“2010: Foreseeable and Unforeseeable Risks ~ The Room For Policy Error is Enormous”

By John Bougearel, author of Riding the Storm Out and Director of Financial and Equity Research for Structural Logic

Policymakers managed to extinguish a financial panic in 2008-09 by March 2009. This rescue operation allowed the broad U.S. stock market as measured by the SP500 to rally nearly 70%. Extinguishing the panic was to be expected. What I have questioned throughout the year are the measures that policymakers took to extinguish the panic and effect a stock market rescue. In particular, I wonder if the measures taken are only masking over serious unresolved issues within our financial atmosphere.

U.S. Treasury Secretary Timothy Geithner in a December 22, 2009, All Things Considered interview with Michele Norris claimed that 2009 is ending on the road to recovery.

The economy’s growing again. The policies the president put in place are helping lay the foundation for growth and job creation…American’s “can be more confident about their financial future, financial security. Growth looks like its accelerating in the 4th quarter.

NPR queried Timothy about a second wave of systemic crisis coming from commercial real estate or some other seen or unforeseen or unintended time bomb. Many experts remain quite concerned this credit crisis will be back-end loaded with second-round effects and positive feedback loops that spirals us further into the rabbit hole the economy entered in 2008-09. Geithner adamantly replied,

We’re not going to have a second wave of financial crisis. We will do what is necessary to prevent that. We can not afford to let the country live again with the risks of another series of events like we had last year. That’s not something that is acceptable and we will prevent that. And that is something completely within our capacity to prevent… When you have the will to act we have substantial ability to prevent that and we will do what is necessary.

Much of the Treasury Secretary’s positive forecast for 2010 and beyond is predicated on the political will to act and anecdotal signs of Q4 GDP growth, incremental increases in business confidence and consumer spending, and the stabilization of the housing and jobs markets. Never again will America be plunged into the 2008-09 rabbit hole because the Treasury Secretary asserts “that is something completely within our capacity to prevent,” and they have the political “will to act.” Throughout the crisis, we saw policymakers displaying the political will to act in a manner that best served the interests of financial lobbyists, not that of the American public. That was transparent enough. Less apparent was how well policymakers served the short and long term interests of their constituents, the highest authority to which politicians’ should have been appealing.

I do not share Treasury Secretary Geithner’s confidence in the policies the Obama administration “put in place” to effect this recovery, and I will not champion them. In fact, many of the policies put in place only mask unresolved issues. So, I am quite concerned about the secondary effects resulting from this global financial meltdown. There are significant unrealized losses still in the pipeline. The full effects of this global financial meltdown have not been felt yet.

Nor do I share Mr. Geithner’s peculiar brand of optimism which is seemingly reminiscent of Chance the Gardener played by Peter Sellers in Being There “As long as the roots are not severed, all is well, and will be well, in the garden.” Policy measures and legislation passed to date to stabilize the financial crisis in 2008-09 have primarily been aimed at saving the dysfunctional big banks and preserving the OTC Debt and Derivatives markets. In short, the aim has been to restore the tentacled and tightly coupled roots in the big banks Financial Garden of Eden. The fact that lawmakers on Capitol Hill helped big banks preserve their Financial Garden of Eden in 2008-009 as much as possible should come as no surprise, because these same lawmakers had previously played such a large role helping banks create their garden in the first place which made possible the big banks fall and subsequent global financial meltdown.

I do have a great deal of reservations and skepticism about America’s financial future and more specifically about American’s financial security. As 2009 comes to a close, we are in the eye of the hurricane. We have yet to be hit by the backside of this financial storm. This credit-collapse is not your typical Post WWII recovery from recession as economist David Rosenberg and others like Paul Volker so often and thankfully remind us. Paul Volcker in a December 2009 Der Spiegel Interview titled America Must Reassert Stability and Leadership:

What complicates this [crisis] as compared to the ordinary garden variety recession is that we have this financial collapse on top of an economic disequilibrium…We have not been on a sustainable track and that has to be changed….those changes don’t come…in a quarter [or] in a year. If we don’t make that adjustment and if we pump up consumption, we will just walk into another crisis. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far…both in the financial markets and in the economy.

The Room For Policy Error is Enormous

Thus, the room for error in Mr. Geithner’s optimistic forecast is enormous. His outlook ignores the fact that an incredible, wide array of uncertainties can blind-side both domestic and global policymakers in a post credit-bubble collapse environment. In particular, I will add, the room for downside risks to the Treasury Secretary’s optimism is significantly heightened by the policy measures implemented to stabilize the big banks, precisely because these policies masked the effects of so many underlying issues. If the stabilization of the big banks and the financial system becomes unhinged again, in spite of what Mr. Geithner insists must be and can be prevented from ever happening again, we will walk right back into crisis and Irving Fisher’s debt-deflation spiral will resume.

