03/13/09 The problem was pronounced “contained,” by then-US Treasury Secretary Hank Paulson on April 7th, 2007. And then, on July 20th, Fed chairman Ben Bernanke admitted that the crisis could bring losses up to $100 billion.
But there was no container large enough to hold the subprime losses. Each time one was set out, it quickly overflowed. The latest reports tell us that the bilge is now 500 times deeper than the Fed head forecast…and still rising. And this comes after $11.7 trillion has been committed in the US alone to pumping it out. Whether the plumbers are plain idiots or clever rogues, we can’t say, but it should be obvious after two years of watching them, their pumps don’t work.
It is not often that we are called upon to advise the world’s government. In fact, we can’t remember a single time. But we can’t resist a lost cause. So, we offer the Daily Reckoning Plan to Save the World, or DRPtStW for short.
We begin with a brief rehearsal of what went wrong: The economy as it was before the spring of 2007 was too wonderful for words; whenever you tried to describe it, it sounded ridiculous. For example: “The richest get richer and richer by borrowing from the poorest.”
“We think; they sweat,” said one analyst, explaining how Americans could live beyond their means year after year. The West was just recycling the East’s “savings glut,” added Bernanke. Meanwhile, derivatives – based on mortgage debt from people who couldn’t pay — “helped to make the banking and overall financial system more resilient,” said the IMF in 2006.
Each sentence must have made the gods choke…groan…and then laugh. But beginning in 2007, came a correction. Suddenly, the big spenders saw their houses fall in value. Lenders watched their collateral collapse. The end was nigh. Two years later, $50 trillion has been lost, according to an estimate from the Asian Development Bank. After a slap in the face like that, you’d expect a little clarity. Instead, the public seems to have acquired a taste for bamboozle; now they can’t get enough of it.
Just read the Financial Times. This week it has a windy series on the “Future of Capitalism,” inviting readers to imagine how the decaying old creed might be reformed. Alas, for capitalism, it’s out of the frying pan, into the toilet. Larry Summers, Obama’s number one financial advisor, voiced the prevailing view: “This notion that the economy is self-stabilizing is usually right, but it is wrong a few times a century. And this is one of those times…there’s a need for extraordinary public action at those times.”
The gist of his program can be expressed in another wistful absurdity: The consumer economy died because of too much spending; now we will revive it by spending more. “Give me your cunning bankers, your hopeless CEOs, your huddled masses of chiselers, spendthrifts and boondogglers,” says the Obama team, “and we’ll give them other peoples’ money!”
“There’s no place that should be reducing its contribution to global demand right now,” explained Summers. “The world needs more demand.” But it was demand that the world recently had too much of. English speakers took on too much debt to create it…and built too many houses and too many shopping malls to satiate it. And despite the ready cash offered by Bush, Bernanke, and Paulson, demand has sunk, because the real problem is not an absence of spending, but a surfeit of debt. In America, for example, total debt went from 150% of GDP in the ’80s to 350% in 2007. The financial markets panicked when it became clear that debtors didn’t have the cash flow to pay off the debt…and that an entire world economy had been fizzed up to supply products to people who couldn’t afford them. Investors have been discounting debt-soaked assets ever since.
The fix is obvious – reduce the level of debt. About $20 trillion worth of debt, in the United States alone, needs to disappear. Then, consumers can go back to doing what they do best – consuming. But how do you reduce the debt level? Former Treasury Secretary Andrew Mellon had the right idea in 1929: ‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate…It will purge the rottenness out of the system…Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”
What’s the cure for a depression? It’s a depression. Let willing buyers and sellers mark debt down to what it is really worth. Mellon’s plan was not followed by the Hoover or Roosevelt administrations. Instead, they introduced elaborate bailouts, stimulus programs, and boondoggles. That is why the depression is known as the Great Depression, rather than the So-so Depression. By the end of the 30s, the US economy was almost exactly the same size it had been at the beginning. Likewise, in Japan, holding off liquidation brought a “lost decade” in the ’90s. Bush followed in Hoover’s footsteps. And now, the Obama administration follows in Roosevelt’s and Miyazawa’s.
Here’s our advice: forget it. Let the depression do its work. Let the bad times roll!
Sign Up for The Daily Reckoning e-letter and receive a chapter from the new Financial Reckoning Day... FREE!
We Value Your Privacy.
To Mr. Wheat – commenter above, please close your brower, power down your machine, walk away from the internet, don’t return.
Reduce debt? You go tell Red China they’ve got to take a haircut. We’re not printing any more coupons. I dare ya. If the leader of the “Free World” doesn’t have the balls, who does? They can have my income tax “fiats” when they pry it from my cold dead hands.
Taking the “castor oil” that Bill B offers would only bring on social chaos.
I was trying to figure out what his cure for this problem is/was, but am dismayed at his analysis.
Anyone can say, “….don’t do anything. let a depression be a depression.”
What has upheld some semblance of “order” so far in this society and crisis, are two very important factors lacking in the last “great depression” and is avoiding possible social disruption: Social Security for the elderly who have lost some up to 45-50% of their retirement monies, and unemployment insurance for the vastly unemployed and who are loosing their jobs by the millions in a short period of time.
Sorry, Mr. Bonner you loose in this debate. Your “cure” can only lead to more of the same and more chaos.
a few steps to add in the transition;
put the bankers back in the pen – they have fed (no pun intended) too much
abolish the Fed – get right of their currency and replace it with a real USA $ and back the USD with gold/silver
Appoint Ron Paul or Mogambo as king
I service computers and quite often I come across compiters riddled with virus and the anti-virus software installed as an after thought and in most cases disabled so it can’t do what it was installed to do. The only tried and trusted solution is to format the entire hard drive and re-install the system with all the required software. All the user’s downloaded songs, documents and family photos that were not backed up are usually lost. Before I leave I tell them exactly what should be done to avoid this exercise being repeated but six months later I find myself back again doing the exact same thing, only this time he has infected backups too.
The future as I foresee it – Obama will fail.
This will lead to the election of soemone like Sarah Palin who will make things even worse.
Then we’ll get someone like Hugo Chavez, who will make things even worse.
Then the Republic will end in a coup. Have a nice day.
The solution: move to Luxembourg, Ireland, or Australia as soon as you can.
Pursuing the “Hair of the Dog that bit you” solution somehow loses it’s charms when the Dog is gnawing on your skull and growling at the same time.
When and if one comes to, and the eyes focus, the scenery will be a vast junkyard and the dog, well, don’t move, he’s a junkyard dog extending another dram of whiskey your way before he begins gnawing again. This is referred to as the Modern Business Cycle.
Helmet Futures are advised and pepper spray shall only make the beast angrier.
Yeah! “Let the bad times roll” and watch everyone act like animals unlike the way they did in the 1930s. Why else do you think they’re trying to keep it all afloat? You would wish you became a survivalist, with all the troops and National Guard units deployed overseas.
By the way, the survivalists must be saying, “We told you so!”