Bear Stearns was not the only sick puppy in the kennel. When another one wobbles and crashes, will the Federal Reserve step in again and accept its worthless CDO paper as collateral on another $30 billion loan, and another, and another, and so on? James Howard Kunstler explores…
Things continue to slip, slide, and shift strangely Out There.
Last Wednesday, a bunch of peeved mortgagees protesting government favoritism in the Bear Stearns case entered the lobby of the company’s (soon-to-be-former) headquarters building in midtown Manhattan. While it might not seem like much, I view the symbolic "penetration" of this corporate stronghold as the very first sign of a much broader citizen revolt against the extraordinary protections being shown to crapped-out investment banker boyz – at the expense of millions of equally crapped-out poor shlubs facing the default and re-po of their McDwelling places.
Occupying an office-building lobby peacefully in broad daylight is one thing. Wait until summer gets underway and The New York Post gossip page resumes its coverage of hijinks in the Hamptons. The executives of Goldman Sachs, J.P. Morgan / Chase, and other dealers in fraudulent securities, plus the art world and show biz glitteratti who party together out there, might all find themselves the object of considerable grievance and resentment as the beaching season ramps up, and the limos roll around the charity lobster roasts, and the guests stray down the lawns, chardonnays in hand, to plot divorce from their over-leveraged husbands…. God knows what seekers-of-vengeance will be creepy-crawling the privet plantings along Gin Lane in the crepuscular gloom, searching for trophy wives to garrote.
Perhaps a bankrupt landscaping contractor from Lake Ronkonkoma, recently stiffed by a hedge fund manager over the installation of a half acre of pachysandra, will be arrested on the Wantagh Highway with blood on his sleeves and a high-C piano wire in his pocket. The non-Hampton precincts of Long Island, which make up more than 90 percent of the fish-shaped appendage to New York State, will be full of angry repo victims, and the Hamptons lie at the very dead-end tail of the geographical fish. Will the banker boyz attempt to flee by yacht? And where might they escape to? Newport, Rhode Island? Labrador?
I maintain, of course, that the media (and the public itself) has no idea how quickly things might get weird in this country – or how weird they might get.
Now bear with me while I shift gears. [Recently,] I went to a pretty major environmental conference put on by the Aspen Institute in their odd little mountain town – and nobody needs to tell me how un-correct it was that I flew all the way out to Denver and then drove a rent-a-car the size of a humpback whale deep into the heart of the Rocky Mountains to attend this thing. (I assure you, I wasn’t paid to go.) The Institute grounds – which looked like the set of a 1950s Raymond Massey movie about the future – were thick with many eminentissimos of Climate Change (minus Al Gore) and activists in "green" politics, more generally. The latest frightful measurements of retreating glaciers, vanishing species, and creeping deserts were proffered and everybody was suitably impressed by the acceleration of scary conditions facing the human race.
Being such a formal conference, though, with the putative mission to advance understanding and set agendas-for-action, a great effort was made through the medium of panel discussions to set forth various "initiatives" to deal with all the scariness, especially by enlisting the agencies of the U.S. government – and most especially with the prospect of a new administration sweeping out the detritus of Bush-dom next January.
I confess I found most of these well-intentioned proposals utterly implausible, along with their trains of hopes, wishes, and fantasies. The main conceit is that we can keep all the normal operations of the American Dream humming by some "non-carbon" related energy source – in other words, run Wal-Mart without oil, methane gas, or coal – and that all the forces of government and capital can be marshaled to make that happen. The secondary conceit is that they would accomplish these things in an orderly process, harnessing "new technology," as though it were a higher sort of school science fair.
My own opinion is that these birds have the scale issue wrong. The exigencies of the Long Emergency imply that virtually everything organized at the grand scale will tend to wobble and fail as the problems of energy scarcity and climate change converge. Institutions from the federal government to Wal-Mart to the University of Arizona will face increasing impotence, incompetence, and bankruptcy. Vesting our hopes in propping up activities run at that scale is bound to be disappointing, to say the least, and the precursor to social upheaval to go a bit further. There’s probably a lot we can do at the finer and more modest scale, but that is not the scale that conferences like this focus on – in particular because so many of the participants are current or former high-up government wonks themselves. Anyway, the scale of global distress tends, by plain inference, to invoke the wish for global "solutions," however detached from reality they may be.
At the center of all this conferencing was the movement’s lead eco-guru, Amory Lovins of the Rocky Mountain Institute (RMI), located just up Highway 82 from Aspen. Lovins’s long-running emblematic project with that outfit is something they call the "hyper-car," a car that gets such supernaturally great mileage that it will save the human race’s threatened Happy Motoring program from extinction. The hyper-car program, which RMI still trumpets to this day, has, of course, the unintended consequence of promoting future car dependency – which is about the last thing that America needs – but that hasn’t prevented RMI from pushing it. Beyond that, Lovins’s RMI program-for-America resembles an actuarial exercise in "carbon credits" and other statistics-based fantasies aimed at inducing theoretically rational behavior among the Wal-Mart executives (and "greening" up Wal-Mart has been another of RMI’s consulting projects – I’m not kidding).
Here lies my third dissent from what I heard at the conference: since America is bankrupting itself so comprehensively at every level, the wished-for "funding" for the green rescue program will not be there in any case. Capital, as represented by Wall Street, is itself flying to pieces this year as its stock-in-trade of paper certificates loses legitimacy in the face of the overwhelming fact that the society behind that paper will be decreasingly capable of producing surplus wealth – which is what capital is. The unwind of "positions" now underway among the big bankz is the process of previously anticipated capital accumulation vanishing down a black hole. It will be gone forever.
