What’s Wrong with This Picture?



25 Responses to “What’s Wrong with This Picture?”

  1. Mark Grannis Says:

    Oo! Oo! I know! Is it . . . um . . . earmarks?

  2. Mark Grannis Says:

    What was I thinking? It’s college affordability, right?

  3. Mark Grannis Says:

    Wait, is that guy in the middle Jeremiah Wright? Or Bill Ayers?

    Come on, man, the suspense is killing me!

  4. Timothy Peach Says:

    Granulous, putting this picture in front of you is like putting a picture of the World Trade towers in front of Jesse Ventura….

    This latest violation of the first law of thermodynamics made gold go up 50 bucks… I thought you’d be happy about that.

    Circular funding isn’t new, and it has produced some great short-term results. Look at a stock chart of Enron through the 1990’s into 2000!

    What’s RIGHT about this picture, for me, is that the US government has finally stopped pretending that any kind of reason or structural integrity is guiding this “effort”. We have just landed with a bump on our butts at the bottom of the rabbit hole! There is no spoon!

  5. Mark Grannis Says:

    So the problem is procurement fraud?

    “What’s wrong” is not an idle question. Our government has been hawking a very expensive set of “solutions” for more than six months now, and it seems to me we have absolutely nothing to show for it. I haven’t seen wishful thinking marketed this effectively since I signed a contract for basement waterproofing. And I haven’t seen such an expensive collection of ineffective policies since . . . uh . . . hmm.

    We are bringing our nation to the brink of collapse. If it’s not helping, shouldn’t we stop?

  6. Timothy Peach Says:

    How would you go about “stopping”?

    And what do you think would happen in the 15 minutes after the “stop” was announced?

  7. Mark Grannis Says:

    I would stop by stopping. No more big press conferences to announce new solutions. No more rescue bills. No more new acronyms.

    There wouldn’t be any “15 minutes after” because there wouldn’t be any announcement. Businesses would get themselves in trouble. Then they would either get themselves out of it, or not.

    But over time, some asset values would fall, some wages and prices would fall, some jobs would be lost. But of course, that is exactly what’s happening now. Government policies have not succeeded in avoiding economic pain; they have succeeded only in disconnecting risktakers from risk.

  8. Timothy Peach Says:

    Nope, that’s ridiculous, takes 10 minutes to figure that out.

    Stopping means letting it fall down. Really fall down. AIG folds, Citi folds, all their counterparties fold, disorderly liquidations, dominoes everywhere, half the banks go down in a cascade, literally zero credit, almost all free capital destroyed, cash/barter economy, Dow at 2000, 30% unemployment, more maybe. Panic everywhere, cash under mattresses, guns, safes, gold. Massive crime wave. Like Robocop.

    Core industries go down, all the suppliers go down in waves, all the service industries that feed off the chain are in shambles, trade barriers are erected everywhere, martial law, Wall Streeters lynched in the street (the AIG guys are all getting death threats now… for taking money that they had contractually), riots, revolution, World War, tyrants take over everything.

    Because we “stopped”, right? No buffer. Because like Hindus believe that cows are sacred, we “believe” in capitalism and laissez-faire. It’s a religious imperative.

    The problem now isn’t that “Ron Paul was right”. The problem is incompetence and lack of political courage. We elected the wrong guy. Pretty much 5 times in a row. (Whether there was a “right guy” in those races is another question. We pretty much guarantee our candidates suck, because they reflect “the wisdom of the people”.)

    Given your stupendous brain power, I’m surprised you can’t see these chains. Do you really believe now that if we had let AIG go after Lehman, we’d have been ok? Or that letting Lehman go wasn’t a mistake? As if we could burn down one row house in the middle of the block, and then go back to the ball game.

    The only people that think we should just “stop”, literally, are either misanthropes who are fairly well positioned for Armageddon, or people with nothing to lose (we can both think of one) who just want to “see what would happen”.

    This Ayn Rand shakeout you have in mind which involves some moderate pain, some winners and losers, and some heroes of capitalism, is wishful nonsense. We the People, deploying our selfishness and stupidity in Olympian fashion, committed the biggest collective blunder in history. We created this tower of crap together. The idea that it’ll be unwound without government intervention and without unthinkable calamity is the dumbest thing that’s ever been suggested.

    So if you’re going to get in my face with the Ron Paul routine, I want details. I don’t want this vague rhetoric about markets adjusting over time. You walk me through how the dominoes somehow manage to stay up.

    We’ve plowed this ground already. It is possible to create a system that has enough constraints on leverage and size so that survival of the fittest is generally workable. (It’s not a laissez-faire system, but it could certainly be less “mixed”.) But if that system exists, it’s somewhere in the future. That is not the system we’re sitting in now. It’s Frankenstein, and if we let him wear himself out naturally, we’ll be sifting through the rubble for generations, and the form of government we’ll have will be so far from democratic that no one will be able to imagine the road back.

  9. Mark Grannis Says:

    Tim, your argument certainly carried the day last August, and again in September, and again in October, and again in February. And I’m probably missing a few. Congratulations! You got your wish. How do you think it’s going?

    It seems to me that many of the marchers in your parade of horribles are already cavorting about. The bailouts don’t prevent the domino problems, they don’t prevent the disorderly liquidations (except for a favored few), they don’t prevent the unemployment, and they don’t prevent the widespread resort to mattresses, safes, gold, and guns.

