6. It would actually be possible, therefore, to maintain something resembling normalcy by indefinitely sustaining the bubble already begun. This would be accomplished by continually pouring more and more money into the failed financial institutions, money obtained either through additional borrowing (already stretched to the limit) or simply by printing it (as Bernanke is already doing). This appears to be the best idea Obama and Geithner have come up with so far:
Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful (from Propping Up a House of Cards, by Joe Nocera).Whether the cash infusions are administered via "nationalizing" the banks or maintaining their "private sector" status has no real bearing on the fundamental problem. In a sense, the "nationalization" question is a red herring, obscuring the far more basic issue, as described so eloquently by Nocera. While the Republicans fixate on their version of creeping socialism, the Democrats can safely pursue their own agenda by insisting on their loyalty to the tried and true "private sector" model. (Getting the hapless Republicans all worked up for nothing almost makes the whole charade worth while.)
In theory, there is no limit to the numbers of dollars the Federal Reserve can print, but in practical terms a "system" of this sort is highly unstable. Which makes it very difficult to predict exactly when or how the inevitable collapse will take place. The Chinese could decide at any time to call in their chips, or, more likely, stop investing in Treasuries altogether, forcing Bernanke's printing presses into overdrive. Since we are now in what looks like a deflationary spiral, the danger of inflation appears minimal -- a situation that's being used to justify the explosion of the money supply. But things could turn around literally on a dime if the Chinese or the Oil sheiks or Warren Buffett or George Soros, Bill Gates, etc. make any sudden moves in the wrong direction. Given the insatiable need for trillions in freshly minted dollars, it's impossible to ignore the very real danger of hyperinflation or worse -- and the high probability that the inflation will, in fact, be far worse than anything heretofor experienced or even imagined.
Meanwhile, the instability of the "Geithner fix" will be compounded by a host of forces, not only in the form of predictable Republican opposition, but also from second guessing by a long list of experienced economists, like Nocera, alarmed by its inherent weaknesses (but with no viable alternatives to offer). So the plan will lurch along half-heartedly, winding down a bit when the deficits become too alarming, picking up the pace whenever the stock market takes too steep a plunge. One thing I can say for sure, however, is that the madness will continue to the bitter end. Because, as we've learned from Vietnam, and as we've learned from Iraq, once a certain level of commitment is made, there is no going back. Once so many billions of "taxpayer" dollars have been invested, no one in government will be in a position to say, "this was a mistake, we are on the wrong track, we have to cut our losses and get out." So what we'll be hearing more and more in the coming months or years is: "Don't panic. There is light at the end of the tunnel. Stay the course."
7. Meanwhile, given the drastic downturn in literally every economy worldwide, real people in the real world are going to be suffering. North Americans tend to be politically uninformed, naive and passive. Not true of most people in other parts of the world. While the US has been predictably quiescent, we are already seeing many protests and riots in farflung corners of the "global economy" and there will certainly be many more. Most of these countries already have well established socialist parties and it's not difficult to predict that such parties are going to do really well in upcoming elections, a development that will increasingly isolate the United States from the rest of the world.
8. Nevertheless, modern socialist governments will not necessarily be in a better position to deal with the economic repercussions of the financial meltdown than their capitalist predecessors. So economic conditions will continue to deteriorate everywhere as the financial meltdown evolves into a black hole. Socialist governments will be in a better position to deal with the social aspects of the crisis, since they are far more likely to give priority to human needs, as opposed to the "needs" of investors, but these governments will nevertheless continue to assume that what they most need is money -- and money will be continually losing its value. The citizens of the United States, with its staunch opposition to socialism in any way shape manner or form, will suffer the most, because it will still be assumed, right up to the last minute, that stabilizing the economy by protecting investors at all costs must take priority over what is misleadingly called "entitlements" (i.e., basic human needs). The mantra will persist to the bitter end: what's good for Wall St. is essential for Main St.
9. At some point, with millions of people literally starving and homeless, there will be a breakthrough. A moment of truth. It will come only when the value of all the world's money finally reaches zero. Goose Egg! This will be the great awakening, the fall over the precipice, the opening of the "gateless gate," the resolution of the aporia, the passage into economic Hell . . .
(to be continued . . . )