Gimme Gimme Gimme! (Financial Lies)


Look what I woke up to this morning…

“They’re all saying the same thing, which is don’t kill the goose that lays the eggs you depend on,” NYU’s Smith said. “So they’re getting through to the Basel people, and they’re getting through to them in two ways — one is to soften the expected blows,” he said. The second is “to extend them well into the future.”

What goose?  Financial engineering.

But is this really “engineering” at all?  No.

I know I keep beating this drum but it needs to be beaten – and if I must do so until my hands are bloody stumps, I will.

“Financial engineering” is not innovation.  It is not growth.  It is asset-stripping, pure and simple, and there is no particular reason for any nation to allow them to do it to us.

We can bribe people in this country to allow it, but in the end the people can only support so big of a monkey on their back.

Consider what you would do if you had a monkey on your back that ate 30% of every plate of food you ordered or cooked, and if that monkey was violent enough to force you to sit by and let him eat – before you got to take a bite.

This might seem ok in a “time of plenty”, when you have more than enough money – and food – to simply let the monkey eat.

But when the lean times come, that monkey demands to be fed, and if he isn’t, he starts crapping all over your carpet and destroying the curtains – and your expensive china.  He might even steal your car and go for a joyride, and since monkeys don’t know how to drive, he’ll wreck that too.

The Basel committee agreed last month to give banks more leeway in the types of assets they can count as capital. Geithner, in his speech at NYU last week, said delaying capital rules will make it easier for banks to earn the money they use as capital.

“Importantly, that means banks will have the opportunity to meet these new requirements in part through future earnings and that will help protect the recovery currently under way,” he said.

Uh huh.

Leverage is an ugly thing.  It’s a drug.  The ability to have now and pay later is powerful.  The media recognizes it and Madison Avenue hones it:

“I love shopping,” she says, giggling. “Mostly clothing. I love Macy’s, Aero’s, American Eagle, Maurice’s.”

Giggling, eh?  Clothing oneself is a euphoric event?

Oh indeed.  But just like drinking – or using drugs – starts out with pleasure, soon it turns to pain avoidance instead.  We shop because “Mr. Jones” has that new Lexus in his driveway, and when we walk out to get our mail we suddenly feel “inadequate” that we own a beaten-up Ford.  Maybe the paint is a bit faded, the seats have lost their shine, the dashboard has a crack in it and “that jackass” at the mall scratched your paint with his car door.

So off we go to the dealer, even though we have no money, and once again we mainline the credit into our veins, coming home with that shiny new car.


But now the sighs of satisfaction have turned into the screams of withdrawal.  We claw, we fight, we complain.  Madison Avenue helps in our screaming – why, it’s not fair that we can’t HELOC out another $100,000 and go on yet another binge.

But in point of fact, we can’t – the equity is gone.

Homes were sold as a “stable means of increasing your net worth”, as if giving a bank $600,000 to buy a $200,000 house was a good idea.  Oh sure, it’s forced saving – of 1/3rd of the money.  The other 2/3rds go to the skimmers – the bank.

But that wasn’t enough, so the bank got us to hock the other 1/3rd so we could have a new iPhone – right now.

“It’s not like we’re saying, as Basel did about leverage, wait until 2018,” Sabel said of the Dodd-Frank Act’s provisions. “Within one to two years this stuff will pretty much be coming on line. I think that’s quite soon enough.”

Uh huh.

We’ll see about that. 

See, Jamie Dimon was correct in his original observation that financial crises tend to come every five to seven years.  The amusing part of this is that it’s really just an observation of the age-old 7-year business cycle, which anyone who’s followed the economy knows is somewhat of a shopworn statistic that has been thrown around forever.

My father, a CPA by profession, used to note it regularly – and indeed, in my youth it seemed to hold true.

Why does it happen?  Mostly because humans are pack animals to a large degree, and we will follow the herd.  CEOs, businessmen, individuals – we all tend to toward excess because it’s “easier” to say yes than to say no.

So businesses hire too many people and produce too much stuff.  We’re too optimistic.  This in turn leads people to spend money predicated on a job that is unstable (unknown to them) and when that collapses, they lose their income and the produced “stuff” goes unsold.  Recession.

But recessions have another use, when allowed to run to their natural completion.  By bankrupting lenders who were imprudent, along with borrowers, they cause market discipline to come to the fore.  The memory of big losses cause people to learn – that is, to transfer pain avoidance from “buy it now, pay never” to “if I buy it now, I may pay with my house, my car, and live under a bridge!”

That balance is important – and it has been lost.  We have intentionally fostered an environment where nobody is allowed to fail.  Where bad ideas are not allowed to be flushed out of the marketplace – banks can lend $500,000 to people who make $30,000 a year, and instead of failing (as they should) we bail them out.  States can promise $150,000 pensions to firefighters, teachers and police offers, even though mathematically they are unable to deliver it without 8% growth annually (impossible on a permanent forward basis), and we bail them out.

But each bailout does in fact require money.  That is, credit requires surplus somewhere to be loaned, otherwise it’s a circle jerk.  If you think about it there is no other possibility in reality – to “print money” simply dilutes all the existing money and thus doesn’t actually finance anything – it steps on the heads of everyone, thereby damaging future economic activity.

We’ve played this game for 30 years, and now the American Consumer’s head is being pressed underwater. 

We don’t have until 2015. 

We may not have until 2011.

We squandered our opportunity, and I believe we will pay for having done so far sooner than we care to imagine – or admit.

The Market-Ticker