Wednesday, December 28, 2011

Karl Denninger, "Janet Skewers MF, But Arianna Needs To Cut The Crap"

 "Janet Skewers MF, But Arianna Needs To Cut The Crap"
by Karl Denninger

"Gots to love me some Janet today... In her book "Third World America," Arianna Huffington urged us to break "the choke hold that special interest money has on our politics." (P. 172) Congress allowed no-strings bailouts during the 2008 financial crisis and ongoing impunity and benefits for connected Wall Street banks. Yet there has been little accountability and no high profile indictments for widespread financial fraud.

Eh.  I think there's a problem with the connection being drawn here.  Bluntly, it is specifically the overspending of Congress that makes possible all the bubble machine nonsense along with the games played by corporate America and the banksters. The reason is simple monetary mechanics - in order to create ever-expanding "moneyness" there are only two ways to reach that goal:

   1. Innovation.  That is, do more with less.  This is true progress in the economy and society as a whole.  It is what lifted man from straw huts and holes in the sides of cliffs and has powered our economic progress since.

   2. Government deficit spending.  That is, pretend to do more with less.  Make promises that one will not pay for via taxation in the present tense, relying on the ability to issue an ever-larger promise to force our children and the unborn to labor ever-harder and pay ever more in taxes to cover the check at some indeterminate point in the future.

Since #1 isn't happening at the desired rate you have to have someone who can and will issue ever more non-liquidating credit into the system.  That is #2, since nobody else can get away with that on a forward basis for very long (those who try go bankrupt - ala GM, AIG, etc.)

It is of course politically convenient to intentionally ignore this fact, but it is also fundamentally dishonest.  Corzine didn't get his ideas on his own - he got them specifically from the belief that Europe would be bailed out by ever more profligacy from the governments involved, including our government through Fed swap lines. "On October 31, MF Global went bankrupt under circumstances that suggest a classic situation for fraud. MF Global's Chairman of the Board and CEO was Jon Corzine, former Goldman Sachs CEO, former U.S. senator (D., New Jersey), and former governor of New Jersey. On November 4, 2011, Corzine resigned as head of MF Global. Customer money to the tune of $600 million to $1.2 billion is still missing. JPMorgan was MF Global's largest secured creditor. Corzine either can't or won't explain what happened. He offers neither a theory nor an expert opinion."

That appears to be true.  When the bet went bad it looks like someone stole the customer money in an attempt to "buy more time."  But where did Corzine get the idea that if he just held onto those losing positions they would be made good?  Let's cut the crap and get down to brass tacks: Exactly where did that idea come from?

It came from the bankrupt policies and expectations promulgated by Congress and our President, by those on both the left and right side of the aisle.  Remember that our Congress ran up against the spending wall in August and instead of ceasing deficit spending simply wrote more rubber checks.  That very same Congress, in concert with the Executive, has continually put forward an intentionally fraudulent model of government finance and political promises for the last 30 years.
Arianna wrote that both corporate and financial interests have "captured our leaders' hearts and minds... Obama's senior economic advisors believe we live in a Wall Street-centric universe." (Third World America Pp. 151-152.) Arianna is stuck in the "progressive" mindset where we don't have to pay for what we want.  She's in the mindset of the petulant child who believes she can simply demand more "cheese" and get it; in short she believes that an intentionally distorted market predicated on threats and frauds is somehow sustainable. She's wrong, but like a heroin addict she (and many others) refuses to see the truth behind these policies - they're bankrupt, they were bankrupt 30 years ago and they will destroy our nation on both an economic and political level if they are not abandoned. "A few members of Congress fight for the rights of taxpayers and for the system of justice we used to expect in the United States before special interest groups bought much of Congress. Representative Marcy Kaptur is a fierce fighter for justice not only for her constituents but for all Americans. She's not alone. The MF Global hearings revealed that a mix of Democrats and Republicans stand up for what is right, but there are members of Congress on both sides of the aisle that don't."

