Nationalize the Banks or Charge into the Valley of Death!

I had a pleasant month out of the country working on my old sailboat and while things were bad when I left, the last week or so has the US economy in free fall led by the same old suspects, the banks. While I was away I read David McCullough’s “John Adams”, a fascinating history of John and Abigail Adams and the new American nation in the late 18th century. One of the early steps to stabilize the economy with its patchwork of currencies was the establishment of the first national bank of the United States in 1791 followed in 1816 by the Second National Bank of the United States. It was the establishment of these banks which gave me the idea that a possible way out the current banking morass would be to establish a true national bank which would have most of the features of private commercial and investment banks. It would be staffed by government employees and entirely transparent. I should add that upon closer scrutiny I discovered that these early national banks were in fact private quasi government affairs not entirely dissimilar from the public private banks of today where lately the private sector reaps the profits and the public sector shoulders the debts. The alternative idea would be to nationalize some or all of the banks. This has been partially done already here and in Europe, primarily in Ireland and the UK. It has been a disaster and a failure as the bank losses keep mounting and government front end loaders keep shoveling money into their vaults in a futile attempt to keep them solvent. It must stop. My suggestion would be stop all banking bailouts until the banks open their books and mark to market the toxic assets and derivatives and then we will have a realistic accounting. For example, I have tried to look at what passes for the books at Citigroup from multiple sources. I have a very simplistic and primitive understanding of basic economics and accounting and I may be missing some key concepts but here is what I found. Henry Blodget, a journalist and securities analysis in Wall Street with a storied past(read criminal) pulled some of Citigroup numbers together.
City is said to have $2.05 Trillion in assets. They list $775 Billion in deposits which I assume is part of the $2.05 Trillion. They have short debt(borrowing) of $105 Billion, $393 in long debt and $646 Billion of other debt and liabilities which includes $250 Billion from the Fed. I think this totals $1144 Billion. The problem is that the figure of $2.05 trillion is bogus because as anyone knows, a lot of Citigroup’s assets are worth only a fraction of their value and who knows what fraction. Now lets say we have the mother of all bank runs and the $775 Billion in deposit assets are removed from the balance sheet. I am ignoring the reality of fractional reserve banking for the sake of illustrating the simplest asset/liability structure of Citi. That would leave Citi’s assets at $1.275 Trillion($2.05-$.775 trillion). If the remaining assets are worth 90 cents on the dollar(.9X1.275) then Citis assets are worth $1.14 Trillion, equal to their liabilities. It is far more likely that these toxic assets are worth less than 90 cents on the dollar and therefore Citi is insolvent. Until City is forced to mark these assets to true book value, difficult as that would be, there is no justification of giving them or any of the other banks one more dollar. There are several banks in the UK and Ireland who are insolvent despite government denials and I have a sneaking suspicion that the same situation exists here. The crash in banking stocks of the past few days comes despite the disgraceful exit of a discredited administration and the coronation of Obama. The sad fact is that the Obama Administration seems quite willing to continue the flawed bailouts of the Bush era. I say either nationalize the banks or let them fail. There is simply not enough money in this country to save these insolvent banks not to mention irrelevant car companies, insurance companies, bond holders, pension funds etc. In the early 1990s Sweden went through a de facto default of its banking system and Sweden took over the banks, fired the management, and marked assets to true value. They cut loose the bond and equity holders and began to run the banks in the interests of the people and businesses of Sweden. That is how it it should be.I know that the Mutual funds and wealthy bond holders will squeal like pigs but allowing them their losses is far preferable to handing the losses to the taxpayer and his children who bear no responsibility to keep an insolvent, incompetent and and corrupt former investment bank in business. The problem is there is very little time and this country needs a change and using the personnel and policies of the Clinton and Bush administrations represents failure as usual. The current actions hark back to Lord Cardigan’s famous blunder during the Crimean War in 1854 immortalized by Tennyson in “The Charge of the Light Brigade.” If we keep on this present course it wont be Henry Paulson and his cronies descending into the valley of death. It will be the American taxpayer.


