Last Ditch

     Why do the big deals always happen over the weekends? So the big boyz in government and finance can take off their neckties when they bargain with each other? So the markets will be closed and unable to register a response one way or another? So the shrinking fraction of the US public that pays attention to anything besides Nascar and pornography won't catch the news Saturday evening?
     This weekend's big deal was the US government taking over the "government sponsored enterprises" (GSEs) Fannie Mae and Freddie Mac that guarantee trillions of dollars in mortgages. The "guarantee" is supposedly accomplished by converting bundles of mortgages from the banks and loan companies that originate them (that make the contracts with the buyers of houses) into bonds that can be sold downstream. Risk was theoretically dispersed among the holders of these bonds. This all seemed to work during the long stable period when our cheap oil economy was chugging along, and house prices maintained a consistent relationship with incomes, and people paid their mortgages dependably. The whole system ran like a reliable machine -- like a Chrysler slant-six engine!
     Until the cheap oil age came to an end. Then, all parts of the system shook apart. It was the end of cheap oil that catalyzed the housing collapse and, by extension, the current huge financial crisis. But the run up to it was like a bounce off a high diving board into an empty pool. The bounce came around 2001 when it became apparent that the US standard-of-living could not be maintained on incomes in a post-cheap-oil economy. The trauma of 9/11 prompted a new and utterly insane consensus to form that the US standard of living could be switched over from income to massive debt. All the normal brakes against irresponsible lending and borrowing came off -- embodied in Alan Greenspan's absurd statement that it was a good time to assume an adjustable rate mortgage when interest rates were at a historic low -- meaning they could only be adjusted upwards. Why hold Greenspan responsible? Because he was at the apex of the authority vested with establishing norms, and he shoved our behavior into the realm of the recklessly abnormal, and he should have known better.
      The public went along with it because "free money" and high living are fun. Their behavior was reinforced by other authorities -- for instance, President Bush, who told Americans to go shopping after the 9/11 attacks. (They went shopping with credit cards.) Things really wobbled in 2005 -- which was, coincidentally, the year of all-time world-wide peak conventional oil production -- with hurricanes Katrina and Rita ripping through the Gulf of Mexico oil rigs as a dramatic highlight. (It was also the year that The Long Emergency was published.)
      Since then, the US economy and the financial part of it that became a nine hundred pound tail wagging a thirty-pound dog, has been held together with baling wire, duct tape, and band-aids. All the debt run up by all parties -- home-owners, credit-card holders, business, banks, hedge funds, government -- is not being paid back reliably, and all the leveraged arrangements that depend on it being paid back are coming apart. Thus, capital disappears. The wealth of a nation disappears. All that remains is the pretense that we are still a wealthy society
    Fannie and Freddie are near the center of this black hole of debt. So far, the black hole has been "papered over" by the old stage magician's trick of diverting the audience's attention. The systemic wound that Bear Stearns represented, was covered up with a band-aid applied by the Federal Reserve's exchange of loans for worthless securities. In fact, the capital of Bear Stearns actually did disappear -- a mere residue of it, a few cents on the dollar, was shifted to JP Morgan as payment for taking the wrapper off the band-aid. But, basically, the money is gone.
     Now, the same thing has happened with Fannie and Freddie, except that the scale is an order of magnitude greater. This time, the US Treasury Department is assuming worthless paper and paying out much larger loans to enterprises that are functionally bankrupt. The exact nature of the government's chartered "sponsorship" has always been ambiguous. Professional opinion has generally held that government backing was implied rather than explicit -- but that's a ridiculous internal contradiction that went unchallenged for decades as Fannie and Freddie's Ponzi-style operation lumbered on (and their executives made off with obscene payouts). Now the government's role has suddenly been made explicit. It will probably only make things worse, since the enterprises are too big and over-scaled to work under any circumstances, let alone insolvency.
     One thing this points to is a truth that is uniformly overlooked by kibitzers: that what we developed over the past decade in America was not an "information economy" or a "consumer economy" but a suburban sprawl building economy, meaning an economy dedicated to building a living arrangement with no future. The climax of the sprawl building economy occurred in absolute lockstep with the climax of peak oil. You can date it virtually to the month -- May, 2005. After that, the future asserted itself and all the financial expectations bound up with sprawl-building went up in a vapor -- including the value of mortgages on suburban houses. Everything that followed has been an attempt to cover up this basic reality: that the way we live in America can't continue.
     The reason our energy debate is so hollow and idiotic is because we can't face this basic reality. The fantasy-du-jour among both political parties is that we can become "energy independent." By this they mean we can keep on living the way we do by means other than oil. This is just not true. We have to make profound changes in everything we do from the way we inhabit the landscape to the way we produce our food. Lately, the only change we've shown any interest in is changing what our cars run on. But that is not going to rescue us, not even a little. Our inability to talk about anything else except the cars will drag us down into poverty and turmoil.
     The housing market is not coming back. Ever. In the form that we knew it. The suburban project is over. That version of the American Dream is over. We'll be a lot better off if we put aside dreaming altogether for a while and start focusing on reality instead -- that part of the day when we're awake and capable of actually doing things. We've got a lot to face and a lot to do.
     The government takeover of Fannie and Freddie is just another papering-over of our fundamental problem -- that until we embark on new ways of being a nation, of living differently and working differently on different things, the other nations of the world will not have confidence in us, or the paper we issue, and we will not really have confidence in ourselves.
     I have believed all along -- and said as much in The Long Emergency -- that we would not get through this crisis without passing through a period of hardship. We're entering it now. Even if the stock markets shoot up five hundred points today on the basis of the Fannie-Freddie deal (and the mistaken belief that our troubles are over), we are only at the beginning of a very painful workout. Personally, I think we're in for financial carnage before the election. The Fannie-Freddie deal may be the place where the wheels really come off.
   ____________________________________
My new novel of the post-oil future, World Made By Hand, is available at all booksellers.