    But the bailouts are not totally without effect. They do create such massive uncertainty about the future that you’d have to be insane to invest any of your remaining capital in a new business. They do discourage private investors from buying up distressed assets. They do perpetuate the political consensus that we can go on spending other people’s money forever without consequence. And they may even get the Dow back up to 14,000 — the only catch being that if that happens, 14,000 will be the new 2,000.

    You can sneak up on the fundamental contradiction in our policy by attending to our official rhetoric. What caused our problem? A bubble that has popped. What are we going to do about it? Promote recovery. Recovery to . . . the old bubble? Another bubble? So that one can pop? To what end?

    To be clear, I am not arguing “that if we had let AIG go after Lehman, we’d have been OK.” I am arguing that under no set of circumstances would we have been OK. But our best chance of being OK again anytime soon is to get the pain over with and unleash the productive capacities on which we used to rely.

  10. Timothy Peach Says:

    Yes, I’ve been hammering away with the same theme. But when you’re trying to get through something made out of cement (viz. your head), you need to be persistent with a heavy instrument.

    How is it going? It’s going badly. It HAD to go badly. As you just said, under no set of circumstances would it be OK. There is no easy road back from Gomorrah. And the one we’re on could have been smoother. But the one you suggest would be working better…. it wouldn’t be. The Granulous plan, had it been followed to date, would have us destitute with no road map back, and probably on the verge of a World War. There would, at a minimum, be massive, uncontrollable civil unrest right now.

    The bubble analogy is overused and very imperfect. What we have now is more like a plane with one engine down and the other faltering. We’re trying to find and foam some runway as best we can, given where we are and who is available. It’s going to be a mess, and I wish we had Chesley Snelberger at the helm. But it beats the crap out of a nosedive into the pavement, which is your plan.

    You’re like a guy with a massive brain tumor who is bitching about having to go in for another microsurgery because they can’t seem to get it all. “If they’d have just cut my freaking head off like I suggested, we wouldn’t have to deal with all these ‘unintended consequences'”. Yeah, that’s true, the problem would be fixed. But you’d have to live in Sleepy Hollow. (It’s nearby — I’d be happy to take you on a tour.)

    Notice you supplied no details, again, like you didn’t in August, September, October, February, your last post, almost certainly your next post… just more platitudinal nonsense about “get[ting] the pain over with”. Are you prepared for a decapitation of the world economy and financial system? It would really hurt.

    Maybe I should come down there and cut your head off. Just as a test. Then we’d have some “pain data” to look at.

    History will have plenty of time to assess just how bad our impromptu runway was created and foamed. So far I’d make the following assessments:

    – Paulson saved the world. Period.
    – Then he dropped the ball on execution and probably created the leg down to Dow 6500 with that TARP do-si-do
    – Christopher Cox should be in jail for sins of omission at the SEC. The failure to police naked shorting and the failure to reinstate the uptick rule did about a third of the damage. And I mean half of ALL the damage. History will figure that out soon…. already is.
    – Mark-to-market accounting, beyond marketable securities, is idiotic and created another third of the damage. The idea that we should be marking companies to market and ignoring things like franchise value, earnings power, and being able to hold investments to maturity, is a piece of lunacy no one can explain. The FASB should be disbanded over this.
    – The other third is real. This crisis should be about a third the size it has become. We stupided two-thirds of it.
    – Bernanke is doing a great job. I thought I would never say that. He is doing what he needs to do. It just took him too long to get going. We need to inflate our way to a reasonable landing here — hopefully in a controlled way. Everything the Fed is doing makes a lot of sense except the circular funding thing in the picture above. That’s just silly — you can’t lend yourself money, and the markets will figure this one out. Just print it. Then let the markets recalibrate relative values.
    – Bernanke knows (at least he projects a sense of knowing) that this is the easy part of his job. The tough part comes later — sopping up all the extra foam. That’s going to be the really politically tough part. He’ll need to be a tyrant to get it done. If the politicians don’t let him….. then we’re headed for another big mess. A hyperinflationary one. But the dilemma is not avoidable. Bernanke will have to be the man Greenspan wasn’t.

    Even though it’s your blog, I feel pretty strongly that you need to EARN your next response by drawing some kind of picture of how your “let God sort them out” strategy would actually play out without Armageddon. Good luck with that.

    And by the way, this myth of “unleashing the productive capacities on which we used to rely”? When was that? I think you’re remembering a fable of laissez-faire capitalism that never existed.

    • Mark Grannis Says:

      I regret that I was otherwise occupied yesterday (swimming in a meet for old fat guys), because I’m fascinated by the suggestion that my argument would be strengthened by the addition of “details” about what would happen in the absence of bailouts. I think this is wrong, for at least three reasons.

      First, the attempt to supply “details” about the future is fundamentally suspect. Forecasting is without question the weakest part of the entire discipline of economics, and I am sick and tired of all these Keynesians climbing out from under the academic rocks they’ve been under for the last thirty years and telling us what the “right size” of a “stimulus” package should be, what the “multiplier” is, and how many jobs it will “create” or “save” — as if they had the slightest idea. It’s Jeanne Dixon on steroids, and it astonishes me that this kind of nonsense gets reported without anyone asking to see where any of these fearless forecasters ever predicted the fix we’re in now. If anyone deserves to be arrested for fraud, we should start with these charlatans.

