I was visiting with a good friend this weekend and at one point in our meandering conversation we passed a moment of nostalgic reflection on an old computer game for the Commodore-64--(remember that?)--called "M.U.L.E." Basically the game was an exercise in supply and demand economics, and how markets work to set prices as buyers bid for commodities. You can read up on this 1983 classic here, and I'll come back to this in a moment.
How did M.U. L. E. make it into my early morning brain today? The Washington Post published a quote from White House insider Larry Summers clearly spinning out a thesis that the worst was over in our recent financial crisis, and like Bernanke, he took a little credit for it all. "Lawrence H. Summers compared the government's actions to a successful but evolving response to a natural disaster. "We are making a clear transition from rescue as the priority of public policy to sustained recovery," he told reporters in a briefing Friday afternoon. "We have moved back from the brink of financial catastrophe." Sustained recovery? Watch what happens to car sales next month without the $4000 government credit Cash for Clunkers offered. And watch what happens to housing sales when the $8000 tax credit for first time home buyers expires soon. Then we get back to reality--sustained decline.
Let me beg to differ with Mr. Summers. What we have done is to quietly agree, in the back rooms of Congress, the Treasury Department, and the Fed, that the core beams of our financial system, (BofA, Citigroup, JP Morgan Chase, Wells Fargo) are simply too big and important to fail--even though they have failed and are technically insolvent. But we have decided instead to change the way the bad debt these institutions carry is reported, and then backstopped them with truckloads of freshly printed cash and trillion dollar lines of credit at the Fed--sums of money that exceed the total money our government has spent to fight every war in it's history, and fund every major purchase or program (like the moon race) to boot. $13.8 trillion is one hell of a truss system thrown up to support the banking structure. This was what saved the core of the financial system--not a real resolution of the bad debt they carry, but simply an agreement not to acknowledge that debt, and the creation of massive allotments of digital dollars on the computer systems of the Fed.
Nobel Prize winning economist Joseph Stilgitz agrees, and was quoted in Bloomberg today as saying: "In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis." Get that? Things are even worse now in the core financial companies than before the collapse last year--and this is after the $13.8 bailout and Fed program billion bonanza they received. So in what way have we stepped back from the brink? By jumping over the cliff?
We now have now what I call a false illusion of recovery and stability. This was accomplished because the powers that be realized, in the end, that these gentlemen's agreements are the way anything in the world is assigned value, from a comodity like food, a "real asset" like a house, to a hunk of metal like gold, or a printed piece a paper we now call a "Federal Reserve Note." A thing is worth only what people agree it is worth, and the way we sample the general consensus of opinion as to what a thing is worth is called a "free market." Things in this market get put up for sale, and buyers make offers, competing with one another to get what they need--just like that nifty little game called M.U.L.E. But in this case the government, and the Fed, simply decided to overrule the price discovery of the free market and intervene directly to decide what value "toxic" securities will have--rather they changed rules to allow banks to simply assign this value, and the multiple trillions in securities are simply penned in at values that the banks could never collect if these same securities were offered up on the "free market" ...or in a game like M.U.L. E.
One play balancing feature of the game was a series of seemingly random events that would happen each turn. Players could lose valuable equipment in natural disasters, or win a windfall bonanza when something like good weather increased their solar energy harvest. And you could also go out and hunt a creature called the "Wumpus" to get more points if needed. But no matter how well you played the game with superior trading strategies, the Space Pirates could show up and simply steal away a huge chunk of your wealth. This was programed in to keep the game relatively even for most players, though eventually one player had to win.
It occured to me that the Space Pirates on Wall street have had a pretty good run in the last year--stealing away wealth from the public trust--from you and I as taxpayers and from those that will fill that role for generations to come. None of it has really been "paid" mind you. The Federal government doesn't collect enough tax money to even keep its bloated administrative mechanism running each year. It is currently $1.38 trillion in the red--just ten percent of that $13.8 trillion in new debt that was "created" to backstop the banks. So this was what "stabilized" the financial system--the creation of massive new debt, all while we refuse acknowledge or write down the collosal debt that is already on the balance sheets...somewhere. Talk about fighting fire with fire!
But in M.U.L.E. you eventually came to realize these programmed events were a part of the game, and planned accordingly. I guess that is what Wall Street has done to engineer this wonderful Bear time rally we've seen the last six months. While the real economy--the buying and selling on Main Street, has seen not a whisper of a rally, the trading of stocks from companies that service that economy has been brisk and profitable. What a game! Jim Kunstler summed up the situation we have now very nicely in his Sept 14 post today: "What we've seen in the vaunted rally for the last six months is the triumph of wishing over facts, combined with the most arrant market manipulation by floundering banks backstopped by a panicked government -- all pounding sand down a rat-hole of hopeless non-performing debt, while pretending that the machinery of capital finance still grinds on."
