The globe is spinning. Its leading team of bumbling spinmeisters, statist incompetents, unalloyed greedsters, malicious socialists and phony conservatives is running this tired Western jalopy toward The Rock of Immovable Reality. Harpo, Gekko, Barko and Sarko are together in the catbird seat, still throwing off comforting gibberish but testing the buckles on their ejection seats.- - - - - - - - -
The systemic faults created by the gross incompetence and corruption of governments (1) have been exploited by the bankers to raid the bank. When reality check came and real estate values crashed, governments bailed out the malefactors and fanned the flames of fear to implement “solutions.” Such solutions took two forms: “bailout,” i.e. the transfer of toxic debt from the banks’ balance sheets to the governments’ balance sheets, or “stimulus,” i.e. throwing easy money at the hoi polloi and further inflating the governments’ balance sheets.
All that was merely another instance of the Western model of misgovernance, based on rolling over the consequences of wickedness and folly onto future generations. That protects the perpetrators but worsens the ultimate consequences for the rest.
The moral hazard and future consequences of bailing the banksters out were known. The Telegraph‘s 11 February 2009 headline said it all: “European banks’ toxic debts risk overwhelming EU governments.” Furthermore, the monetary/fiscal plague afflicting the world now erupted not in 2007 but in 1998. Its course was predicted and warnings were sounded from the outset by several Cassandras unwelcome in the corridors of power (2).
It started when Russia defaulted on its sovereign debt in 1998, precipitating the collapse of Long Term Capital Management and the subsequent near-collapse of stock markets worldwide. Central banks, particularly the U.S. Fed, responded by what money pros call “opening the spigot.” All that easy money created the Tech Bubble of 1998-1999, and the inevitable crash of 2000-2002. And that opened the central banks’ spigots much more than the first time — particularly the American spigots that were controlled by the hugely misguided Alan Greenspan.
Torrents of cheap money looking for a harbor found their way to the real estate market as of 2000. Real estate price doubled and tripled, particularly in places that had a sunny climate and beaches (e.g. Greece, Spain, Portugal, Italy, Florida, Coastal California) or a boomtown location (e.g. London, New York, Las Vegas). Thus, the worldwide housing bubble and its subsequent and, again, inevitable, crash. According to Martin Weiss of Weiss Research, just the American investors’ losses were $6.6 trillion from the Tech Wreck and $15.5 trillion from the burst Housing Bubble, a total of $22.1 trillion.
Central banks, however, read from the same book that has only one paragraph. With the third crash precipitated by exactly the same policies of cheap credit and too much money sloshing about, they just tore off the spigots completely, set interest rates at near zero, and let it rip. Hence “bailout,” “stimulus” and the resulting fourth bubble: the bubble of sovereign debt.
Between 15 September 2008 and 1 July 2009, for instance, the central banks of England, U.S., Switzerland and EU expanded their balance sheets (i.e. printed more paper money) by 127%, 119%, 80% and 39%, respectively (3). It’s the biggest bubble of them all. And now, this inflatable Mickey too is collapsing with a hiss.
They who inflated all these liquidity monsters in the first place, cannot but create “solutions” that are worse than the problems. The only problem that they have solved is the problem of governments’ lust for more power. Now they have much more such power.
With Ben Bernanke on the cover of Times Magazine, and Martin Wolf declaring at Financial Times that economists saved civilization, it’s worth reasserting that this has been just a classical Club of Crooks and Loons swindle: transform a Wall Street bankruptcy into a sovereign debt bankruptcy. Print money in a dozen underhanded ways to postpone a deflationary depression on your watch, even if that entails hyperinflation some years down the road. Or, to paraphrase the financial publisher Bill Bonner, Japan first, Zimbabwe later.
Read the rest at the Brussels Journal.