Saturday, September 24, 2011
September 24 2011: Get Rid of the Clowns
Unknown Clown Eats Boy September 1953
Fun House, Santa Cruz, California Beach Boardwalk
The Automatic Earth
Ilargi:
Don't you love farce?
My fault I fear.
I thought that you'd want what I want.
Sorry, my dear.
Kick out the clowns.
Get rid of the clowns.
Don’t bother, they're here.
• Stephen Sondheim
Where we find ourselves today has just about all been entirely predictable, as readers of The Automatic Earth know only too well; we've predicted most of what's happening now pretty accurately (going forward, remember what we've said about the dollar and about gold). Not predictions of the exact timing, but that's not the essence, except perhaps when you're a day trader; but even they have children.
The essence is the very simple fact that a debt crisis can't be averted with more debt (again, barring warfare, zero-point energy and meteor strikes). And that a debt crisis of the present magnitude inevitably leads to a credit crunch that paralyzes entire economies, in this case even the whole global economy as we have come to know it.
Once you accept that, measures completely different from what we have seen so far and what is now being touted once more, are called for. But we're not getting these different measures; it's as if those who "lead" the world are able to live and think in two dimensions only, whereas comprehension of a third dimension is needed to understand the issues at hand.
All these so-called leaders refuse to accept the possibility that monetary and fiscal policy may not hold the tools to fix the mess and get back to normal, or whatever passes for it. Yes, there’s a political crisis. But it's not that they can't get their act together to dump more public funds into the alleged right places, it's that dumping public funds is the only measure they can think of.
The underlying idea is that if banks' assets (debts) would be marked to market right now, the banks would be broke. By injecting trillions more, the hope is that asset values will recover. Still, that is not what has happened so far; the opposite has happened. It's the notion that markets are cyclical, hence they must come up again. But even if that's true, cycles can be long, and the banks don't have decades to save themselves.
Short version: by issuing trillions more in debt, governments and central banks -apparently- hope they can turn around financial markets, and have them recover to heights that would turn today's losses into tomorrow’ profits (or at least more bearable losses).
There are lots of voices that will tell you that we didn't need to be where we are, that things could have been done: (If Leadership Fails, Prepare for Recession!). They all mean more or less the same things: capital injections into the financial industry. A financial industry that is by and large broke and now depends on money from governments and their taxpayers all of whom are by and large broke.
Amidst all the fear and panic and selling, let me repeat what I've said a thousand times by now: there is no way out of this crisis that does not involve defaults on debt, restructuring of debt and bankruptcies caused by debt. Nothing else will achieve anything other than window dressing. In other words: all we've seen so far has been window dressing, and of a very expensive kind.
Yes, it’ll be tough, yes, it’ll be severe, yes, it’ll be brutal. But isn't it true that nothing's more brutal than having to listen day after day year after year to over-paid clowns lying through their teeth and other body parts and then in in the end still wind up in a situation that's in all likelihood even worse than where you would be if you’d have shut them out from the start?
The real problem is not, as a plethora of voices is now proclaiming, that governments have a hard time reaching consensus on recapitalizing the banking system. The real problem is that they are still, despite all the trillions squandered on exactly this approach, even considering doing so.
When we hear Lagarde, or Zoellick, or anyone of the "trusted" media pundits, say that all that's really needed is for "leaders" to "get their act together", what they mean is that a lot more money should be pumped into the financial system, and into broke governments. For people like Paul Krugman and his ilk, there is only one possible problem with stimulus measures: that they're too small. In other words: if a stimulus measure is large enough, it will solve any problem.
However, that idea of course carries its own problem: that the agent that does the stimulating will itself get into financial trouble. And who then will bail IT out? These ideas are based on the notion that no amount of debt can be large enough to overwhelm an entire financial system, or economy. That is not a very intelligent notion, if you ask me. It carries with it the idea that debt can be cancelled out with more debt.
The IMF’s Global Financial Stability Report this week suggested that European banks could be "saved" with a capital injection of perhaps around $400 billion. But the IMF, like everyone with a pair of functioning neurons, knows full well that that wouldn't save the banks. It would only and simply allow them to live another day or two. And then the game would start anew, exactly like it has over the past, let's say, 50 months. This is true of all stimulus, all QEs, all of it.
That is, unless a miraculous growth spurt appears out of the blue and against all the odds dictated by reality as we know it today. In other words, more capital injections simply and only mean more double or nothing gambling. We need restructuring, not replenishing. We need to sleep this one off, not get a refill.
This is not a simple difference of opinion, where one option is as valid as the other. There is no way the Lagardes and Zoellicks of the world can "know" that what they propose will achieve what they say it will. They refuse to believe - at least in public, let me add-, and therefore even consider, that the banks and indeed the entire system can go belly-up. And they also refuse to believe that throwing more money into the pit will not at some point be enough to fill that pit.
We need to get rid of these clowns. Unfortunately, I have very little faith that we actually will, if only because in the end, as much as our "leaders", we all are the clowns. As the Sondheim song goes: "Don't bother, they're here". Getting rid of the clowns is an almost entirely hypothetical situation, in the exact same way that solving debt with more debt is.
What governments need to do at this stage, and it's years overdue, is to ringfence their citizens, in order for them not to lose even more money than they already have. And then to combine that with a massive restructuring, with many defaults and bankruptcies, of the banking system (but without losing citizens' deposits) and the non-banking system that carry too much debt on their books.
Our present day "democratic" political systems are woefully inadequate to kick out the clowns and replace them with people that make sense, and are willing to do so for the masses.
But until we get a system that is capable of achieving this, we are in for a whole lot more misery.
Behind a painted smile.
September 24 2011: Get Rid of the Clowns
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