Implosion

Mar 2, 2009      Earthside.com

Dave Chandler

Mar. 2, 2009 (Earthside.com delivered by Newstex) --

Earthside Comments: Who is fooling whom?

Do you really believe that Obama and Geithner think AIG (NYSE:AIG) can somehow be saved? Citigroup (NYSE:C) ? Bank of America (NYSE:BAC) ? Chrysler?

Do YOU believe that somehow the central government is so smart and so resourceful that all these insolvent and bankrupt organizations will be saved?

Who actually believes that any 'rescue' is probable using convoluted financial schemes and maneuvers? Does anyone really think that no one has to fail, no matter how corrupt or incompetent they may have been?

Nobody is being fooled but the uninformed or the purposefully self-delusional. Obama and the federal government and the Federal Reserve are simply attempting to keep the whole economic system from imploding tomorrow. Literally, tomorrow. They are cobbling together ways to mitigate the collapse one day at a time.

There is plenty of news demonstrating what is happening everyday -- but below in this post are some articles that attempt to show a bit of the big picture.

You can believe this: the entire economic model under which we are presently operating based on borrowing and lending is ... imploding.

The only real question is whether or not we want to deal with the consequences of the failed system now, get it over with and start rebuilding from scratch ... or endure a slower, more painful unravelling that may keep us in a modern 'dark ages' for generations?

If the central government of the United States persists in rewarding failure and corruption (as happened again last night with AIG), then storming the castle walls will soon be in order -- as we have previously noted: " ... That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, - That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government ..."

Who Will Rescue Us? | Danny Schechter/Information Clearing House Pilot Chesley 'Sully' Sullenberger has been given his own Facebook page which may be the equivalent these days to being inducted in some heroes hall of fame. He became the rescuer who knew where he was, saw where he was going, and touched his huge plane down into what he calculated correctly would be a safe landing on the Hudson River. Will President Obama be able to rescue us from the ongoing economic collapse that has put the country and his plans at risk? Is he flying blind or does he know how to achieve a safe landing even in the absence of flight controllers and people who know what is going on. Is he going far enough?

Does anyone even know how bad the economy is, or how much worse it will get? Can anyone see the "bottom" the way Sully saw the water rushing up at him in the cockpit of his distressed aircraft? He handled his crash; can we handle ours?

On Friday, after a crisis that's been going in full panic mode since August 2007, the people who are supposedly in the know don't "seem" to be. This AP report from late last week made that clear: "WASHINGTON - The economy's downhill slide at the end of last year was likely much steeper than the government initially thought and it is probably doing just as poorly now - if not worse - as a relentless slew of negative forces feed on each other, pushing the country deeper into recession." Reread the sentence and you can see, as a famous Hollywood Screen writer wrote years ago "nobody knows nothing." The operative phrases are "likely much steeper than the government initially thought" and "it is probably doing just as poorly now." What? Duh?

The self-styled experts had what they call a "revision" of the numbers. At first they thought the economy only dropped or "contracted" by 3% but when they looked again, it had more than doubled to 6.2%. Oops! These new fourth-quarter figures showed the economy shrinking at the fastest rate in a quarter century, were far worse than expected.

There is a reason economics is called "the dismal science" although the science part of all this is very shaky and may have to be separated from the "dismal" part. There were economists like Nouriel Roubini forecasting these trends but he was marginalized by agencies that thought they were so much smarter than the man they called "Dr. Doom."

Someone needs to take a deep breath and figure out what all of economic stimulus efforts are stimulating, General Motors (NYSE:GM) and many banks have received and lost billions. Insurance companies are lining up for more moolah. Fannie Mae (NYSE:FNM) needs another $15 biliion.