      You, Tim, steer clear of the galling pretense of precision, but your own “details” are pretty comical. You say that if we stop bailing,

      AIG folds, Citi folds, all their counterparties fold, disorderly liquidations, dominoes everywhere, half the banks go down in a cascade, literally zero credit, almost all free capital destroyed, cash/barter economy, Dow at 2000, 30% unemployment, more maybe. Panic everywhere, cash under mattresses, guns, safes, gold. Massive crime wave. Like Robocop.

      Core industries go down, all the suppliers go down in waves, all the service industries that feed off the chain are in shambles, trade barriers are erected everywhere, martial law, Wall Streeters lynched in the street (the AIG guys are all getting death threats now… for taking money that they had contractually), riots, revolution, World War, tyrants take over everything.

      This sounds suspiciously like what Bill Murray and his pals predicted in Ghostbusters when the mayor asked him what would happen if they weren’t allowed to do their thing: “Fire and brimstone coming down from the skies! Rivers and seas boiling! . . . Forty years of darkness! Earthquakes, volcanoes . . . The dead rising from the grave! . . . Human sacrifice, dogs and cats living together . . . mass hysteria!” I’m perfectly willing to admit that some of the things you predict might happen if the bailouts stopped. Or they might not. And importantly, they might happen even if the bailouts continue. But we have no way of knowing any of this with any confidence, so you’re essentially challenging me to a creative writing competition. I decline.

      Second, it’s a small point, but it’s important to note that my side of the debate is based almost entirely on the proposition that it is impossible for anyone to know what will or ought to happen as a result of billions of free and independent economic decisions. This sets up a very asymmetric debate: We bailout opponents proudly admit that we don’t know any “details” about the future, while you bailout proponents must perpetuate the (so far unsubstantiated) claim that you know what will happen if the government does X or Y. If I thought that question were answerable, I’d be on your side!

      Finally, I have in fact already thrown out some possible ways forward that would not involve the government. In general, I believe other players would step in. Which other players? In the credit markets, it might be regional banks or wealthy individuals looking for more than 0.25% on their money. In the housing markets, it might be hedge funds or prudent individuals who were previously priced out of home ownership by the bubble. Yes, there would be massive dislocations, particularly in cities, but farmers would still grow food, and truckers would still carry it to distant markets, and middlemen of various sorts would still match supply with demand for all manner of goods. Some things would suddenly become ridiculously scarce, and there might be many places where a gallon of gas or a half-gallon of milk suddenly looked much more valuable than five or ten of the little green pieces of paper. Would there be riots? Maybe. But if you had asked me in early 2001 how I thought New Yorkers would react to a terrorist attack that leveled the WTC, I might have predicted riots there too. The reality was different. We just don’t know. And if I had to make five predictions, my top one would be that the most important facet of the recovery would be one that I didn’t predict.

      Here’s a thought experiment. It’s 2005. We’re both working at a major investment bank, and we’re selling mortgage-backed securities like there’s no tomorrow. We’re making money hand over fist. And we’ve bought credit default swaps from AIG that will pay us $20 billion if mortgage defaults hit the levels we have in fact seen. I say to you, “What good are those going to do us? If AIG owes us $20 billion, think what it’s going to owe Morgan Stanley and Merrill Lynch and Citi and all the others! That company will fold. And then the rest of the financial sector will follow along like dominos! We’ll have zero credit, 30% unemployment, the Dow at 2,000, panic everywhere, a massive crime wave. Like Robocop. We’d better not sell any more of these suckers.”

      Are you really telling me that this prediction stuff is so easy that in that context, it would take you only ten minutes to see that the follow-on consequences of letting the losses stay where they are would be unacceptable?

  11. [Name Withheld by Request] Says:


    I’ve watched/read this little exchange from the sidelines, but your last posting has me envisioning the near-apoplectic swelling of the veins in your head.

    You’re probably right from a short-term, pragmatic standpoint. The multitude who have been spoon-fed from birth the pablum that government is the answer to all that ails ’em—and that also have no problem either allowing theft from their “too-wealthy” neighbor or future generations—will look into the pit of despair and gladly push anyone they need to in to avoid or forestall that same fate.

    But in the longer-term (and I’m afraid we won’t have the luxury of waiting for death, Mr. Keynes), I believe Mark is absolutely right and not even as emphatic about it as I.

    What we have witnessed happening has in no way saved us. As they are wont to do, those who believe they can somehow better oversee the billions and billions of daily inter-human decisons and transactions that make up our collective lives, have done the only thing they can possibly do–delay the inevitable and make it far worse in the process.

    This week’s salvo of inflation-yielding actions is unprecedented, but it won’t look like anything compared to what they’ll be forced to do in our not-too-distant future, I fear. (If you wanted a very good investment this year so far, look no further than Smith & Wesson or Sturm Ruger. And that’s just with the “fringe” folks out there.) If the govt continues down the path of destroying its currency, AIG’s failure would be a walk in the park by comparison.

    And what do the folks in charge worry about? What does the main-stream media focus us on? Who at AIG got some comparatively miniscule bonuses (interestingly, the also impressive Freddy/Fannie bonuses garner little press…). If we cannot avert some—well—very interesting times (and I don’t see how we can, frankly), there will be challenges we will face that are of a magnitude we’ve never faced before. And if our government will single us out for special confiscatory taxes, there’s little it won’t do (say when they think your IRA/401K is just a tad to large compared to the “average”?)

