J.R.R. Tolkein's The Hobbit is a charming fantasy. It doesn't have the depth or richness of scope of the sequel, Lord of the Rings, but it's an engaging treasure hunt where an unlikely everyman is recruited by a wizard to help a group of dwarfs kill Smaug, the evil dragon living on a pile of stolen gold under the Lonely Mountain.
And it's a good metaphor for a lot of the criticism I've seen leveled at President Barack Obama and Treasury Secretary Timothy Geithner's plan to relieve the banking system of these toxic "legacy assets." Because the key element in that description is fantasy. There is no Smaug.
There also is no Kossaku again this week, for the same reason as last week; I've not yet been able to recover the template from my old computer and I've not yet made up a new template. My apologies.
And another apology, below the fold....
An Apology: I lost my patience yesterday in debates about the Geithner Plan, and said some things and said them in ways that I shouldn't have. To all whom I offended, I'm sorry. I was wrong, and there was no excuse for it.
There is no Smaug.
The Hobbit is plainly a children's fantasy story. J.R.R. Tolkien wrote it to amuse his own children, and submitted it for publication almost as an afterthought. The publishers asked for a sequel, and that gave rise to the masterpiece, Lord of the Rings, a story with greater depth and scope, and with more adult themes of temptation and redemption, death and rebirth, destiny and decline. The Hobbit is a treasure hunt.
And that seems to be the way many people view our economic challenges: as a treasure hunt. Somewhere there are the Rich Greedy Bastards™, sitting like Smaug under a Lonely Mountain atop a pile of stolen gold. Our gold. If we can just find and slay the RGBs™, or at least put them in jail or fine them or something, we can get our gold back and everyone - well, except the RGBs™ - will live happily ever after. Unless we have to write a sequel.
"You can't make chicken soup from chicken shit ..."
I first heard that expression in law school, to describe why a case was lost. In a standard legal brief, an attorney lays out the facts of the dispute, then the specific legal issue(s) on which the dispute turns, then the rule(s) of law governing each issue. Finally, for each issue, the attorney offers an argument for why, given the facts of that case, the rule(s) of law compel a decision in favor of his/her client.
But what if the facts can't be presented in a way that favors the client, and/or the rule(s) of law clearly show the court must decide against the client? That's when good attorneys decline to file an action, or advise the client to settle if the action is already in progress. Because "you can't make chicken soup from chicken shit ..."
"... except in confidence games."
Confidence games are all about "making chicken soup from chicken shit," or at least appearing to for long enough to extract money from the mark. In most confidence games there is a "McGuffin," a treasure to be found if only the mark will front the confidence artist the money to search for and recover that treasure.
The McGuffin may or may not exist, but in most real-world confidence games it doesn't. There's no "there" there. The con artist gains the mark's confidence (hence the origin of the term) that: (1) the McGuffin does exist; and, (2) if the mark will finance the operation, the con artist will recover the McGuffin and split the profits. Once the mark has turned over the money to finance the recovery, the con artist then performs the "brush off" by feigning an unsuccessful search or, more commonly, simply moving on to find and fleece another mark elsewhere.
Most con artists get caught because they have to keep finding and fleecing new marks. They have to do that because the amount of money they get from a confidence game is usually fairly small, especially as compared to the McGuffin. The McGuffin may have allegedly been worth millions, but the confidence artist gets only hundreds or at most a few tens of thousands.
That's because the mark, while perhaps gullible, is rarely downright stupid. If the cost to finance the operation is so high and/or the operation so risky that the likely profits from the McGuffin won't cover the investment, the mark will lose confidence. So the con artist has to set the price of the operation carefully, high enough that it doesn't smell too badly of "something for nothing," but low enough that it sure does smell like a good deal. And that is usually pennies on the dollar of the McGuffin.
And when it works, the con artist really has "made chicken soup from chicken shit." The McGuffin may be unrecoverable, or may not exist at all. Even if it did exist, the con artist rarely had any intention to recover it. For the con artist, the McGuffin was never the objective. The objective was to convince the mark to finance its 'recovery,' and then perform the brush off.
Our mega-trillion dollar McGuffin
Which brings us to the present economic crisis, and the search for a Smaug. The belief that Smaug must exist, in the form of the RGBs™, is based on the value of the McGuffin whose recovery we were asked to invest in. That McGuffin was and still is the belief that 5% of the world's population can go on consuming 25% of the world's resources, with each generation having more goodies than their parents. It's a mega-trillion dollar McGuffin, and a lot of us are seeing it slip away. Many want the McGuffin back, and they're convinced that McGuffin must exist somewhere: a pile of stolen gold under the Lonely Mountain, jealously hoarded by our Smaug, those RGBs™.
But like most con artists, they got only pennies on the dollar of the McGuffin. Sure, pennies on mega-trillions of dollars is a lot of money, but not enough to pay for the McGuffin. Because as in most confidence games, that McGuffin never existed. We could root out every one of the RGBs™ and shake out every dime they have, and it wouldn't be enough to fund the McGuffin of 5% of the world's population continuing to consume 25% of its resources, with each generation having more goodies than their parents.
Yes, we've been conned. Yes, we can and should institute a better, more progressive income tax to reduce the dangerously high wealth disparity in our nation. Yes, there are RGBs™ with a lot of money, and some of them acquired it by means that were or should have been illegal. If the means were illegal, those people should be prosecuted and the ill-gotten gains recovered insofar as possible. If the means were not illegal but should have been, the law should be changed.
But even if we did all of that, there wouldn't be enough money to fund the McGuffin. And recognizing that is going to cost We the People a lot of might-have-been money, because there is not and never was that much real money. The plans we'd made based on that might-have-been money will have to be changed or abandoned.
What we should be asking:
The important question now is not "How do we get our money back?" A lot of it never existed.
The important questions now are: (a) "How much do we really have?" and, (b) "How do we manage it so the fewest people get ruined?"
I believe the Geithner Plan is essentially a way to search for an answer to the first question: "How much do we really have?" What is the real, productive value of these toxic "legacy assets?" Most of them are not entirely valueless, but they're not worth their McGuffin value either. We need to know what their real, productive value is to know how much was never anything but McGuffin money.
The second question is one President Obama seems to be trying to answer with a budget focused on jobs, green energy, education, and health care. Whatever our future will be, we'll need to work to make it happen. We'll need to break our addiction to fossil fuels. We'll need an educated work force to find innovative solutions. And we'll need to find a sensible health care plan that doesn't enrich insurance companies while too many of us can't get health care, or are never more than one serious illness or injury away from bankruptcy.
We're still going to lose a lot, because too much of the way we'd been living was premised on the McGuffin. Too much of our personal, corporate, and government budgets were based on rates of growth that were never realistic. Scaling back those growth projections to more reasonable levels will break those growth-based budgets, and there is no magic bullet to avoid that breakage. There is no Smaug under the Lonely Mountain, sitting on enough gold to pay off that breakage.
But we can try to spread the breakage as widely as possible - over as many people as possible and as long a term as possible - so as few people as possible get ruined in the transition.
And we can prepare - individually and as a nation - for a more reasonable and sustainable future.
Well, we can, once we stop thinking we can get it all from Smaug.
Happy Wednesday!