Comments

[peakoilmom]

The Web bot program says that around Oct. 7 something momentous is going to happen. I wonder if it will be the financial implosion of the U.S.?

If so, what should the average person do at this point? Pull everything out of the stock market and put it in precious metals?

[LaughingAsRomeWasBurningDown]

I started to say "you forgot Ike" but looks like it's fizzled out over Cuba for now. Great column today. Saving the bad news for the weekend, when they know we are not paying attention. Oh well, it was almost worth the economic collapse just to see Cramer bitchslap Pat Buchanan on MSNBC this morning. Almost.

[Flamsey]

Fannie Mae was featured in the book Good To Great about 4 years ago. At the time the stock was trading at $70+. Seems like it went from good to great to horrible. Time for a new book.

We may never know what it cost the tax payers to get out of this hole... but at least they have stopped digging, for now anyway.

[LaughingAsRomeWasBurningDown]

> what should the average person do at this point?

There was a list posted before. I think ammo, cigs, condoms, liquor, axes and something else were strongly recommended investments.

[asoka]

Something I never understood about buying "precious metals" (because paper dollars have no value). When you buy gold or silver, don't you get a paper certificate of ownership? What makes that paper any more reliable?

In addition to the domestic mess we have, the Iraq mess is not going well. It seems the Iraqis actually believe they are independent.

"Oil Minister Shahrastani offered what might be seen as a declaration of oil policy independence. "[Global] oil supplies," he declared, "meet and may slightly exceed current world demand." The world, that is, had plenty of oil, and so there was, he insisted, no global need to rush pell-mell into oil development agreements that might not, in the long run, be of use to Iraq." --Tomgram: Michael Schwartz, Is American Success a Failure in Iraq? (Sept. 7, 2008) http://tomdispatch.com/post/174973/michael_schwartz_is_american_success_a_failure_in_iraq_

The use of bandaids seems not to be very effective when the problem is a spurting artery.

I completely agree that the "American way of life" is not sustainable.

[the bonanza of bumbling boondogles]

Jim,

Here is my question. It appears that the entire "case" for financial collapse is based on the premise that we have hit or will soon hit a peak in oil production and that energy costs will ramp up.

I agree that if indeed that is the reality we face than our entire way of life must change and that our financial system is going down as well as our government.

BUT. What if we have not peaked? I have been trying to answer this question for the past several years and cannot even get accurate nor reliable data to either support this assertion or to deny it. It remains unclear. The information we have is either incomplete and there are so many interests that it is impossible to know who is telling the truth about reserves, ect...

I agree that we can lean towards a conclusion based on common sense but I am wondering where your sense of certainty is coming from regarding this question. Since this is THE QUESTION going forward, I just am wondering how you be so sure?

Thanks.

[Dave]

Great Post !

What is required now is a massive reorganization of our society or it will break down then reorganize locally and regionally. My bet is the second.

[bobn1955]

"So the shrinking fraction of the US public that pays attention to anything besides Nascar and pornography "

You forgot Pro Wrestling.

I think Vince McMahon is a giant mutant rat.

