Failure Beyond Finance

     Events are driving us now, not personalities or even policies. Ben Bernanke, Hank Paulson, and the other characters in the headlines might pretend that they are managing things, but the truth is that problems in the financial sector have spun wildly out of control. The wheels are coming off and we are in that long sickening moment of sideways sliding motion when no attempt at steering will avail to avoid the crash. That it is happening at the very height of the Christmas season, when events have previously been controllable -- the season of manufactured Santa Claus rallies and $50 million bonuses -- shows how perilous the situation is.

      The reason the financial sector is crashing is really pretty simple: it created too many fraudulent securities. What has been conspicuously absent so far is any sense of accountability for what may go down as history's greatest swindle. It's really impossible to imagine that a bunch of low-ranking worker bees in the banking hives spun out all these bundles of collateralized debt obligations, mortgage-backed securities, and similar trash on their own without the say-so of their bosses -- a group that includes the current Secretary of the Treasury, Mr. Paulson, formerly CEO of the Goldman Sachs organization. And, of course, the questions naturally follow: what about those in charge of the ratings agencies that awarded AAA status to high-risk junk investments; and where were the banking regulators when outfits like Countrywide Financial, Washington Mutual, and Ditech were handing out miracle mortgages to borrowers without normal qualifications; and where was the Securities and Exchange Commission when the wholesale trade in creatively-engineered debt instruments ramped up to high volume, and what was the board of directors at Merrill Lynch thinking when it allowed disgraced CEO Stan O'Neal to back a truck up to the company loading dock and fill it up with $160 million in bonus-and-termination payments after O'Neal presided over at least $8 billion in losses?

     What we're also seeing is a crisis of authority on top of a crisis of capital, and it will probably lead to a crisis of legitimacy -- by which I mean a catastrophic loss of faith that this society can govern itself at any level. Leadership across the board has failed, in government, in business, in what used to be called the press, and in education. Leadership in every sector went along with the program, marveling stupidly at their society's ability to get something for nothing.

      The general public did not perform any more honorably -- due to whatever failure of civic norms they operate within -- and indeed the nation as a whole may deserve all the suffering it faces. But however bad the general public's behavior, or dark their fate, a failure of civic norms is ultimately a failure of leadership, which is about clearly stating the boundaries and terms of behavior. When anything goes, nothing matters. Since that was our leaders' attitude, the public did what it naturally does: it follows the example set by leadership.

      We haven't begun to see where all this will lead yet. Since what is happening is basically the evaporation of trillions of dollars in supposed wealth. At the very least we're likely to see an impoverished nation very soon short of money to buy necessities. Historically this is known as a ruinous deflation. The last time America went through such an experience was the Great Depression of the 1930s. Like this situation, it came at the end of an extraordinary expansion of credit -- loans largely made in that day for the purchase of stock "on margin."

     One difference between then and now is that in 1929 a relative small minority of Americans were involved in stock purchases. Today, a relative large number of ordinary citizens own overpriced houses bought using extraordinarily risky loans, and a large number of institutions such as pension funds, banks, hedge funds, and money markets own fraudulent securities based on these house loans, worth a fraction of their face value. Some other differences this time around: in the background is a "real" economy of depleting natural resources (oil, soils, aquifers, etc) and the systematic disassembly of an industrial manufacturing infrastructure. In the 1930s, many people could return to family farms and get by, even with little money. Today there are far fewer family farms.

     The nation is acting just now like a crowd of bystanders watching a car wreck that has nothing to do with them -- as though they were just occupying the Nascar grandstand on a particularly bad day. They'll discover soon that it's their own society that's hit the wall out there on the track. It raises the question, under the circumstances, as to whether the next presidential election will have any legitimacy.

   

Comments

[Riddick]

All I can say is that you have hit the target this time with laser precision! I have worked in local government for two decades and your assessment of the dearth of leadership at all levels is beyond valid. It would seem that an empire, at the height of historic glory and omnipotence must implode from within due to a void of visionary, charismatic leadership that knew the future and was heading there with purpose.

