Monday, October 6, 2008

Confidence Game

Now, there will be all kinds of explanations for what has happened to the Financial Markets and Why the Bailout Isn't Working. But perhaps the best explanation I've heard so far has come from "This American Life" on NPR.

The System is a Confidence Game, a Protection Racket, a Ponzi Scheme, and the System failed because it's based on nothing but what can be squeezed from "below." And when "below" ain't got nothin', or it seems like it, Boom Goes the Dynamite, and it all falls to pieces.

That's what happened.

The massive infusion of money from the Treasury in the end will not affect the outcome measurably at all. The Game itself has stopped. Or at least the portion of it that the cash infusion is supposed to "help."

Parts of the Financial System are still working. Loans are still being made, credit is still available and the wheels of industry are still idly turning (not that we have much industry left). Some of the price inflation that has made people's lives so miserable has mitigated. What collapsed was not at the root of the System of Finance and Capital but was on the margins, in all those strange derivatives and credit default swaps and what have you, margins that were pumping lots and lots of essentially bogus and worthless "value" into the System, through a Protection Racket and a Con Game. Lots of workers in the Financial field got rich playing this game, and of course they didn't want it to stop.

But it had to. And when it did, POOF! All that "value" that was never really there in the first place, disappeared. And lots of people in the Financial Industry started screaming. The Bailout/Extortion was designed to prop up the marginal Phony Value sector until the most of the players had a chance to get out of it. It's not just too little too late, though. All these marginal products had become disbursed throughout the System, padding bottom lines here, there and everywhere. All this toxicity needs to be removed through some sort of purge of the System. The Extortion Scheme is supposed to buy up all the toxicity and remove it in an orderly manner. But because of the way things are mixed up in the System, that may be easier said than done. There may be a lot of failures of "fundamentally sound" institutions because the toxicity can't be separated any more.

This may be why the Graybeards and Wise Guys who run the System have been reluctant about or resistant to the notion of actually helping out at the bottom of this teetering pyramid of debt, by helping homeowners who are facing foreclosure. The foreclosure and subprime crisis has been going on for years. Millions upon millions of homes purchased in the last few years have been seized and families forced out of what they thought were their homes. It's tempting to blame them and ignore the elements above them in the System that caused the problem in the first place. But the reluctance of the System to help them in this crisis -- and there is certainly no urgency whatever to assist homeowners in a bind -- seems to have more to do with the fact that the System doesn't see the problem in foreclosures. In other words, it's never been about those subprime mortgages. In fact, the majority of those allegedly "toxic" mortgages are still performing fine.

The problem -- as far as the Wise Guys are concerned -- is well above the individual mortgage level and the value of individual properties. They really don't care what happens at that level. If it mattered to them, they would have called for intervention long ago.

No, the problem is all the "Protection" that's been sold and re-sold based on artificial and inflated values (not just mortgage and real estate values), "Protection" that is essentially worthless.

THAT'S what the problem is, that's what the Extortion is being demanded to cover.

There isn't enough money in any combination of treasuries to do it. Since it was all based on fantasy -- if not outright fraud -- anyway, the notion of covering these bets out of tax revenues (or more borrowing) gets into realms of faith and belief that beggar description.


It seems that the Masters of the Universe are trying to use the Hooverite pre-Great Depression methods to prop up the System, by covering some of the bets at the top of the teetering pyramid, and they will find (like Hoover did) that it doesn't work. It makes things worse. This time, though, the Masters have convinced themselves that it will work.

It's way too late to prevent the Finance System's problems, but it may not be too late to shift the focus from the "top", however.

As has been pointed out, some of the System, the traditional loan and credit portions of the System that don't rely on all the toxic products for "value," are working more or less well. There is some difficulty in some sections, but be wary of the auto industry's plaints, for example. They are claiming they can't get loans to purchase inventory on the one hand, but on the other hand, they're saying their showroom traffic is down by half or more. And they are trying to make out that the customer can't get loans, which isn't exactly true. The dealers can't get loans for inventory purchases. But they can't sell the inventory right now anyway. So what are so fretful about? They don't need the inventory. They can't sell it. Nobody is in the market for a new car right now.

So it is with many of the businesses claiming inability to get credit. It doesn't mean that credit isn't tighter than it was; it's just that things are not necessarily as bad as some of the louder voices want to make out.

Which doesn't mean they won't get much worse.

The focus has to shift from the "top." The Masters of the Universe got their demands met, more or less, but it won't do them much good. If the masses are unable to buy and sell and live relatively decently because they can't get jobs or they don't have homes, or whatever the case may be, then all the fussing over and currying of the Masters isn't going to make much difference. Attention has to shift immediately to the conditions ordinary people are facing -- should have actually been focused there all along -- and efforts to increase employment, fund infrastructure, energy transition, health care and education, and any number of domestic priorities has to enter the equation. Incomes for the masses have to rise, and those of the rich have to fall.

Fundamental to what needs doing is the revival of the notion of Public Interest, and Public Good.

When we get to that point, then we'll know the Reagan Revolution is well and truly over.

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