[bobn1955]

"After that, the future asserted itself and all the financial expectations bound up with sprawl-building went up in a vapor -- including the value of mortgages on suburban houses. "

Actually, the peak oil implosion is just barely starting - the current implosion is just the bursting of the cheap credit bubble. Note that housing in also dying in downtown areas of Miami, LA, Phoenix, and recently New York. This was mostly due to the end of funny money - once the phony-DTI gimmick mortgages died, house prices higher than historical level of price/income ratios were totally unsupportable.

The effects of peak oil will be even worse and more weighted against the ex-urban areas, as you say. I just don't think that the process of that has really gotten started.

[Abrey]

Dear Jim: Off-topic alert. Your Grunt posting of September 1st featuring a picture of Sarah Palin in a bikini holding a rifle is a hoax. There have been several websites exposing this fraud.

http://urbanlegends.about.com/library/bl_sarah_palin_bikini_pic.htm

Abrey

[Movenonup]

More dominoes falling?

Fannie, Freddie Credit-Default Swaps May Be Unwound

"Investors may be forced to unwind contracts protecting $1.47 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. government seized control of the companies in a bid to bolster the housing market.

Thirteen ``major'' dealers of credit-default swaps agreed ``unanimously'' that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said.

``This is a big deal,'' said Sarah Percy-Dove, head of credit research at Colonial First State Global Asset Management in Sydney. ``The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown.''

A settlement of credit-default swaps would probably be the biggest attempted in the market's decade-long history because Fannie and Freddie are members of the benchmark index of U.S. credit risk, Percy-Dove said. The index comprises the most frequently traded contracts in the U.S.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajsxbVS.W2lQ&refer=home

[daazdnkuntfuzd]

Mr. K.,
Could you...PRETTY please.... tell us your private musings on this S. Palin character? I can't wait!

[Patrick]

The saddest part of this whole Fannie/Freddie mess is the drastic increase overnight in the size of the national debt.

Not only is the "real" national debt so large ($9Trillion) that every year Congress has to vote to increase the amount the US can borrow. But now the US just cosigned for another $6Trillion of debt held by the Macs.

Even if the US wanted to try and alleviate the problem of peak oil--they're running out of the credit to invest in any significant transition.

[peakoilmom]

I'd like to hear Jim's comments on SP as well ...

but until we get them, check out this Alaskan blog ... It's my go-to place for SP news and speculation.

http://mudflats.wordpress.com/

[montysano]

"Mr. K.,
Could you...PRETTY please.... tell us your private musings on this S. Palin character? I can't wait!"

Until JHK weighs in, here's my take:
- It was such a reckless choice as to question McCain's judgement;
- Her closet is likely full of skeletons;
- She is so unprepared for the job that she is being sequestered from the press;
- Choosing her was a cynical gimmick, but a brilliant one, and it just may work. In fact, right now, I think/fear that it is going to succeed.

[Movenonup]

Hi All,

This would be happening without "peak oil." It is peak resources and the limits of growth in general that are the problem. It is Jim's job to keep our attention on the Suburbia/peak oil angle and it is a useful frame, but I have been looking a fractional reserve banking lately and $#i++ing a brick at how screwed we have been since we were born.

The only show in town is to prevent a run on the banks, both locally and internationally. In a fractional reserve system that is always the only show in town, everyday of the week 24/7. Keep them in the casino.

We could pull a big joke on the government/banksters: Hold on to our money. Do nothing with our money except pay our bills. That would be profound revolution. That and don't pay tax and they suffocate, the whole thing grinds to a halt.

The American revolution was an effort to get out from under the influence of the international banking system. We have betrayed the revolutionaries. Woodrow Wilson, after signing the Federal Reserve into existence in 1913, realized what a mistake he made and said so publicly.

All the Big Boyz have to do is offer up a story that most people buy that keeps them from asking for their $#it back. That is all that I see going on, no more. Restore faith in the system. Keep it flowing. Show goes on till the next crisis.

I have been studying a while and came to it yesterday, the system must have inflation and deflation/depressions as "adjustments." Each of these things serve to reconsolidate wealth and correct the system. The need to earn "interest" is the problem, the source of the need for correction. In order to pay interest, new debt must be incurred to create money to pay the interest on the old debt. In a closed system, there is no interest, otherwise those earning the interest would eventually own everything. You have to grow it to get more. Only infinite growth cannot work mathematically nor can it work given finite resources. Interest out weighs principle. Number of consumers on earth out weighs remaining resources. Amount of pollution out weighs livable, breathable spaces. Same paradigm, same results. Collapse.

I don't know if I have explained this well, but the expectation of earning interest requires the system to keep growing, or else it will fail.

As a sociologist, we don't do conspiracy theories. We talk about the agency of individual actors vs. structural contingencies. We talk centralized vs. localized, the impacts of globalization, Blah, Blah.