I believe that the "wealth effect" coupled with the "Bread & Circus" extravaganzas numbs down the populous and leads to today's moral "Buffoon Show" of self-proclaimed leaders all grand standing and acting (stringing along script writers, make-up artists, pollsters, and producers) their way into high offices of power that were once occupied by men with the vision and drive of Julius Caesar.

It is as if America has collectively given up, dumbed down and headed over to the mysteries of a self-aggrandizing faith to explain the decline that is becoming apparent everywhere. How people can't see beyond the hand clapping hallelujahs and directly into the fat bankrolls of the self-proclaimed Prophets of the biblical end times is beyond appalling.

I'll tell you I don't post often here unless I really feel I have something to add to the discussion. Today is such a day. If we Americans don't get it that the party is over, the appetizer platters all gone and the horde just beyond the hill then we eclipse even the most stupidly blind population imaginable.

I have no idea how this will play out if we even approach a Great Depression-like era in the impending decade. My predictions are that things will go poorly with perhaps spots of hope in pockets of perception and true understanding. The key is to find oneself aligned there and prepared.

[judetennessee]

Sadly, I believe your are asking a very scary question! I have grave doubts about everyone of the current candidates with the exception of Kucinich who is not really even on the radar screen. All right, Sean Penn supports him! I was doing research for a paper on the origins of savings and loans over the weekend. It was amazing to discover that they were formed to help folks save money to buy a home. What a novel f****ing idea! That you save for what you desire and you can afford it or you don't get to buy it. Our society has sold out for stuff and now there is going to be hell to pay.

[oneEyeOpen]

"I have grave doubts about everyone of the current candidates with the exception of Kucinich who is not really even on the radar screen. "

Damn it. If only the rest of society could see the wisdom in Dennis Kucinich. A true giant among men.

[Farmgal]

I find what is happening to be very discouraging. It doesn't seem as if the majority of people nor our elected officials "get it" to any significant degree. The current crop of candidates is truly disheartening; lots of babble about everything but what we need to urgently confront and deal with. As bad as the Dems are, the Republicans truly astound me; just endless babble about abortion and family values.

The mainstream media is a joke; it's the last day of the climate talks in Bali and what was on the front page but steroids and baseball. Frankly, so what? How is the use of steroids by overpaid idolized baseball players going to amount to anything of real importance? We spend endless time focussed on marital issues of stars and how much weight some singer has gained and on and on while the country is sinking fast.

I have to admit that while I'm still working for change, I don't hold out much hope. People are still going to the malls for Christmas shopping(how on earth did this spending spree get started anyway?), lining up for hours and stalking UPS trucks to score Wii's, and focusing on everything but our crumbling empire.

I don't understand why more people aren't concerned unless they are either too ignorant or not paying attention.

BTW, wondering what your take is on the proposals to try to freeze interest rates etc on some of the sub-primes? Seems to me that a loan is a loan- one should check out the terms before one signs the papers. Most of these people knew that they were either lying about their income and assets or would be unable to afford the higher payments when they kicked in. Some of us actually saved up a down payment for years and only bought what we could afford to pay for, which in my case started out as a derelict hunting camp with an outhouse. Why should bad choices and greed be rewarded anyway? Wouldn't allowing home prices drop to saner levels actually help in the long-run?

[FARfetched]

This one is pretty much spot on. The only quibble I would add is when you say «a catastrophic loss of faith that this society can govern itself at any level». To hear people talk, I would conclude that we reached that point a long time ago, and society has been continuing primarily on inertia for 30 years or so.

Things could have been different if people had been presented with a vision, or at least a vision they didn't find even worse than the status quo. But these days, any vision is quickly countered by media spinmeisters who job it is to *maintain* the status quo, meaning that their patrons continue to run things. The result is that we're simply coasting to a halt.

Oh, to be a pollster and ask people "are things going in the right direction?" Then, when (as about 2/3 of people do) they answer "no," ask "how would *you* fix things?" I actually have my own answer(s), which could only be implemented if I were crowned Emperor, because everyone would get p!$$ed off at least one or two parts of it.

