The scope and style of the economic violence that is now being exercised on this nation is unspeakable, without historical precedent, and completely unjustified on either moral or legal grounds.

by David Fauntleroy for The International Chronicles 


The abject failure of Keynesian economics has finally performed a hard landing on the front pages of this nation’s newspaper of record: the USA Today. Normandy-era fonts notwithstanding, we are left to hope that those alarmist headlines proclaiming “Wall Street Quakes’’ make it past the collective basal ganglia of the body politic and into the frontal cortex where ordinary reason and judgment might elicit the only reasonable reaction from Joe Sixpack: ‘’What the hell?’  
If you are making a market in the above: call me - I am a seller. Having drunk from the credit fire hose these last few decades (hell, who are we kidding – it’s been since the Federal Reserve Act was ratified in 1913), the average Joe is soon to be parted with his comfortable assumptions about what bank ‘deposits’ really mean. In my last missive, I proclaimed that ‘despite the fact that the oars have just been put into the water on this particular debt bust, the Federal Reserve and Treasury will catastrophically fail in their efforts to stop it.’ Since that April blurb, the future has become more ‘realist’ than ‘cubist’: and the nation is about to embark on the terrible journey into the real (and inevitable) economic consequences of this debt deflation.

Say what you want about that housewife in Des Moines, but her reality isn’t determined by the vicissitudes of Lehman Brothers or Bear Stearns, nor by the rent-seeking of Goldman Sachs or the influence peddling of Hank Paulson, and even less by the legal parsing between conservatorship and nationalization. No, the Des Moines Community Bank is as close as she gets to the imploding debt bubble.  
And, as it turns out, that’s plenty close enough. For the next unfolding leg of this debt disaster should fall upon the shores of the regional and local banking system and should wash up in the pages of her banking statement and her 401K. For you see, the imminent failure of Wachovia Bank N.A., with deposits of $273 billion, will bankrupt this nation’s Federal Deposit Insurance Corporation. Lehman’s balance sheet was levered 30-1; it survived the Civil War and the Great Depression. But it didn’t survive the 21st century’s ‘Greater Depression’. And neither will a host of the financial walking dead: regional and community banks whose leverage is less egregious than the currently-below-ground financial institutions located in Manhattan, but who nonetheless are about to realize their exposure is just as onerous – and their downfall merely delayed - as they await the trickle-down effects of this graft extravaganza.  
Whatever safety levers, institutions, and mores that one might naturally assume are present in the U.S. of A. have long since left the building. For its part, the FDIC, a corporation entrusted to providing insurance for a total ‘deposit’ base of $4 trillion, is 99% underfunded. It ‘covers’ (if that is the proper verb for what it actually does) $4 trillion in deposits with an insurance fund of $37 billion in Treasury and Agency debt securities (that’s after Indymac’s failure). That’s the equivalent of being levered to the tune of 108 times. The Brothers Lehman were pikers in comparison.  
The complete lack of oversight – of the more enduring and impactful societal free-market kind rather than the faux ‘regulatory’ type so brayed for nowadays – can be brought into full relief with the following illustration. At the end of Q1:08, the board and shareholders of Lehman Brothers awarded its CEO Dick Fuld $22 million (that’s $2,512 per hour) for his services in the year 2007; that comp for the genius that it requires to generate 5% net profit margins while accumulating debts that, in toto, reached $613 billion if their bankruptcy filing is to be believed. This figure - and the tens of billions of dollars that have been awarded to the executives of the top 10 US banks and brokerages over the last 5 years - are figures so obscene as to make one embarrassed to share the same genome (let alone profession) with these reprobates.  
The widespread call for incarceration for these executives (and regulatory limits on their compensation) certainly has its visceral benefits, especially in light of the various tent cities that appear to be popping up ‘round the country like kudzu. But human beings are, well… human beings. We’re captive to a limbic system designed for the Serengeti but required in the ‘modern’ world to harness a bulbous cortex inadequate to make decisions under uncertainty (see Taleb, Lowenstein, Kahneman, et al). This physiological tug-of-war is the causa proxima of compensation schemes that award failure. But it’s the system that needs alignment. The humans that inhabit it aren’t going to evolve before Q1:09. So somehow we must develop a system that eliminates the modus operandi that compound errors and result in $2,500 per hour remunerations for sheer indolence and idiocy. Let’s focus on the system, because mandatory brain stem transplants for every man woman and child simply isn’t a feasible option.  
Ultimately that line of thinking leads directly to a replacement of the current fiat currency with something more durable than ‘in god we trust’, as well as the forceful removal of the government’s monopoly on - and cartelization of - money, banking, and permanent inflation. But those arguments are subtle, nuanced, and deserving of honest and open debate - something that we as a body politic seemingly cannot make time for. So we’re stuck in the current off Wall Street play, where Act I, scene 3 has just finished and Act II is just getting underway (starring Barney Frank, Chris Dodd, and the always hilarious George H.W. Bush).