Charles Kindleberger tells us financial crises are “hardy perennials.” That is true, but traditional remedies for extinguishing panics in the financial system over the past two hundred years have more or less always followed Walter Bagehot’s prescript that you “lend freely and early, to solvent firms, against good collateral, and at high rates.” This is what the bank of England did to avert the Panic of 1825. It is exactly what JP Morgan did to avert the Rich Man’s Panic of 1907 ~ he liquidated the bad banks and recapped the good ones. This is roughly what FDR did in 1933 and what Sweden did in the 1990s. They all separated the good banks and good collateral from the bad banks and bad collateral, letting the bad banks fail, and backstopping the still solvent banks. The broader aim was always the same, to save the financial system rather than the bad banks and their shaky collateral. To do this, they let the under-collateralized banks fail, and lent freely to solvent banks against good collateral at a high rate.

The financial panic of 2008-09 stands in stark contrast to the extinguishing of previous financial panics. The most outstanding features to the financial panic of 2008-09 was that the policies set in place were to save the bad banks loaded with toxic collateral on and off its balance sheets rather than to save the financial system itself. Lawmakers effected this change in March 2009 when they eliminated the fair value accounting rule to allow insolvent banks to mark their toxic assets at full value rather than at market value. Effectively, they swept the toxic asset under the rug. They masked their toxic effect, but unresolved issues remain. These toxic assets are now being stored on the Federal Reserves and other off-balance sheets, loaded with unrealized losses. The Basel Committee and FASB are now allowing banks until 2012-2013 to put these assets back onto their balance sheets. This explosive timetable has been reset to 2012, the end of the Mayan Calendar. For those with an eschatological bent, this date with destiny might be the End Days of our financial system as we knew it.

This is a first-ever occurrence in 200 years of banking history that losses stemming from bad collateral were not realized early on. They are time bombs with delayed fuses. To partially offset this day of reckoning in 2012, the Federal Reserve adopted a Zero Interest Rate Policy (ZIRP) to help the very same insolvent banks lever up the yield curve borrowing short and lending long to earn their way out of insolvency. But rather than letting these profits restore the banks impaired balance sheets, bank executives are redistributing these profits in the form of bonuses. Worse yet, ZIRP is a financial hardship that hurts millions of saving Americans plowing their hard earned dollars into CDs and money market funds. In this way, a zero interest rate policy serves to undermine the financial security of millions of Americans. And still, the unanswered question is whether insolvent banks can successfully recap themselves before these Bouncing-Betty’s detonate. In a race against the clock, policymakers are simply buying banks time, hoping they can avoid mutually assured destruction when their eschatological date with destiny arrives.

Global Warming Trends Serve as a Model for the Global Financial Meltdown

Financial innovation over the past thirty years led to a huge growth spurt in the OTC Debt and Derivatives markets. One could say that innovation led to a revolution within the financial industry. This revolution has created vast sums of toxic assets now being stored on the Federal Reserves and other off-balance sheet vehicles. By way of analogy, these man-made toxic assets can be likened to man-made greenhouse gases being created by the industrial revolution and fossil-fuel industries which are now contributing to accelerating global-warming trends. The meltdown in the global financial markets has many dangerous parallels to global-warming trends to consider.

Man-made greenhouse gases like carbon dioxide that have been released into the earth’s atmosphere are being partially absorbed by the ocean and then stored there. However, the carbon dioxides that have been absorbed into the ocean are not passively sitting there; they are actively destroying the ocean’s corral reefs and shellfish. These gases being stored in the ocean have yet to be re-released into the earth’s atmosphere. The ocean creates a lagged effect on global warming trends. When they are re-released into the earth’s atmosphere, this will create negative second-round effects thereby accelerating global-warming trends in the decades ahead.

Today, the Federal Reserve acts much like the ocean for greenhouse gases, absorbing and storing the toxic assets and shaky collateral [OTC Debt and Derivative products] created and released by the big banks. These financial carbon dioxides being stored on and eating away at the Fed’s balance sheets have yet to be re-released into the global financial system. When these financial carbon dioxides are re-released into the global financial system, this will create negative second-round effects that will broaden the reach of the global financial meltdown in the immediate years ahead [2011-2013]. Do you see where I am going now?

