Saturday, February 14, 2009

The Shape of Things to Come -- Part 7:The Black Hole

While our politicians continue to resist nationalization, the need for it is becoming increasingly clear to leading economists. Witness a column in today's NY Times,
A Stress Test for the Latest Bailout Plan, by Joe Nocera, who "still can’t help thinking that Mr. Geithner is avoiding the most straightforward, obvious path out of the crisis."

“When I talk to experts, after about two minutes they say, ‘we should just nationalize,’ ” said Simon Johnson, a banking expert (and blogger) at the Sloan School of Business at M.I.T. “That tells me that the consensus is moving in this direction, and we are all just afraid to say it.” Nationalization. I just said it. The roof didn’t cave in.

But nationalization isn't in the cards, because . . .
Mr. Geithner simply doesn’t seem able to get his head around the idea of nationalizing a big bank. As he told the New York Times columnist David Brooks recently, “It’s very important that we don’t look like there’s any intent of taking over or managing banks. Governments are terrible managers of bad assets. There’s no good history of governments doing that well.”

But that’s a canard. The government did a terrific job managing banks during the savings and loan crisis of the 1980s. It took over banks — “we called them bridge banks,” recalled William Seidman, the former chairman of the Federal Deposit Insurance Corporation, with a chuckle — replaced their top managers and directors, stripped out bad assets that the government then managed brilliantly, and sold the newly healthy banks to private buyers. It turned out not to be all that hard to find actual bankers who could run these S.& L.’s for the federal government.
In my view, nationalization is certainly preferable to any alternative Geithner is likely to come up with, and I predict that, sooner or later, the banks will in fact be nationalized. I also predict, by the way, that Geithner will be resigning soon, possibly very soon. But the process by which nationalization will take place will be the wrong one -- and it will fail. The sensible way to nationalize the banks (and all other institutions "too big to fail") is to first allow them to fail and then take them over -- at little or no cost to the government (i.e., the people -- I hate that word "taxpayers"). Unfortunately, however, our politicians are still bemused by the fatal notion that somehow these banks can be "saved," whatever that means, so, in the process of nationalizing them, they will simultaneously be pouring money into them -- not as an investment, as in spending money to hire new staff or modernize the technology, but in the vain hope that somehow the mountain of "toxic debt" held by these banks can be exorcised.

It can't. And for that reason, nationalization won't really solve the problem either. The only way to deal with the toxic assets is to let the banks fail first, which will reduce their investors, their creditors -- and their toxic assets -- to zero (Goose Egg, remember?), where they rightfully belong, since the investments in question are clearly worthless. But the "assets" (actually liabilities) are so huge that their failure would be tantamount to the failure of the entire US -- and world -- financial system. And that cannot be allowed to happen. Except that there is no way to prevent it from happening. So everything that will be done after nationalization will be purely in the realm of magical thinking. Very expensive magical thinking, because the only way to maintain the illusion that these obligations can be redeemed is to print money -- trillions of dollars of it.

There will never be enough. Not only will our economy follow the financial institutions themselves into bankruptcy, but our profligate printing of money will eventually make money itself worthless. This development will be far beyond mere inflation, or even hyperinflation. It will take us to the point that money will cease to have any meaning whatsoever. One could call this the "Black Hole" theory of economics, which would make it especially attractive to science fiction fans. Only it won't be fiction. It will be real.

This will be the oft-mentioned, but never explained, "unacceptable alternative" we've been hearing so much about, the total and complete disaster everyone in government is determined to avoid at all costs. But, as I explained in an earlier post, such a disaster, while it cannot be avoided, can most certainly be lived with. It's not like the aftermath of a war, where factories, transportation, communication, power, agriculture, even the social fabric itself, may have been totally destroyed. What will have been destroyed is the monetary system, i.e., money -- and the financial system that depends on it. And if its destruction is handled sensitively and intelligently, then the collateral damage to society per se can be minimized. If the process is badly handled, then the collateral damage could prove disastrous -- and that would be a shame, because such a dire outcome is not necessary.


  1. They should not be nationalized: new public banks should be created with a clear goal: keep the credit going (in healthy terms) to small entepreneurs, worker cooperatives and the basic credit lines of individual consumers. Private banking has failed, let bury it.

