Still Pretending by James Kunstler

Congratulations Mr. Knustler, you got it right.

But let’s put a little less blame on the “big banks” and a little more on the “enablers”. It is government interference in the economy, namely the central banking system, established by the Federal Reserve Act of 1913, that set the current looming economic disaster on is present course.

With the total elimination of asset-based currency under Nixon, we now have a system of debt-based currency that allows the Fed to print fiat money at its discretion and pump that money supply into the economy in the form of easy credit. The “big banks” are only responding to the signals from the Fed and its enabler, the U.S. Government.

Currency that is debt-based only has value based on future ability to repay. Therefore, all new additional money is debt and all debt is paid with deflated dollars. Wealth is siphoned from the poor and middle-class through inflation and boom-bust business cycles. America is essentially insolvent as we speak because there is no accumulated savings to back up this obligation to repay.

As Mr. Knustler says,

Sooner or later we’ll get back to money that stands for something and banks that function as credible repositories of wealth.

“Money that stands for something” means asset-based. “Banks that function as credible repositories of wealth” means banking and lending institutions that are not tools of the government.

I have been supporting the only Presidential candidate who fully understands our economic situation, how we got where we are, what are the consequences, and what is the only remedy. This is the only authentic change: complete course correction — not branding the ‘status quo.’

Americans have been offered their liberty and security on a silver platter and are content to let it pass in favor of “American Idol” politics. They deserve now whatever rot they get.

Thanks you Mr. Knustler for agreeing with me.

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Ha ha ha ha ha! Okay, okay, if you want some discussion, you’ve got it. Here goes…

The banks LOVE to maneuver. They thrive on it! Remember interest rate regulation? That was abandoned 25 years ago because the banks consistently demonstrated the ability and the will to maneuver around the regs. Hey, it’s what they do. But as far as the blanket goes, well, as much as I like the joke, I’m not sure it applies here. In fact, the banks *are* trying to make the blanket bigger, and may be succeeding.

The subprime mess is, you won’t be surprised to hear, a fully self-inflicted wound. It is the result of financial services industry campaigns that began over 10 years ago. I remember participating in a bank analysts symposium back in ’95 or ’96 where a string of speakers extolled the virtues of subprime lending to boost yields (FWIW, the focus then was on subprime credit card and auto loans, not mortgages; they came to that later). Well, the chickens finally came home to roost. But they ALWAYS do. The banking sector regularly goes through binge-and-purge cycles that cause terrible economic dislocation. Alas, the politicization of the bank regulatory apparatus promises that this phenomenon will persist. Unfortunately, the bad actors behind the subprime mess have already been enriched, and nothing’s going to change that. They already won, and we all lost. Such is life.

I remember another time that the banking sector undertook a system-wide campaign to capitalize unpaid debt-service obligations. That was back in the 1970s and 1980s. And the assets were not mortgages. In fact, most of these loans had little in the way of security; much of it was “sovereign debt.” We referred to this as “LDC debt,” loans that were issued to developing nations with terms that were often hard to meet. These loans were funded by “petrodollars” (deposits generated by the explosion in petro-wealth created by the run-up in oil prices in the mid-and-late-1970s) that the banking sector needed to “recycle” (i.e., invest). Well, when the debtor nations couldn’t/wouldn’t pay, the banks would renegotiate, folding the unpaid interest into the orginal loan, and perhaps boosting the rate a bit. So the amounts owed to the banks kept rising until the comedy became too absurd to continue (or, the “blanket” had gotten so insanely huge that it HAD to be unraveled — the banks were carrying those “blankets” on their books at full value, as if they expected to collect one hundred cents on the dollar). That was in 1987. The banks swallowed hard and wrote down the value of their LDC debt, booking billions in losses. It was also the only time since the Great Depression that the banking sector has posted an aggregate loss.

Will banks end up writing off subprime mortgages the way they did third-world debt? Perhaps, but not nearly as deeply. First of all, even though it may be subprime, a mortgage by definition has collateral. So when push comes to shove, the bank can foreclose on and sell the collateral — LDC loans didn’t tend to have collateral one could seize. Also, and perhaps more importantly, it is much easier for a lender to go after some poor schmo homeowner than it is to go after a sovereign nation, so I wouldn’t expect subprime mortgage borrowers to receive the same forebearance that developing nations did (unlike with LDCs, the State Department has no interest in getting you favorable terms on your renegoitated mortgage). In other words, banks would be limited in the amount of unpaid interest that could be capitalized; the “blanket” couldn’t get as big this time. Even though some banks may suffer, it won’t compare to the suffering endured by some borrowers.

We saw abysmally stupid commercial real estate lending combined with lax regulatory oversight take down huge numbers of banks and S&Ls in the late ’80s and early ’90s (hey, Senator McCain, I remember your role as one of the Keating Five, even if everyone else seems to have forgotten). The parallel with the subprime mess is striking. And the fact that all this is hitting the proverbial fan during W’s administration is too ironic, as the last time the banking sector was in such dire straits was during daddy’s four-year term.

All right, enough incoherent rambling. I’ll wrap with a “Thanks!” to Uptown Ruler for the post launching this thread, to Tim Peck for his passion, and to Undercover Blue for egging me on.

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Add to the peak oil problem (with spiraling costs and the world shifting to payment in Euros), the global water shortage (exacerbated by demand for ethanol), the massive U.S. debt that Bush has racked up … and then imagine how we’re going to pay it off.

We used to have a manufacturing base here that could garner foreign currency and provide high paying jobs, both of which built real wealth. Like other empires before us we moved from growing things to making things to providing financial services (see Spain and Great Britain, and Kevin Phillips “American Theocracy”).

U.S. wealth was initially built on wheat and other grains and grasses the greater part of which is grown in the “wheat belt.” Now it appears that we’re not only losing our shirts but losing our belt as climate models suggest that the wheat belt is moving steadily north into Canada.

Rough sledding ahead, indeed. We need to quickly shift to true-cost accounting and embrace what has been termed radical localism. Local food can provide some measure of food security. Local energy generation can keep some lights on in the absence of coal trains and tankers. Local services can keep local wheels turning whether they’re on cars or bicycles.

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