Thus the curtain parts and we find ourselves in a cruel but entirely natural mirror image of the credit creation process that started in all its hyperbolic madness in 2001. The ongoing debt deflation happening on the balance sheets of money center banks and their brokerage subsidiaries is the same slow motion train wreck but in reverse. The dissimulating liquidity injections by the Fed, the Treasury and Goldman and JP Morgan notwithstanding, such debt deflation is at this stage unstoppable: the magnitude of the securitizations (hundreds of trillions of dollars of them) that rest upon the tiny real asset base that Austrian economics scholars term ‘the real pool of savings’ is an inverted pyramid of grotesque proportion. And more to the point, the social mood that drives these phenomena is squarely and indefatigably negative for an economy as leveraged as ours: people just abhore any more debt. If a leitmotif existed for debt-fueled economies it would be ‘NO MAS!’.  
The major establishment presidential candidates that have been anointed by a sub-committee from the Council of Foreign Relations and the AIPC are reflecting this particular zeitgeist on the campaign trail. Calling for the populist-sounding policy of stopping the serial bailouts, ceasing the socialization of banking system losses, letting financial institutions fail: these say-change-but-don’t-mean-it candidates are growing increasingly alarmed at the size and frequency of the Wall Street bailouts. And what this means is that they focused grouped that message and came to one incontrovertible conclusion: it plays.  
Whatever hope that might induce in you that the body politic is manifesting some embryonic outrage at the grotesqueries that has become command economy finance, I’m afraid that the slack-jawed acceptance of the status quo will not soon be shaken; at least until things get much worse to your average, non-verb conjugating letter-to-the-editor writer. Much, much worse. Why should we be surprised by that anyhow? This is the sort of mental torpor that only comes from 12 years of statist indoctrination in the idiot factories known as the United States Public School system. When a lame-duck Treasury Secretary can yolk the US citizenry to the tune of an additional $5 trillion in debt (at least) for the FNM/FRE bailout and ask a week later for $700B to repo every piece of debt ever packaged here and abroad, all with the stroke of a pen, nary a whisper from congress, and without complete outrage from voters, I can only surmise that Judge Napolitano had it right: we are truly a nation of sheep. This is taxation without representation. The only thing missing are the redcoats.  
We can now safely say that the banking/finance/regulatory system is the single largest criminal enterprise to have ever existed in economic terms. The 'transfer of wealth' (in the way that a robber transfers your wealth to him at knife point) now dwarfs anything ever seen before; it is of a mind-bending scale. And worse, it is about to get a lot bigger. The Fed, having spent half their balance sheet for less than nothing now recognizes the need to save not an institution or two but the entire cartel. This is why they have been so keen to bring in the Treasury and its limitless balance sheet (nothing of the sort actually exists as we will see in a few years when foreigners and their banking cartels stop buying US dollars). Forget what they say about full employment and stable prices (as if stability of value matters: the Fed has destroyed the value of the USD to the tune of 97% since 1913): the real goal of the Federal Reserve, the one that supersedes all others, is maintenance of the stranglehold on the banking monopoly.  
This and this alone is the reason for the midnight conversion of Goldman Sachs and Morgan Stanley to bank holding companies. Such a conversion allows these government agencies to purchase commercial banks with their glorious deposits then, thanks to the Fed’s repeal (temporary until Jan 16th they say – ha) of rule 23 A, allow Goldman and Morgan to downstream all those deposits from Jane and Joe Q Public into the securitization cuisinart that is their level III assets. Presto chango, you’ve just ‘saved’ Goldman’s and Morgan’s balance sheets by sending good money after bad: by stealing the accumulated labor of the nation’s dry wallers, cement mixers, and nurses and passing it over to the comrades at Goldman to turn into lead. It’s like some sort of perverted alchemy, and it represents a complexus of everything that is most despicable about US Finance Inc.  
The financial establishment of this country – from Treasury to the Fed, from Goldman to FDIC, from Morgan to congress – are either the biggest fools this nation has ever created or the most evil. And I do not rule out that they are both. Mouthing the most banal and patently untruthful economic catch phrases they can muster, these naked emperors believe they have some sort of divine right to moral agency: they pronounce short sellers evil and hedge funds ‘corrupt’, yet steal ordinary savers’ funds, impoverish the elderly, agitate speculation and consumption, and punish thrift. No wonder Das Kapital sold so many volumes. But the proletariat shares much of the blame in this vulgar waltz they find themselves in - hand in hand with their Treasury. And until they suffer the greater consequence of personal hardship, the tens and hundreds of billions of dollars being thrown around in their name will continue to be abstract in the extreme. What does $700,000,000,000 mean to someone who makes, after tax, $16.20 per hour? (that’s the national median)  
The scope and style of the economic violence that is now being exercised on this nation is unspeakable, without historical precedent, and completely unjustified on either moral or legal grounds. We have become the ‘Land of the Well and Truly Lost’. And if history is any guide, we can say with a high degree of probability that physical violence is close behind, for one births the other. Given the violence that the Treasury, the Congress, and the Federal Reserve are committing as I write, I shudder to think of the magnitude and brutality of the physical violence that seems well nigh inevitable down the road.  
‘’When plunder becomes a way of life for a group of men living together in a society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it’’ – Frederick Bastiat



David (Excitable Boy) Fauntleroy is currently macro and portfolio strategist at a large global hedge fund - he has toiled in various research roles at three global diversified investment banks over the previous 15 years, and has fled all three's rank senior managerial mediocrity in a feral sprint.                             


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published this page in The Attic 2012-03-26 21:57:00 -0400