Is the U.S. Alcoholic, or Merely Schizophrenic? (July 15, 2008)
Since it runs in our family, I do not use the word "alcoholic" lightly. Those of you who have to deal with alcoholics know the drill: the liquor stashed behind the fridge, as if everyone doesn't know it's there; the stumbling into the pool, the humiliating rescue, the tearful promise of change which goes nowhere, and all the rest.
I seriously suspect the entire American culture is alcoholic--not about liquor, but about debt. In all the thousands of words printed about the subprime meltdown, the meltdown of Bear Stearns and now, the crispy-crittering of Fannie Mae and Freddie Mac (can Ginnie Mae be far behind?), not once have I seen anyone in the MSM or mainstream financial press confess that "borrow our way of out of trouble" is not just financially bankrupt but morally bankrupt as well.
Like a full-blown alcoholic, the U.S. populace and government stagger from debt source to debt source, weaving drunkenly between "stashes" of new debt in the Fed, Treasury and private sector markets. Meanwhile, behind the scenes, you can bet you last depreciating dollar that the Fed and Treasury are leaning on all their pals in other central banks to buy T-bills and U.S. mortgage bonds, to maintain the alcoholic's ever-important image of low-rate, low-risk normalcy.
As our overseas friends suffer stupendous losses propping up their free-spending alcoholic "buddy," the loan-soused, totally debt-addicted U.S., the apologists for the alcoholic debt-binge continue to claim the risk of systemic failure and collapse of asset values is low.
Like the closet alcoholic who quickly comes to the defense of the full-blown addict, the mainstream media is careful to treat the debt-hurricane as if it were an act of Nature. We just need to help those poor people who have found themselves at the head of investment banks, throwing up all the bad debt they swilled in such quantity, and those poor homeowners who were struck by the terrible uncontrollable urge to leverage a few thousand bucks into a mountain of mortgage debt. Poor, poor people, we really need to bail them all out.
This is the classic "enabler," the folks who yearn to help the poor alcoholic mend his ways--if only the rest of us were more sympathetic and generous. In other words--don't demand a dose of reality for your neighbor's little drinking problem--then your own debt addiction might attract some unwelcome attention, too.
The media's role as enabler/apologist for the privatization of profit and the socialization of risk is well-stated by knowledgeable reader John H., who recently wrote:
The media doesn't control what you think about the issues, it controls what issues you think about.And a free market is precisely what our government (the Fed and Treasury) are fighting so hard to avoid. If our nation is as debt-drunk as it appears to be, perhaps we need a national 12-step program, which would begin with this:
1. We need to appeal to a higher power: an open, free market.
And you already know what much of the off-balance sheet portfolios of investment banks and other institutions will be once they're marked-to-market: zilch, nada, zero. Like the full-blown alcohoic who fears "cold turkey," the Fed and Treasury just keep hoping that another bottle or two of Wild Turkey (as opposed to cold turkey) will ease the delirium and we can all go back to hiding our addiction behind the fridge.
Like an alcoholic's pathetic attempts to con listeners into believing he's got his "problem" under control, the Treasury announces a $2 billion loan to Fannie, as if a little nip of the good stuff will "cure" the dementia of the U.S. real estate market's debt addiction. My esteemed blogger colleague Karl Denninger pegged Fannie and Freddie's mortgage losses at a minimum of $900 billion, and I agree with him that this number is being extremely charitable.
Let's be a little more hard-nosed and say that $2 trillion (out of $10 trillion in total loans and mortgage bonds) has already vanished; and when the bubble has well and truly deflated, Freddie and Fannie's $5 trillion portfolios will have lost $2 trillion themselves, with another $2 trillion being lost by the other bagholders.
Does anyone see the absurdity of the Treasury plinking down $2 billion to "cover" a $2 trillion loss? This raises an even more horrendous possibility: the U.S. is not alcoholic: it's schizophrenic, literally unable to discern reality.
Frequent contributor Harun I. recently provided this troubling summary of our plight:
All the banter about Fannie and Freddie is interesting but no one seems to be asking: how did the people in a democratic republic, the world's largest economy, host to the world's reserve currency, the only remaining super power, let their economy become solely dependent on the ability to process and reprocess debt on homes? How did we let our government legislate into being, through the GSE's, the largest Ponzi scheme ever?I would agree. We all know what happened in the past decade:
1. Thanks to intervention by the Fed and Treasury, money became insanely cheap and easy to borrow.
2. This fueled a frenzied, utterly unsustainble, insane real estate bubble.
3. Homeowners and businesses alike borrowed vast sums based on these inflated valuations, a.k.a. the home equity ATM.
4. As valuations begin returning to reality, howmeowners and businesses now have negative equity and can no longer borrow more.
5. Without trillions in borrowed money flowing into the economy, the economy sinks into recession.
6. As the recession/credit contraction takes hold, people lose their jobs and businesses lose their lines of credit, further restricting their ability to service their massive loans.
7. As defaults and impaired debt rises, lenders fall like dominoes into insolvency.
8. A feedback loop takes hold: credit contracts, more businesses close and workers lose their jobs, which further reduces the value of assets backing outstanding loans, which then further reduces credit and consumer spending, sending more borrowers and lenders into bankruptcy/insolvency.
So what caused our collective blindness to risk and the consequences of relying on an addiction to ever-rising debt? I asked Harun for further comments, and he responded thusly:
My main point was that the mess we are in is the fault of the people. It was not just one generation but several generations of greed, ineptitude and apathy on the part of the citizenry that has allowed this to happen. (emphasis added, CHS) We have gotten exactly what we deserve because it could be no other way. At every juncture the American people had the ability to raise its voice and demand a new direction. But generation after generation, administration after administration, the lies were told and we bought into it when we knew or should have known the consequences.It is a terrible thing to hope that the U.S. is only alcoholic and not completely out of touch with reality. The alcoholic knows he has a problem, and fears the solution more than the destruction he is wreaking on himself and everyone around him.
Will we ever get tired of listening to the media enablers, who manage to cast everyone as a victim of forces beyond their control and responsibility? Will we ever get tired of a Congress, Fed and Treasury filled with prevaricators and liars of the most alcoholic sort, too drunk on their own lies and power to countenance anyone else speaking truth to a higher power?
If you know any alcoholics, you know how painful it is for them to face reality --that they have to stop drinking, totally, completely, and now, not tomorrow. You also know that it all too often takes a crisis to instigate this admission of their sorry state.
I don't expect any change until the crisis forces it upon us. The years of denial and enabling are about to end. The long 24-year era of ever-cheaper, ever easier money is ending, and a 20+ year cycle of ever higher interest rates is poised to begin.
How can I know this? Easy. The U.S. debt addiction is now so large that
the global financial markets will soon be unable to finance its continuation. As global
recession cuts profits, incomes and assets across the board, there simply won't be
enough money to fund trillions more in new debt to keep the U.S. debt machine
staggering on. Other nations are running huge deficits, too; everyone joined us
on the debt-binge, and the only answer--cold turkey--is about to be forced on us all.
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