Jim Hansen, a leading global warming scientist has shown us that global warming trends in the earth’s atmosphere do not respond instantaneously to increases in greenhouse gases. There is a “substantial amount of what Jim calls ‘unrealized warming’ or warming that was still ‘in the pipeline’ – we hadn’t felt it yet.” What Jim Hansen is describing are the feedback loops and secondary effects that are still in the pipeline. “And feedbacks are inherently slow to unfold.” One of the most important examples of feedback is the melting of permafrost in Alaska, northern Canada and Siberia. “Plants that have been frozen for thousands of years are now supplementing the greenhouse effect as they decompose and send prodigious quantities of carbon dioxide and methane into the air.” The artic tundra stores more than 500 billion tons of carbon which is twice that of all the rainforests on the planet and 20 times the amount of fossil fuels emitted in a year. The secondary and lag effects with respect to global warming, Jim Hansen notes “obviously complicates the tasks of decision-makers.”

To the extent that the policy measures put in place in 2009 to “mask” “store” and “freeze” the financial dioxides embedded in the financial system rather than having them purged them from the system, most American’s financial futures and their financial security will be at risk for several years to come. I see no room for complacency. Moreover, American’s financial security will be further compromised in the coming decades as and when Social Security and Medicare pass their tipping points as well. Will the U.S. government default on their social obligations to meet their financial obligations in the years to come?

So what happens as and when the frozen and unrealized losses still in the pipeline and being stored on off-balance sheets are allowed to decompose over the course of the next three years? What will be the cost to millions of American’s financial security once the full effect of this financial meltdown is felt? And I speak as if this were only an American problem. But in point of fact, this is a global problem, particularly in those countries running large deficits. The financial security and well being of hundreds of millions of global citizens remain vulnerable.

Mr. Geithner’s reassurances to Americans aside, the lagged consequences of the global financial meltdown remain considerable. While some of these risks are transparent, many of the risks are opaque and remain hidden. Final outcomes are imaginable yet highly uncertain and largely unquantifiable. No one person can possibly get their arms around all of the risks. Below I attempt to highlight some of the foreseeable uncertainties, risks, and challenge that lie ahead between 2010 and 2013. The list is by no means comprehensive.

Domestic Risks and Uncertainties

1. The Bulk of the Option Arm resets trigger in 2010-2011 – “The reality is that these loans were never meant to survive the reset. Unless an alternative is created, the human pain and loss will be massive.” Institutional Risk Analyst Chris Whalen
2. The Black Holes at FNM and FRE and other GSEs continue to grow
3. Bank hoarding in 2009, with no end in sight until those option arm resets trigger and all toxic assets have been brought back onto their balance sheets by 2013
4. State and local governments defaulting on financial obligations. To meet financial obligations, austerity measures will be required, social obligations will suffer, meaning more unemployment and less teachers, firemen, and policemen. This burden will be another source of drag on the U.S. economy.
5. Credibility of the Fed and U.S. Treasury and White House Administration will be on the forefront on Investors minds in 2010 and beyond. If their credibility suffers, there will be negative ramifications in the financial markets
6. Stock Market Rescue Operations like the one that got underway in March 2009 tend to last roughly two years, and are followed by bear market resumptions. My models indicate the 2009 bear market rally may end sometime in 2H 2010 followed by a resumption of the secular bear market into 2012-2013.
7. My models also indicate the 2009 bear market rally in the Dow Jones may peak at 11,750-to 12,000, near the bull market crest in 2000. That leaves maybe 12% further upside in 2010 and implies that most of the gains from this bear market rally are already in place. As David Rosenberg pointed out throughout 2009, this is a rally for investors to ‘rent.’ What reallocations can they make as and when the rally ends?
8. Advanced Economies in America and Europe all face Pension liability nightmares with shrinking workforces to support the retiring population, recent examples are GM and YRC pension nightmares. Are taxpayers going to be obligated to fund all private and public pensions of bankrupt companies and state governments?
9. Risk Aversion, saving more versus spending more will be a drag on the economy
10. U.S. government mandate requiring 30 million uninsured Americans to buy health insurance will curb consumer spending and act as a tax on the economy. It will also curb hiring plans amongst U.S. employers further prolonging Americans sidelined from employment opportunities and exacerbating the unemployment rate issues.
11. Will the kindness of foreigners continue to fund the U.S. deficit spending? Eric Sprott and David Franklin noted in their December 2009 missive titled “Is it all just a Ponzi Scheme?” that the “household sector” bought $528 billion of the $1.88 trillion of U.S. debt that was issued to them. This sector only bought $15 billion of treasuries in 2008, where would this group find the wherewithal to buy 35 times more than then bought in the previous year. Sprott concludes that makes no sense with accelerating unemployment and foreclosures, so the household sector must be a “phantom. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.”

