[R-G] [BillTottenWeblog] The Risk Economy

[Bill Totten]

Clusterfuck Nation

by Jim Kunstler

Comment on current events by the author of
The Long Emergency (Atlantic Monthly Press, 2005)

www.kunstler.com (May 04 2008)


My new novel of the post-oil future, World Made By Hand, is available at
all booksellers.


As the West's industrial regime sputters toward a cheap-energy-crackup
conclusion, there have been attempts to recast what our economy is
actually about, how to account for whatever wealth we manage to produce,
and project what our society will actually be organized to do in the
years ahead.

For a while in the 1990s, the idea was a "service economy", kind of like
the old fable of the town whose inhabitants made a living by taking in
each other's laundry - only in our case it was selling hamburgers to
tourists on vacation from their jobs making hamburgers elsewhere, or
something like that.

Then came the idea of the "information economy" in which making things
of value would no longer matter, only the processing and deployment of
information (sometimes misidentified as "knowledge"). This model seemed
to suggest a yin-yang of software engineers who made up games like
"Grand Theft Auto" serving the opposite cohort of people who bought and
played the game. If nothing else, it certainly explained how lifetimes
could be frittered away on stupid activities.

That illusion yielded to the housing bubble economy, which actually did
produce a lot of things, but not necessarily of value - for instance,
houses made of particle board and vinyl 38 miles outside of Sacramento.
It was a tragic and manifold waste of resources, as well as an insult to
the landscape. But the darker side of the housing bubble lay in the
world of finance, where a vast empire of swindles was constructed to
support the Potemkin facade of production homebuilding.

Now we are in a strange period when those swindles are unwinding. The
people who run the finance sector - the Wall Street investment banks,
hedge funds and ratings agencies, the Federal Reserve, and the US Dept
of the Treasury - in desperately trying to prevent the unwind, have
rapidly ramped up another new economy based entirely on the buying and
selling of risk. Risk, as a pure abstraction unconnected to any real
capital activity, is all that's left to buy and sell after all other
plausibly practical vehicles for finance have failed.

While a lack of transparency in the individual risk vehicles has been an
object of complaint over the past year, the system as whole is
transparently absurd. The system is also abstruse enough to prevent most
mortals (including many employed in the system) from understanding its
operations. But the general public and the news media are virtually
helpless to intervene in this last gasp racket, so the probability
increases that it will do tremendous damage to whatever remains of the
US economy.

One feature of the risk economy is the Federal Reserve's new willingness
to absorb any sort of crap collateral in exchange for massive cheap
loans to insolvent companies and institutions. The Fed has, in effect,
made itself the world's largest financial shit-magnet. It has already
taken in a few hundred billion in securities based on non-performing
real estate loans, and has now opened the window to securities based on
non-performing credit card debt, car loans, and other miscellaneous IOUs
still drifting un-hedged in the banking ether.

It's a mark of our collective desperation to avoid the consequences of
so much reckless behavior that no credible authorities have stepped up
to denounce this racket - no Fed governor, no politician of standing
(including the candidates for president), no newspaper-of-record. The
Attorney General of New York, Andrew Cuomo, may be quietly cooking up
some cases in the deep background, but the SEC and the federal banking
regulators hung up their "out-to-lunch" signs on this long ago.

Meanwhile, the basic situation is this: the world is awash with bad
investment paper. The standard of living in the US can't be supported on
debt anymore. The people of the US don't produce enough real value to
service their debts. Institutions can no longer be supported on debt
gone bad. Something's got to give - meaning something has to bring the
US standard of living down to a level consistent with our declining
actual wealth.

Everything else going on right now is a dodge. The Fed maneuvers, the
"coordinated actions" of the western central banks, the postponements of
default, the non-disclosure of contents in bank portfolios, the pretense
that risk alone is a kind of fungible resource that can be endlessly
traded to generate fees - all this fucking nonsense will only make the
eventual unwinding much worse.

Personally, I doubt that it can go on more than a few more months. The
velocity of everything is going up past the "red line" where things
really fly apart. The increased velocity of non-performing mortgages and
deadbeat credit card accounts is one thing that can't be hidden or
escaped. America will feel and see very vividly when the repossession
teams rush families from their homes, when the pickup truck is taken
away, and when the pink slip appears in the pay envelope. Meanwhile all
the higher-end banking shenanigans will only debase the dollar and make
it more difficult for people already in distress to buy gasoline and food.

If the bankers and treasury officials collude to prop up one more
failing big bank a la Bear Stearns, the political fallout for Wall
Street could be lethal. In any case, I think we will have a way
different sense of ourselves as a society by the time the election comes.

http://jameshowardkunstler.typepad.com/clusterfuck_nation/2008/05/the-risk-econom.html


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