It’s my serene conviction, by the way, that this sucker actually is going down, right now, even as I clatter away at the keys — perhaps in slow motion, so that not many other bystanders have noticed yet, and the few who have noticed are mostly too crosseyed with nausea to speak.

It’s perhaps useful to define even what we mean when we say “this sucker.” Everybody knows what a sucker is, of course — say, a Midwestern public employees’ union pension fund snookered into buying a fat slice of equity tranche in a Goldman Sachs-engineered CDO. But “this sucker” is something else: a rather large cargo of commercial relations, entailed obligations, hopes, expectations, habits of daily life — indeed millions of whole lives — loaded onto the rather creaky vessel we call modern civilization. “This sucker” was such an apt term coming from someone whose understanding of civilization was like unto that of a boy who found a PlayStation under the Christmas tree.

It’s also perhaps useful to define what we mean by “going down.” To my mind it means an awful lot of money disappears and nobody can pay for anything and an awful of things that have kept going on promises to pay and to get paid will stop keeping going. I don’t think that the idea of money disappears — that is, paper certificates representing claims on future work — but there will be a lot less of it to go around.  Eventually the idea of money could go, too, at least in its current form as Federal Reserve notes. But mostly for some years it will just be a lot of people, companies, and governments who are broke.

“Going down” will mean a society with no money and an infrastructure for daily life that requires gobs of money to run, and a populace too dazed, confused, and inflamed to do anything useful in the way of organizing new infrastructures for daily life for their new circumstances. In retrospect, the Great Depression of the 1930s will look like “The Philadelphia Story” compared to what we wake up to ten years from now.

President Obama’s speech at Cooper Union last week was a remarkable performance. It managed to appear forceful and serious without containing any really serious or forceful proposals to discipline a banking system that is running a hostage-and-ransom racket on civilization. If this is finally what the Obama Experience is all about than his detractors have been right all along: he is a tool. Finance reform aside, there are still plenty of laws left on the statute books that could be applied to the frauds and rackets that ran absolutely amok on Wall Street the past few years. I would still like to know why buying CDS “insurance” against your own issue of bonds deliberately engineered to default is NOT a form of insider trading, to put it as simply as possible.

The SEC action against Goldman Sachs is likely to open a Pandora’s box of troubles for that company, and perhaps all of the Too Big To Fail banks. But even so, I believe this sucker is going down before 99.9 percent of it is sorted out. Anyway, there was a lot about the SEC action that seemed curious, to put it mildly, from the timing of it, to the brevity of the document, to the strange fact that it emerged at all from an agency whose principal activity the past few years has been the viewing of internet porn, and which has otherwise behaved so indifferently in the face of numberless offenses to common decency, not to mention the public interest, that it might as well have been staffed by a thousand head of Holstein cows rather than licensed attorneys and graduates of accredited colleges.

This sucker is going down because the train of bankruptcies underway has a remorseless self-reinforcing power to provoke more and more bankruptcies at every stop along the line as every promise to pay is welshed on. The mortgages will not be paid and securities will not pay their investors and the banks will choke on the bad paper promises in their vaults and the pension funds will not pay their beneficiaries and the states and counties and municipalities will go broke and not pay their employees and creditors, and the federal government will not be able to “print” new money in sufficient quantities fast enough to compensate for all the money not being paid up-and-down the line… and one morning we will wake up and discover that all those promises to pay were sham promises based on no productive activity whatsoever… and that will be a sad day. Perhaps the Dow Jones Industrial Average will hit 35,000 on that day.

Nothing can stop this chain of bankruptcy. It’s already baked in the cake. There is probably some wish on the part of those in charge, like Mr. Obama, to try everything possible to postpone it.  And there is likewise surely a huge effort underway in the banking sector right now to cream off as much cash as possible so that when this sucker does go down they will bethink themselves better positioned to survive the consequences.

Personally, I believe that the damage was mostly done during the tenure of poor dim George W. Bush, and his predecessor Bill Clinton. I suspect that Mr. Obama learned at the height of 2008 election campaign — during those days of the Lehman collapse and the TARP — just how completely the government — and the people of the USA — were in fact hostage to the banking system, and that it has been his unfortunate role to pretend that there is some other fate to bargain for besides this sucker going down. It is probably why he continues to smoke so much. He must be lighting one Marlboro off the tip of another, one after another, in whatever inner sanctum he repairs to when the midnight chimes toll around the White House.  It’s sad to think of this graceful, still rather young man going down in history as the chump-of-the-century, a reincarnation of Herbert Hoover on steroids, with sugar on top.