Global Risks and Uncertainties
12. Sovereign Risks of Default are increasing as is their fiscal credibility in countries with large debts
13. Asymmetries within the EMU could precipitate a possible breakup of the EMU. The solidification of the countries in the EMU may break-up like ice sheets in the Artic tundra as the global financial meltdown puts further stress on the EMU. Incentives to remain in the EMU, for many EU countries it might be better to leave the EMU than stick around for its constraints and austerity measures
14. The One-size fits-all monetary policy in the EMU may be derailed by this crisis
15. Germany may not want to subsidize weaker countries in the EMU if their exports to those weaker euro countries are falling off a cliff as the crisis rolls on
16. The ECB may not be able to accept sovereign collateral and assets from countries in the EMU that have a negative credit outlook and are later hit with further downgrades. That could have spillover effects into the banks-at-large, including the ones the U.S. government sought so frantically to save.
17. The PIIGS (Portugal, Ireland, Italy, Greece, and Spain) debt ratios are all expected to exceed the 3% GDP 1992 Maastricht Treaty requirement.
18. PIIGs negative 2009 GDP resulting from global export decline leaves them with little incentive to stay strapped to an expensive Euro.
19. Italy is expected to be the first country that will first kiss the EMU good riddance. Greece and Spain might not be far behind as a domino-effect takes hold.

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31 comments

  1. fresno dan

    “The most outstanding features to the financial panic of 2008-09 was that the policies set in place were to save the bad banks loaded with toxic collateral on and off its balance sheets rather than to save the financial system itself”

    All we are saying, is give failure a chance.
    It is my birthday, so my birthday wish is for there to be reality based accounting, for insolvent institutions to go bankrupt, and to discontinue the affirmative action program for stupid and/or venal bankers. What, you say? If we did that there would be financial catastrophe? Look around.

  2. Francois T

    traditional remedies for extinguishing panics in the financial system over the past two hundred years have more or less always followed Walter Bagehot’s prescript that you “lend freely and early, to solvent firms, against good collateral, and at high rates.” This is what the bank of England did to avert the Panic of 1825. It is exactly what JP Morgan did to avert the Rich Man’s Panic of 1907 ~ he liquidated the bad banks and recapped the good ones. This is roughly what FDR did in 1933 and what Sweden did in the 1990s. They all separated the good banks and good collateral from the bad banks and bad collateral, letting the bad banks fail, and backstopping the still solvent banks. The broader aim was always the same, to save the financial system rather than the bad banks and their shaky collateral. To do this, they let the under-collateralized banks fail, and lent freely to solvent banks against good collateral at a high rate.

    The financial panic of 2008-09 stands in stark contrast to the extinguishing of previous financial panics. The most outstanding features to the financial panic of 2008-09 was that the policies set in place were to save the bad banks loaded with toxic collateral on and off its balance sheets rather than to save the financial system itself. Lawmakers effected this change in March 2009 when they eliminated the fair value accounting rule to allow insolvent banks to mark their toxic assets at full value rather than at market value.

    Going against history is rarely a recipe for success. Yet, there was apparently no good collateral against which lending freely was possible, even at high rates.

    This means that the decades of financial innovation were a scam, pure and simple. Yet, no investigation, no reform, and the same actors who destroyed this economy are still in place, collecting giga-bonuses with the benediction of Congress and the White House.

    So, I’m asking our lawmakers and Administration: How much more pain and suffering must we endure before you wake up? Must we hit you so you guys wake up? How hard? Make no mistakes oh! powerful people out there. This is the stuff that, sooner or later, breeds revolutions.

    You can only hope it’ll be a peaceful one.

    1. Doug Terpstra

      “Those who make peaceful revolution impossible will make violent revolution inevitable.”
      — John F. Kennedy

  3. Andy

    heyyy. how come the most important part of global picture are not calculated?

    1. Oil price will stay in upper $70 due to OPEC soft boycott, as long as Israel/Palestine issue is not resolved.

    2. China gets slightly cheaper oil price. This fuels their economy even more. so the question, what will the chinese do with their cash? a) maintain peg b)increase spending on infrastructure c) buy hard assets d)accelerate market integration with rest of asia. I believe intra asian trade will accelerate a great deal due to recent spat of free trade agreement.

    3. smaller countries with no USD big debt will do competitive devaluation. (vietnam devalue and rise interest rate. I guess you can do that in autocratic country) Larger asian countries probably do the same as china. So asean now will build like in late 90’s.

