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Our Fragile “Hothouse” Economy

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  by Charles Hugh Smith  Of Two Minds   November 3, 2011

Financialization has led to a “hothouse” global  economy where the slightest disruption in central bank/Central State  intervention will cause the sickly flowers to wilt and expire.

Of the three great financial truths that have been left  unspoken for the past four years out of sheer dread, lest their mere mention  collapse our economy, let’s start with the most obvious: if the Federal Reserve  and Federal government ever crimped the dripline of “easing” and  bailouts, America’s financial sector would promptly roll over and expire.

Does this strike you as a robust, flexible, transparent  system? Of course not. Rather, it is a “hothouse” financial sector,  one that needs constant injections and a carefully controlled environment just
to keep it alive.

And since the U.S. economy has been fully financialized,  it is now dependent on financial machinations and skimming for its  “growth,” profits and the debt expansion that fuels everything else,  including the metastasizing Savior State, a gargantuan aggregation of an  unaccountable National Security State with crony-capitalist cartels and a  dependency-inducing Welfare State.

Without the debt conjured into existence by the Fed,  Treasury and the financial sector, even the mighty multi-tenacled Savior State would quickly starve.

As a result of our dependence on financialization and  exponential debt, our entire economy has become a weak, sickly  “hothouse” economy which can only survive in a narrow band of  temperature, debt injections and opaque manipulations of data and what’s left  of the nation’s shriveled markets.

Once exposed to Nature, i.e. “wild” transparent  markets that are allowed to discover the price of all assets naturally, then both the nation’s financial sector and its economy would implode.

The second great financial truth is that the financial  sector has long been detached from the real economy. The real economy is for chumps; the “no-risk” skimming of monetary legerdemaine is the raison d’etre of the entire financial sector, a point brilliantly made in this “must read” essay posted on Zero Hedge: MF Global Shines A Light On Monetarism’s Incapacity To Enhance The Real Economy

Granted, some of the  financialization schemes described are not that easy to grasp, but here’s the  primary point:

That is why this system has to change at some point. It  is exactly designed to be misleading, and the reason is so very simple. In any fractional system there will be a desire to amplify that fraction to the maximum degree. But in doing so, participants recognize that the process of maximization entails creating negative human emotions and perceptions since history is not really that kind to this manner of fractionalization. So the system has institutionalized, abetted by the very regulators that are supposed to cap fractions and leverage, these methodologies of hiding just how much financial entities have engaged in maximizing themselves under the cover of mathematical precision.

The Panic of 2008 was supposed to correct these excesses and remedy the fact that risks have not been accurately priced for decades. Yet the system has resisted every effort, simply settling for redefining the appearance of safety yet again. Somewhere in that mathematical pursuit of maximum fractions, the very goal of finance changed, as if traditional banking was no longer sufficient to support the pursuit’s ever-growing ambitions. So the financial economy has broken away from the real economy, using the ironic cover story of enhancing price discovery to the process of intermediation.

The fact that money is disconnected from the real economy never enters the consciousness of monetarists since money is always the answer. But make no mistake, the primary reasons for this global malaise are that money has lost its productive capacity and its proper place as a tool within the system.

The third great unspoken truth is that the conventional Status Quo– the financial punditry, the Cargo Cult of Keynesianism, the
incestuous academic community, the PhDs in the Fed and Treasury, the politico lackeys, the self-serving think-tanks of both empty ideologies (“which is better, Bud or Bud Light?”), not to mention the lobbyists, revolving door toadies and all the other hangers-on in New York and Washington– have no Plan B and certainly no Plan C. In other words, they are utterly clueless about what
to do when their abject and total failure becomes unavoidably obvious.

It is of course a crisis of self-service; nobody dares put their own status, wealth, power and perks at risk by thinking independently, much less speaking All That Cannot Be Spoken Lest This Sucker Implode.

But it is also a monumental lack of imagination; the lackeys and toadies cannot imagine any other Beast other than the one whose teat they have sucked all their lives. They live in mortal fear not of being ignorant or lacking in imagination–those deficiencies are too obvious to contest–but of the truth of the system’s increasing weakness and vulnerability being openly revealed.

America’s (and the world’s) financial sector is a fragile, sickly hybrid which will shrivel and expire the moment it is placed in the real, dynamic world. And because the global economy has become dependent on the slouching beast of financialization, it too is fragile and sickly, sensitive to the slightest perturbations and exquisitely vulnerable to any disruption of the constant life support offered by central banks and Central
States.

It is neither capitalism nor socialism, but a twisted hybrid of the worst traits of each.

