10.10.08

The Correction

How wrong Jonathan Franzen turned out to be. The little rubber squares protecting our economy were just a cruel ruse. Our world is still fully capable of calamitous collapse. We may have had safety features, but the seatbelt only works if you buckle it.

Who to blame? Well you can say Reagan, Clinton, the Bushes, the Democratic Congress, the Republican Congress, the Chinese, the Europeans, Dick Fuld, Fannie Mae, Freddie Mac, Republicans, Democrats, Alan Greenspan, and Ayn Rand, and you wouldn't be wrong. They can all share. But equally culpable is just about every American who has lived during the past twenty years. I thought Gawker actually put the list quite nicely. In fact, the regular citizens' portion of the blame doesn't have to stop at our borders. I would say the only people on the planet who don't deserve any blame for the financial crisis are the very young, and most Sub-Saharan Africans.

The rest of us have benefitted somehow. Everyone's gotten a credit card, a car loan, a student loan, a mortgage, 2nd mortgage, 3rd mortgage, refinanced mortgage... whatever, that was enabled by the byzantine financial web of subprime loans, credit default swaps, and/or the $531 trillion global derivatives market. Unfortunately, pleading ignorance doesn't cut it. If you, Mr. Subprime Predatory Lender Victim Homeowner, want to plead ignorance, then you gotta let Dick Fuld do the same.
The fact is no one really knows how exposed anyone is to these markets or where the next bank collapse will occur. When I cite the $65 trillion credit default swap market or the $531 trillion derivatives market, don't take those numbers at face value. The numbers are not indication of the value of those markets, but rather the impossibility of determining, in an unregulated system, whose money is whose. Especially when it changed hands a half-dozen times on the way there.

Is Dick Fuld more culpable than Mr. Subprime Predatory Lender Victim Homeowner? Absolutely. And I fully support anyone else who decides to knock him the fuck out, as he was at the Lehman Bros. corporate gym the day of their collapse. I've always been a fan of China's system for dealing with massively corrupt businessmen (although they hardly apply it equitably, just every once in a while to get headlines) in which they are put on trial one day and, if convicted, executed pretty much the next day.

But blame is for another day. Blame is a luxury we should hope we have the opportunity to explore. If there is no country or judicial system left in a few months, then the only justice we'll have to meet out will be tawdry mob-vengeance. I doubt it's as satisfying as it may sound.

Here's how I see where we stand now: The country, and you might be able to say the whole world, is basically without any leadership. George Bush mails it in everyday. He just wants to run out the clock and dump this in someone else's lap. That's what the hopes were for the $700 billion bailout - it didn't even get him through a day. The economists who know what's going on, who aren't still insisting that liquidity is the root of the problem (a la Bush and Paulson) and have stated since the beginning that lack of capital is the root of the problem, have been ignored. Their ranks, to me at least, are led by Paul Krugman who I read religiously for his political and foreign affairs analysis before the crisis - even though he's an economist - and then tuned in closely to his economics work as the crisis unwound.

Thankfully, when British Prime Minister, Gordon Brown, injected £50 billion of capital into British banks yesterday, the US took notice and Paulson is considering using the authority that Congressional Democrats insisted he be granted in the bailout, which Paulson declared he did not want (because it's SOCIALISM!), to do the same with the bailout money for US banks. That would be a good step towards loosening the credit market, lowering the TED spread, if it's not already too late.

The dangers we face in the future are a McCain presidency and a loss of financing from foreign states. Right now gross US liabilities to foreign states exceeds $16 trillion; that is more than our annual GDP. If China gets pissed off enough by Bush's recent sale of $6.5 billion in arms to Taiwan (they're mad already) to yank out its support on the dollar, we're sunk. This is from a recent report by Brad Setser from the Center for Geoeconomic Studies at the Council on Foreign Relations titled "Sovereign Wealth and Sovereign Power":

"A debtor’s ability to project military power hinges on the support of its creditors….In some ways, the United States’ current financial position is more precarious than Britain’s position in the 1950s…Britain’s main source of financing was a close political ally [- the United States]. The United States’ main sources of funding are not allies. Without financing from China, Russia, and the Gulf states, the dollar would fall sharply, U.S. interest rates would rise, and the U.S. government would find it far more difficult to sustain its global role at an acceptable domestic cost."

The more pressing concern is a McCain presidency. McCain and his campaign - it is unclear how this dynamic works, it appears the campaign surrogates (Palin et al.) aim to project this image and leave McCain with plausible deniability - are in such a desperate position that their strategy is to incite the most racist and vile portions of their base to assassinate Barack Obama. If that happens, the United States will no longer exist the next morning. Riots would be the most benign term for what would ensue. Neither would the United States survive a John McCain presidency. His utter disdain for all policy that doesn't include the word "defense" will ultimately break the bank and we'll either end up a most dramatic anarchy or a brutal dictatorship by his term's end.
Would Barack be able to turn this place around? On the economic side, it's impossible to say simply because there's no way to predict what the situation will be when he would take the reins. It may already be too late by then. Unemployment might be at 15% and China may have yanked its lifeline to the dollar. If that's the case, then good luck. If we can ride things out until January, the immediate benefit of Barack in office will be a return of goodwill from the rest of the world towards the United States. Foreign leaders will be more willing to work with us, and there will be a period of international support from the people of the world who would love to see America as a force for good, on their side. John McCain couldn't inspire ice to melt on a boiling tarmac in Houston.

The only things to do now: your reading on the economy, your poll work for Barack, and every American ought to go up to the attic and dust off their long-lost sense of humility. Pride is what got us here and, if we stay hopped up on it, it will be the end of this country.

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