It seems endless, and we are not even touching the surface of the real economic time bombs on the horizon from credit default swaps, derivatives and credit cards. Nomi Prins who worked for as an analyst for Bear Stearns and a managing partner for Goldman Sachs (NYSE:GS) says the official math is totally fuzzy: "The media, like Washington hasn't a clue as to the way in which the system leveraged itself. It talks about the home loans. It talks about the homeowners. It talks about asset securities and packaging and slicing and dicing as if it really understands what happened with these securities. And it really doesn't talk about the 10, 20, 30 percent or what ever amount of leverage or borrowing that was done on the back of them. "And the fact that even the treasury, the Oval Office, no one in Congress has actually been able to present an accurate description or evaluation of the loss of the value these securities used to be, the borrowing that was done on top of them and the way this nothing set of loans - remember there was only 1 ½ trillion dollars worth of sub loans - subprime loans created - became $14 trillion worth of asset backs and 140 minimum trillion dollars worth of just stuff. "And there is no way to quantify that because they're not asking questions of the banks that created this stuff. They're not saying 'you know what? Give us an accurate picture, every single one of you.' Which is most of the banks in the country. Certainly ones participated more than others and throughout the world. 'Tell us what you own. Tell us what you borrow. Tell us what your loss is. Give us exact numbers. Don't tell us you don't know how to evaluate it.' Political Scientist Ben Barber amplifies: "There is somewhere between 50 and $600 trillion, nobody knows how much, of that paper around. But that's because nobody even knows what the paper is. Here's what happens. There are three defaults on mortgages. The bank that holds those sells those at 10 cents on the dollar to a second bank. That bank puts those together with three other defaults and three other defaults and makes a second package and sells it to a third Bank. The third Bank sells 6 of these things from 10 different -- from five different banks to a hedge fund. The hedge fund repackages them, bundles them and sells them to some investor who has no idea what he has. And now we have a world of bad debt and no one can even tell you what it's -- you know, what it's worth." How did this happen? Was anyone paying attention? Mo Sacirbey, a former investment banker and Vice President at Standard and Poors, says behind all of this is that the financial system itself changed with more and more people making money from money, not investing in companies that make things. He says the system became predatory and markets and prices were manipulated: "I think we had a transition from what truly was a free-market system to something now that is out of control and probably what I would define as a predatory system where we are not so much dealing anymore about the notion of fair prices, and the notion of markets that -- that work transparently an open late but in fact frequently markets that are manipulated for the end of maybe a few out there -- a few investors, mega-investors. It's even -- even that's very difficult to tell. We still don't know who in fact is making money while so many are losing money on Wall Street right now." Years ago, right after the American civil war, there was a bearded prophet in Europe, who studied the system and demystified it. While his predictions were off, his analysis still seems on target. Anyone remember Karl "Das Kapital" Marx?

"Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism."

Today long trips are taken not by road but by air, so we may need Captain Sully to fly us away on some magic carpet. The right is mobilizing against the sprectre of a phony socialism while the government is pumping money into the economy to save capitalism. They are back to red-baiting falsely claiming the USA is becoming the next USSR. We don't need more neo-cons or for that matter, neo-coms.

Wake up: government funding and private control do not socialism make. A broader mobilization is needed to stop the "Big C's" system meltdown.

WHAT NEXT? | James Kunstler Isn't that a question, though ... The Peak Oil story was never about running out of oil. It was about the collapse of complex systems in a world economy faced by the prospect of no further oil-fueled growth. It was something of a shock to many that the first complex system to fail would be banking, but the process is obvious: no more growth means no more ability to pay interest on credit... end of story, as Tony Soprano used to say.

There was a popular theory among Peak Oilers the last decade that the world would enter a "bumpy plateau" period when the global economy would get beaten down by peak oil, would then revive as "demand destruction" drove down oil prices, and would be beaten down again as oil prices shot up in response -- with serial repetitions of the cycle, each beat-down taking economies lower -- the only imaginable outcome being some sort of quiet homeostasis. This scenario did not play out as expected. It was predicated on a mistaken assumption that all systems would retain some kind of operational resilience while ratcheting down. Anyway, the banking system was mortally wounded in the first go-round and the behemoth is dying hard.

The last desperate act of the banking system in the face of Peak Oil's no-more-growth equation was to engineer species of tradable securities that could produce wealth out of thin air rather than productive activity. This was the alphabet soup of algorithm-derived frauds with vague and confounding names such as credit default swaps (CDSs), collateralized debt obligations (CDOs), structured investment vehicles (SIVs), and, of course, the basic filler, mortgage backed securities. The banking system is now choking to death on these delicacies.

The trouble is that the EMT squad brought in to rescue the banking system -- that is, governments -- can't remove these obstructions from the patient's craw. They don't want to drown in a mighty upchuck of the alphabet soup.