    [And one quick, but important aside on my old friend, Mr. gold (and only b/c you raised it to Mark). No one should be happy to watch the price of gold rise dramatically or quickly. In fact, people who buy gold for the reason they SHOULD buy it want no more to see that occur than they do to see their house burn down just because they bought fire insurance. Gold is money. Has been for thousands of years. Will likely be as long as we’re around as a species. It meets all the criteria of true money–most of which are very poorly met by inked paper. Though gold will never go to zero in dollars, the closer it is, the better for everyone and no one who owns it should be concerned in the least if it goes down (but, unfortunately, I would not hold my breath for that occurence just now)–and if you understand what it’s for, you’ll own some, and buy more, regardless of price.]

    Which brings me to the REAL pragmatism that we should all be focused on. The owner of this blog is a very intelligent person. The viewers/participants he attracts, I’d assume, are also very intelligent. You and I have not seen each other in many a year, unfortunately, but you always were very, very bright, in my opinion. Add to that of the contributors to this blog, you have probably been the most directly impacted (at least, so far) by all of this.

    So, it’s OK to take opposing sides of the theoretical arguments at play here—and even to get yourself over-heated about them, I guess. And it’s great to hope for the best. (In fact, it’s the ONLY way to live ones life, I think.)

    But in the real world of having to protect those you love/care for (and foremost, yourself, in order to be able to do so), we do not have the luxury of disregarding what human nature and common sense tells us will happen. We MUST do so and truly prepare as best we can for realistic eventualities. (And there are a GREAT MANY potential outcomes in between some utopia and Galt’s Gulch and the status quo and armageedon.)

    So I hope that all the harumph and bluster is from someone who has done/is doing just the kind of pragmatic thinking and, most-importantly, action-taking that one would expect from such an intelligent person.

  12. Timothy Peach Says:

    Hey [NWBR], just out of curiosity, what are all the criteria of “true money”?

    While your diatribes here and elsewhere always sound “religious” to me, I will agree with one thing — the chance of runaway inflation is high, and it’s a good idea to start protecting against that possible outcome. There are some good ways to do that:

    – As Granulous has said, “Borrow”. Borrow fixed. Get your mortgage into a 4.5% fixed 30-year as soon as you can. The window won’t be open forever
    – Commodities. Gold is one, but really any of them will do, and I think you’ll do better with something people have to have (e.g. energy) rather than something they’d like to have (e.g. gold).
    – Shorting long-tenor Treasuries. Ben’s circular folly provided perhaps the last attractive window into this trade. You can get double short 10’s with PST, and double short 30’s with TBT.
    – TIPs might be ok, but the anti-Statists here would probably tell you that’s not the best way to go, because our evil government could find a way to define away your protection. The Mogambo would DEFINITELY tell you this.

    Dogma to the side, you can’t fight the math. If you print a bunch of dollars, and it’s an uphill political battle to sop them up, you have to have inflation on a dollar basis.

  13. [Name Withheld by Request] Says:


    First, the criteria of true money (plucked out from my December posting below…)

    “But what makes good money? To be and remain a good medium of exchange, money must generally have seven main attributes. These are:
    (1) Value as a material;
    (2) Stability of value over time
    (3) Indestructibility;
    (4) Portability;
    (5) Homogeneity;
    (6) Divisibility; and
    (7) Cognisability.

    While it’s been pointed out that man has used many things in history as money, including seashells, rocks and (yes, Jim) cattle, very few things have met all the seven attributes of real money. Those things that have met them have been used the most and survived the longest as money—and none have done so longer than those “archaic” metals, gold and silver.”

    Your inflation suggestions:

    1) Borrowing–agreed wholeheartedly

    2) Commodities–agreed wholeheartedly that all kinds of commodities–hard and ag–will do well (saw a good blip this week, in fact, not coincidentally with the foolishness that occurred w/our currency.) However, disagree that energy trumps gold. As important as energy is to progress and development, you can’t eat oil or light bulbs and doing your laundry will be a pretty low priority when you’re hungry. Money is the primary commodity to have in order to exchange for what you truly need–shelter, water, food and clothing. (I can’t resist inserting here a link to a recent video in Zimbabwe. It’s only 7 mins and it’s tough at parts, but I received the link today and it just couldn’t be more coincidental as to this timing. Go to:

    3) Shorting treasuries–probably one of the best places to place speculative portfolio today. What has gone WAY down beyond reason, will go WAY up–likely also beyond reason…

    4) TIPS–no thx, mon ami…

    Inflation is baked into the cake. Just as most people feel safe in virtually no-interest paying treasuries, CDs and bank accounts, they’re about to get a serious taste of finding out the dollars they trust will be returned to them, will be returned worth a whole lot less. A good chunk of ’em should be replaced with real money. Thousands of years of human history, again, says that real money is most likely gold and silver…

  14. Timothy Peach Says:

    Nice line of reasoning Granulous. You just invalidated the study of economics, and the concept of planning, and any recognition of the hierarchy of outcomes.

    “Second, it’s a small point, but it’s important to note that my side of the debate is based almost entirely on the proposition that it is impossible for anyone to know what will or ought to happen as a result of billions of free and independent economic decisions. This sets up a very asymmetric debate: We bailout opponents proudly admit that we don’t know any “details” about the future, while you bailout proponents must perpetuate the (so far unsubstantiated) claim that you know what will happen if the government does X or Y. If I thought that question were answerable, I’d be on your side!”

    I just wish the global warming zealots would get that point.