    The problem right now is that governments across the world are giving away money to bankrupt private companies, either as bailouts or mere ridiculous 0% interest credits, and these do not feed the consumer and small company credit at all, as it's in theory expected. What do they do with all that money? I guess that they eat it or something.

    But so far I have defined the issue only in capitalist terms. Becuase state socialism is just a form of capitalism (in fact capitalism has never been anything else and whoever thinks otherwise is deluding him/herself).

    What if we define it in ecologist terms? What if we decide that it is a great opportunity to simply reduce consumption (and therefore production and waste) while keeping the basic well being for the common citizen. We can maybe invest in public transport, in making jobs less time-demanding, in green energy, in bicicles, in local production-consumption cycles, in workers' management of their own companies, in permaculture...

    We don't need anymore to feed the multinational corporaative monsters: they are agonizing? Fine. That's good news. Let's save the small producers, those that are enviroment friendly, those that make things for the community local and globally. Maybe some big companies need to be nationalized in order to smooth the transition by keeping the industrial demand, I don't say no to that, but the focus should be in re-creating the economy with a community and enviroment friendly productive/consuming activities.

    Forget about Monsanto, what we need is permaculture - and that is a pratical science, not a centralized business (mafia). Forget about Ford, what we need is bycicles and buses. Forget about the seven sisters, what we need is to harness solar and wind energy.

    And all that needs totally new policies, detached from the interest of corporations, which are nothing but to swallow money from people.

    It is a great opportunity and the countries who tackle it properly will become the new leaders in few decades.

  2. I heartily agree, in principle, with everything you say, Maju. Especially what you say about "state socialism," which deserves repeating: "because state socialism is just a form of capitalism (in fact capitalism has never been anything else and whoever thinks otherwise is deluding him/herself)." This is it exactly. Which is why "free market capitalism" is not so much an economic system as an elaborate ruse, an illusion, through which the oligarchs maintain control over the rest of us. Capitalism is theoretically based on risk -- and for most investors of modest means, the risk is very real. But the super wealthy, and their highly paid "advisors" cannot tolerate risk. All their investments are based on insider knowledge, theoretically illegal, but only if you get caught red handed, which they know how to avoid. And, since the institutions they control (either directly or from behind the scenes) are "too big to fail," then they can count on the politicians to bail them out, in acts of so-called "state socialism," which as you say is part and parcel of capitalism itself. Which is why the political system in the United States, far too heavily influenced by the super-wealthy, in far too many ways, is in itself in need of serious reconstruction. This type of "socialism" is the exact opposite of both real socialism and real democracy as well.

    As for your suggestions, as I said, I agree -- in principle. The problem is that things have gotten far too out of hand for the sort of reforms you are suggesting to any longer be possible. It seems to me as though we (and by we I mean the entire world) have already crossed a Rubicon, and are now on a course that will inevitably lead to a complete breakdown of the disastrous system of oligarchically controlled "free market capitalism" that has dominated the world for so long. In other words, something spectacular is about to happen (or already happening) that will be so big no one will be able to control it. And in the long run it could be better that way (though no one can predict exactly how it will turn out -- and it could, admittedly, wind up as something far worse). What we need to concentrate on now is not so much the various reforms that could have prevented the disaster, but on the various possibilities that remain for limiting the collateral damage to the population as a whole. AND on building a much better system, based on real socialism (as I see it, the only alternative), which can also be described as: government of the people, by the people and FOR the people. In the words of Abraham Lincoln!

  3. It's also important to understand that the type of nationalization I am recommending, through which the institutions are allowed to fail prior to their being nationalized, would NOT be the sort of "state socialism" that's part and parcel of capitalism. Because, unlike what is now being planned, the oligarchs would NOT be protected, and in fact there would be a tremendous loss of wealth among the super-wealthy everywhere. Many medium and small investors would also lose their badly needed retirement accounts, of course. But, as I recommended in my post "Just a Thought," of Feb. 2 (, the trillions now being planned as a bailout could be used to build a social safety net so effective as to render the need for such "retirement investments" unnecessary. This would be real socialism, of course, and NOT the capitalist variety.

    Actually, it would be a lot like the way cancer is treated through chemotherapy, which kills ALL fast growing cells, both healthy and cancerous. Once the cancer is cured, the healthy cells can be safely restored.