This is the year we find that out. Bear Stearns was not the only sick puppy in the kennel. When another one wobbles and crashes, will the Federal Reserve step in again and accept its worthless CDO paper as collateral on another $30 billion loan, and another, and another, and so on? And will the individual mortgage default homeowner shlubs just watch all this go down on CNBC without any action beyond "penetrating" the lobby of a Manhattan skyscraper? I don’t think so. What goes down in the Hamptons will go down in Aspen, too.
for The Daily Reckoning
April 09, 2008
James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis.
His latest nonfiction book, The Long Emergency describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.
March’s FOMC minutes were released yesterday…and while they were interesting, what was said in the last meeting wasn’t too terribly surprising.
The minutes show that Fed policymakers were worried that a "deep" recession, rather than a "shallow" one, would permeate the U.S. economy, which spurred them to cut the key interest rate by three-quarters of a percentage point.
The Fed was mostly united in their decision to cut the key lending rate, except for two dissenters, Philadelphia Fed President Charles Plosser and Dallas Fed chief Richard Fisher.
While the majority saw the rate cut as the right decision since "further restriction of credit availability and ongoing weakness in the housing market made a severe downturn a strong possibility," Plosser and Fisher thought otherwise. The hawks were more comfortable with smaller cuts because of the concern that an inflationary flare-up would occur.
MSNBC reports: "On the one hand, the Fed has been urgently moving to prevent the trio of economic woes – housing, credit and financial – from plunging the country into deep recession. On the other hand, with soaring energy prices and high food costs, policymakers realize they can’t afford to let inflation out of control, either."
The financial media and experts are placing bets that the Fed will chose to cut rates again next month, as the economy has yet to reach its final bottom.
"There’s no question the U.S. economy is one of the weakest in the world,” Stephen Koukoulas, a London-based global strategist at TD Securities, a unit of Toronto-Dominion Bank, Canada’s third-largest bank, said in an interview with Bloomberg Television. "We do need the policy makers, the Fed and even the administration to come in and kick-start the economy. It’s probably going to get worse before it gets better."
*** Alan Greenspan has been popping up all over the press lately – after 18 years of Greenspeak, it looks like the former Fed chief wants to set the record straight…at least from his point-of-view.
"I have no regrets on any of the Federal Reserve policies that we initiated back then because I think they were very professionally done," Mr. Greenspan told CNBC yesterday.
And to the Journal, he said: "I don’t remember a case when the process by which the decision making at the Federal Reserve failed."
The Financial Times recently ran a piece titled, "The fed is blameless on the property bubble." James Saft, writing for Reuters says that Big Al argued that the epic bubble was not caused by loose monetary policy, but by "the fall in global long-term interest rates, which, as chairman…of the most powerful central bank in the world, apparently had nothing to do with him."
Albert Edwards, global strategist at Societe Generale Cross Asset Research in London puts it bluntly: "He was the midwife of serial bubbles that are unraveling."
Former Fed chief Paul Volcker remains unconvinced by Greenspan’s protests, questioning his cheerleading of the "bright new financial system," that "for all its talented participants, for all its rich rewards, has failed the test of the marketplace."
And in a speech to the members of the Economic Club of New York, Volcker chided Bernanke for "toeing ‘the very edge’ of the bank’s legal authority in orchestrating last month’s bailout of beleaguered investment bank Bear Stearns," reports The New York Times.
"Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank," Volcker said.
*** We had the opportunity to interview Mr. Volcker for I.O.U.S.A. We met the economic bigwig, who is most famous for fighting the inflation of the 1970’s and 1980’s in his office overlooking Rockefeller Center this past winter.
We asked him the obvious question: Does he see a similarity to today’s economic climate to that of when he was at the helm of the Federal Reserve? And do we need the same sort of forceful hand that he lent to the economy during that time period?
"Well, there are all kinds of consequences and uncertainty in the future if we don’t deal with these problems. But when I look at back on my lifetime, it was obvious that letting inflation get a little bit out of control and not dealing with economic problems effectively in the ’70s led to the kind of crisis in the late ’70s and the early ’80s, and it was very uncomfortable. We don’t want to have to go through big recessions to teach lessons. We’d like to anticipate what needs to be done while maintaining the growth of the economy. And the threat always is an unstable economy, an unstable currency; and that it’s destructive not just to economic life, but it can be destructive of America’s position in the world, which is a concern to me more generally.
"But the great challenge, I think, for democracy, is being able to cope effectively with problems that are pretty clearly out in the future, but require action that require some discipline, some restraint today," he continued.
"And that’s the test we’re going through, and that’s a question of education and understanding, I think. So I think as people get better understanding of some basic economic issues, the democracy will be better able to cope with those challenges out there in the future."
This idea of educating America comes up again and again as we promote the documentary. The other night, at a Q&A following a screening at the Philadelphia Film Festival, one audience member suggested that I.O.U.S.A. be shown at every high school in America. We couldn’t agree more. After all, the generation that will have to deal with these debts and deficits should be educated on the subject.
By the way, if any of our readers are in the Philadelphia area, we have a screening of I.O.U.S.A. this evening at 5 PM at the International House.
The Daily Reckoning