lesson is no matter how much money you throw around, economies cannot recover until noncollectable debts are written off. That is why you have “zero interest rates and still nothing’s happening.” The moment fiscal stimulus stops economies are virtually guaranteed to relapse until the core problem is resolved. The problem is Asset Bubbles, Malinvestments, and debts that cannot possibly be collected. Bailing out the banks did nothing to fix these problems. Consumers are still saddled in debt, in underwater mortgages, with no job. Moreover, there is no driver for jobs given rampant overcapacity in nearly every sector.

    Banks do not want to lend in this kind of environment so they don’t. Businesses do not want to expand in this kind of environment so they don’t. Meanwhile the Obama administration is making matters worse by increasing taxes on small businesses and proposing everyone pay for health insurance, with businesses forced to offer a plan or pony up part of the cost. This too is giving small businesses an incentive not to hire. Housing prices are too high yet the Administration and Congress are hell bent on propping up prices. The solution is to let prices fall until they are affordable. The irony is after all the bitching we have heard and all the “Affordable Housing Plans” out of Congress, we have a golden opportunity for affordable housing and no one wants it.

    US Faces Second Lost Depression
    I have talked about this before in U.S. Faces Second Lost Decade “Because” of Misguided Stimulus. Final analysis shows the U.S. Faces Second Lost Decade “Because” of Misguided Stimulus, not as a result of pulling stimulus too early as Koo, Krugman, and Romer suggest. If that sounds wrong then just take a look at how we got here: Hoping to end the recession of 2001-2002, the Fed slashed interest rates, held them too low, too long, we had the mother of all housing/credit booms and the global economy crashed.

    The US has nothing to show for all that stimulus other than a wrecked economy, massive debt that needs to be written off, and extremely wealthy parasite bankers bailed out by consumers after contributing to these problems. Koo, Krugman, and Romer think more spending and more debt will solve the problem although Japan has proven without a doubt that such attempts are economic madness. What got the world out of the great depression certainly was not insane monetary stimulus but rather WWII. War destroyed the productive capacity of much of the world, and with US productive capacity completely untouched and with returning soldiers ready to start families, the US led the world out of depression.

    Let’s hope it does not come to war again to solve these problems. Over 10 years ago, the advice from Greenspan and the Fed for Japan was to write off the debts so that a recovery could begin. Ironically this is one of the few things Greenspan ever got right and Koo cannot even see it staring smack in the face of debt to the tune of 200% of GDP. Stepping back for a moment, the best thing to do is not blow bubbles in the first place. Yet the Fed seems hellbent on blowing another. The result will not be any better this time than either of the last two.”

    ‘Richard Koo On Why This Recession Is Different; Mish On What To Do About It’ – by Mike “Mish” Shedlock – Thursday, April 15, 2010.

    -Quote Ends-

    Mish is the first US economics bloggist I’ve come across who fully grasps the futility of the current situation with regard to massive spending to quash weak aggregate demand. The spending will ultimately lead to subsidy of over-capacity, thus to deflation, and poor profit environments, low wages and low employment, plus the now usual ‘investment’ without any return. It’s already happening. Until excess capacity is dismantled and the debt that produced it is gone (and ill-fated originating banks also) there will be no end.

    It amazes me that heavy spending is proposed to support a credit-inflated GDP level from far too much private credit, as non-investment wonton spending.

    Look at it this way; you make 80k per year, but you spend 140k per year for ten years and never repay anything and end up with a 600k debt, plus interest. You never budget, and always make minimum repayments-if at all. You appear to be making lots of money for that decade. But suddenly find you can’t finance any more so you then go to your family and say look I need to avoid weak aggregate demand as I won’t appear or feel so wealthy anymore, and the cool stuff I bought will be sold off for peanuts, and I’ll get real depressed. So can I spend some of your coin as well? That’s effectively the argument, let me use your budget to keep me out of depression so I feel and look wealthy, and we all just pretend it’s my recovery from a financial hiccup.

    Likewise, I wonder if Rogoff identify any country in the past 2-centuries that fell into depression, which did not bring it upon themselves via poor budgeting and systemic corruption?