Ponzi Schemes

Carlo aka Charles Ponzi was a famous swindler from the 1920’s who used an elaborate pyramid scheme to reward earlier investors by using newer investor money, much the same way as Bernie Madoff did. Because of the scale of things, I think $50 billion trumps a few million and we should rename it a Madoff Scheme. But maybe we should call it a Federal Reserve Scheme or a Treasury Scheme or a Bernanke Scheme.
Bernie Madoff kept his operation going by choosing his investors carefully and by absolute secrecy of his methods much the same way of Bernanke and his Pals at the Fed. We call it the Federal Reserve but guess what? I recently realized there’s nothing Federal about it. It’s the Private Reserve. Bloomberg Financial News recently sued the NY Federal Reserve Bank to find out where a bit more than $2 Trillion dollars had gone that was dispensed by Chairman Bernanke. They used a Freedom of Information statute designed to pry previously secret information from the government. Bloomberg simply wanted to know which banks got how much of our taxpayer money. But the Federal Courts turned Bloomberg down. Why? Because the NY Fed is not part of the government.!!! Whaaat? Yup. How can that be? We have zillions and trillions of money going to god knows who from taxpayers administered by government employees to private firms and nobody but Bernanke and his goons know how it’s being dispensed? When Bernanke was asked why he wouldn’t release this information he said something to the effect that releasing that sort of information could erode confidence in said incompetent banks!! Who said we had any confidence? It was eroded a long time ago! The more I looked into this mess, the worse the smell. A lot of investment advisers and conservative libertarian bloggers have spouted these anti-fed sentiments over the years but lately some pretty responsible investment columnists like Bill Flenstein and Jim Jubak at MSMMoney have spilled some data which has given me pause.
Jubak mentioned in a recent column as did Fleckenstein that the Fed has been buying up T Bills and notes and competing with institutional and private investors. The Fed is also buying agency debt such as Freddy’s fannie paper, corporate bonds and stock as well as well as spending trillions filling up the coffers of criminally incompetent private banks that have brought the world financial system to the brink of ruin….and he is still doing it. Good luck trying to find out how much. I wont even suggest going to the federal (oops Private) Reserve website to try to find out anything. Jubak estimates that this buying of government securities is up 160% from last year and now totals something on the order of $2 to $3 Trillion. This is on top of an estimated o $8.5 trillion which has gone secretly to essentially insolvent banks. Kathleen Pender, “Government Bailout Hits $8.5 Trillion,” San Francisco Chronicle (November 26, 2008). The Fed used to track the different measures of money supply, M1, M2, M3 etc but has withdrawn the data. M2 survives as a measure of money in circulation and was about $8 Trillion last month. In just a matter of months, in a sense, the private Federal reserve has doubled our money supply It’s our money they are giving to these thieves, right? Well, not exactly. It’s more like the future of your money. The treasury floats bonds and notes and the Fed runs the printing presses. Federal reserve notes, Right? The Constitution has granted the right to print and oversee the money supply to our government. But the Fed is not our government. Does that mean that this consortium of private banks along with a passel of government appointed board members are our government? See what I mean by smell? Even Fannie and Freddy are not government. They are Quasi-Government entities, whatever that means.My head is spinning trying to understand this and so must be your head as well, but there is one thing which is becoming very clear to me. Our entire banking system is at the root of our troubles, Quasi- or not. The Fractional Reserve system(see Wiki:…….
is the system by which a certain amount of money is deposited in a bank and the bank can then loan out a Multiple of that deposit, maybe say 3 or 4 times the amount. The bank has to keep a certain amount handy on reserve to cover withdrawals, but only a fraction of the original deposit. Here is where the Ponzi part starts to kick in. If you have a loss of confidence in the bank, depositors may show up and demand their money back but because the bank only has a fraction of those deposits, it can only return a fraction of those deposits. So you now have a bank failure. The Federal Reserve can then step in with money if it chooses and provide reserves. The Fed is then part of the new money component of a ponzi pyramid scheme, at least as I see it. Of course if the bank has time it can sell off assets it had invested in but if those assets were Collateralized Debt Obligations of toxic mortgages which it had purchased on margin of say 20 or 40:1…….well then Houston.We have a problem.Nobody in their right mind will touch the stuff. It just gets more and more complicated because banks and investors had purchased “insurance” on their investments from the unregulated “derivatives” market. The whole complicated system was and is incestuous and interconnected and at high risk of instability or failure.
And now as the worst administration in the nation’s history is packing its bags, things will improve. Right. I’m as optimistic as the next clod but I think I see the same play with different actors. The congress cares only about its reelection prospects and finding campaign money and most of the members of even the Banking Committees are either stupid or incompetent. The public is clueless and the whole corrupt unregulated incompetent quasi financial system of debt creation remains in place rolling along on a destiny that can only lead to collapse. Oh by the way, Happy New Year. I have been out of the country for a month and it has been pure pleasure not to have thought about the Great Delamination going on back home.

