[A-List] Margin Call
shimogamo at attglobal.net
Wed Aug 15 17:41:01 MDT 2007
by Jim Kunstler
Comment on current events by the author of
The Long Emergency (Atlantic Monthly Press, 2005)
www.kunstler.com (August 13 2007)
The seas were a mite choppy off Hedge Fund Island last week after all
when the Federal Reserve started tossing life preservers of ready cash
to the Big Fund Boyz bobbing and thrashing in the swells. Now, about
that "money" - which is, in essence, a bunch of extended lines of credit
at the Fed's artificially-low official interest rate - what actually
happens to it? The simple answer is: it disappears into the same ocean
of financial woe that the Boyz are drowning in.
The mere $38 billion that the Fed tossed out Friday afternoon, as the
Dow was tanking down a few hundred clicks, will be used by banks and
investment houses to cover losses in the synthetic securities they
themselves created, and have been trading, during this psychotic final
blow off of cheap energy capitalism. In essence, the Fed is buying
worthless paper. The trouble is, there is so much more worthless paper
out there that all the computers at the Federal Reserve could never
generate enough pixelated cash to cover them in the life of this
universe or several like it.
An additional problem: there is a practically inexhaustible supply of
"dead" mortgages and corporate loans washing up on the pebbled beaches
of Hedge Fund Island. No matter how bad the mortgage- and credit-
derived racket looks now, it is certain to only get worse as the dead
mortgages and loans fester in the sun and the tropical foliage on Hedge
Fund Island starts to wilt from the toxic fumes of all that decaying
matter. This summer is only the beginning of a cycle of adjustable
mortgage interest rate re-sets. The numbers go way up in the fall and
are scheduled to continue rising well into the winter of 2008. How long
do you think the Big Fund Boys can tread water?
What you're seeing now is a simple matter of financial sector players
trying desperately to evade the consequences of their own actions. The
fake wealth generated by the synthetic securities they created is now
being recognized for what it is: a swindle. The hallucination is over.
The collective denial that supported that hallucination is dissolving.
The losses are become manifest. Even worse, the losses are growing
exponentially because the synthetic securities were used as collateral
to leverage far greater multiples of "positions", bets, and plays in a
casino-like global electronic trading arena.
This is what happens when investment gets de-coupled from real
productive activity and becomes an end in itself. It has been
terrifically enhanced by computer programming. But no amount of digital
legerdemain - with the "sugar on top" of accounting trickery - can now
hide the fact that there is no "value" there. What's more, the losses
are going to have to show up somewhere. If you try to suppress them in
one area, they'll pop up in another. If the Federal Reserve tries to
cover the losses racked up by the Big Fund Boyz by giving "cash" away,
they'll only succeed in destroying the value of the cash itself, that is
the US dollar.
Now, few reasonable people can really imagine that the Fed would blunder
into hyper-inflation. But the situation is so desperate that the Fed's
mission to do what's necessary to rescue drowning banks may over-ride
the prudent deployment of cash life preservers. As that occurs, foreign
holders of the US Dollar may detect the impending loss of value of the
dollar, and there would be a stampede to the redemption windows to get
rid of them. That would leave the Federal Reserve (and by extension the
American Nation) in a position of stark and implacable insolvency.
In any case, the US now stands on the brink of an unprecedented
liquidation of assets. The mortgaged title holders to over-priced
McHouses will have to liquidate their positions as "home-owners". The
over-leveraged holders of credit-card debt will have to sell their Ford
Explorers, bass boats, sports memorabilia (good luck with that shit) and
flat-screen TVs. The retired dentists will have to dump their stocks and
bonds. The corporations will have to sell off subsidiary operations,
buildings, and corporate jets. Some colleges will just shutter. The Big
Fund Boys will have nothing of value left in their portfolios to sell.
They will just drown. Their heirs and assigns will then have to dispose
of the house in Sagaponak, the ten-room apartment on Central Park West,
and the family fleet of SUVs. The Big Boyz will take quite a few
institutions with them - the club-like banks and investment "houses"
that employed them and went along with their mendacious shenanigans.
The upshot is that we are going to find ourselves a poorer nation. There
will be far fewer people with money. There will be far fewer buyers of
repossessed McHouses, bass boats, et cetera. Even the houses in
Sagaponak and the Manhattan apartments will go cheap. The effort to
pretend our way out of a financial crisis will fail. Sooner or later the
recognition will set in that all that "boo-yah" was dreamed up. The
United States swindled itself. We became a nation of such greed-crazed
clowns that we committed financial suicide in an orgy of self-deception.
Anyway, that's how I see it this morning. The equity markets open in a
half hour or so. The mood out there must be dark. The hands that hold
the Starbucks cups must be trembling at the trading desks. I hasten to
add that I think the turmoil and destruction can go on for quite a
while. This slow-motion train wreck is not going to play out in just a
week or two. And in case anyone forgets, in the background looms another
storm at least as potent as the one now blowing through the financial
markets: the gathering permanent global energy crisis (aka "peak oil").
Just because some Big Fund Boyz liquidated their positions on the oil
futures market last week to try to cover their losses elsewhere does not
mean that price of oil is going to keep going down. It may rest on the
ledge in the $60 to $70 range for a spell, but you can be sure it will
take flight again. And if it does as the dollar is crashing for other
reasons, this will become a pretty disorderly nation in a very dangerous
and unforgiving world.
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