This week, US Treasury Secretary Paulson met with a group of about 200 "community members". These included bankers, housing counselors and "activists". His role was to defend the Treasury's role in helping to set up the mortgage relief plan.
During the course of this meeting, Mr Paulson made a very telling statement:
"The role of government is to prevent a market failure."
A MARKET failure? Or a desperate and doomed attempt to maintain the fiction that in the world of modern money and "finance" - as distinct from any other part of life - actions do NOT have inevitable consequences?
Ever since the present lending crisis broke open in August, a great deal has been written about the functioning of the modern financial system. In the initial stages of the crisis, the message was that this was a temporary, albeit serious, situation which would require some concerted actions by the monetary authorities to be averted. These actions were taken. Huge amounts of "liquidity" (read money created out of thin air) was pumped into the banks and the markets by the Fed and most of the other major Central Banks. The Fed began to lower interest rates. These were the tried and tested measures which have been used for decades to stave off any "glitch" in the borrowing and spending which fuels modern "economies". There was no conceivable reason why they should not work again, according to all the pundits. And indeed, as August became September and then October, they did seem on the surface to be working yet again.
There was only one "anomaly". Over the course of September and October, the US Dollar fell to all time lows and the $US price of Gold rose well over $US 100 to threaten the all time highs it had set in January 1980.
Then, in November, the lending freeze flared up again, this time with even more virulence than had been the case in August. This time, the consternation was more pronounced and the amounts of "liquidity" injected even bigger. This time, there was professed shock which quickly morphed into manufactured outrage at the size of the losses now being admitted by the banks. And this time, there has been concerted Central Bank action. Now, with Christmas almost upon us and the new year less than two weeks away, it seems that the stated goal of preserving a functioning banking and financial sytems and preventing any "market failures" until the end of the year has been met.
The US Dollar has recovered a small part of its lost ground. Gold has been "tamed" for the moment at least, cycling each side of the $US 800 level in recent weeks but still safely below the dreaded $US 850 all time high. The US Treasury, along with the US Fed, was performing Mr Paulson's "role of government".
Integral with the new financial crisis brought on by the lending freeze since November has come more and more articles and analyses delving into the "fraud" perpetuated by the creation of off-market packages of debt paper - the CDO and CDO squared paper which nobody wants to buy - or sell - anymore. It is said that the banks no longer "trust" each other. Of course they don't. They know what they were doing and they know what all the other banks were doing. It is said that the subprime loans and the other toxic sludge which has now fouled the banks' nests were fraudulent from the start. The lenders knew that the borrowers wouldn't be able to service or repay the debt. That didn't matter. They just stapled the loans together and "on sold" them into the "markets". Those same markets that Mr Paulson is now telling us that the government's role is to support.
All of this is true enough, as far as it goes, but it does not go anywhere near far enough. As a cursory glance at ANY of the "money supply" statistics in the US or anywhere else stretching back to 1971/1973 and the dawn of the global fiat paper currency era will show, the one constant has been a steady and steadily accelerating amount of inflation. For 25 years, since 1982, this inflation has been denied by almost everyone with complete impunity, because the "prices" that were rising were those of financial assets. According to the gospel according modern economics, the Gold price rise from $US 35 to $US 850 between 1971 and 1980 was "inflation". The Dow rise from 776 to 14164 between 1982 and 2007 was not. Nor was the almost tenfold rise in US government funded debt. Nor was the TRILLIONS in additional consumer debt. Nor was the HUNDREDS OF TRILLIONS in financial paper and derivatives over the same period.
Almost all of this grotesque increase in the total stock of money has been either borrowed into existence or pyramided (in the case of derivatives) on top of paper which was borrowed into existence. The insoluble problem of any economy and any paper asset markets driven by constant credit expansion is that the credit expansion must constantly accelerate to keep the system functioning. Ever increasing levels of debt require ever increasing amounts of "legal tender for all debts public and private", else the debt can neither be serviced nor rolled over nor repaid.
Subprime loans, CDOs, "Alt A mortgage paper" and all the rest were the fodder for the last gasp of the credit expansion, the US and global housing bubble. All of this paper was created, packaged, and sold to "investors" all over the world as the last gasp of the credit creation. It was the last gasp in the efforts to perpetuate the pretense that a "promise to pay" and a final payment are one and the same thing. It was the crowning insanity in the decades long attempt to pretend that in the financial sphere, actions do not have consequences.
What we are seeing with the freeze in subprime and "asset backed" paper is the end result of pushing a credit expansion beyond its inherent limits. The consequences have been postponed, so far, and the postponement may well last until the end of this year. They will NOT last until the end of 2008.
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