[R-G] [BillTottenWeblog] Last Ditch

[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 (September 08 2008)


Why do the big deals always happen over the weekends? So the big boyz in
government and finance can take off their neckties when they bargain
with each other? So the markets will be closed and unable to register a
response one way or another? So the shrinking fraction of the US public
that pays attention to anything besides Nascar and pornography won't
catch the news Saturday evening?

This weekend's big deal was the US government taking over the
"government sponsored enterprises" (GSEs) Fannie Mae and Freddie Mac
that guarantee trillions of dollars in mortgages. The "guarantee" is
supposedly accomplished by converting bundles of mortgages from the
banks and loan companies that originate them (that make the contracts
with the buyers of houses) into bonds that can be sold downstream. Risk
was theoretically dispersed among the holders of these bonds. This all
seemed to work during the long stable period when our cheap oil economy
was chugging along, and house prices maintained a consistent
relationship with incomes, and people paid their mortgages dependably.
The whole system ran like a reliable machine - like a Chrysler slant-six
engine!

Until the cheap oil age came to an end. Then, all parts of the system
shook apart. It was the end of cheap oil that catalyzed the housing
collapse and, by extension, the current huge financial crisis. But the
run up to it was like a bounce off a high diving board into an empty
pool. The bounce came around 2001 when it became apparent that the US
standard-of-living could not be maintained on incomes in a
post-cheap-oil economy. The trauma of 9/11 prompted a new and utterly
insane consensus to form that the US standard of living could be
switched over from income to massive debt. All the normal brakes against
irresponsible lending and borrowing came off - embodied in Alan
Greenspan's absurd statement that it was a good time to assume an
adjustable rate mortgage when interest rates were at a historic low -
meaning they could only be adjusted upwards. Why hold Greenspan
responsible? Because he was at the apex of the authority vested with
establishing norms, and he shoved our behavior into the realm of the
recklessly abnormal, and he should have known better.

The public went along with it because "free money" and high living are
fun. Their behavior was reinforced by other authorities - for instance,
President Bush, who told Americans to go shopping after the 9/11
attacks. (They went shopping with credit cards.) Things really wobbled
in 2005 - which was, coincidentally, the year of all-time world-wide
peak conventional oil production - with hurricanes Katrina and Rita
ripping through the Gulf of Mexico oil rigs as a dramatic highlight. (It
was also the year that The Long Emergency was published.)

Since then, the US economy and the financial part of it that became a
nine hundred pound tail wagging a thirty-pound dog, has been held
together with baling wire, duct tape, and band-aids. All the debt run up
by all parties - home-owners, credit-card holders, business, banks,
hedge funds, government - is not being paid back reliably, and all the
leveraged arrangements that depend on it being paid back are coming
apart. Thus, capital disappears. The wealth of a nation disappears. All
that remains is the pretense that we are still a wealthy society

Fannie and Freddie are near the center of this black hole of debt. So
far, the black hole has been "papered over" by the old stage magician's
trick of diverting the audience's attention. The systemic wound that
Bear Stearns represented, was covered up with a band-aid applied by the
Federal Reserve's exchange of loans for worthless securities. In fact,
the capital of Bear Stearns actually did disappear - a mere residue of
it, a few cents on the dollar, was shifted to JP Morgan as payment for
taking the wrapper off the band-aid. But, basically, the money is gone.

Now, the same thing has happened with Fannie and Freddie, except that
the scale is an order of magnitude greater. This time, the US Treasury
Department is assuming worthless paper and paying out much larger loans
to enterprises that are functionally bankrupt. The exact nature of the
government's chartered "sponsorship" has always been ambiguous.
Professional opinion has generally held that government backing was
implied rather than explicit - but that's a ridiculous internal
contradiction that went unchallenged for decades as Fannie and Freddie's
Ponzi-style operation lumbered on (and their executives made off with
obscene payouts). Now the government's role has suddenly been made
explicit. It will probably only make things worse, since the enterprises
are too big and over-scaled to work under any circumstances, let alone
insolvency.

One thing this points to is a truth that is uniformly overlooked by
kibitzers: that what we developed over the past decade in America was
not an "information economy" or a "consumer economy" but a suburban
sprawl building economy, meaning an economy dedicated to building a
living arrangement with no future. The climax of the sprawl building
economy occurred in absolute lockstep with the climax of peak oil. You
can date it virtually to the month - May 2005. After that, the future
asserted itself and all the financial expectations bound up with
sprawl-building went up in a vapor - including the value of mortgages on
suburban houses. Everything that followed has been an attempt to cover
up this basic reality: that the way we live in America can't continue.

The reason our energy debate is so hollow and idiotic is because we
can't face this basic reality. The fantasy-du-jour among both political
parties is that we can become "energy independent". By this they mean we
can keep on living the way we do by means other than oil. This is just
not true. We have to make profound changes in everything we do from the
way we inhabit the landscape to the way we produce our food. Lately, the
only change we've shown any interest in is changing what our cars run
on. But that is not going to rescue us, not even a little. Our inability
to talk about anything else except the cars will drag us down into
poverty and turmoil.

The housing market is not coming back. Ever. In the form that we knew
it. The suburban project is over. That version of the American Dream is
over. We'll be a lot better off if we put aside dreaming altogether for
a while and start focusing on reality instead - that part of the day
when we're awake and capable of actually doing things. We've got a lot
to face and a lot to do.

The government takeover of Fannie and Freddie is just another
papering-over of our fundamental problem - that until we embark on new
ways of being a nation, of living differently and working differently on
different things, the other nations of the world will not have
confidence in us, or the paper we issue, and we will not really have
confidence in ourselves.

I have believed all along - and said as much in The Long Emergency -
that we would not get through this crisis without passing through a
period of hardship. We're entering it now. Even if the stock markets
shoot up five hundred points today on the basis of the Fannie-Freddie
deal (and the mistaken belief that our troubles are over), we are only
at the beginning of a very painful workout. Personally, I think we're in
for financial carnage before the election. The Fannie-Freddie deal may
be the place where the wheels really come off.

____________________________________

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

http://jameshowardkunstler.typepad.com/clusterfuck_nation/2008/09/last-ditch.html


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