Simon Johnson has published an interesting article in Atlantic:
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises.
Mr. Johnson examines the crisis from the expert’s viewpoint; he is a banking system repairman and that is what he writes about. He suggests how to repair US banking, that is considered the beginning and end of the problem and that is to some degree the beginning and end of the problems as far as Atlantic is concerned, otherwise they would not have published the article. There in no mention of Peak Oil or other resource constraints, or other macroeconomic – or social – contributors to our perfect storm. As is also the case in many of these essays, his exciting and insightful description of the problem leads to disappointingly lukewarm solutions.
Cut to the chase: he describes the possible playing out of what is currently underway:
… the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.
Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.
Which would hopefully result in bank nationalization, balance sheet transparency, bank triage, and a breakup of the banking superstructure – the last a very good idea, by the way! Otherwise, ho hum …
Why stop there? Why avoid entirely the ‘something for nothing’ paradigm that is embodied in the whole finance/fiat money/exponential growth/industrial- scale ‘efficiencies’ strategy? Probably because this lies outside the range of expertise. It is this strategy that has failed and failed again. Fixing the banks won’t leave anyone any better off. The factories are closed and the workshops are closed and the jobs are gone or shipped off to Mexico or China or are not done at all … period. The billions of people scraping with their bare hands to put food in their mouths have been failed. The unemployment rockets. The countryside is littered with junk development, parking lots, automobiles; the people in a trance mindlessly gobble resources, the systems outside the banks are just as badly compromised as the banks are.
The average age of farmers in the USA is 60. That’s a REAL problem.
Even within the ambit of banking there are undeterminable issues, the central being that of non- rational valuation. Nobody knows right now whether their house is worth $300,000 or $3,000, the value mechanism of supply and demand is broken. This is bizarre and difficult to understand, it is like gravity is broken or centrifugal force.
In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.
What they are supposed do is what they don’t do; determining value is central to collateralization, without it there is no credit and without credit the raison d’etre for banks simply disappears. Banks are central to the vicious/virtuous cycle of valuation. Banks are enablers of markets. That’s why banks were invented.
Without valuation, what matters? Who matters? Jane D’Arista’s shadow banking system? Doug Noland’s bond and currency markets? Matt Simmons’ oil market? Jim Rogers’ commodity markets? How far does deflation extend into these markets? Part of the answer is technical; in deflation the house is worth $300,000 now and will be worth a lot less over time and people have never lived with deflation, they don’t know how to embrace it, how to anticipate it. Deflation is not in peoples’ bones the way inflation is. People feel inflation because they have lived with it for decades, its illusory steady advance of values is the pivot point of what Ludwig Von Mises admitted were constant economic calculations by all people.
Johnson never examines the pathway from where we were – a bloated empire of Roadrunner- esque wishful thinking into the economic undertow of deflation; perhaps it doesn’t matter. He poses instead a conspiracy of ‘clear eyed and hard- headed businessmen’ crony capitalists:
Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?
Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.
The concerted efforts of Johnson’s ‘oligarchs’ and the tidal wave of production and loan capital and media propaganda have distorted the pricing mechanism … and continue to distort it. It”s the American dream of a free lunch that is dying hard … The outcome of these distortions means the value of credit, both in and out of the marketplace, both embedded and not within goods and services … becomes devalued pretty much all the way to nil.
Like Wile E. Coyote hanging in space too far past the edge of the cliff, his demise can be postponed but only that. Even if the banks are fixed.