    4. Japan will hold 90 exchange rate and simply play with export import amount to keep employment rate acceptable, regardless of what fiscal number say. (they owe the money to themselves anyway, specially after the carry trade reverse)

    5. Will US interest rate able to compete with Asian rate? This will be interesting specially when Asia start raising rate to stem inflation from super high growth and even cheaper export.

  4. Doug Terpstra

    Famous last words, most quotable in 2010, 2011, 2012…

    “We’re not going to have a second wave of financial crisis. We will do what is necessary to prevent that…we will prevent that. And that is something completely within our capacity to prevent… When you have the will to act we have substantial ability to prevent that and we will do what is necessary.” —Timothy “TurboTax” Geithner

    Nobody panic, please remain calm!

    1. DownSouth

      Sounds a lot like this, no?

      The aide said that guys like me were “in what we call the reality-based community,” which he defined as people who “believe that solutions emerge from your judicious study of discernible reality.” … “That’s not the way the world really works anymore,” he continued. “We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality—judiciously, as you will—we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors…and you, all of you, will be left to just study what we do.”
      http://en.wikipedia.org/wiki/Reality-based_community

      Those were comments made in regards to the Iraq war, and we all know how that ended.

    2. Carlo Ponzi

      Echoes of Irving Fisher’s infamous “Stock prices have reached what looks like a permanently high plateau.” quote of Oct 21, 1929.

  5. LeeAnne

    “That’s not something that is acceptable and we will prevent that.”

    Who’s WE? Chilling words –in a democracy.

  6. moneta

    is roughly what FDR did in 1933
    ——————-
    Why does everyone expect instant results?

    We could argue that we are currently in 1930… in such a scenario that means lots of mistakes left to be made before we change course.

    Especially when you consider the difference in population between now and then. We have significantly more overly confident seemingly educated know-it-alls today than we had then. We’re in a world with too many chiefs and not enough soldiers. That means so much more noise and confusion.

  7. Ina Pickle

    The “household sector” buying treasuries is the 401(k) funds of the remaining employed in the middle class. They got burned in the stock market, in which they were FORCED to invest by their “betters” during the past decade when their pensions were liquidated and their only hope of saving for retirement was turned into a slot machine on Wall Street. Those people are looking at their retirement accounts, looking at the current stock market and the balanced funds that contain bonds, and are flocking to two options: money market or treasuries. Those are their only options. There are not any other funds for them to invest in!

    So probably they are investing in treasuries, but it has nothing to do with faith in their country or with patriotic tendencies. These are not “war bonds.” This is supposedly a safe investment, for which they are willing to (apparently) accept negative returns. Some probably even understand that treasuries aren’t really safe, but figure that if the US government defaults on its debt, they will have much bigger fish to fry than worrying about the destruction of their nest egg. I have to agree.

    The real mystery here is why the American people do not rise up and revolt. No one in my generation (born in the 1960s) expects to ever see a penny of social security money, despite paying into the fund our entire lives. The opportunity to actually diversify our forced savings in 401(k) funds is denied us: basically our “pensions” have just been used as fodder for market manipulation for the past 20 years. None of us will ever be able to retire, assuming that there is still employment for us when we’re 65.

    1. JTFaraday

      Well, considering that you, formerly dubbed “Gen-X,” are the lucky cohort already being told you’re washed up at 40, it’s hard to be optimistic.

      I do think we are in deep demographic denial, on a number of fronts.

  8. sharonsj

    I doubt OPEC gives a rat’s ass about the Israeli/Palestinian conflict. OPEC only does what’s good for OPEC. And the price of oil often depends on speculators.

    Many banks are in terrible shape, but we don’t know how bad because they are still doing funny accounting. But the ARM reset, along with tanking commercial property, will be another blow.

    As for the states, they are sinking too. If they keep raising school and property taxes to save their asses, you’ll be seeing armed homeowners next.

    1. Doug Terpstra

      OPEC’s 1973 oil embargo, with devastating impact on the global economy was a direct response to the wars of 1967 and Yom Kippur—clear blowback for US support of Israel’s expansion and occupation of Palestine. Though inconvenient history, that wellspring of Arab rage as much as Vietnam caused the last Great Recession. In the maddening absence of any peace process a repeat of that and another 9/11 is very likely—hence our increasingly entrenched militarism in the region—and the insane push for expanding war to Iran, Yemen, Syria, etc.