    Kid’s got a fever of 104 and terrible stomach cramps. Doctor doesn’t know precisely what my kid has — tests are inconclusive. Doctor says, “Not sure what to do, but I think we need to get that fever down.” I say, “Any chance the effort to get the fever down will have side effects?” He says, “Of course, and we’ll have to deal with those side effects as best we can if they arise. But if we don’t get the fever down, the situation will spin out of control.”

    How hard is that to understand?

    Paulson’s judgment is of the exact sort I’m putting forward here. He didn’t know exactly how to fix the thing. He couldn’t calibrate all the secondary impacts. What he did know is that if didn’t act quickly, the whole thing would fall down. We make these kinds of judgments all the time.

    I like hyperbole because it’s more fun in print, but I can describe in great, sober detail to you, along a number of connected chains, what would have happened if AIG had been allowed to fail. My description would only be 80% to 90% accurate, because as you say, no one can calibrate all the details and connections. But total financial calamity was a certainty. The only thing that would have stopped that outcome was governmental intervention of some kind. Without it, we’re talking about something akin to the 1930’s, or worse because of the level of leverage.

    This is simply not a matter of competing fictions. What it unfortunately comes down to is that, in this particular area, you don’t know enough to have an intelligent opinion. I hate to have to say that. And papering that over with a big philosophical word salad about the futility of predictions is disingenuous.

    You should not be insulted by this. You have subtle legal discussions with folks all the time on this blog that I can’t keep up with (even though sometimes I try to, embarassingly). I’m not equipped for those debates — I don’t have the knowledge base, and perhaps the right kind of wattage. I’m ok with that.

    Your 2005 (2006, even early 2007) thought experiment actually occurred. At my old employer, the guys who tried to pull the break got fired — I know one of them. The guys who ultimately decided to keep throwing coal in the fire weren’t smart enough to understand the systemic risks, and were heavily incentivized to keep shoveling coal. At JP Morgan, Jamie Dimon simply shut the nonsense down, because he did fully understand the ramifications — he did the math in that good head of his, and realized it was crazy.

    At Goldman, they took a more practical (and some would say sinister) approach by continuing to sell snake oil at the biz level while doing massive hedging at the mgmt level. Of course, a lot of those hedges were with AIG — that was a failure of imagination on the part of Goldman management. Luckily, since Goldman controls the US Treasury, they had a backstop.

    People have been talking and writing books about this kind of systemic risk for a long time. Then they argue about the medicine. The arguments are about level and type of government intervention. They’re almost never about no government intervention. Even Roubini wants organized nationalization and reprivatization of the banks. He knows you can’t just let them collapse.

    Maybe it’s time to end this thread, because I doubt you can just say, “Maybe you’re right.” I know [NWBR] can’t. This is a religious debate for him. There is literally no line of argumentation, and no actual outcome, that would lead him to conclude that some element of his belief system on this was miscalibrated. For him, this is all dogma.

    Is it for you?

  15. Mark Grannis Says:

    It’s entertaining to be accused of excessive dogmatism by someone who thinks we cannot acknowledge the limits of our predictive powers without invalidating the study of economics and the concept of planning.

    But not only can I say, “maybe you’re right,” I have said it already. I have also said that maybe you’re wrong, and I think that more likely. Currently, the empirical evidence favors me, though you’re way out in front on scary stories.

    How do you feel about treating that 104 degree fever with leeches? If you were alive in the 19th century, it had a 2,000-year consensus of the experts behind it. Unfortunately, it didn’t work; in fact, it made patients weaker.

    I’ll happily concede this round to you — again — if you will be good enough to tell me how long you think we should try this before concluding that it’s the 21st-century financial equivalent of leeching.

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  17. Timothy Peach Says:

    That’s fair. Let me walk through the outcome on AIG falling, with the proviso that there’s no intervention to break the fall, then I’ll happily agree that if we get anywhere near the following, we should stop trying to “manage the landing”.

    Post-Lehman, the world had to take on the possibility that the US government really would step away from the arena and let the markets simply “operate”. This encouraged the shorts to wildly attack any institution with a similar model and/or similar exposure. The easy targets were Merrill, Morgan Stanley, and AIG.

    I remember that afternoon well. I went for a walk, because I knew we were hours from a total meltdown, and I couldn’t just sit there in it.

    So AIG is allowed to collapse. They file for Chapter 11. Because of the leverage, everyone realizes recoveries will be peanuts, as in Lehman. But the scale is SO much bigger.

    Now the panic selling starts. The banks pull in all the credit lines of the hedge funds, and the margin calls start. All the hedge funds have to decide — do we panic sell and try to raise enough cash for margin calls, or do we file for bankruptcy. Most do the latter, because they realize everyone is now simultaneously in the same situation.

    The short sellers are now going berserk, momentum shorting every financial they can. The markets are gapping down, and shutting down in accordance with the breaker systems. When they reopen, they are “limit down” again.

    All the major banks are now insolvent on paper because they are holding worthless claims for loans they made and trades they did with hedge funds. The shorts are slamming their stocks mercilessly, and there are NO buyers.

    After panic pleas to the US government to intervene, Citi, B of A, Wells are all forced to file for bankruptcy. JP Morgan is debating whether they are now forced to join them. All the lines between the banks have been pulled.

    The European banks are now all about to be nationalized, because those governments never believed in laissez-faire. The US government has signalled to the world that “we must allow the markets to adjust themselves without intervention.” Blistering criticism and threats pour into the White House as world markets continue to gap down. Anti-American sentiment is exploding, and embassies around the globe are under attack as panic pours out. Evacuation plans are deployed.