Monday, Monday. Oh well, after Wednesday I don't have to come back to work until 2008. One of my blog-buddies also thinks we're in for some economic hurtin' next year — he doesn't think Bush-league will be able to stave it off until he can dump it on the next prez. Now there's a question for discussion: how long can "they" keep things going?

[FARfetched]

Farmgirl, I think people are in the "let us eat, drink, and be merry, for tomorrow we die" mode right now.

[FARfetched]

Ah dangit, that should have been Farm*gal*. Sorry.

[Zack S]

Here are some nasty surprises for The Day After TSHTF.

Money market accounts and CD's are not FDIC insured. And BTW, if your bank fails the FDIC has up to 30 years to pay you back.

[Nicholas Paredes]

A couple of hundred years ago some people had the profound idea that the people could manage themselves. Somehow, along the way, people were convinced that the world was way to complex for them to understand, and the “derivatives” of governance were foisted upon them.

The mirror is always the most difficult judge. Hopefully, we’ll take it gracefully, too many people won’t perish, and we’ll begin the process of building viable lives and communities.

[montysano]

JHK's indictment of leadership is spot on, especially now as we all witness the dim, grim spectacle leading up to the '08 election. What a pack of mealy-mouthed equivocators, snake oil salesmen, and empty suits. Only Kucinich and Ron Paul seem like real humans. I'm afraid we've reached that point, prophesied in Vonnegut's amazing "Player Piano", where all acknowledge that the president is nothing but an actor, a vapid presence with nice teeth and hair.

The place I've come to recently is that perhaps, at some level, there is no failure of leadership. Reading truly dark bloggers like Arthur Silber, Cryptogon and Chris Floyd has opened me to the possibility that, for The Old Boys In Charge, things are not falling apart at all. Instead, things are going exactly according to plan, and the end result of The Plan will not be a happy one for 99% of the planet's population. The hard truth is that the planet probably has a long-term carrying capacity of only 2-3 billion people. How do we get back to that point?

We've started shopping for rural property. I used to think that a rural retreat was futile because of Roaming Hordes. Instead (again borrowing from Player Piano), I've begun to think that there will be Placid Serfs, resigned to their lot, and willing to play along as long as there's something on the boob tube and some swill to eat.

Selah.

[Dave]

leadership? where they gonna lead ya? the fact is that the days of empire and industrial society are drawing to a close. all the "leadership" in the world ani't gonna change that, get over it.

take julius ceaser, as an example. what would he do other than send legions into the hinter lands to protect the interests of empire? sound familiar?

we got all the "leadership", on a societal basis anyway, that we're ever gonna get.

this all a good thing bye the way. who wants to spend a lifetime listening to assholes?

[Dave]

lisa for president.

http://www.youtube.com/watch?v=ZiRHyzjb5SI&eurl=http://7.gmodules.com/ig/ifr?url=http://www.google.com/ig/modules/youtube_videos.xml&nocache=0&ifpctok=-74506706

[bruiserbob]

from an above comment...
"I don't understand why more people aren't concerned unless they are either too ignorant or not paying attention."

From a psych point of view, in general, humans are very afraid of the unknown. From what i've read, this is a common fear, and deeply rooted. Thus, people do not want to dig in for the truth because it threatens their daily existence. Also, the general suburbanite has little or zero knowledge of finance and the complicated terms that go along with it, and they are far too busy running their little children around to soccer, kickboxing, piano lessons, etc, to spend any time learning about it.
The Repub method is to "keep em' dumb, and keep em' happy", which currently is working like a charm.

The dangerous part is that all these people have their entire retirement money tied up in mutual funds (i.e., the stock market), and when things crater, all that money (and retirement) is gone. It is going to be a mess i suspect.

[JLee]

Until we stop rewarding CEO's with hundreds of millions of dollars to not do their jobs or even to do their jobs the rot will not stop. This sort of entitlement is a clear symptom of the fundamental failure of our system. And the laws as structured not only fail to deal with it but encourage it. I say until heads roll and blood flows it's not going to stop.