I happened to catch a brief interview on DW TV (German TV, with English announcers and subtitles) of one of the few ECB (European
Central Bank) officials with the integrity to resign in protest at the ECB’s blatant interventions in the bond market (buying Italian bonds to prop up a market that would implode the second ECB support vanished) and the central bank’s slippage toward money-printing as the answer to every problem.

This gentleman said that the ECB had to monitor the global economy 24 hours a day lest some tiny policy mistake bring the entire shaky edifice down.

Does that strike you as a description of a robust, adaptable, capitalist system based on transparancy and price discovery of assets? Of course not; it describes a hothouse economy, always on the ragged edge of collapse if its central bank and Central State minders make the tiniest error in its care.

For four precious years we have been force-fed nothing but lies, obfuscation, misdirection, fear-mongering, spin, sins of omission, misinformation, propaganda, false rumors and false hopes. The hothouse is slowly falling apart, and the sickly global financial sector is wilting. The financial media is heralding every “save” and every “rescue” with ever-shriller enthusiasm, lest a contagion of truth spread through the hothouse like a chill wind.

But we can be sure of one thing: those who know better have already sold, and it is now the job of the politico lackeys and the
toadies of the Mainstream Media to convince the bagholders to hold on and not sell, because “everything’s been rescued.” Distilled to its essence,
that is their one and only job: to convince you not to sell. That keeps the bid up for their Masters to sell into.

If history is any guide, the final collapse will be triggered by an apparently “controllable” event, something like the bankruptcy of MF Global. All eyes are on Greece’s referendum, apparently scheduled for December 4 or 5; but regardless of the vote, does a “yes” or “no” change that nation’s fundamental insolvency? No, it doesn’t.

Does the passage of some toothless law in Italy magically render that nation solvent? No, no, a thousand time no; none of these public-relations tricks can change the fact that all these nations are insolvent, the banks are insolvent, and even France and Germany are staggering under unprecedented burdens of debt.

The smart money sold in May, 2010, and the disbelievers among the Power Elite sold in May 2011, or perhaps August. Now those below the
smart money (but still above the dumb money) are sniffing the fetid hothouse air, where the rank, sweaty desperation of the minders is now everpresent.

So the apparatchiks and foot soldiers have been ordered to keep the dumb money from selling, until their “betters” can sell into a rumor-juiced bid. This explains the sudden jump in the S&P 500 on every rumor of rescue, as if an over-indebted and leveraged-26-to-1 financial system can be rescued with “belt-tightening” and ECB intervention with taxpayer money.

The entire euro “project” was a scam that enabled a vast new scale of financialization. Now that the “project” is falling apart, the bagholders who bought into the shuck-and-jive are nervous and fearful; has it all really been “saved”?

No, it hasn’t; it cannot be saved. The only “solution” available is to sell: sell now, while there is still a bid. Sell fast, sell hard, sell everything denominated in euros. That is precisely what the Status Quo fears the most: an awakening continent of bagholders and debt-serfs.

Anyone thinking the euro (and eurozone) can’t possibly go down until after the Greek referendum may well find their confidence in the
Status Quo’s “rescue” has been sorely misplaced.

More from Smith:

The  Collapse of Our Corrupt, Predatory, Pathological Financial System Is Necessary  and Positive

Charles Hugh Smith, Of Two  Minds|Nov.  5,  2011          We are being throttled by the Big Lie: we’re told  that if the predatory financial system implodes…

How  Much of the Global Economy Is Useless Friction?

500 Million Debt-Serfs: The European Union Is a Neo-Feudal Kleptocracy (July 22,
2011)
The Dynamics of Doom: Why the Eurozone Fix Will Fail (July 25, 2011)
The European Model Is Also Doomed (February 7, 2009)
When Debt-Junkies Go Broke, So Do Mercantilist Pushers (March 1, 2010)
Why the Euro Might Devolve into Euro1 and Euro2 (March 2, 2010)
Why the Eurozone Is Doomed (May 10, 2010)
Ireland, Please Do the World a Favor and Default (November 29, 2010)
Why The European Union Is Doomed (March 28, 2011)
Greece, Please Do The Right Thing: Default Now (June 1, 2011)
Why the Eurozone and the Euro Are Both Doomed (June 23, 2011)
Greece Is a Kleptocracy (June 28, 2011)

Written by laudyms

November 5, 2011 at 3:16 pm

INSIDE JOB- criminals are still running American finance

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“Inside Job” won the 2011 Academy Award for best documentary on Sunday night. The film’s director used his acceptance speech to deliver pointed criticism of Wall Street and the financial industry.

“Inside Job” director Charles Ferguson subjected Wall Street players, economists and bureaucrats to a fierce cross-examination to depict the economic crisis as a colossal crime perpetrated on the working-class masses by a greedy few. His film examined the financial crisis of 2008. His speech lamented the lack of accountability three years later. “Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong,” Ferguson said.

