Sunday, September 21, 2008

The Insane Are Running The Asylum

You're beautiful, more beautiful than me.
You're honorable, more honorable than me.
Loyal to the Bank of America.

- R.E.M. "Exhuming McCarthy"

The definition of insanity is doing the same thing over and over again and expecting different results.- Albert Einstein

But you already knew that. How throwing another $700 billion down the rat hole that is Wall Street's gaping maw will save the world economy is beyond me. There are many thoughtful debates taking place across the bubblesphere on the bailout proposal, but I wanted to give my take also. I hope it adds to the discussion.

For the last five years or so, the U.S. (and some might say the World) economy has operated under a collective insanity, that debt was the same as wealth. The average person buying a home, officials in every level of government, and almost every corporation, believed that purchasing assets with borrowed money would lead to prosperity. Loans were traded like money. Stocks were purchased with money from home equity lines. Credit cards were used to buy cars. Wars were fought with money borrowed from enemies.

When the debt burden became too great, defaults occurred. The problems began at the bottom of the financial food chain, where the poorest loans were made to the poorest people, and quickly moved into the financial sector and imperiled the mightiest banks in the world. Delaying tactics were used, like underreporting losses, refusing to mark down asset values, and hiding worthless securities in foreign accounts, but the market discovered the lies. Banks and other financial companies began to fail.

Last week, a climax was reached. The most precious currency of the realm, trust, was gone. No one believed anyone else would repay a loan. Banks distrusted other banks. Insurance was useless, or impossible to buy. Corporate debt was untradeable. The entire global credit market had a heart attack and froze solid.

It's still frozen. Trust in the system is gone.

Now Hank Paulson and Ben Bernanke's solution is to go another $700 billion in debt, gambling on the hope that trust in the credit market can be restored by making good all the bad loans in the marketplace. They're telling us that this trust is more valuable than the $700 billion.

What they haven't told us is how engaging in the same behavior that got us into trouble will get us out of it. They're telling us that if we let them drink our milkshake, we'll still have it. Isn't that a little insane?


patient renter said...

Great piece Max, and it brings up a lot of interesting points which leaves me wondering why the MSM can't be curious about some of these things.

Bryan said...

As these catastrophic scenes of epic proportion and financial carnage on an unprecedented scale play out, I feel like I can hear, faintly at first, and then more clearly, the distinct and a little obnoxious sound of Darth Toll happily crunching on his chips has he too watchs the scene. Like a director watching his own disaster flick, he winces at the parts that he felt could have been better, but overall is satisfied with the movie and the chips.

The last couple weeks have been eventful indeed.

Max said...

I think the MSM is in 9/11 terror mode, and they're afraid to say anything that might set off a panic. Remember, they're still getting blamed for causing the housing market to drop by publishing negative stories. Their intellectual sides know that isn't true, but their ego wants to believe it (since that implies that the media really has power to shape events.)

If you do any critical thinking at all, you realize the bailout is a horrible idea. One good thing I've noticed is that Paulson doesn't want anything less than absolute authority over the bailout. No oversight. No conditions on who gets the money or what they do with it. No transparency. The Dems are asking for very reasonable conditions for what will be the biggest bailout in the history of mankind, and Paulson is balking.

Makes me think the situation isn't as bad as he's been telling congress. Reminds me of the negotiating tactics the Bush Administration has used during prior emergencies that turned out to be anything but.

Anonymous said...

Crunch, crunch, crunch...

Just kidding. In reality, I too am watching this movie with a combination of disgust and horror, although some have confused my persistent doom and gloom prognostications with actually WANTING to see this outcome and relishing it. In reality, nothing could be further from the truth. Whatever nickles I may pick up in front of the steamroller will be small consolation for the wreckage in society and in people's lives (the human toll) and could things be different I would gladly have it.

Max has a good point though. As bad as things are, they are certainly being trumped up for purposes of looting favored assets with the stinky low-ball bid. Russ has another excellent follow-up to the great con-job that is going down, and that guy has been on top of it since day one:

I've heard McHugh and a couple of other uber-bears say recently that the game the pigmen are playing might have gotten away from them(?!) If that is remotely true, welcome to GD2 followed directly by WWIII.