Indeed. Marcy is right to go after Corzine, and so are the others in Congress who did so.  But while this process continues, and I do hope and expect that Corzine and others will face prosecution for what happened with MF Global, we must stop playing games with our federal and state financing, and tell the people the truth about what they were promised along with what can be delivered. This means an immediate cessation of deficit spending and acceptance of the fact that last year close to 10% of GDP was in fact generated through fraud - more than a trillion dollars of economic activity for which there was no demand and no ability to pay.

There is no resolution through "soak the rich", "paying one's fair share" or anything of the sort.  We would have to double the tax revenues (not rates) in order to balance the budget this way.  If we were to tax all income over $250,000 at 100% we would not manage to balance the budget, but in the next year we'd collect zero from that tax, since nobody would work hard enough to earn more than $250,000 if they didn't get to keep any of it.  In addition even if we were to cut military spending in half we would only reduce the budget deficit by about 25%!

Further, the payroll "tax cut" is both backward and wrong; it is simply stealing Social Security tax revenues in order to buy yet another few months (or year, depending on whether you believe in the two months or a year extension) of ponzi federal finance.  A vote for that bill was a vote for the collapse of our government and society and those who argued for it in print or otherwise did in fact arguing for anarchy and social collapse.  In other words there is no solution that does not involve massive and immediate cuts to social spending along with taxation at a level that balances the budget right here, right now, and on a permanent forward basis.
Medical spending both in terms of private insurance costs and Federal Government budget allocation is rising at more than 9% annually and has been for the last 30 years.  It was $53 billion in 1980, is about $800 billion now and in 20 more years at this rate will be close to $4.5 trillion.  That obviously won't happen and yet it's the path we're on. These are matters of mathematics, not politics.

My problem with both sides of aisle is that neither will come to the table and be honest with the American people about the facts.  And yet they are facts.  No amount of political game-playing with change any of this and no amount of punditry will be adequate to explain away the complete and utter collapse of our financial system and government if we don't cut this crap out.
Huizenga continued: "This certainly doesn't feel or look like you were caring for those other people's money in the way that you should have or certainly were expected to." None of Corzine's money was at risk in these accounts. The representative summed up: "You've got thousands of hard working people around this country that feel cheated." They were cheated.  But this cheating is not confined to MF Global.  It has been going on for 30 years on a serial and intentional basis throughout our political and financial system.

It was time to stop this crap a long time ago but now we're out of the ability to continue with it.  We either stop it now - right now - or we go off the cliff. Europe is coming apart now.  The idea that we can deal with these problems "tomorrow" is a fantasy.  We have taken what was a required 20% contraction in the size of government in 2007 and turned into a 50% one by screwing around and lying, on both the left and right, for the last four years.

The mathematics of geometric series make clear what's coming - in the next two years the required shrinkage will be closer to 75% and in four our economy and government will require more than a 100% reduction in size and thus will collapse upon itself.

In short we have screwed ourselves by refusing to deal with the facts.  We failed to force the fraudulent edifices in our financial system to purge the bad debts and go through resolution in 2008.  Instead of forcing these firms through bankruptcy in early 2009 we codified fraud as a lawful business model in the now-infamous forcing of "mark to fantasy" as a "lawful" means of presenting balance sheets and the utter refusal to outlaw off-balance-sheet financial shenanigans such as "Repo to Maturity" transactions - a major part of what sunk MF Global.

We are on the precipice of a meltdown in Europe and several of their major financial institutions have leverage close to 50:1.  These institutions are holding debt on their books at "par" that are not going to pay exactly as our banks are (HELOCs and Second Lines anyone?) and the only reason they have not blown up yet is the willful suspension of disbelief that these debts are "covered" and "money good." The entire premise of this argument is that "economic growth" will "rescue" these firms.  This is mathematically impossible as in order for it to work growth must expand faster than outstanding systemic money and credit does - and that has never happened over the last 30 years."

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