    Meanwhile, at local banks, everyone pulls out their money, and the cash dries up quickly. Having decided not to intervene, there really isn’t much to do. The government reminds everyone that there deposits are insured, but nobody cares now because the government has signalled that it’s every man for himself.

    The markets are at unthinkable levels. Dow 3,500, S&P 400, and they have to be shut down. Orderly trading is now impossible.

    Literally all discretionary commerce has stopped. The US automakers all file for bankruptcy — they are all Chapter 7 liquidations because there is literally no source of credit for DIP financing, and the US government is not providing any kind of bailout for this purpose. All of the Tier 1 suppliers to the Big Three file Chapter 7 as well.

    Nobody is delivering anything to anybody, but the normal operation of credit has stopped. All business is on a cash basis, putting half of the players in a completely frozen state. Many file for bankruptcy, again, with the almost certain trajectory being Chapter 7. You can’t go 11 without financing.

    In a span of weeks, millions upon millions of workers are suddenly out of a job. They get very little severance and no benefits because their employers are being liquidated.

    Everyone’s retirement savings are wiped out. Pension plan funding levels drop to about 40% of fully funded status. Every major pension sponsor is forced to file for bankruptcy because their now crippled business prospects and negative cash flow can’t possibly support the enormous minimum funding requirements required by law, and amending those rules would constitute a corporate bailout. We’re not doing bailouts.

    Municipalities start reneging on their debts. Housing values are now 60% down from the peak. There is no tax base to hit for ongoing debt service.

    Anyone who purchased a home in the last 5 years is now hopelessly underwater on their home, and masses of people walk away from their mortgages, as a large percentage of these homeowners have lost jobs anyway and couldn’t make the payments even if they didn’t care about servicing a crippled asset. It quickly gets to the point where a majority of homeowners are simply not paying their mortgages. The mortgage holders are all bankrupt anyhow, and there aren’t enough bodies to chase down all the delinquencies.

    Because my fingers are getting tired, I’ll let you work through the civil unrest elements of this “fiction”.

    Remember — you set the rule: no intervention.

    Are you nuts? Are you simply nuts? This isn’t hyberbole. This is what Paulson realized. This is why, when asked by Congressional leaders what would happen if the bailout effort failed, he said, “Heaven help us all.”

    It’s the 1930’s on steroids, because of leverage. You don’t have to be a genius to figure this out.

    [NWBR], I think, knows that this account is materially correct. But he’s ok with it. He thinks it’s inevitable. And he’s ready for it. And maybe it is inevitable. But no rational person wants to jump to the end state. We have to try something more humane, because it might work. In fact, it will probably work.

  18. Timothy Peach Says:

    Please note that, if you divide through by the linguistic caution of senior government officials who do not want to create a panic, Bernanke and Geithner are currently testifying that my narrative is largely accurate.

    The word Geithner keeps using to describe the consequences of not bailing out AIG last fall: “catastrophic”.

  19. [Name Withheld by Request] Says:

    Wow–talk about a paradigm being “religious” for someone…

    What an incredible shock that the government wonks honchoing this whole thing through would say that if they didn’t do what they did, the results would have been “catastrophic”.

    If one buys that argument on its face, it’s far more a reflection of the success of the indoctrination of the buyer, I’d venture…

    (For me, Geithner’s pronouncement immediately calls to mind a line from V For Vendetta, from future England’s authoritarian ruler, “What we need right now is a clear message to the people of this country. This message must be read in every newspaper, heard on every radio, seen on every television… I want everyone to remember, why they need us!”)

  20. Timothy Peach Says:

    OK, [NWBR], your turn.

    What happens after AIG files for Chapter 11 and Paulson and Bernanke inform us that “they’re out of the bailout business”?

    Describe it for me.

    • [Name Withheld by Request] Says:

      What would have happened if the meddlers hadn’t meddled is that capitalism would have done what it does best–creative destruction.

      Fannie Mae would have gone bankrupt

      Freddy Mac would have gone bankrupt

      AIG would have gone bankrupt.

      And LOTS more companies with ’em, I’d guess, in the government’s dreaded and fear-inspiring “series of cascading defaults”…

      And what would have happened?

      Many people would likely go through some severe hardships–no doubt. And most would do what people do in such circumstances–pull themselves up by their bootstraps and rebuild what they’ve lost. It happens time and time again in company and industry after company and industry.

      And the market pricing mechanism would adjust quickly (rather than in the torturously slow and distorted way we’ll be suffering through now and for some time to come). Prices would drop to a level where even allegedly “toxic assets” could become bargains. Those assets would change hands–going to new owners that were more capital rich and/or so enticed by low prices as to take the risk that capitalists do to make something more out of something less by serving their customers. New businesses would develop and the phoenix would proverbially rise from the ashes.

      How bad would it get? Who knows? Surely not Helicopter Ben or his cohorts now using other people’s money, pulling various one levers and hoping for cherries.

      Would it have been as horrific as you portray? Mad Max, blood in the streets, people bussing in to hang businessmen in effigy? (Oops–that one’s already happening). Hang ’em for real? Company executives committing suicide in droves? All possible, I suppose, but we will never now know–thanks to the world improvers.

      (And many economists believe the govt should not have/should not intervene in this, e.g., all those in the Austrian School absolutely–and many others, as well.)