    Ultimately it’s not about TBTF, it’s not about re-regulation or enforcement, it’s not only about getting people back to work, it’s not about deficit spending or tax policy. The system is actually broken this time, it needs a full reset, or as you put it “a new world order”.

    You can extend and pretend, as Japan has, via counterfeit, but why would you?

    I also wonder if Mark Faber’s often repeated suspicion that printing can extend this much longer than expected, is possibly not so. The conditions are present already for another systemic coronary. Keep in mind that the USSR’s economic breakdown and depression and law and constitutional reset were very rapid-money printing’s success is very much a function of economic credibility and the Soviets had none, so any money printed was untrustable. So printing can fail suddenly when economic and systemic credibility are low. And if systemic reforms turn out to be low in credibility then you have real risk of failure.

    As you point out fiat money itself is what’s broken. Jim Puplava’s Financial Sense Newshour ( on 10th April 2010 made a lucid case for this (audio file: fsn2010-0410-2.mp3). That’s the money we all use, and the rest are pegged to. But it’s always ended in systemic failure, and abandonment, and is happening again after a massive credit, BS and printing induced hiatus. When you’ve never known any other sort of money it makes it very difficult to comprehend that physical cash can become dysfunctional.

    What’s offered as alternative? A flirtatious theoretical edifice of MMT, based on this same money, acting as an ultimate extend-and-pretend economic paradigm. Frankly, we are seeing this already and its a depressionary end-game for QE money as paradigm.

    Plus, when a Sovereign can do this unseen digitally, and buy treasuries without it even being detected, you have a serious systemic credibility problem. Now look who’s in charge of the US Fed. Bernanke’s main claim to fame and ‘cred’ is that we know for sure he will print trillions.

    So we have some issues;

    1) Pending money failure and replacement.
    2) Pending major debt crisis – everywhere.
    3) Thousands of broke banks to be destroyed symptomatic of a coming absence of private investment and destruction of savings.
    4) Too much global productive capacity that must and will go away despite the imperative to export.
    5) Nowhere near enough opportunities to gainfully employ (in GDP terms) everyone as this happens.
    6) Increasing likelihood of trade conflict.
    7) Increasing risk of actual large-scale combat.
    8) Commodity supply under-capacity especially of room-pressure liquid fuels will bite harder than expected from mid decade.
    9) Population levels that when combined with items 1 through 8 amounts to cities that become disorderly, as substantial areas of cities become unaffordable, unserviceable or uninhabitable. Detroit’s an early-phase example of suburban decay, that’s going to spread more generally, in the developed world, later this decade and next.

    Ed, you recently said you’re giving up on policy makers. Fair enough, but I know you’ll be thinking about why this happens. The truth is, they aren’t in control, they are just very good at weaving a cute pretence.

    Once you realise the system is beyond self-correction, you stop expecting leaders to get it right. The ‘system’ as it operates is ad-hoc. Every ‘fix’ is a patch, not a reform. The things that are systemically broken are broken with good reason. It’s not a bug, it’s a feature, some people want it broken.

    It’s not you Ed, your frustration is in wanting the system to work for the general public interest but definitely isn’t supposed to. If or when it does it’s purely a fortuitous coincidence (to be milked for all it’s worth).

    The above items 1 thru 9 will not be consequentially addressed. These things are literally unspeakable. You can’t put those issues on ‘Good Morning America’, or an Australian equivalent. You can’t have that within a socio-economic paradigm where confidence-gaming via distraction and advertising is essential to systemic continuity.

    The system is thus necessarily partial, blinkered and warped. The show must go on.

    So forget systemic self-correction.

    Thus irreversible processes will make the impending changes instead, and ‘leaders’ will have no control over events, but will certainly pretend they do until its entirely obvious that they don’t. Then we’ll all re-learn how trade works and what an exchange medium must be to be accepted by a trade partner or by a lender.

    It won’t be some cute economic theory that resolves it.

    Theoretical expositions come post-fact in economics. The material world isn’t a theory and it never behaves like a theory for long. At best it approximates a theory, sometimes. But no matter how many times that is made apparent, there are always theorists who believe that there’s some magic logical construct that mirrors and explains all.

    It’s like positing a true answer to a phoney question.

    For some reason the basic inappropriateness of that process isn’t as generally clear as it should be.

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