The collapse of complex systems is actually predicated on the idea that the systems would mutually reinforce each other's failures. This is now plain to see as the collapse of banking (that is, of both lending and debt service), has led to the collapse of commerce and manufacturing. The next systems to go will probably be farming, transportation, and the oil markets themselves (which constitute the system for allocating and distributing world energy resources). As these things seize up, the final system to go will be governance, at least at the highest levels.

If we're really lucky, human affairs will eventually reorganize at a lower scale of activity, governance, civility, and economy. Every week, the failure to recognize the nature of our predicament thrusts us further into the uncharted territory of hardship. The task of government right now is not to prop up doomed systems at their current scales of failure, but to prepare the public to rebuild our systems at smaller scales.

The net effect of the failures in banking is that a lot of people have less money than they expected they would have a year ago. This is bad enough, given our habits and practices of modern life. But what happens when farming collapses? The prospect for that is closer than most of us might realize. The way we produce our food has been organized at a scale that has ruinous consequences, not least its addiction to capital. Now that banking is in collapse, capital will be extremely scarce. Nobody in the cities reads farm news, or listens to farm reports on the radio. Guess what, though: we are entering the planting season. It will be interesting to learn how many farmers "out there" in the Cheez Doodle belt are not able to secure loans for this year's crop.

My guess is that the disorder in agriculture will be pretty severe this year, especially since some of the world's most productive places -- California, northern China, Argentina, the Australian grain belt -- are caught in extremes of drought on top of capital shortages. If the US government is going to try to make remedial policy for anything, it better start with agriculture, to promote local, smaller-scaled farming using methods that are much less dependent on oil byproducts and capital injections.

This will, of course, require a re-allocation of lands suitable for growing food. Our real estate market mechanisms could conceivably enable this to happen, but not without a coherent consensus that it is imperative to do so. If agri-business as currently practiced doesn't founder on capital shortages, it will surely collapse on disruptions in the oil markets. President Obama at least made a start in the right direction by proposing to eliminate further subsidies to farmers above the $250,000 level. But the situation is really more acute. Surely the US Department of Agriculture already knows about it, but the public may not be interested until the shelves in the Piggly-Wiggly are bare -- and then, of course, they'll go apeshit.

The recent huge drop in oil prices has left the public once again convinced that the world is drowning in oil -- if only the scoundrelly oil companies were forced to deliver it at reasonable prices. The public has been consistently deluded about this for decades. What's missing so far is for the president of the US to lay out the reality of the situation in a dedicated TV address. I know a lot of you think that Jimmy Carter already tried this and failed to make an impression (and ruined his presidency in the process). I guarantee you that Mr. Obama will have to do this sometime in the next few years whether he likes or not, and he'd be well-advised to get it done sooner rather than later. And by this I don't mean just vague allusions to "energy independence" or "renewables" in speeches devoted to many other issues. I mean telling the public the plain truth that we'll never offset oil depletion and the intelligent response is to do everything possible to transition to walkable towns and public transit, not to sustain the unsustainable.

The alternatives -- i.e. what we're trying now -- is to further delude ourselves into thinking that we can run WalMart and the suburbs by some other means than oil. Despite all our investments in these things, we won't be able to run them by other means, and the news about this had better get out before enormous disappointment turns into titanic rage. If Americans think they've been grifted by Goldman Sachs and Bernie Madoff, wait until they find out what a swindle the so-called "American Dream" of suburban life turns out to be.

On this blizzardy Monday in the power centers of America, attention is fixed on the never-ending fiasco of AIG -- a company whose main product turned out to be credit default swaps, and is now choking on them. Kibitzers on the sidelines of finance are forecasting a king-hell bear market suckers' rally in the stock markets followed by a belly flop to Dow 4000 or lower. I myself called for Dow 4000 two years ago -- and was obviously a bit off on my timing. All this is surely trouble enough. But while your attention is focused on Rick Santelli in the Chicago trader's pit, or Larry Kudlow desperately seeking "mustard seeds" of new growth in financials, try to let one eye stray to the horizon where these other complex systems are working out their next moves. Farming. The oil markets. These are the coming theaters of alarm and distress.