[orbit500]

"Until we stop rewarding CEO's with hundreds of millions of dollars"

Given my uncle-in-law is a CEO of a Fortune 500 corporation I would have to argue against that point even if he does take home an ethical $4m as opposed to most of the circus ringleaders on multiples of that.
I asked him recently of his corps plans against rising energy costs and fall in assets and all he would say was 'I never try and time the market' but somehow I don't think he will be on the losing side in any heavy downturn.
My father-in-laws house is up for sale in central London for close on £4m and they have a contract signed so p[lenty of people with $$ to shift around aren't slacking off at all.
Just you and me with an eye on the heating bill, grocery bills and car running costs.

[Ed]

The availability of credit drives up prices. The availability of easy credit is like credit on steriods. Back in the old days, when Savings Banks and S & L's got started, credit was hard to come by and houses didn't sell for a lot of money.

[XER]

montysano,

Arthur Silber, lifts the lid and exposes the cosmic hell we have created for ourselves. It is clear to me as well, that the elites know exactly what they are doing, and are preparing to navigate the collapse of the current order. They are building walled in "Green Zones" to attempt to shield themselves from those that will be eating "cake".

Silber has been brilliant in his historical analysis of post civil war America. He has shown that America suffers from a deranged mind filled with ideological fantasies, a sick heart that praises darkness while listening to fantastic myths about itself, and a will that is held captive by fear and greed.

Arthur Silbur will go down as one of the great moralist writers of our times.

[Holmes, I presume]

Belligerent “flash mob” of Santas in Oakland, CA.

Idle or not idle?

http://video.knbc.com/player/?id=196085

This is precisely why the internet as we enjoy it today will eventually be shut down. Enjoy these Halcyon Days.

[Loveandlight]

"I don't understand why more people aren't concerned unless they are either too ignorant or not paying attention."

You are obviously not informed as to what a meticulously and painstakingly contrived and crafted thing willful denial is.

[Holmes, I presume]

Of course the internet and various other communications networks will still be provided as needed to us alleged citizens (perhaps even for free) to better facilitate the dissemination of propaganda and other instructions for living, and to facilitate consumer activities. Approved virtual private networks and other purpose critical communication needs will be accommodated.

Guerilla blogs spring up briefly in the comment threads relating to purchased products, tiny flashes of light in a vast dark chamber -- perhaps indicative of detected neutrinos.

[montysano]

@ XER,

My only complaint with Silber is that it's all problems, no solutions. Maybe there are no solutions, eh?

[Farmgal]

Actually Zack- so far as I know CD's are generally FDIC insured and some money market accounts are, especially those at banks, but not at mutual fund type companies, eg: Fidelity, Vanguard, etc.

As for the government taking 30 years to refund money if the bank collapses- well if that's the case, I'd guess that we were in such deep doo doo at that point that the money would have little value anymore as it was...

[XER]

montysano,

Arthur Silber is in the business of explaining our national state of mind. He is aware that solutions are impossible to suggest, let alone implement while in an extreme state of moral denile and crisis. I see him as a man that has taken the wrecking ball to the national conscience. The demolition crew must complete their work before the builders can even get started. I would say we are beyond the point of solutions, we will be forced to start new amoungst the ruins. Currently, solutions are mainly addressing a rotting corpse. Nature has a hand in all of this.

I'll admit, that Silber gives me comfort in knowing that I'm not alone in realizing the moral rot that has taken hold in the American soul. 500 years materialism is hitting the wall, and will run it's course in my generation's lifetime.

We are living in great times!

[baileyalexander]

Finally, we’re hearing the concept of 'willful ignorance' as discussed on a national level, entering a collective conscious.

Many suggest that people don't feel an obligation to understand money, propaganda, how to analyze the information they process, although I think there are other symptoms that give license to or at the very least, lend themselves to our nation's inability to cope; a litigious, evangelical and therapy/drug cure like culture that allows the victim notion to reign supreme.

Willful ignorance masquerading as native wit maybe. Well, the wolfs at the door. That false sense of entitlement will fall away and that inalienable right will feel more like something that you have to work really hard for...

Great post, scary stuff.

[Uncle Remus]

"Could emerging markets really carry the global economy through a massive downturn in the United States?"

http://www.newsweek.com/id/78113