A government that is operating under the credo "by the corporation for the corporation", rather than "by the people for the people."
For roughly forty years (since the report was published in 1972), technology has pulled one magic rabbit after another out of the hat, making a mockery of the claims that there were limits on consumption and resource extraction: the green revolution and fossil-fuel fertilizers expanded food production, new supergiant oil fields and improved drilling technologies opened up vast new energy reserves, and improved technologies led to more efficient use of resources. The success of the past four decades in pushing back looming limits has created a widespread confidence that technology can solve any apparent limits. For example, if the seas have been stripped of fish, then aquaculture will fill the desire for fresh fish. Presto-magico. But what if the technological improvements are entering a terminal phase of diminishing returns? What if the "solutions" don't really replace what has been destroyed? For example, the ecology of the open ocean is not restored by aquaculture; rather, it is further harmed by poor aquaculture practices.
What are the consequences of a central bank creating trillions of dollars for speculation and a central state borrowing trillions of dollars on a permanent basis? As noted before, risk cannot be extinguished, it can only be offloaded onto someone else or masked for a short time. The consequences of this sleight-of-hand (the Fed creates money to buy Federal bonds so the government can borrow and blow trillions of dollars) are not yet visible, but there will be consequences at some point; the risks have only been temporarily cloaked.Borrowing and printing $10 trillion hasn't fixed anything; it has only raised the reservoir of risk to the top of the dam. Cracks are opening as the pressure builds, and we should not be surprised when risk and consequence reconnect and the dam gives way.
From the historical perspective, concentrating virtually all systemic risk into the state is a Grand Experiment. Cheap, abundant oil, expanding working-age populations and rapidly increasing productivity conjured the illusion that the state was large enough and powerful enough to absorb infinite risk with no real consequence. The problem is the state's ability to tax/print/borrow money to cover payouts and losses is not infinite. Having transferred virtually all systemic risks to the state, we presume the state is so large and powerful that a virtually limitless amount of risk can be piled onto the state with no consequences. Offloading risk onto the state does not make the risk vanish; it simply concentrates the risk of collapse into the state itself.
There are all sorts of candidates for the root cause of the systemic global financial crisis, but if we separate the wheat from the chaff we're left with risk and moral hazard. Pointing to human greed and cupidity as the cause doesn't identify anything useful about this era's crisis, as human greed, self-interest and opportunism are default settings. Programs that backstop banks and social insurance systems like Medicare are not like fire or life insurance because they are effectively open-ended in terms of costs and in exposure to risk. A system which pools risk without distributing it to the participants and eliminates the causal connection between risk and consequence introduces moral hazard on a grand scale.
Over the last thirty some odd years, the world has seen an unprecedented level of economic growth and prosperity. That much is certain. However, things are not as they appear when the bullish rose-tinted glasses that most view the world through are removed.
And the issue is debt.
Why sell cocaine at a 200% markup when there are much bigger profits to be had in this moral hazard economy funded, government protected business.
The rapid pace of China credit expansion since the Global Financial Crisis, increasingly sourced from the inherently more risky and less transparent "shadow banking" sector, has become a critical concern for the global markets. From the end of 2008 until the end of 2013, Chinese banking sector assets will have increased about $14 trillion. As Fitch notes, that's the size of the entire US commercial banking sector. So in a span of five years China will have replicated the whole US banking system. What we're seeing in China is one of the largest monetary stimuli on record. People are focused on QE in the US, but given the scale of credit growth in China Fitch believes that any cutback could be just as significant as US tapering, if not more. Goldman adds that China stands to lose up to a stunning RMB 18.6trn/$US 3trn. should this bubble pop. That seems like a big enough number to warrant digging deeper...
We've discussed Jiangsu before (dead pigs, TBTF Solar companies, and bird flu) but the Chinese province (that is big enough to be a Top 20 global economy with GDP greater than that of G-20 member Turkey and 79 million people) is on the brink of collapse under the weight of its own debt (cough Detroit cough). As China's leaders attempt to rein in over-capacity industries, tamp-down residential real-estate bubbles, and generally unwind "...the greatest misallocation of capital the world has ever seen, which was China’s 2009 stimulus," Jiangsu stands head-and-shoulders. With debt far higher than its peers, its mainstay industries (shipbuilding and solar panel manufacture) drowning in over-capacity, and massive 'empty' property developments now starved of funding, Jiangsu "can potentially pose a systemic and macro economic risk to the country."
... Well, not today's Ben Bernanke of course - a far more honest version of the current Fed Chairman, one speaking before the New York Chapter of the National Association for Business Economics, on October 15, 2002.
"I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market."
So do we Ben.
"Perhaps the success that central bankers had in preventing the collapse of the financial system after the crisis secured them the public's trust to go further into the deeper waters of quantitative easing. Could success at rescuing the banks have also mislead some central bankers into thinking they had the Midas touch? So a combination of public confidence, tinged with central-banker hubris could explain the foray into quantitative easing. Yet this too seems only a partial explanation. For few amongst the lay public were happy that the bankers were rescued, and many on Main Street did not understand why the financial system had to be saved when their own employers were laying off workers or closing down." - Raghuram Rajan
Back in 2002 Warren Buffet famously proclaimed that derivatives were ‘financial weapons of mass destruction’ (FWMDs). Time has proven this view to be correct. As The Amphora Report's John Butler notes, it is difficult to imagine that the US housing and general global credit bubble of 2004-07 could have formed without the widespread use of collateralized debt obligations (CDOs) and various other products of early 21st century financial engineering. But to paraphrase those who oppose gun control, "FWMDs don’t cause crises, people do." But then who, exactly, does? And why? And can so-called 'liquidity regulation' prevent the next crisis? To answer these questions, John takes a closer look at proposed liquidity regulation as a response to the growing use of 'collateral transformation' (a topic often discussed here): the latest, greatest FWMD in the arsenal.
Now, after the Fed's generosity caused by "a decoupling of the 'real' economy from the financial economy with its lavish creation of fictitious wealth...
The Fed has created a Doomsday Machine. The Fed has nurtured moral hazard in every sector of the economy by unleashing an abundance of cheap credit and low interest mortgages; the implicit promise of "you can't lose because we have your back" has been extended from stocks to bonds (i.e. the explicit promise the Fed will keep rates near-zero forever) and real estate. An abundance based on the central bank spewing trillions of dollars of cheap credit and free money (quantitative easing) is artificial, and it has generated systemic moral hazard. This is a Doomsday Machine because the Fed cannot possibly backstop tens of trillions of dollars of bad bets on stocks, bonds and real estate. Its power is as illusory as the abundance it conjured. This loss of faith in key institutions cannot be fixed with more cheap credit or subsidized mortgages; delegitimization triggers a fatal decoherence in the entire Status Quo.
We first discussed the possibility of state and local governments using eminent domain to 'save us' from further housing issues a year ago but now the NY Fed has gone one step further with an academic-based justification for why this process is not a "zero-sum-game" and will render all stakeholders better off. We can hear echoes of "trust us" in this commentary as the authors explain how multiple valuation methods will be used to ascertain "fair-value" - which has always worked so well in the past - and that we have "little to fear" from the resultant long-term contraction in liquidity or credit as bubbles can only inflate during times of easy credit availability (and that will never happen!) Paying for all this? Don't worry - resources to fund purchases of loans/liens can be raised from public, private sources or a combination of the two. It seems to us that MBS holders will not be happy, consumers hurt as mortgage costs would rise (this 'risk' has to be priced in), and taxpayers unhappy as this is yet another transfer payment scheme to bailout underwater loans.