Obama Placing the Economic Cart Before the Horse | Peter Schiff/SeekingAlpha.com In his first televised speech before Congress, President Obama asserted that prosperity will return once the government restores the flow of credit in the economy. It may come as a surprise to him, but an economy cannot run on consumer loans. Furthermore, credit stopped flowing in the U.S. for a very good reason: there was no more savings left to loan. Government efforts to simply make credit available, without rebuilding productive capacity or increasing savings, are doomed to destroy what's left of our economy. The central tenets of Obamanomics appear to be that access to credit will enable people to borrow money to buy stuff, the spending will spur production and employment, and thus the economy will grow. It's a neat and simple picture, but it has nothing whatsoever to do with how an economy works. The President does not understand that consumption is made possible by production and that credit is made possible by savings. The size and complexity of modern economies has obscured these simple concepts, but reducing the picture to a small scale can help clear away the fog.

Suppose there is a very small barter-based economy consisting of only three individuals: a butcher, a baker, and a candlestick maker. If the candlestick maker wants bread or steak, he makes candles and trades. The candlestick maker always wants food, but his demand can only be satisfied if he makes candles, without which he goes hungry. The mere fact that he desires bread and steak is meaningless.

Enter the magic wand of credit, which many now assume can take the place of production. Suppose the butcher has managed to produce an excess amount of steak and has more than he needs on a daily basis. Knowing this, the candlestick maker asks to borrow a steak from the butcher to trade to the baker for bread. For this transaction to take place the butcher must first have produced steaks which he did not consume (savings). He then loans his savings to the candlestick maker, who issues the butcher a note promising to repay his debt in candlesticks.

In this instance, it was the butcher's production of steak that enabled the candlestick maker to buy bread, which also had to be produced. The fact that the candlestick maker had access to credit did not increase demand or bolster the economy. In fact, by using credit to buy instead of candles, the economy now has fewer candles, and the butcher now has fewer steaks with which to buy bread himself. What has happened is that through savings, the butcher has loaned his purchasing power, created by his production, to the candlestick maker, who used it to buy bread.

Similarly, the candlestick maker could have offered "IOU candlesticks" directly to the baker. Again, the transaction could only be successful if the baker actually baked bread that he did not consume himself and was therefore able to loan his savings to the candlestick maker. Since he loaned his bread to the candlestick maker, he no longer has that bread himself to trade for steak.

The existence of credit in no way increases aggregate consumption within this community, it merely temporarily alters the way consumption is distributed. The only way for aggregate consumption to increase is for the production of candlesticks, steak, and bread to increase.

One way credit could be used to grow this economy would be for the candlestick maker to borrow bread and steak for sustenance while he improves the productive capacity of his candlestick-making equipment. If successful, he could repay his loans with interest out of his increased production, and all would benefit from greater productivity. In this case the under-consumption of the butcher and baker led to the accumulation of savings, which were then loaned to the candlestick maker to finance capital investments. Had the butcher and baker consumed all their production, no savings would have been accumulated, and no credit would have been available to the candlestick maker, depriving society of the increased productivity that would have followed.

On the other hand, had the candlestick maker merely borrowed bread and steak to sustain himself while taking a vacation from candlestick making, society would gain nothing, and there would be a good chance the candlestick maker would default on the loan. In this case, the extension of consumer credit squanders savings which are now no longer available to finance other capital investments.

What would happen if a natural disaster destroyed all the equipment used to make candlesticks, bread and steak? Confronted with dangerous shortages of food and lighting, Barack Obama would offer to stimulate the economy by handing out pieces of paper called money and guaranteeing loans to whomever wants to consume. What good would the money do? Would these pieces of paper or loans make goods magically appear?

The mere introduction of paper money into this economy only increases the ability of the butcher, baker, and candlestick maker to bid up prices (measured in money, not trade goods) once goods are actually produced again. The only way to restore actual prosperity is to repair the destroyed equipment and start producing again.

The sad truth is that the productive capacity of the American economy is now largely in tatters. Our industrial economy has been replaced by a reliance on health care, financial services and government spending. Introducing freer flowing credit and more printed money into such a system will do nothing except spark inflation. We need to get back to the basics of production. It won't be easy, but it will work.

President Obama would have us believe that we can all spend the day relaxing in a tub while his printing press does all the work for us. The problem comes when you get out of the tub to go to dinner and the only thing on your plate is an IOU for steak.

Newstex ID: DAVE-0002-32464511

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