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The Risk Economy
Kunstler.com ^ | May 5, 2008 | James Howard Kunstler

Posted on 05/05/2008 5:43:20 PM PDT by Lorianne

As the West's industrial regime sputters toward a cheap-energy-crackup conclusion, there have been attempts to recast what our economy is actually about, how to account for whatever wealth we manage to produce, and project what our society will actually be organized to do in the years ahead.

For a while in the 1990s, the idea was a "service economy," kind of like the old fable of the town whose inhabitants made a living by taking in each other's laundry -- only in our case it was selling hamburgers to tourists on vacation from their jobs making hamburgers elsewhere, or something like that.

Then came the idea of the "information economy" in which making things of value would no longer matter, only the processing and deployment of information (sometimes misidentified as "knowledge"). This model seemed to suggest a yin-yang of software engineers who made up games like "Grand Theft Auto" serving the opposite cohort of people who bought and played the game. If nothing else, it certainly explained how lifetimes could be frittered away on stupid activities.

That illusion yielded to the housing bubble economy, which actually did produce a lot of things, but not necessarily of value -- for instance, houses made of particle board and vinyl 38 miles outside of Sacramento. It was a tragic and manifold waste of resources, as well as an insult to the landscape. But the darker side of the housing bubble lay in the world of finance, where a vast empire of swindles was constructed to support the Potemkin facade of production homebuilding.

Now we are in a strange period when those swindles are unwinding. The people who run the finance sector -- the Wall Street investment banks, hedge funds and ratings agencies, the Federal Reserve, and the US Dept of the Treasury -- in desperately trying to prevent the unwind, have rapidly ramped up another new economy based entirely on the buying and selling of risk. Risk, as a pure abstraction unconnected to any real capital activity, is all that's left to buy and sell after all other plausibly practical vehicles for finance have failed.

While a lack of transparency in the individual risk vehicles has been an object of complaint over the past year, the system as whole is transparently absurd. The system is also abstruse enough to prevent most mortals (including many employed in the system) from understanding its operations. But the general public and the news media are virtually helpless to intervene in this last gasp racket, so the probability increases that it will do tremendous damage to whatever remains of the US economy.

One feature of the risk economy is the Federal Reserve's new willingness to absorb any sort of crap collateral in exchange for massive cheap loans to insolvent companies and institutions. The Fed has, in effect, made itself the world's largest financial shit-magnet. It has already taken in a few hundred billion in securities based on non-performing real estate loans, and has now opened the window to securities based on non-performing credit card debt, car loans, and other miscellaneous IOUs still drifting un-hedged in the banking ether.

It's a mark of our collective desperation to avoid the consequences of so much reckless behavior that no credible authorities have stepped up to denounce this racket -- no Fed governor, no politician of standing (including the candidates for president), no newspaper-of-record. The Attorney-general of New York, Andrew Cuomo, may be quietly cooking up some cases in the deep background, but the SEC and the federal banking regulators hung up their "out-to-lunch" signs on this long ago.

Meanwhile, the basic situation is this: the world is awash with bad investment paper. The standard of living in the US can't be supported on debt anymore. The people of the US don't produce enough real value to service their debts. Institutions can no longer be supported on debt gone bad. Something's got to give -- meaning something has to bring the US standard of living down to a level consistent with our declining actual wealth.

Everything else going on right now is a dodge. The Fed maneuvers, the "coordinated actions" of the western central banks, the postponements of default, the non-disclosure of contents in bank portfolios, the pretense that risk alone is a kind of fungible resource that can be endlessly traded to generate fees -- all this fucking nonsense will only make the eventual unwinding much worse.

Personally, I doubt that it can go on more than a few more months. The velocity of everything is going up past the "red line" where things really fly apart. The increased velocity of non-performing mortgages and deadbeat credit card accounts is one thing that can't be hidden or escaped. America will feel and see very vividly when the repossession teams rush families from their homes, when the pickup truck is taken away, and when the pink slip appears in the pay envelope.

Meanwhile all the higher-end banking shenanigans will only debase the dollar and make it more difficult for people already in distress to buy gasoline and food.

If the bankers and treasury officials collude to prop up one more failing big bank a la Bear Stearns, the political fallout for Wall Street could be lethal. In any case, I think we will have a way different sense of ourselves as a society by the time the election comes.


TOPICS: Business/Economy
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To: AndyJackson

No answer? LOL!


21 posted on 05/05/2008 9:15:39 PM PDT by Toddsterpatriot (Why are doom and gloomers, union members and liberals so bad at math?)
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To: AndyJackson
"...why the FED is buying up stuff..."

This sounds like a great question.  I'll be happy to offer an explanation of why the Fed's buying something, but first you'll need to tell us if you're talking about the Fed loaning money or guaranteeing other people's loans.  If there's a case where the Fed's actually buying something, please tell us just what it is.

Thanks.

22 posted on 05/06/2008 3:37:45 AM PDT by expat_panama
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To: Toddsterpatriot

LOL!


23 posted on 05/06/2008 6:31:17 AM PDT by AndyJackson
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To: AndyJackson
Poor Andy, so many stupid comments, so little time. LOL!
24 posted on 05/06/2008 6:46:58 AM PDT by Toddsterpatriot (Why are doom and gloomers, union members and liberals so bad at math?)
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To: Toddsterpatriot

Poor Todd. Knows everything. Is wise about nothing.


25 posted on 05/07/2008 5:58:12 AM PDT by AndyJackson
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To: AndyJackson
I'm just glad we could show you that M2 can grow without the help of the Fed. That MZM can grow even if the Fed holds M1 steady.
26 posted on 05/07/2008 6:02:29 AM PDT by Toddsterpatriot (Why are doom and gloomers, union members and liberals so bad at math?)
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To: Toddsterpatriot
That MZM can grow even if the Fed holds M1 steady.

That was never disputed.

I'm just glad we could show you that M2 can grow without the help of the Fed

We are just going to have to continue to disagree on this point. Sure if there are excess reserves lending can expand, but the banking system does not generate legal tender (money acceptable by the US government to settle government debts) all on its own without the FED.

Finally, I think you will subscribe to the previously agreed upon point that banks cannot lend money that is not somehow or other on deposit with the bank, i.e. if my customers deposit $1,000,000, I the bank will go bankrupt when I attempt to issue $2,000,000 in checks for deposit in other banks based on loans that I attempt to originate.

27 posted on 05/07/2008 12:50:10 PM PDT by AndyJackson
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To: AndyJackson
That MZM can grow even if the Fed holds M1 steady.

That was never disputed.

Except by you.

I'm just glad we could show you that M2 can grow without the help of the Fed

Sure if there are excess reserves lending can expand

Excellent!

Finally, I think you will subscribe to the previously agreed upon point that banks cannot lend money that is not somehow or other on deposit with the bank, i.e. if my customers deposit $1,000,000, I the bank will go bankrupt when I attempt to issue $2,000,000 in checks for deposit in other banks based on loans that I attempt to originate.

As I've said over and over, banks can't lend out money they don't have on deposit (unless they borrow).

Glad you understand now that M2 and MZM can grow when new loans are made. Even if the Fed doesn't lift a finger. It was hard work but you finally learned something new. I'm glad I could help :^)

28 posted on 05/07/2008 1:43:01 PM PDT by Toddsterpatriot (Why are doom and gloomers, union members and liberals so bad at math?)
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