      And how did it ever get to the point where this was even a possibility??

      J Q Adams said, regarding foreign policy, America does not go out in search of monsters to destroy. As he continues to do 360s in his grave, our America has one-upped his fear big-time–not only in foreign policy but in domestic as well. NOW, our govt CREATES the monsters first–birthing the very abominations (whether Sadam Husseins abroad OR loan guarantees and reduced lending standards at home) that ONLY the power of govt, says they, CAN destroy– (again–we must show the people why they need us…)

      And every bit as importantly (but seldom focused on) what would NOT have happened?? Just some examples include:

      –the pricing mechanism would not have been supplanted with the judgment of some collection of govt busy bodies who profess to know what’s best for us.

      –tens of thousands of people would not be staying in houses they can’t afford by legally reneging on their mortgages. And tens of thousands more of their neighbors wouldn’t be put in the position of wondering why THEY themselves shouldn’t stop keeping their contractual commitments. And tens of thousands of people who wanted to own a house–and could have had prices been allowed to fall to their market-driven level–won’t be able to b/c prices have been kept artificially high (for every “winner”, there is a “loser”).

      –all kinds of products stay at artificially higher prices (e.g., autos) b/c govt bailouts have made it possible for companies to postpone the day of reckoning–keeping more unneeded capacity than necessary, going longer than necessary, as well as bloated administrative levels, etc. The companies win, short-term. Buyers lose.

      –without govt interference with interest rates (flooding the market with the “product” of dollars), rates would not have fallen to such a low level as to discourage savings and penalize our many brethren on fixed incomes

      –And, relatedly, worst of all, trillions of dollars would not have been/will not continue to be created out of thin air, as though w/o impact. The “creation” of this unbacked paper or electronic digits will, I fear, cause long-term suffering of all those least able to afford it. There is no more onerous or regressive tax than inflation. And we’re set up to get it in spades. At some point sooner (if, e.g., China or other creditors get fed up with our printing press mentality and trade in their paper chips–what is it the Bible says about borrowers and lenders??) OR later if our creditors hang in there as we slowly but surely take the pain we “avoided” by intervention, grow it and then spread it over an entire population, creating widespread misery as people realize they’ve been conned by their benificent big brother–and become even more dependent on the “cradle-to-grave” protection of same, at an increasingly lower standard of living, until the norm of equal misery for all is reached, as it always will be when socialism becomes the way of life.

      Now you’ve used good psychology on Mark. “Ken is too dogmatic. For him, this is a religious. Surely you Mark are far less rigid and closed-minded. You’re not susceptible to Ken’s idiosyncracies and therefore YOU can see my position. Unlike that thick-headed Libertarian, you can see the necessity of the Leviathan coming in to save us here. You’re a more rational person–someone I can work with, aren’t you??”

      Well, Tim, I’ve only said from the start a few things that I still stand behind:

      1) No single entity, no matter how actually or seemingly powerful, omniscient or outwardly benevolent, can accurately allocate finite resources in any way better than the billions of individual decisions determining the free exchange prices of a free market.

      2) Every attempt by some individual or group of individuals to do so in history has led to greater economic distortions and misery for mankind–not less.

      3) We do not and CANNOT know what would have happened on a path not taken.

      4) We do not and CANNOT know what will happen on the interventionist paths we have chosen (though a simple consideration of human nature and common sense can give us a pretty good idea for the long-term implications).

      5) While hoping for the best, everyone that can, should prepare for some of the worst cases–not only to retain their own peace of mind and not be forever a slave, reliant on Big Brother–but also to be able to be part of the next wave of progress, having the capital with which to help others.

      If that’s “religious”, I guess I’m guilty as charged.

      But again, to me, listening to the preachings of Bernanke and his comrades and announcing that as the Gospel that proves my point–now THAT is religious…

      • Timothy Peach Says:

        I was all geared up to be snide, and now I’ve lost my willpower. Damned decency.

        A lot of what you say about the evils of government intervention is true. Total government intervention, which defines one endpoint of the spectrum (communism), has never had a successful experiment. And it never will. It runs so counter to human nature that the gear grinding shuts the machine down in due course.

        But what you fail to acknowledge is that laissez-faire capitalism also has never had a successful experiment. Every time in modern history that a society has allowed “market forces” to operate unfettered, the privileged and gifted have simply pressed their advantage to absurd proportions, creating abusive monopolies, radically misallocating capital, and committing the most heinous human rights and labor violations. These experiments have spawned what you hate most — Marxism, “unionism”, excessive regulation, the grand buzzword “Statism”. The pendulum never swings back the right amount.

        The best times, all in, for the great gamut of humanity, from rich to poor, smart to dumb, noble to pariah, have occurred when society finds itself in a tenuous balance between social justice and free enterprise. The ideal state, in my world view, is when government creates a big but sturdy box within which we can all pursue our commercial interests with relative freedom. Note I said RELATIVE freedom.

        As a general rule, I have learned to be wary when what I’m instinctively driven to do — my personal path of least resistance — is somehow the exactly “right” thing to do. I’ve learned to suspect that I’m simply cheerleading my book. It’s no surprise that when a guy gets dealt good cards, he doesn’t want there to be a draw… he just wants everyone to push in their chips and show their cards.

        I simply can’t abide by a theory that, in some impossible act of alchemy, converts brute self-interest into a categorical imperative. Success is too complicated to be used as a moral scorecard.

