or Thinking the Unthinkable
The pressing question of the day is whether the G-7 finance ministers will come up with a plan to stabilize the financial house of cards long enough to take it down without breaking everything. Let's call it a house of glass cards.
Luigi Zingales of -- disgustingly enough -- the University of Chicago, has proposed Plan B, a two-part plan that would recapitalize the banks and restructure home mortgage debt without government financial exposure, by harnessing the market through contracts and regulatory changes. It would work. Probably one reason it will not be selected by those in charge.
On the other hand,
Why bother to hope? Finance ministers have been getting a fairly unified message from economists for weeks. They may have a marginally better understanding today than they did six months ago. But they are plainly from the same school and on the same page as Henry Paulson and Ben Bernanke. That means they are woefully behind the curve. Their constituents are the banks and entrenched interests, so their answer will tend toward burdening the citizens with the costs of keeping the current actors in their places.
Let's think for a moment about the unthinkable. Also known as the inevitable.
The destruction of trillions of dollars of paper wealth.
One of the absurd but real statistics is that nearly sixty trillion dollars of credit default swaps have been written on six trillion dollars of corporate bonds. The bailout of AIG and Bear Stearns and the code words "too interconnected to fail" are sacrifices to this pile of credit default swaps.
But we are getting distracted from the unthinkable.
The real economy produces goods and services, food and stuff. The financial economy produces ... you fill in the blank. At its base it is supposed to mobilize savings, manage risk and allocate capital, according to Joseph Stiglitz. I would say, it is supposed to facilitate exchange socially, geographically and temporally. The money itself is useful as a medium of exchange, but is lousy as a store of value. The value has to be stored in the real economy.
In fact, money is abused when it is assumed to be a store of value, as when it itself is exchanged for goods instead of being the medium of the exchange of goods. I drive a bus. You grow wheat. It would be very hard for us to barter. We use money. But if that money itself is taken as a good or service and stored up, things get out of whack. Instead of trading agricultural products and machine tools to China for electronics and apparel, we traded dollars for the Chinese goods. Meanwhile we created out of housing a financial asset worth much more in dollars than its value as a shelter from the cold.
Getting distracted from the unthinkable again.
To make a long story, or at least an elaborately illustrated story, fit on one page, we now have an immense number of dollars each looking for a way to survive as something of value. Looking for an asset that won't collapse in value. That is, a way to maintain value. Get the point?
It is not commodities, as we've seen. Commodities inevitably depend on an ability of others to buy them, so as the commodities bubble proved, they didn't store value for dollars. It is not housing or stocks, so it must be U.S. short-term debt.
Yes, my fear is that just as nobody sees the commodities bubble, except those few who made a financial killing on it, now nobody sees the U.S. Treasuries bubble. Even as the financial prospect of the government worsens, as its central bank's balance sheet becomes bloated with toxic paper and its deficit explodes, the value of its debt instruments rise? How does that work?
I'm not going to connect to the final dot, because I don't want to give the obtuse a path to their own destruction. Suffice it to say, it is not by figuring out anything to do with the money that we return to sobriety and prosperity, it is by making things and providing services and value in the real economy. This demand side is being ignored in the current calculations of the financial ministers and their Wall Street advisers.
If the real economy is helped sooner, it gives the money a purpose for exchange and a base of value. If later, the interim period is an acid bath in which the money will dissolve.
But think about it. The unthinkable. A financial collapse. At least it eliminates the so-called wealth in the vaults of those who conspired to manipulate the system and foisted the religion of markets on the unwary. Yes. A collapse hurts everybody. It would be better not to go there. Unfortunately there are financial instruments the value of which has to either be eliminated or ratified by diluting the value of everything else. Also unfortunately, we are asking the G-7 finance ministers to cut off their own gangrenous limbs and a couple from the private marketeers who are their best friends. It may not happen. Not only because it is a gruesome prospect, but because as they've amply illustrated, they cannot see that the problem is serious enough to require such an exercise. If they had such insight, they would have used it before now.
After the unthinkable,
Can we somehow reform a financial architecture that is sturdy and will acknowledge obligations internationally and interegenerationally? That is, can we admit that the real economy is the only economy and the function of money and credit and the financial sector is for exchange and bringing forward value from investment? We ought to admit that it is possible to devise financial systems after the crash that serve our needs and not accept a negotiating position that we are paralyzed by the needs of the currently wealthy.
Which is only a way of saying, there are factories and farms and hospitals and buses that are growing less well utilized. They are not being destroyed -- these real things -- only the organization of exchange is being destroyed. Why not invent the mechanics of utilizing them well out of the rubble?
Well, somebody has to think past the sky falling.
I have put up some other posts here at Kos and I podcast with some degree of accuracy at demandside.
On Kos:
Why the (original Paulson) bailout plan will not work.
from February:
Why Democrats may have to lead BEFORE innauguration
and eleven months ago, wondering where the Democrats were as the economic problems built up steam:
Kitchen table issues