    2. Ted K

      Adjustable rate mortgages are the biggest scam that’s been sold to the middle class over the last century. 95% of the time ARMs favor bankers, and anyone who doesn’t realize that hasn’t got a basic education in finance. Nobody writes terms and works double time to sell and market those terms (ARMs) unless they benefit from it. Least of all the banks.

      And anyone who cares to disagree with me please do: It will be proof of your current employment at a financial institution or that you never took finance 101 in University. Just please let us know which.

  9. Hugh

    This is a good synopsis of the financial situation. We have a pig (the deteriorating fundamentals) and lipstick (bubbles in stocks and commodities and happy talk emanating from the likes of Tim Geithner).

    I would just add to his list the continuing drag on the economy of high unemployment and high debt loads. Uncontrolled healthcare costs will be unaffected too by any of the current healthcare bills. The 2010 elections will also change the political calculus, making reasonable reform even less likely. Foreclosures are touched on in the entry on GSEs but a real wild card remains the legal ramifications of the MERS and other related messes.

  10. Harminder

    the attempted Christmas Day bombing and the expansion of Al Qaeda (Pakistan –> Afghanistan –> Pakistan –> Somalia –> Yemen –> ??) is a reminder that, even as the US/EU economies struggle, they will be stuck with high defense & security expenditure.. no chance to get any savings from ending the war in Iraq (swords into ploughshares etc)… while China, India, & South East Asia move along with the free trade agreements and managed peace, and no responsibility for bearing any of the burdens of global security…

    as long as Israel does not settle with Palestine, the US will be stuck bearing the cost of this conflict, and none of the benefits (if there are any, other than the existential gain of being in one’s historical homeland)…

    I think this security burden will, in the longer run, have a much larger impact on future growth than economic/banking reform… that might just be the neo-con victory at last…

  11. mario margiocco

    Dear Mr. Bougearel,
    I think you insist too much on the Emu forthcoming problems. There will be, already there are problems, and Italy might have to struggle to keep its creditworthiness.
    But, first, your list in my opinion should be inverted, in the sense that Greece is already in trouble, Spain might come next, Italy third. Do not look only at public debt, look also at private debt and foreign debt.
    You see, on the western side of the Atlantic the only top person who has always been in favor of Emu and the euro has been Paul Volcker. Plus several academic economists, not many, and very few politicians. The euro had to fail. It seems to me that there is a scent of this in your analysis. We shall see.
    Now, some reflection. Given the fact that the U.S. economy is muuuch bigger and muuuuuch better than the Italian one, given the fact that if I had the choice to invest I would always prefer the U.S., not ignoring Italy nonetheless, given everything you want, do you know that if you take into account the U.S. gross public debt as you should and not only the debt held by the public, and if you rightly add to that the shaky assets of Fannie and Freddie covered by full federal guarantee since september 2008 and even more so since December 24 2009, do you know that if you do all this adding you reach a debt/gdp ratio for the U. S. higher – even now – than the Italian one?

    Thank you for your attention, and best wishes for 2010

    Mario

  12. kevinearick

    Back in the 70s, labor and capital had a row. Labor was reorganizing to accommodate demographic deceleration into equilibrium, and capital chose to replace all the labor superintendents with its own corporate people, to avoid losing the ability to pull revenue forward from the future.

    If you look, you will see that its superintendents have become increasingly corrupted by the process over time, accepting more and more money, other people’s debt, to liquidate the middle class, a capacitor that was built up over several thousand years of evolution. In a mere 35 years, they have liquidated the mechanism. Capital shorted its own future.

    Labor does not work for capital; they are countervailing powers. To the extent they compliment each other, a semi-neutral middle class grows between them. There is currently no agreement between them because capital shorted the constitution on a handful of votes in the Supreme Court to implement family law, with the intent of breeding weaker counter-parties to replace labor.

    Labor simply continued to move forward, as it always has under such circumstances, because it is subject to evolutionary pressure to do so, a condition capital doesn’t have to deal with until it discharges. The AFL-CIO is not labor. Take a look at its collection of non-performing capital; it has no understanding of physics.

    Now, 35 years later, the global economy must still be reorganized from the bottom up to accommodate demographic deceleration into equilibrium. Municipalities will continue to fall off the cliff of collapsing tax receipts until they adapt, through purely municipal interest law. The nation/state nexus is simply too tightly bound to initiate effective change; without space to disassemble and reorganize, it is imploding of its own gravity.

    The Internet is a temporarily useful crutch. Look around, where you are and in your travels. The reported numbers are meaningless; they are all designed to support demographic acceleration, an invalid objective.