I am almost ready to commit to it that the world really is run by bankers and until the world wakes up to this fact and stops fighting over the scraps they let fall from their table, we will be debt slaves, always.

Even me, she who is debt free.

It is a way of thinking that underpins everything we think and do. Fractional Reserve banking is a philosophy, a way of knowing, a way of living and expecting. It is the Matrix.

[msjanket]

Sarah Palin won't be any worse than Joe Biden. Obama talks about the new future, but forgets he chose an old hack for a running mate. Dems have stooped to ridiculously low levels to lambaste Palin, but it's all for nought. New blood offers new chances.
I doubt JHK has much new to offer about Sarah. It might be humorous, well written, but it surely won't be new. Sarah hails from an all-American family with all the foibles and problems, she's a natural match for the job. Unless we can break the stalemate we have in political leadership, we are sunk.
While well written, Jim's post is trite, hackneyed, and offers zero new insights. I expected more. I got less. Maybe next week.

[scott]

United Airlines trading was halted, looks like they are finished also...

http://finance.google.com/finance?q=NASDAQ:UAUA

I bought LCC Friday morning at 7.49 and sold in the late afternoon at 8.04. My account is in a 90 day restriction so wasn't able to get back in at 5.49. Won't be cleared again till Wednesday. I have been following FRE closely for about a month now and actually bought and sold some shares a week and a half ago, got spooked and barely covered the commissions. If I would have held it for a couple more hours would have cleared a couple grand.

The Google finance message boards have been an ecclectic mix of delusional bulls that kind of mirrors the population in generals expectations and some saavy bears that have been expecting this takeover with remarkable accuracy.

[scott]

http://finance.google.com/group/google.finance.12896/browse_thread/thread/71e48bbac65fc19c

[EEofDC]

"You have to grow it to get more. Only infinite growth cannot work mathematically nor can it work given finite resources. Interest out weighs principle. Number of consumers on earth out weighs remaining resources. Amount of pollution out weighs livable, breathable spaces. Same paradigm, same results. Collapse." --MOU

Bingo, Girlfriend! My only quibble is "collapse." I would go for "recycle" instead. As one of my heroines has quoted recently, there are no markets any more, just interventions.

Bye, bye globalism!!

[EEofDC]

"New blood offers new chances." --msjanket

"Blood" is certainly the operative word for Sarah Palin.

[inquisitivemind22]

Hello to all,
Abrey- I emailed Jim after he posted the Palin pic and let him know it was photo shopped.

Dave- while there is some weakness in Manhattan, over all the housing market in the North East has held up. Some NYC suburban areas have yet to have significant price drops.

msjanket-
Its crazy to me that Palin and McCain claim to be for change! It was their party that was in control of all 3 branches of the federal government for the past 6 or 8 years. Bush didn't make the bad decisions coming home to roost now in a vacuum. He had help. Have McCain and Palin asked the rest of the GOP to go along with their "change"? Have McCain/Palin admitted all of the problems the Bush admin caused? Have they apologized for devaluing our currency, wrecking of the bankruptcy laws and system, bankrupting Medicare/Medicaid/Social Security? Have they apologized to all of the veterans who are denied decent health care? Have they apologized to the US taxpayer whose devalued tax dollars are being used to bail out "too big to fail" financials while their CEOs keep their million dollar paychecks and bonuses from the past few years?

In my opinion, McCain and Palin have a lot of explaining to do before they can claim to be for change. They have to really prove their leadership will be different. America is a wreck and there is a lot on the line.

[Nudge]

Asoka wrote:

"When you buy gold or silver, don't you get a paper certificate of ownership? What makes that paper any more reliable?"

Err, no offense, but I believe the use of gold/silver predates paper certificates of ownership as well as the use of paper itself.

Jim .. utterly fantastic post :)

The Zoloft fog appears to have enveloped Wall Street entirely ..

[NineInchNachos]

being an Alaskan, I recently featured Sarah Palin in my community building sidewalk chalk challenge...

http://www.flickr.com/photos/tacoma-inventor/2808999899/

also you can read the full palin-critical letter from that lady in Wasilla, Alaska named Anne Kilkenny.

I'm just happy we finally have somebody willing to stand up for Americans right to have their library books banned.

[westville_girl]

A question (perhaps a silly one, I don't know) about gold and silver:

Let's say I'm a farmer, and I have some chickens, and you'd like some: What would inspire me to trade some of my precious food commodity for some shiny metal?
I'm just wondering about the value of gold and silver in a barter economy, I suppose....