Posted by Karl Denninger
Doug Noland over at The Prudent Bear has written a piece that everyone, in my opinion, should read – particularly the section on “The Volcker Rule”:
While certainly not without faults, the financial system back in the Volcker era was more stable. The ABS market barely existed. The Wall Street firms and their marketable debt instruments were not major factors in system Credit creation. The banking system dominated the extension of private-sector Credit. Derivatives markets were in their infancy – and certainly didn’t dominate the financial world. Outside of some GSE MBS, mortgage Credit was in the form of bank loans. There were only a handful of hedge funds – not thousands. Leveraging marketable debt instruments wasn’t The Game.
One of the big problems today is that there are tens of Trillions of marketable securities out there – and their value depends greatly on the ongoing creation of Trillions more. Our system needs major financial reform – no doubt about it. From today’s Wall Street Journal: “The White House’s relationship with Wall Street is close to the breaking point.” A war on Wall Street would put Credit growth, asset markets and economic recovery all at risk.
Just say it Doug: It’s a Ponzi Scheme and thus ultimately must fail, as do all Ponzi Schemes.
I find it amazing how far people will go – describing the essence of the scam, go through it in detail, laying it all out right in front of your eyes – and then they walk right past the obvious (and indeed the only) statement that sums it all up.
All such schemes of creation or maintenance of “wealth” that rely not on the underlying value but on creation of more of the same are Ponzi Schemes. They all must fail because in each and every instance you must continue to find a way to make “more” of whatever you started with in order to maintain value, and as time goes on this “more” grows geometrically in support of what already exists.
This cannot occur forever as a consequence of basic mathematics, which is why all such schemes are supposed to be unlawful.
That is the underlying reason why we must have reform. It is not a matter of one means of profit being “good” or “bad”, nor of whether the financial sector is “too big.” It is that the structure of finance in this country, and indeed the world, has grown into a blood-sucking vampire that creates more vampires, and thus has turned into a Ponzi Scheme. Eventually it must run out of blood sources simply due to the fact that it continues to expand in size at a rate faster than the productive economy and yet the productive economy upon which it feeds has a limited amount of blood that can be extracted without dying – just as is portrayed in the movie Daybreakers.
We reached that limit in 2007 and that is the root cause of the trouble we got into – and remain within.
Doug is just the latest of many who walks right up to the truth, stares it in the face, and then ignores it.
Wake up Doug.