Animosities brewing as they are among the white trash elements of the country, I just hope this sucker doesn’t resolve into an ugly bout of attempted ethnic cleansing. Certainly Obama’s racial make-up has inspired a revival of the Ku Klux spirit around the Nascar ovals. I’m sincerely worried that the misdeeds of people name Blankfein, Rubin, and Madoff could provoke a red-white-and-blue pogrom.

The big mystery for the moment is how come a few good men of stature in important places have not stepped forward to say the right thing or do the right deed. How come no US congressperson challenged the knavish behavior of Republicans who condone malicious idiocy that they know to be false like the so-called “birther” activity. How come no putative “progressive” has called the Democrats on their disingenuous failure to call illegal immigrants what they are. How come no state attorney general has filed charges against TBTF bank misconduct even if the US attorney general lies in state over at the US DOJ. How come no political figure of any stripe has called for the resignation of Summers, Rubin, Gensler and other Goldman Sachs “sleepers” infesting high levels of government. How come Dylan Ratigan is the only visible figure in any major newsroom willing to identify the precise nature of the meta-swindle.

When this sucker goes down, our primary task will be reorganizing American life on a much more local and de-complexified basis. It’s a very big assignment and especially daunting against a possible background of political disorder. The losses will be epic and the changes severe, but it doesn’t have to mean the end of recognizably American culture. There will be very little money around, and it may end up being a certificate backed by gold issued by a bank other than the Federal Reserve. Or maybe we’ll just be swapping stuff for the makings of dinner.

So many forces are roiling around ‘out there’ now that it’s hard to believe that the authorities in government and banking can keep the illusion of normality going a whole lot longer. The possible litigation against Goldman Sachs-style frauds by a thousand aggrieved victims is enough to paralyze the system. Meanwhile, trillions in credit default swaps are ticking away like dirty bombs. Greece is going down, with Portugal, Spain, Ireland, and the UK standing by to go next. Nobody can pay their bills. Before long, the old folks won’t get their checks. Then the poor folks. Lately, I wonder if there will even be an election six months from now.

Regards,
James Howard Kunstler
Whiskey & Gunpowder

April 29, 2010

Modern Civilization: This Sucker Is Going Down was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

While I share these concerns — there’s no question Murdoch has a history of using some of his media outlets to push his neoconservative world view and others to advance his own business interests — I looked at the front page of Wednesday’s paper and thought to myself a Murdoch-driven Journal couldn’t be much worse than the current iteration.

Two stories stood out, both on topics familiar to Whiskey & Gunpowder readers: the housing bubble and tightening world energy supplies. Let’s look at the housing one first, for that got the most prominent play — 2,800 words, above the fold, headlined “LENDING A HAND — How Wall Street Stoked the Mortgage Meltdown: Lehman and Others Transformed the Market for Riskiest Borrowers.”

We actually have two stories in one here, one of them pretty good, the other just awful. The good one is an examination of how Lehman Brothers was first to the post among Wall Street’s high rollers when it came to taking junky subprime mortgages and packaging them in investment-grade bonds — the sort of bonds that blew up in the face of Bear Stearns last week. There were tales of employees at Lehman’s in-house lending unit being pressured to push through dodgy loans to bolster volume — leading to unorthodox practices such as altering documents with scissors, tape, and Wite-Out. (Lehman’s response was a classic, amounting to, “We’ve done nothing wrong, and we’ll never do it again.”)

Oops, Better Put the Story in Context for the Masses

It could have been good story about one company’s role within a major economic trend, but no, Journal editors couldn’t leave well enough alone. It looks to me as though they pushed the reporter to make it a “bigger” story, to live up to the first part of the headline — “How Wall Street Stoked the Mortgage Meltdown.”

Thus, a sidebar summarizing the story was largely a rehash of the self-evident:

And the little-picture Lehman story was larded down with big-picture background such as this:

“A generation ago, housing finance was different. Bankers took in deposits, lent that money to homebuyers, and collected interest and principal until the mortgages were paid. Wall Street wasn’t much involved.

“Now it plays a central role. Wall Street firms provide working capital that allows thousands of mortgage firms to make loans. After lenders sign up consumers for home loans, investment banks pool the income streams from these loans into bonds known as mortgage-backed securities. The banks sell them to yield-hungry investors around the world.

“Before the mid-1990s, mortgage-backed securities consisted mostly of loans to borrowers with good credit and cash to make ample downpayments. Then investment banks found they could do the same with riskier loans to borrowers with modest incomes and flawed credits. Pooling the loans created a cushion against defaults by diversifying the risk. The high interest rates on the loans made for bonds with high yields that investors savored.”

None of this is news to you, because Mish Shedlock has done a bang-up job of informing Whiskey readers about an impending housing crisis for the better part of two years now. Other alternative media outlets have also enlightened their readers, including our sister publication The Daily Reckoning.