        And by the way… let’s not forget who we are. Actuary, attorney, accountant….. in the eyes of Ayn Rand, we’re parasites. Ain’t none of us going to that mountain retreat.

        • [Name Withheld by Request] Says:

          Tim–where does the time go to when one’s having a good time living and working? Sorry for my delay, but I haven’t forgotten you, here…

          And never fear or fight your desire to “be snide”. It has at least two benefits: (1) such a response generally is a sign that there’s nothing much of substance to say and (2) if I can’t take attempted abuse from you, well that would be saying something… (But certainly don’t deny your desire for snideness with some feigned “decency”… :-)

          Now let’s start with your first fallacy. Of course I realize and fully acknowledge that laissez-faire capitalism has (unfortunately) never had a successful experiment. One of Ayn’s very good non-fictions is, in fact, “Capitalism, The Unknown Ideal”–which makes that very point. But where we’ve come closest, mankind has most prospered–in every sense of the word. And where we follow a path that permits our fellow man to rule us–either through monarchy/tyrant, oligarchy or the majority–rather than live under the rule of law, our progress is stunted and human suffering increased.

          Not sure what you mean by “Every time in modern history that a society has allowed ‘market forces’ to operate unfettered, the privileged and gifted have simply pressed their advantage to absurd proportions, creating abusive monopolies, radically misallocating capital, and committing the most heinous human rights and labor violations.”

          The statement seems totally at odds with reality for me–but very common rhetoric for most folks raised to believe that we government is the great regulator, the savior from the ravages of capitalism. It smacks of all thpse same folks now saying how the unfettered market is what caused all this current mess. None acknowledge how many years of government regulation, protection and misdirected “busybody” intrusion into the markets made them anything but “unfettered”. And if you fall for the great arguments from on-high of robber barons and monopolies, you are living in a contrived, make believe. Name me ONE “monopoly” in human history that did not achieve that status with the direct help, intervention and protection of the state. And the longer a monopoly does indeed last, the greater the involvement of the State. (When you think of monopolies in the U.S. today, what is the greatest but the U.S. Post Office–the epitome of inefficiency and ineffectiveness that comes to pass the more you keep free market forces out at the point of a gun…)

          The experiments spawn all the worst, most controlling forms of government you list BECAUSE the experiments suffer from the ultimate re-rising of human nature. Though the Founders wished to bind that human nature with the chains of our Constitution, through the process of a thousand cuts (some larger than others), those chains were long ago broken. And now more than half of our population receives direct benefits through theft from the rest. And the form of government most greatly feared by the Founders–democracy– is now somehow, the form we have. Ask any of your fellow citizens. Few will know what a Federated Republic is, let alone that we are one. And few will know that nowhere in the Declaration of Independence, the U.S. Constitution or ANY of the States’ constitutions does the word “deomocracy” appear.

          And as our leaders I’m sure are pleased about–we are headed down that path again now of authoritarian rule. And not just in the U.S. (though we’re leading the charge.) For the whole world, big government is back baby. Our savior. And as a result, I predict we’re gonna get exactly what we deserve–good and hard…

          The best times have come for man when the sanctity of the liberty of the individual is held in greater esteem than the State. Your “social justice” is absolutely maximized at such a time–and minimized (in fact, trivialized) when the pendulum you note moves away from individual liberty and towards the State. The largest problem with your “relative freedom” is that it requires someone to tell others what to do–for their own good and the good of society. Who shall that be? You? Barrack Hussein?? No thank you. How many of those in your “social” net must be slaves or worse, die, in sacrifice? What people hate to admit is that you cannot succeed as a laissez-faire capitalist unless you serve your fellow man better than the other guy or gal. And as history shows repeatedly, it doesn’t matter who you are or from which class level of poverty or wealth, race, gender, etc. you come. No other system of human interaction can claim the same…

          This ties into another one of your fallacies–that a person “who gets dealt good cards” doesn’t automatically HAVE to benefit his/her fellow human being. They have absolutely no choice but to do so. It is the nature of capital that where it is accumulated, it will be put to use…

          And if by “brut self-interest” you literally mean acts of violence, well that is not permissable in the free market system and indeed, the protection from such is the main purpose of the rule of law and limited government.

          I long ago came to the conclusion that you, like your twin brother of a different mother on the west coast, would prefer some sort of theocracy with someone or some group in charge that would lay down the ultimate moral law from some power(s) that be. Well good luck. God ain’t available for your plan and any other choice consists of only other human beings. And as long as it is human beings, I think God would laugh at your plan, as well…

          And not only is your knowledge of Ayn’s stand on the existence of pure capitalism in error, so I believe is your thoughts on her positions on our professions. Actuaries, attorneys and accountants would not be considered by her to be “parasites” at all. All three functions can and do serve legitimate functions in a free-market society–some crucial in fact. (Because her fiction focuses on the creators of industry and ideas, don’t be fooled by her belief in the necessity of all the roles necessary to make those industries and ideas function smoothly for the benefit of their users. Now, if the actuary, accountant or attorney work for the State (directly or indirectly–a la the FASB’s shameful display this week) in throwing monkey wrenches into the free market, in essence enslaving their fellow human beings–then yes, they would be parasites.

          Hopefully, there won’t need to be a mountain retreat. But once again, if I were you, I’d put just a little bit of time, effort and money into the possibility that there just might be–and the ramifications on all those not there…

          Happy Palm Sunday…

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