“Fantasies of Green Shoots” well worth reading

Robert Kuttner posted his commentary on the financial situation titled: Fantasies of Green Shoots  in the June 7 Huffington Post.  I agree with most of what he said and I urge you to read it and let me know what you think. These opening paragraphs introduce his thesis: 

“There is a huge reality gap between the happy talk about green shoots, banks passing stress tests, the rise in unemployment slowing — and what’s happening out in the real economy, especially if you take a close look at banking and housing, ground zero of the economic crisis. Credit remains tight for all but the most blue-chip borrowers. Despite the Fed’s policy of keeping short term interest rates at just above zero, average rates on conventional 30-year mortgages, now above 5.5 percent, have jumped nearly a full point since April.“

Last Wednesday, the FDIC quietly folded a program that was the centerpiece of Treasury Secretary Tim Geithner’s effort to get toxic assets off the books of banks.

The program, whose details were unveiled in late March after six awkward weeks of delay while the administration worked out the details, included special incentives for what Geithner delicately termed “legacy assets.” These are the junk securities on banks’ balance sheets, mostly backed by sub-prime loans, for which ordinary buyers cannot be found.

The Treasury drafted the Federal Reserve to provide special loans, and the FDIC to run a pilot program to attract speculators to bid on the securities. All told, the government was prepared to put up 94 percent of the capital if private investors would put up 6 percent. Government would guarantee most of the losses, and split the gains 50-50.”

The recovery process set up thus far by the Federal government has been far too simplistic because it has too few checks and balances to prevent gross gaming of the system and focuses on rescuing and maintaining some of the terminally ill financial behemoths. The government’s been producing a mammal with no immune system, and the parasites and pathogens of finance will suck the life out of it. One of the contributing factors to the banking crisis was the earlier destruction of much of the government’s regulatory system in the name of “free markets,” and the earlier successful gaming of the system by the  parasites and pathogens who sucked up bloated paychecks and bonuses, and created unregulated financial vehicles which brought them immediate profits in return for systemic risks.

I don’t think these governmental failures are conspiratorial… more tragically they are the product of a quick rescue mentality and naiveté. We should anticipate that any system containing pools of valuable resources will be gamed by some clever people, just as the internet is gamed by crooks and con men for personal gain and life itself games all its systems to keep them adaptable. To be effective, a government rescue approach must include enforceable regulations and competent SWAT teams (i.e.an adaptive immune system) which anticipate and protect from the most obvious forms of gaming, and provide a rapid response team for the types of gaming that aren’t anticipated.

One thing is obvious… unless the financial behemoths are broken up (into at least 5 pieces each) and prevented from regrouping, or from using size to avoid competition and destroy free markets… there can be no recovery or lasting solution to the financial facet of this economic crisis; and the parasites and pathogens will continue to suck from the resource pools, while using some of those resources to game the government into passivity; that is their nature.