September 20, 2008

There Is No Fix

That's the truth that almost no one will face about the economic unraveling: There is no fix. This is the fundamental reason I say that, with regard to their publicly proclaimed aims, no one knows what they're doing. They can't know what they're doing -- because, while everyone insists they are trying to "fix it," there is nothing to be done. And yet, everyone in Washington persists in trying to "fix it" -- that is, they are attempting to avoid the inevitable consequences of an economy that has significantly and for a long time gone completely off the tracks. Many actions by many players must lead to certain results now. To rebuild on a solid foundation, the results must play out -- and they will play out, no matter what stop-gap measures are adopted -- and then and only then, a new structure can be erected. The frantic activity in Washington is the hysterical scrambling of terrified and not very bright people faced with unavoidable disaster, still trying to convince themselves and everyone else that "something" can be done to avert catastrophe. This isn't a plan, or even hoping against hope: it's panic, pure and simple.

We can be thankful that in these horrific times, at least we get a lot of Mike Whitney columns. I excerpted two last week -- here and here.

And here are some excerpts from today's Whitney piece:
The system is at the breaking point, and despite Wall Street's elation from the proposed $1 trillion dollar bailout to remove toxic mortgage-backed debt from banks' balance sheets, the market is still correcting in what has become a vicious downward cycle. This cycle will persist until the bad debts are accounted for and written off or until the exhausted dollar-system collapses altogether. Either way, the volatility and violent dislocations will continue for the foreseeable future.

Most people don't understand what happened on Thursday, but the build-up of bad news on the Lehman default and the $85 billion government takeover of AIG, triggered a run on the money markets and a freeze in interbank lending. The overnight LIBOR rate (London Interbank Offered Rate) more than doubled to 6.44 per cent. Bank of America reported overnight borrowing rates in excess of 6 per cent. Longer-term LIBOR rates also rose sharply. On Wednesday, jittery investors removed their money from money markets and flooded short-term US Treasurys for the assurance of a government guarantee on their savings even though interest rates had turned negative which means that their balance would actually shrink at the date of maturity. This is unprecedented, but it does help to illustrate how raw fear can drive the market.

The TED spread (the TED Spread measures market stress by revealing the reluctance of banks to lend to each other) widened and the credit markets froze in place. Borrowing three-month dollars on the interbank market and the U.S. Treasury's three-month borrowing costs widened five full percentage points. That's huge. The banking system shut down.

What does it mean? It means the Federal Reserve has lost control of the system. The market is driving interest rates now, and the market is terrified. End of story.


The problems cannot be resolved by shifting the debts of the banks onto the taxpayer. That's an illusion. By adding another $1 or $2 trillion dollars to the National Debt, Paulson is just ensuring that interest rates will go up, real estate will crash, unemployment will soar, and foreign central banks will abandon the dollar. In truth, there is no fix for a deleveraging market anymore than there is a fix for gravity. The belief that massive debts and insolvency can be erased by increasing liquidity just shows a fundamental misunderstanding of economics. That's why Henry Paulson is the worst possible person to be orchestrating the so called rescue project. Paulson comes from a business culture which rewards deception, personal acquisitiveness, and extreme risk-taking. Paulson is to finance capitalism what Rumsfeld is to military strategy. His leadership, and the congress' pathetic abdication of responsibility, assures disaster. Besides, why should the taxpayers be happy that the stocks of Morgan Stanley, Washington Mutual and Goldman Sachs surged on the news that there would be a government bailout yesterday? These banks are essentially bankrupt and their business models are broken. Keeping insolvent banks on life support is not a rescue plan; it's insanity.
The rest.