The message for all of us here is that the global financial system tried to squeeze far more growth out of the financial system than it was ever capable of providing. In the end it all turned into liar’s poker until that fateful day that the music stopped. A few got rich and many will be now hunted down as governments begin to discover that their tax revenues are in decline.
This is a pretty fair analysis and what is disturbing is that our political leaders simply have not understood what else is in store financially. The taxpayer has now got capital loses to claw back past taxes with. The economy is shrinking. It is not even faking it behind inflation. Everyone is going to be buying cheaper cars and everyone’s asset based credit has hugely shrunk. That means everyone is rebuilding their credit and free cash.
Fortunately, a lot of that economy is not leveraged and will come through fine. So the blood is beginning to flow again.
The financial system has been destroyed and is been recapitalized by the government printing press. This is not over yet. The banks must make good on all the money they owe while praying that their assets begin performing. It will not get worse only because the banks cannot sell their assets. Any refinance is focused on keeping what is already on the books afloat.
The way that the system is leveraged, the majority of assets are now worth less that the debt they collateralize. When this occurs, the bank is in the position were a forced sale actually revalues the balance of the portfolio at an even lower price. In other words they not only collect a fraction of the specific debt, they crystallize the direct loss as a hit on capital and then they absorb a massive additional write down on their asset base as an additional hit on capital.
So right now, the banks are zombies because they have no free capital to lend and they cannot improve balance sheets by sale of assets. And while we are at it, these banks will not be ever playing with reckless 40 to 1 ratios ever again. They are going back to 12 to 1 and learning to like their boring business. This all demands much more capital.
And as I have repeated many times, do not worry about inflation because that has already been put into the system. Now we must restore the massive losses of bank and industrial capital inflicted.
In the meantime, we are also about to start buying cheaper government, like it or not. And as Paul Krugman recognizes, the financial sector is been forcibly down sized and reengineered. It is not over yet, and the apparent lack of imagination is scary.
Paul Krugman: The market mystique
On Monday, Lawrence Summers, the head of the National Economic Council, responded to criticisms of the Obama administration's plan to subsidize private purchases of toxic assets. "I don't know of any economist," he declared, "who doesn't believe that better functioning capital markets in which assets can be traded are a good idea."
Leave aside for a moment the question of whether a market in which buyers have to be bribed to participate can really be described as "better functioning." Even so, Mr. Summers needs to get out more. Quite a few economists have reconsidered their favorable opinion of capital markets and asset trading in the light of the current crisis.
But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.
The market mystique didn't always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.
And the financial system wasn't just boring. It was also, by today's standards, small. Even during the "go-go years," the bull market of the 1960's, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.
It all sounds primitive by today's standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.
After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960's. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.
And finance became anything but boring. It attracted many of our sharpest minds and made a select few immensely rich.
Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans —
all went into the financial system's juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.
But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.
Sooner or later, things were bound to go wrong, and eventually they did. Bear Stearns failed; Lehman failed; but most of all, securitization failed.
Which brings us back to the Obama administration's approach to the financial crisis.
Much discussion of the toxic-asset plan has focused on the details and the arithmetic, and rightly so. Beyond that, however, what's striking is the vision expressed both in the content of the financial plan and in statements by administration officials. In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago.
To be fair, officials are calling for more regulation. Indeed, on Thursday Tim Geithner, the Treasury secretary, laid out plans for enhanced regulation that would have been considered radical not long ago.
But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.
As you can guess, I don't share that vision. I don't think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good.
I don't think the Obama administration can bring securitization back to life, and I don't believe it should try.
Here we have an anecdote for the worst of the doom and gloom. If you ever get really nervous, recall that today it is all about cash in you pocket and there is little likelihood of that disappearing. What governments have failed to recognize is that cash must be fed to the people who are now having their credit destroyed by busted banks.
Sorry Collapsitarians, Doomers and Dystopians a Full Collapse Will Not Happen
Collapsitarians are described the Technium.
Former President Reagan defined a recession as when your friend lost his job, and a depression as when you lost your job. Collapse is when no one has a job; in fact there are no longer any such things as jobs to be had.