    We will get this show on the road when capital minds its own knitting, efficient allocation. Labor supervises labor because evolution requires labor to be effective, to grow the middle class. Talent will not tolerate stupidity, willful ignorance.

    Example:

    I was working with a union kid in his 20s, who was getting six figures to fix elevators. He bypassed all the safeties on an escalator, and shorted out the main circuit board 3 times. Finally, he threw a temper tantrum, in the middle of a mall during business hours, and beat up that circuit board with a sledgehammer. I quit when the union refused to correct the situation. Recently, a child lost his finger on that escalator.

    I don’t blame the kid. He’s working on efficient automation equipment designed to replace him, denied an education by the union filter, and his government certification makes him responsible for outcomes. Of course he’s imbalanced; that is the objective of corporate control, private profit at public cost.

    That kid is still “fixing” elevators, “earning” six figures, while many much more talented people are laid off from $10/hr jobs. The economy in a nutshell, all across the globe. The nation/states are simply playing musical chairs with the exploding debt.

    1. kevinearick

      Acquaintances disassembled American plants and reassembled them in China, only to be surprised with termination upon completion of the task. Now, capital is gearing up to move plants from China to Africa. The circuit ends where it began. Surprise, surprise.

      Left to its own dc devices, capital will short circuit itself every time.

      Unforeseeable? Only to those with no experience in punchbowl economics.

  13. Ignacio

    It is strange when writing about global risks you focus exclusively in the euro area, and particularly in what you call the PIIGS (not very elegant indeed). Didn’t you know that fiscal deficit in 2009 will be in France as large as in Spain in relative terms? What about the UK? They are the champions of fiscal deficit.

    Your “global risks” insights look very much like the typical europhobic english approach.

  14. jdmckay

    Good article, not so sure I agree w/your EU scenarios… very highly speculative IMO. Your bullet point 19:

    19. Italy is expected to be the first country that will first kiss the EMU good riddance.

    Who, precisely, is doing this expecting? Italy needs EU right now a lot more than EU needs Italy.

    you point

    13. The solidification of the countries in the EMU may break-up like ice sheets in the Artic tundra as the global financial meltdown puts further stress on the EMU. Incentives to remain in the EMU, for many EU countries it might be better to leave the EMU than stick around for its constraints and austerity measures

    First one (“break-up like ice sheets”)… I dun’o, think you could be more specific? As several others have mentioned here, long history on this side of the pond “shorting the Euro” in error. There’s reasons EURO is up +/-50% against the USD in this decade.

    As for “better to leave”, seems strange comment as well: the lack of “austerity” measures are means by which US has “swept things under the rug”, as you describe in first part of your article (which I agree w/completely). Seems to me EU’s push for belt-tightening (and restrictions on finance “innovation”) are in their favor, not to their detriment.

  15. NC Jim

    When Brad Setzer was at the RGE Monitor he tried to estimate purchases of Treasuries/Agencies by ME oil countries in the London markets in order to “launder” government purchases into private ones. I wonder if this could be the source of the phantom “household” purchases. If so, they could indeed continue if the oil price stays reasonably high.

    Jim

    1. Doug Terpstra

      Speaking of ‘laundering’, maybe narcotraffickers are the ‘households’ buying US treasuries. This includes Afghanistan, which (with the CIA?) now produces roughly 90% of the world’s heroin—a new growth shadow stat.

  16. Doug Terpstra

    This is a terrific (and terrifying) article. Could it be the globalized collapse in OTC Debt and Derivatives that has panicked Geithner into stammering such dubious assurances? It is very likely that China and other foreign creditors may really be holding the reins, not Timmy. Just sayin’.

    Mr. Bougearel illustrates a kleptocracy with stark clarity. He notes that, unlike Geithner and Bernanke, FDR followed a traditional remedy in lending “freely and early, to solvent firms, against good collateral, and at high rates” while letting bad banks fail. But it is critical to note that FDR—in addition to such supply-side infusions—also made highly-productive demand-side investments in roads, schools, libraries, lodges bridges, dams, utilities, etc, many of them priceless cultural and economic treasures—still paying enormous dividends today. Summers and Geithner, unfortunately, seem too mired in blind neo-liberal Rubinomics to feign more than token stimulus for Main Street—IMO, misfeasance and/or crimes of tragic dimensions.