  4. I have never posted a message on a blog before but after spending a long snowed in day reading these posts I feel compelled to add my thoughts. Please forgive if I have failed to follow some protocol but “I am but an egg”. You see, the literary references already seeping in.
    Only a few months ago this seemed a radical idea, but as plan after plan, among the propeller heads, fails to pan out I become increasing convinced of its viability.
    What would folks do if all the banks were just allowed to fail? As Alan Watts would say “it doesn’t matter”. For instance, homeowners would still have to sell houses. I wouldn’t take long for people to figure out that they could get the down payment themselves and hold a mortgage for the buyer at the 6-8% rate banks charge. Of course then they would have to find a home where the seller would do the same. It would not be quite as neat and tidy as a bank. But, by the same token, it would not take long for a few of these folks to get enough money together to start a “bank”. Same goes for folks with enough cash laying around in the stock market and CDs, who could now start lending to start up companies and manufacturing plants. Why should the bankers be the ones making the enormous profits on the lending of money and now even greater profits from this seemingly bottomless pit of bailout money. Here we watch our stock portfolios dwindling while we could have been lending and borrowing among ourselves and reaping the huge profits the banks have without involving hedge funds, derivatives, and slick and tricky loans to unqualified buyers and insurance (“place your bets” gambles on all of the above. Wasn’t this how our financial system started in the first place? Wealthier ( but lazier) folks with money lending to poorer folks with lots of energy and a good idea?
    Nature abhors a vacuum and the money needing to go somewhere, would quite naturally fill in the void left by the, now nonexistent, banks. These new lenders could call themselves for instance “bankers” and while the system would be somewhat primitive at first I’m sure there could be a website quickly created to simplify online borrowing and lending on a large scale. I’m not economist, but I know that Americans are creative—as in creative financing.
    I know it sounds simplistic but just another vantage point from which to view this economic crisis. Let’s get back to basics , cut out the middle man, treat the banks like any other failing company and save trillions in the process. To do anything less is hypocritical if the free market economists feel that the competitive “only the strong survive” economy is the most advantageous.
    However, whether we truly want or need a cut throat corpatalist society is another question, which DocG has already thoroughly and thoughtfully covered.

  5. East Egg or West Egg, Ashevillekat? :-)

    Your point about what people would do with their houses if the system collapsed is very interesting. For one thing, we now have the resources of the internet at our disposal, so houses could be advertized online and prices negotiated online. Assuming of course that money would still have any meaning, which it very well might NOT. I'm not sure that home sellers would feel comfortable offering mortgage loans, however. This is where the planned economy would come in, however, because the government could function as a guarantor of such mortgage arrangements. It's also possible to envision a situation where anyone with a house to sell would simply sell it to a gov't entity, which would then sell it to a buyer, providing the mortgage at the same time. Another, more radical, possibility is that the gov't could nationalize all buildings and provide housing on a need basis to all citizens.

    While many are resistant to the idea of government control, in a democracy it is really the citizens who are in control. Theoretically at least the government represents their interests and their wishes. There are many ways in which the economy could be managed by the government and decisions would be made by democratically elected representatives, as with all major decisions in our society at present. And if the citizens are unhappy with those decisions they will elect different representative. That's how democracy works , whether capitalist or socialist.

    I'm skeptical about the idea of "lending and borrowing among ourselves," because the average person doesn't have the resources to do that -- and the wealthy already do that -- and find ways to manipulate the system in their interests. Banks have been used in the past because they are able to pool the resources of many people of modest means and that seemed to be a practical way of lending, under the old system that existed many years ago -- and no longer really applies. What's happening now, as I see it, is that the whole system is imploding, and that includes these banks, most of which can't function any more. It will only be the governments that will be in a position to handle these transactions in future, and if there is still any meaningful money in circulation when this finally works itself out, then the gov't would be and should be the one to do the lending. And by the "government" I mean "the people," since in a Democracy the government represents the people and acts on their behalf.

    Setting up a new system from scratch that could lead to the same cut-throat tactics as before is NOT a good idea, imo. I don't think anyone really wants that anymore, aside from a relatively small no. of ideologues who will always insist that everything must be done via the "private sector." To me, that's just baloney. As you say, the question of whether we really want or need that is an important one to ask. I may not have the last word on what is best, but I do think it's important that these decisions be made with eyes wide open.


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