Charles Ferguson’s Oscar Speech Rips Wall Street: ‘Inside Job’ Director Levels Criticism During Acceptance

Where Are The Wall Street Indictments?

Charles Ferguson: The Financial Crisis and America’s Political Duopoly

The United States is now in the grip of a political duopoly in which both parties are thoroughly complicit. The current arrangement all but guarantees the continuing decline of the United States as a nation.

 

“Why aren’t more meltdown moguls indicted?” asks USA Today edit board: “If anyone acted and looked the part of a villain, it was the co-founder of Countrywide … The former managing director of credit rating agency Moody’s Corp. found a novel way to quadruple his company’s market share in rating mortgage-backed securities — he transferred, or fired, most of the analysts in the group … The former head of AIG’s financial products used the sterling credit of his parent company to quickly become the world’s largest insurer of the complex mortgage products Wall Street was churning out”

“You Have More Money In Your Wallet Than Bank Of America Pays In Federal Taxes” reports ThinkProgress: “…as politicians are asking ordinary Americans to sacrifice their education, their health, their labor rights, and their wellbeing to tackle budget deficits, some of the world’s richest multinational corporations are getting away with shirking their responsibility and paying nothing.”

LAT has the latest on the cost of the bailouts: “In mid-2009, [TARP] was projected to lose as much as $341 billion. That’s been reduced to $25 billion … Still, many people are worried about the long-term effects of the government actions [by setting] a dangerous precedent, opening the door to future crises … critics also said that hundreds of billions of dollars in bailout money … will not come back, mainly because of … Fannie Mae and Freddie Mac, which combined have consumed $150 billion … most recent estimates of losses for all the various bailout efforts range from $238 billion to $380 billion. But Treasury officials think those estimates might be too high. They said the total cost of all the financial interventions is likely to be less than $140 billion … less expensive than the federal losses from the savings and loan crisis in the late 1980s and early 1990s…”

Nine stories the press is underreporting — fraud, fraud and more fraud

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Nieman Watchdog:  Questions the press should ask

William K. Black on Capitol Hill in April. (AP)

ASK THIS | October 20, 2010   Harvard University

From liars’ loans to liars’ liens, the financial and foreclosure crisis has been one big story of banks defrauding their customers — a vast criminal enterprise. You wouldn’t know it from a lot of the media coverage, though. Regulatory hero and criminologist William K. Black helps connect the dots.

By Dan Froomkin
froomkin@niemanwatchdog.org

If it wasn’t already blindingly obvious that pervasive fraud was at the heart of the financial crisis and the ensuing foreclosure catastrophe, you would think that the latest news — that banks have routinely been lying their heads off in the rush to kick homeowners off the properties they fraudulently induced them to buy in the first place – would pretty much clinch it.

And yet the mainstream media still by and large hasn’t connected the dots.

What we are seeing all around us are the continued effects of a vast criminal enterprise that has never been brought to account,  employing a process that, as University of Texas economist James Galbraith explains, involved the equivalent of counterfeiting, laundering and fencing.

So the person with the right expertise to lead us here is a criminologist — in particular William K. Black, one of the few effective regulators in recent history (during the savings and loan crisis of the late 1980s), a notorious knocker of heads, and currently professor at the University of Missouri-Kansas City and author of the book, “The Best Way to Rob a Bank Is to Own One”.

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Call for AIG Open Source Investigation (and Goldman Implications)

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December 20, 2009          Nakedcapitalism.com

Spitzer, Partnoy, Black Call for AIG Open Source Investigation (and Goldman Implications)

An op-ed in the Sunday New York Times by former investigators and prosecutors Eliot Spitzer, Frank Parnoy, and William Black calls for AIG to put non-privileged e-mails, accounting documents, and financial models on line to allow for an “open source” investigation. The questions they want to examine include:

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A Media Failure Compounds The Financial Failure

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pissing away

The Press Is Still Missing The Story Of Fraud and Economic Decline Ahead

By Danny Schechter   Global Research, October 8, 2009

We know that Wall Street has not learned much from the crash it helped instigate. We know that our government, whatever its stated desire to clean up the markets and reform the financial behemoths, lacks the willingness and perhaps the clout to rein in the real power centers. We are not sure if they have been “captured” by them, or just lack the guts to take on institutions and individuals that helped fund their rise to power.

But do we know that, even now, much of our media, despite the sheer volume of coverage may be missing the real story? Do we know that if we want to find missing facts and the real context we have to turn away from the failed media system that never really investigated the failed financial system.

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