The Beginning Of The “Big Game”

| September 19, 2008

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Several of my friends and relatives have asked me why I am not posting about the financial antics unfolding in real time these days. I hate to post things like “I told you so”, because they don’t really add much to the solution.

I am amazed by so many facets of what is happening. First and foremost is the length of time it took us to get here. The outcome that is becoming clear to all was apparent to anyone who cared to look at least 2 years ago, maybe more. To quote Ambassador Kosh from Babylon 5:

The avalanche has already started. It is too late for the pebbles to vote

Part of the reason that it has taken this long is the massive and growing effort that the powers behind the world economy have been exerting to try and buy additional time. Each time they were able to stem the tide by increasing the size of the backstop in terms of sheer money that was being offered up to stop the correction.

This action only delayed the inevitable and necessary market adjustments, each delay multiplying the size of the eventual collapse.

What has happened this week could very well spell the end of the free market system as we know it. The government has decided to step in and essentially remove risk from a substantial portion of investments.

This is NOT about subprime loans! That was only the crack that appeared. The crazy “free money” was used in all manner of ways from building strip malls that no one will ever use to financing cars that people could not afford. Worse yet the error was compounded many fold, by use of derivatives and hedging approaches. All of this was built as a complex interwoven structure based on trust and the assumption the counter-party could pay. The question always stood out – could they pay if needed?

Clear thinkers did not have to do much math to understand that there was a commitment to pay up (should everything blow us) that was greater than all the money in the US economy by many times over.

A good portion of my professional efforts of the past 3 years has been working to sell tools to the people who refused to see the problem, who ignored the signs of the impending tsunami. We can’t have been the only ones who had the means to shine a light into this chasm, but far too many companies did not want to look at the growing pool of slime that was eroding the foundations of the economy.

So what happens next? The moves of the government these past 2 weeks are unprecedented. There is no way that even we can really come up with a good projection of what form this ends up in. By using the US treasury to intervene in Fannie, Freddie, AIG and now the new TARP, we have connected what is left of our economy to a heavy weight that is sinking fast.

Yes, that means the question that I asked of who is holding how much bag comes to it’s natural conclusion. You and I, dear taxpayers, are the ones left holding the bag.

We get a lovely story like this from the rather dubious New York Times, Congressional Leaders Stunned by Warnings:

WASHINGTON — It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.

“When you listened to him describe it you gulped,” said Senator Charles E. Schumer, Democrat of New York.

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

For once, America, please remember how to think critically. We have a financial situation that an armchair economist like myself could spot. Now suddenly they are “surprised” and guess what, they need an emergency 1.2 TRILLION dollar superfund, to be passed in the dark of night, to keep it all from sliding into the abyss.

Why would we spend vast sum without a full analysis of the situation? Why would you trust chumps like Paulson and Bernanke who were not sharp enough to spot this one coming two years ago?

There is really only one answer here, and it’s hard medicine. Let it blow up. I will lose a huge amount of money if this happens, but it is going to happen eventually anyhow. The later it is pushed back, the more damage it will do.

Suck it up, take the hit and lets get started on building the future.

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Category: Commentary, Economics, Main

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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