The Rubble of the Global Economy

"State capture" Carabanchel Prison in Spain. Credit Unknown.

“In California, estate agents hoping to shift foreclosed properties have taken to spray-painting the bleached, parched tufts of grass that pass for a lawn green, with the hope of improving the impression of the lot.

Buyers may be convinced, but the sun still beats down mercilessly and there’s only so much respraying that can be done; amid much breathless talk about the greatly awaited “green shoots” of economic recovery breaking out in every direction in an orgy of viridian fecundity, I may not be alone in seeing a parallel…”

Words from a blog post I wrote more than two years ago. It’s truly astonishing how little has changed — or rather, how much worse things have become. The rot has not come even close to being stopped —  just transferred from private to public shoulders, while the money goes in the opposite direction.

It could have been so different and you don’t need to ask an angry anticapitalist to see how. Conservative scholar Niall Ferguson, for example, was pugnacious: “Existing shareholders should face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks.”

Thirty months later as we teeter on the edge of a cliff and many of us are struggling to feed our families, there seems to be little sign of any radical thinking. Given the institutions — very countries themselves — at risk, it seems extraordinary.

Perhaps, as Citigroup chief economist Willem Buiter put it in a blog post for the FT archly entitled “The green shoots are weeds growing through the rubble in the ruins of the global economy”, because governments are dancing simply to the tune of their paymasters, not their tax payers.

I used to believe that state capture took the form of cognitive capture, rather than financial capture… But it is becoming increasingly hard to deny the possibility that the extraordinary reluctance of our governments to force unsecured creditors (and any remaining non-government shareholders) of the zombie banks to absorb the losses made by these banks, may be due to rather more primal forms of state capture…

Governments everywhere are doing the best they can to delay or prevent the lifting of the veil of uncertainty and disinformation that most banks have cast over their battered balance sheets. The banking establishment and the financial establishment representing the beneficial owners of the institutions exposed to the banks as unsecured creditors – pension funds, insurance companies, other banks, foreign investors including sovereign wealth funds – have captured the key governments, their central banks, their regulators, supervisors and accounting standard setters to a degree never seen before.

It is indeed astonishing how unprepared political leaders were to let the financial system take a hit. And it’s not like nobody had alternative suggestions. The New York Times is far from a bastion of extremist anti-capitalists, but this is what William Cohan and Sandy Lewis were suggesting in the wake of the Lehman Bros. collapse.

Let’s seriously consider ripping down the entire structure, dynamiting the foundation and building a new system that rewards taking prudent risks, allocates capital where it is needed, allows all investors to get accurate and timely financial information and increases value to shareholders and creditors…Why is the morphine drip still in the veins of the financial system? These trillions in profligate federal spending are intended to make us feel better again even though feeling pain, and dealing with it responsibly, would be healthier in the long run.

It is time to stop rescuing the banks that got us into this mess. If that means more bank failures on a grander scale or the dismemberment of Citigroup, so be it. Depositors will be protected — up to $250,000 per account — but shareholders, creditors and, sadly, many employees will, for the long-term health of the system, need to feel the market’s wrath…

Is there to be any limit on bailouts? We have now thrown money at the big banks, any number of regional ones, insurance companies, General Motors, Chrysler and state and local governments. Will we soon be bailing out Dartmouth, which just lost its AAA bond rating? Is there no room left for what the Austrian economist Joseph Schumpeter termed “creative destruction”? And what is the plan to get the American people out of all these equity stakes we now own and don’t want?

The plan, seemingly, was to inflate the American people out of them. And all around, the remaining shit that has not hit the fan is gravitating slowly upwards. As Bill Jamieson puts it, the economy is looking like so much dry kindling.

“Massive slides in global stock markets, dire warnings from the World Bank and the International Monetary Fund (IMF) of the world economy “in a dangerous new phase”, Greece in meltdown and America braced for a deepening slowdown: we hardly needed Business Secretary Vince Cable last week to liken our current predicament to “the economic equivalent of war”. For the atmosphere now is ominously akin to 1931 and the chain of events unleashed by the collapse of Credit-Anstalt. Everything seems headed for a denouement, the final spark to a massive pile of dry kindling. All around, the atmosphere crackles with foreboding.

 

That “massive pile of dry kindling” of which Jamieson writes is the empty balance sheets of people like myself — slowly going under despite working hard and living frugally —  and set to be lit with matches willingly handed over to a brazen kleptocracy. Inured to it, many of us increasingly inhabit a parallel universe of social media, where in the words of Adam Curtis, we:  “Dance emotionally, on a platform created by a large corporation — while our feelings bounce back and forth, happy Stakhanovites, ignoring and denying the system of power.”

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