Me? Since I can't set federal or "Fed" monetary policy, I'm going out to enjoy life and hunt the Wumpus.
How did M.U. L. E. make it into my early morning brain today? The Washington Post published a quote from White House insider Larry Summers clearly spinning out a thesis that the worst was over in our recent financial crisis, and like Bernanke, he took a little credit for it all. "Lawrence H. Summers compared the government's actions to a successful but evolving response to a natural disaster. "We are making a clear transition from rescue as the priority of public policy to sustained recovery," he told reporters in a briefing Friday afternoon. "We have moved back from the brink of financial catastrophe." Sustained recovery? Watch what happens to car sales next month without the $4000 government credit Cash for Clunkers offered. And watch what happens to housing sales when the $8000 tax credit for first time home buyers expires soon. Then we get back to reality--sustained decline.
Let me beg to differ with Mr. Summers. What we have done is to quietly agree, in the back rooms of Congress, the Treasury Department, and the Fed, that the core beams of our financial system, (BofA, Citigroup, JP Morgan Chase, Wells Fargo) are simply too big and important to fail--even though they have failed and are technically insolvent. But we have decided instead to change the way the bad debt these institutions carry is reported, and then backstopped them with truckloads of freshly printed cash and trillion dollar lines of credit at the Fed--sums of money that exceed the total money our government has spent to fight every war in it's history, and fund every major purchase or program (like the moon race) to boot. $13.8 trillion is one hell of a truss system thrown up to support the banking structure. This was what saved the core of the financial system--not a real resolution of the bad debt they carry, but simply an agreement not to acknowledge that debt, and the creation of massive allotments of digital dollars on the computer systems of the Fed.
Nobel Prize winning economist Joseph Stilgitz agrees, and was quoted in Bloomberg today as saying: "In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis." Get that? Things are even worse now in the core financial companies than before the collapse last year--and this is after the $13.8 bailout and Fed program billion bonanza they received. So in what way have we stepped back from the brink? By jumping over the cliff?
We now have now what I call a false illusion of recovery and stability. This was accomplished because the powers that be realized, in the end, that these gentlemen's agreements are the way anything in the world is assigned value, from a comodity like food, a "real asset" like a house, to a hunk of metal like gold, or a printed piece a paper we now call a "Federal Reserve Note." A thing is worth only what people agree it is worth, and the way we sample the general consensus of opinion as to what a thing is worth is called a "free market." Things in this market get put up for sale, and buyers make offers, competing with one another to get what they need--just like that nifty little game called M.U.L.E. But in this case the government, and the Fed, simply decided to overrule the price discovery of the free market and intervene directly to decide what value "toxic" securities will have--rather they changed rules to allow banks to simply assign this value, and the multiple trillions in securities are simply penned in at values that the banks could never collect if these same securities were offered up on the "free market" ...or in a game like M.U.L. E.
One play balancing feature of the game was a series of seemingly random events that would happen each turn. Players could lose valuable equipment in natural disasters, or win a windfall bonanza when something like good weather increased their solar energy harvest. And you could also go out and hunt a creature called the "Wumpus" to get more points if needed. But no matter how well you played the game with superior trading strategies, the Space Pirates could show up and simply steal away a huge chunk of your wealth. This was programed in to keep the game relatively even for most players, though eventually one player had to win.
It occured to me that the Space Pirates on Wall street have had a pretty good run in the last year--stealing away wealth from the public trust--from you and I as taxpayers and from those that will fill that role for generations to come. None of it has really been "paid" mind you. The Federal government doesn't collect enough tax money to even keep its bloated administrative mechanism running each year. It is currently $1.38 trillion in the red--just ten percent of that $13.8 trillion in new debt that was "created" to backstop the banks. So this was what "stabilized" the financial system--the creation of massive new debt, all while we refuse acknowledge or write down the collosal debt that is already on the balance sheets...somewhere. Talk about fighting fire with fire!
But in M.U.L.E. you eventually came to realize these programmed events were a part of the game, and planned accordingly. I guess that is what Wall Street has done to engineer this wonderful Bear time rally we've seen the last six months. While the real economy--the buying and selling on Main Street, has seen not a whisper of a rally, the trading of stocks from companies that service that economy has been brisk and profitable. What a game! Jim Kunstler summed up the situation we have now very nicely in his Sept 14 post today: "What we've seen in the vaunted rally for the last six months is the triumph of wishing over facts, combined with the most arrant market manipulation by floundering banks backstopped by a panicked government -- all pounding sand down a rat-hole of hopeless non-performing debt, while pretending that the machinery of capital finance still grinds on."
Me? Since I can't set federal or "Fed" monetary policy, I'm going out to enjoy life and hunt the Wumpus.