Various types of doomers/collapsitarians/dystopians:
* Luddites, anarchists, and anti-civilization activists who are trying the hasten collapse as soon as possible.
* Survivalists: collapse as the penalty for modern liberalism.
* Radical environmentalists who see ecological and environmental collapse
* Anti-globalists who see collapse as the penalty for globalism.
* Anti-Americans rooting for collapse of America and developed world
* Financial doomers: who see the never ending Depression
* Peak Everythingers who see all resources running out
Plenty of other places online describing these scenarios of decline, war, and collapse to 0 to 2 billion people starting as early as this year and usually by 2025 but no later than 2100. One thing of note is that most people usually think that Hitler and Stalin were bad guys for killing or causing the death of about 100 million people. Most of the civilization die off scenarios are that level of death each and every year for 70 years. 1000 times the number of deaths in the holocaust. Why is there the belief that significant mitigation efforts would not be made ?
Why it Won't Happen
1. Efficiency, conservation and an energy plans can be enhanced beyond current levels with minimal strain. There has been partially voluntary reductions in energy demand during the credit crisis. 10% reductions with minimal effort and 20% reductions with more austerity.
2. Rationing of food, fuel and clothes was successfully maintained in many countries during World War 2. Any resource decline or environmental situation can have governments use rationing to buy time for a transition.
Thus it shows that oil and food supplies can be greatly reduced while maintaining a war-level mobilization.
90% reductions can be handled in this way and possibly more.
3. Some simple and rapid transitions are possible. Ban or confiscate large gas guzzling vehicles and only allow light weight all electric or super-efficient vehicles other than freight trucks and heavy delivery trucks. In less than one year a mobilized effort with shifts in the weight of vehicles permitted and loosened safety and bureaucratic regulations to speed the changes.
4. Rapid switchover for the electricity generation infrastructure. A war-time level mobilized switchover for electricity generation could be achieved quickly. Lift regulatory restrictions on nuclear power. Weld together containment domes to get around production limitations on large forgings. Use the staff of coal plants for the new nuclear plants. The staff of early nuclear plants did come from the coal plants. Nuclear staffing levels were 200 or less originally.
5. In regards to global warming and environmental concerns:
* a rapid switchover to totally clean power would stop the air pollution of coal and most oil and would greatly reduce any additional CO2
* geoengineering can be used to reduce global temperatures if necessary
* if the beliefs of climate change being from man-made sources are right then we are already geoengineering by accident as a side effect of our industry. It will be cheaper and easier to geoengineer to cancel those accidental side effects with intentional reversal efforts
7. If there was a global war over resources. There would be clear winners. In all out war there would be clear losers. The US would not lose.
8. There is plenty of technology now and a lot more that will be available soon to innovate away doomer scenarios.
* biofuels and synthetic fuels are already at about 10% of total fuel levels. If there was a need to replace all oil tomorrow a combination of world war 2 level rationing and biofuels and synthetics would be sufficient (Germany invented to coal to liquid fuel technology back in World War 2.)
* There are significant levels of hydroelectric, wind, and nuclear power
* If any of the challenges can be staved off for ten years or so there will be significant transitions to new technology (electric and hybrid vehicles) and the availability of more new technology
9. Financial doom scenarios
* Mandated resets of debt forgiveness, re-issuing script etc... can be used to reboot a country or a financial system
* People and systems for production would still exist even if there was 1000 trillion in debt 10. All out nuclear war would kill less than 50% of the population. Current nuclear arsenals are reduced by ten times from the peak.
There are valid extinction risks and scenarios with several listed and discussed at the Lifeboat Foundation.
Generally the extinction effects have to be so rapid that their is no time to mitigate or adapt. Space based phenomena like massive asteroid or a nearby gamma ray burster are the kind of situation that we currently could not handle. This is why there is need to stop pissing around with penny ante crap and get serious about moving civilization to full Kardashev level II. At that level there is no known threat other than all out super-war that would be a risk to such a civilization. Even things like the sun going nova could be detected and handled as such a civilization would have its own highly efficient nuclear fusion and other power sources.