    There are no brakes to this kleptocracy, save the laws of physics—gravity and thermodynamics. Mr. Bougearel’s ecological model for the global economy helps a layman to visualize the parallel dynamics of financial and natural system sustainability—in this case how self-reinforcing ‘positive’ feedback loops in either sphere can potentially trigger an accelerating cascade of forces that overwhelm systemic carrying capacity rapidly (a tipping point conceivably beyond even Mr. Geithner’s herculean abilities, even after corporatizing Social Security). Particularly ominous here is the prospect of both planetary systems, natural and economic, converging in roughly synchronous collapse, with arguably apocalyptic global impacts, physical and geopolitical. Add in the possible exhaustion of ‘peak oil’ and James Howard Kunstler’s ‘Long Emergency’ and ‘A World Made by Hand’ may be upon us soon. Thus, the reference to the Mayan calendar seems not so fantastic.

    1. john bougearel

      Doug,

      I wrote this 2010 preview while reading “Censoring Science” by Mark Bowen. This book highlights the efforts undertaken by the White House administration since the Reagan presidency to censor the Earth Science with respect to global warming trends. Political appointees to the various White House administrations, not surprisingly, have come from the coal and other fossil fuel industries. Various administrations have been captured by the fossil fuel industries. These appointees have agendas and were responsible for distorting and censoring global warming science. Public affairs officials edited or censored the messages coming from scientists. The redactions downplayed the risks of global warming trends to the public. The public got the wrong message over the past twenty years. White House Policy at these various administrations have taken a “business-as-usual” approach to the anthropogenic (human-related)dangers of greenhouse gases.

      I found some of the global warming science that underscores the human footprint is akin to the human footprint that created the ongoing financial crisis. I borrowed from some of the language from the global warming sphere as I wanted folks to plainly see the parallels between the two industries. The products created from both industries release a greenhouse gas that in the long run is neither safe nor sound.

      The terrifying part is watching each administration coming in and continuing its policy of “business-as-usual” relationships with just the financial and fossil fuel industries. These administrations consistently deny that there is anything wrong or harmful about these industries business models. For example, lawmakers at the Bernanke confirmation hearing consistently framed the language surrounding the collapse of the financial system as “mistakes” thereby denying that anything criminal occurred in the way of securities fraud, or that there was anything markedly dangerous or inherently harmful with respect to the financial innovation and deregulation that led to this crisis etc…

      The fact is that that this type of capture is not limited to the financial and fossil fuel industries. And as Yves and others have pointed out, we find that the health care reform that Democrats under the Obama administration just passed served the interests of Lawmakers on Capitol Hill are also captured by the Big Pharma, Insurers and Medical Equipment companies rather than to everyday Americans their constituents. The American public should be the highest authority that these politicians serve, but that is not the way the system works.

      No doubt the health care industry are creating products that give off their own dangerous greenhouse gases to everyday Americans. The health care reform the government just passed is yet another illustration of the govt supporting big business to the detriment of the economy and to the American public.

      The bottom line is this: the preservation efforts of the gov’t to maintain a “business-as-usual” approach to the private sector needs to change. That is, the entire U.S. public[govt]-private partnership model of “business-as-usual needs to radically change.

      To your point, the business-as-usual language of the public-private partnership model should be reconfigured in ecological terms. The entire framework of the U.S. public-private partnership model should be ecologically couched, based upon long-term safety, soundness, sustainability goals rather than short-term greed.

      This is a radical proposition for the U.S. gov’ts public-private partnership to embrace. Our best hope is for Americans to get informed, get angry, and stay angry at the entire US public-private partnership until long-term measures of safety and soundness have been adopted as policy. And here the American public can benefit by adopting an ecological mindset.

      Yet another industry where safety and soundness has come unglued in recent years is the airline industry. See Bloomberg Caroline Salas’s article “Fatal Flying on Airlines No Accident in Pilot Complaints to FAA”

      http://www.bloomberg.com/apps/news?pid=20601109&sid=aaNPBjZ2kB54

  17. shrek

    Excellent article. I tell all my young friends that no one should be worried about investing at all right now. the number one thing is to get out of debt and have 90 percent of there net worth in cash. At some point the system is going to go kaput and the global economy is going to implode. how geithner thinks we are going to avoid this without getting rid of too big to fail, dangerous derivatives, and the huge amount of liabilities is totally laughable. The intellectual elite in this country are totaly braindead. They are even worse than the bankers.

  18. mannfm11

    This is no longer about toxic assets. This is about an unsustainable level of debt in the largest economy in the world. I have the sensation that China could actually be even worse and much more overbuilt as well. The whole world could melt and I wouldn’t believe one word Al Gore says, nor a word by any Wall Streeter about the global warming nonsense. There won’t be a solution to excessive debt other than bankruptcy and a wiping out of much of the imaginary wealth claimed by really rich folks, especially the crooks on wall Street.

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