Do you recognize anyone here? Say John Thain or Hank Paulson? I definitely see Tim Geithner there to the right. I keep hearing about the Zombie banks and Ben Bernanke at the Fed really hates the term. But the term is absolutely precious. A zombie is a reanimated human corpse.
What better way to describe Citigroup or B of A or Wells Fargo. Zombies have no free will are are under the control of a distant sorcerer. Larry Summers, are you listening? Today I spent considerable time reading testimony from Bernake and interviews with Geithner as well as a transcript from Barak before the congress and I was ready to launch into another rant on prevarication and other forms of deception but it occurred to me that it is possible that they do not think they are lying or that lying to the public is acceptable if it serves a nobler purpose. This has been a tried and proven strategy from Machiavelli to Karl Rove and a few in between…….
“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State”……………….Joseph Goebbels
I am afraid that it is more than the banks that are Zombies. I think it is our entire American Dream Economy that is zombified but most of us haven’t figured that out yet. I think that in this century we will be winding down the industrial economy as energy sources get ever more scarce and expensive . James Michael Greer who writes the Archdruid Report: http://thearchdruidreport.blogspot.com/ has been writing about this postulated change to society for many years and he believes that our industrial society will over time become less industrial as it smashes headlong into resource and energy constraints. He thinks we are likely to go down in stairstep fashion as we exhaust our heretofore free fossil energy. JMG as he is known is a brilliant thinker and he has been unfairly characterized as a “doomer” and dismissed by the mainstream panglossian press. I happen to agree with many of JMG’s ideas but I don’t think the current depression has been largely caused by these factors raised by Greer. We are going through a classic debt and credit fueled expansion and collapse that we have seen on multiple occasions in the past 200 years commonly referred to in old books as a PANIC. It also is a great phrase and I intend to resurrect it on this blog as a term superior to “depression” which conjures up visions of sad faces and Prozac. This Panic was very much as inevitable as the Panics in 1929,1873,1867,1937 and 1819. Those previous panics led to years of depression just as I think this one will. The difference with this panic is more a matter of scale. I think this panic has the possibility of becoming the mother of all depressions because of the globalized interconnected nature of the credit and debt collapse. It is likely to be far worse than previous panics because the blunders have been worldwide in scope and because it involves strange and terrible structured investment vehicles as they have been called. I include all the various acronyms given to them like CDOs, CDSs and the gigantic derivatives market of swaps and bets and currency and commodity futures contracts which banks and hedge funds and corporations devised to mitigate risk. Now it’s all coming unglued at a level of magnitude clearly never dreamed by its mathematical model creators. These are models that only a Cray computer can understand. I do concede that all the counter party risk associated with this panic will probably not all implode at once and there is probably a chance that this world economic downturn will not be as bad as some people think but the simple fact is: no one really knows. Yikes! Even Ben Bernanke reassured us saying”We’re not completely in the dark.” That’s reassuring. I ran that through by Babelfish translation program and it came back in English as “We are completely in the dark.” And so the untouchables at Treasury and the Fed using flawed outdated Keynesian assumptions of growth and the economy keep plugging away at fixing the banks by pouring borrowed money into insolvent skyscrapers so they can again lend to companies who will go bankrupt and citizens who are broke and soon to be hungry sleeping in their Hummers in a Wall Mart parking lot. Here is my chief objection to this level of borrowing to bail out insolvent banks and corporations. Credit works only as long as the money borrowed can be repaid later:Principal + Interest. For that to happen you need growth . If you can persuade Abu Dhabi and China to buy 30 year bonds yielding 3.5% and your GDP growth exceeds 3.5% for the next 30 years, that debt will be serviced. If you have a steady state or contracting economy, it will not. It’s worked to some extent for the past 60 years because for various reasons the US had a monopoly in energy production and industrial production of goods and services the world needed. We used to be a manufacturing powerhouse with 26% of the workforce engaged in manufacturing in 1960. This had fallen to 9+% by 2006 . What do we make in the US now besides weapons and aircraft and heavy machinery that the world wants? We make very little here that our population needs and therein lies the tragedy of our manufacturing economy. For many years our growth has been fueled by relentless debt assumption by our citizens, our corporations and our government. If the world stops buying our debt or stops believing that we will ever pay off the debt, the party will end. There are several scenarios which could play out. These countries could fall into a depression and their exports to us could fall. This is now happening. Their economies could also collapse or go into a prolonged recession or depression. Their current account surpluses could disappear. Even if that doesn’t happen, these countries could decide that 3.5% is too low a rate of return if they see the dollar at risk because of inflation or because they fear that Fed might decide to devalue the dollar. But they are already in a bind because if they demand a higher rate of return than 3.5% they could see the value of their bonds fall because the value of bonds runs inversely to the yield. If they try to sell their bonds as the US is trying to issue new bonds, the market could become oversupplied with sellers. They must be fearful of future inflation in the US. So they are in a catch 22 position. It seemed so ironic to me that Hillary Clinton visited China and begged for the Chinese to continue buying our debt. This is the same Hillary who in the campaign said that being indebted to the Chinese was a threat to national security! Which is it Hillary? I think Hillary’s pleadings are a very ominous sign that the big fear of the administration is that unless we have countries stupid enough to buy our debt, the party will be soon over. And my final very important point is that if Greer is right, we are undergoing a paradigm shift in our economies primarily because of post Peak Oil. If rapid growth and rising industrial production is simply not possible, then the assumption of debt is also not sustainable, and therefore fundamental macroeconomic assumptions are fatally flawed. If we continue to borrow without the ability to pay off the debt, we will collapse economically and the greater risk is that we could collapse socially. Many countries have bounced back after defaulting on their debt. Spain defaulted eight times in the 19th century. But a civilization that collapses may not bounce back.