But for the ordinary financial news consumer, these things have to be spelled out in painstaking, mind-numbing detail — because the mainstream financial media did such a poor job alerting their readers and viewers about the dangers you and I saw coming. The thought process of Journal editors likely ran along these lines: We’ve got all this good investigative stuff on Lehman, it’s passed muster with our lawyers, and it’s ready for publication, but we need to put it in context now that Bear Stearns caught everyone by surprise. Hence, the effort in remedial education.

If the Journal were serious about illuminating the root causes of the subprime meltdown, it might have examined the role of the Federal Reserve recklessly expanding the money supply in recent years — fueling the housing bubble at all levels from subprime to super-luxury. But that’s asking too much of an organization that barely batted an eye when the Fed stopped reporting M3 last year.

Peak Oil? What Peak Oil?

Our next sorry exhibit is headlined: “Exxon, Conoco Exit Venezuela Under Pressure: Host Nations Escalate Demands on Oil Firms; ‘Some Tough Decisions.’”

Here, too, we witness an attempt to take a micro story — Exxon Mobil and ConocoPhillips giving up their projects in Venezuela, rather than put up with any more guff from President Hugo Chavez — and turn it into a macro story about the troubles international oil companies are having as more and more governments around the world nationalize their oil and gas reserves. In this instance, the likely motivation is that for whatever reason, the Journal was a day late to this story. Reuters had sources who confirmed the two companies’ decision to take their marbles and go home late last Monday — in time for publication in many papers on Tuesday.

Whenever a media outlet gets spanked on a big story like this, one way it tries to recover is to attempt to place the immediate developments in a larger context. So the story had all sorts of background on not only Venezuela, but also Russia. And that’s fine — I don’t fault the financial media for being asleep on resource nationalization nearly as much as I do for being asleep on the housing bubble; it’s a more complex phenomenon.

Still, this story gets into trouble early on — the third paragraph, to be precise:

“The companies feel they won’t get adequate value from the Venezuelan government, so they may pursue arbitration rulings that, even if favorable, mean a long wait for compensation. But the need to replace significant holdings could intensify exploration and result in new finds elsewhere, as happened after the last widespread purge of Western majors from developing nations.”

This rather oblique passage is explained further down in the article:

“One response is to move aggressively to find opportunities in politically stable nations. The wave of nationalization that swept the Middle East in the 1970s led to the development of the giant fields in Alaska and Europe’s North Sea. Conoco pursued a similar path by creating a joint venture to tap Canada’s heavy-oil deposits, which hold enormous reserves of oil, but are expensive to produce.”

The subtext here is subtle, but unmistakable: “Don’t worry about the stability of the world oil supply. And don’t worry about Peak Oil. Even if Chavez and Russia’s Vladimir Putin make it hard on the Western oil majors, they’ll rescue us with new finds in “politically stable nations.”

Readers given to paranoia might think this is part of some diabolical conspiracy to suppress awareness of Peak Oil. But that’s giving the financial media too much credit for ingenuity. After all, Peak Oil is already out of the bag — as I explained last month. It’s being debated openly on CNBC. BusinessWeek is giving space to guest columnists who take Peak Oil seriously. But among those in the media who’ve been familiar with Peak Oil for a while, the comfortable mind-set still prevails that further exploration, or new technology, or some other panacea will assure the continued steady supply of oil for the foreseeable future — because that’s how it’s always worked in the past. Trust me on this — there’s no grand scheme to squelch the truth; there is a collective consciousness that’s unreceptive to new ideas, developed by mere force of habit. But the dereliction of duty is nonetheless a serious one.

Could Murdoch Do Worse?

So there you have it. A head-in-the-sand approach to Peak Oil, and a day-late, dollar-short attempt to educate readers about the genesis of the subprime mess. Ignore crises while they’re forming, and do hand-wringing coverage once the crises break. Turn on the Fox News Channel’s business coverage, guided both on-camera and behind the scenes by the heavy hand of Neil Cavuto, and you’ll see a dumbed-down version of the same. (The market’s up? Celebrate with an “expert” panel. The market’s down? Let’s talk about a recently jailed hotel heiress!) Could a Murdoch-owned Wall Street Journal do its readers a worse disservice than under the paper’s existing sclerotic leadership?

Regards,
Dave Gonigam

[Full disclosure: This author was employed by one of News Corp.'s TV stations for eight years. While I objected mightily to Fox News Channel's editorial bent, I observed no conscious design during my tenure to impose that template on the local Fox broadcast outlets, and I left in early 2007 on friendly terms. Just thought I should get that on the table.]

July 2, 2007

Rupert’s New Rag was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.