Bye Bye American Pie

The end of suburbia is near and almost no one gets it yet. The whole gigantic misallocation of national wealth has probably ended soon to be followed by the great national garage sale. My borther who lives in California’s central valley told me that unemployment has jumped to 11 %
In Merced a town just north of him, 75% of all house sales are foreclosures and property values have dropped 50%. Even people not in foreclosure can’t sell their houses unless they price them at foreclosure prices. Access to american dream boxes is only possible by private car and the charade in Washington of uber wealthy Auto CEOs’s with tin cups was act 2 of The Great Depression Revisited, a play coming to your town soon. And the financing of all these boxes and BMWs was c/o the american banking dream which is in full retreat begging all the way down, with Citigroup the lucky reipient of today’s cash for trash award. So now the two pillars of the american dream: cars and crapboxes are collapsing with congress falling over itself trying to keep the dream alive with more credit and debt. But I think the music has died. What most economists and politicians have failed to see is that in an environment of declining economic growth, assuming more long term debt makes no sense whatsover.The banks may have already figured this out. How will you pay back the debt if you lose your job? The only thing that keeps credit alive is the assumption that you can pay back the loan with every rising income and appreciating asset values. The music has died and those assumptions are dying with it. This great suburban build out of America with its sprawl of highways, crapboxes and big boxes, strip malls and office parks could only have happened with free energy. That party will be over soon. The sudden world delationary economic collapse has detroyed all asset classes, oil included, and slackening demand will buy us a few years until supply falls to meet demand and then we’re back to the roller coaster again. With credit drying up, there will be no drill baby drill. We need renewable energy and infrastructure upgrades but it is beginning to look like we wont get very much change from the new administration. The names have changed but the pool of applicants come from the same” growth is good” school of economics. Obama’s solutions look perilously close to Paulson and bush solutions. We don’t need any more stimulus packages. We need savings, we need manufacturing jobs at home, we need local food production and rail transportation and taxation of wealth, not income but I don’t see it happening until the depression worsens to a full scale collapse. Trying to keep John McCains’s American Dream alive will ultimately bankrupt the country and lead to full scale default. We need real change, a new American Dream but I don’t see it happening. We were lucky to elect a president who has intelligence and perhaps he will find a way to lead us to a new paradigm but if the quality of his advisors to date is any indication, I will remain skeptical. Gertrude Stein of “a rose is a rose is a rose…” fame summed up our current economic predicament :”There ain’t no answer. There ain’t gonna’ be an answer. There never has been an answer. That’s the answer.”

Swiss and Icelandic solutions

This is the quiet time in Jackson Hole. The motor homes have long since departed down the winding road in Hoback Canyon, the hotels are empty, the restaurants slow. The recession is starting to show. The local paper historically had pages of want ads to a few columns of rentals and that ratio has reversed with pages of rentals. Rents appear to be off 20%. There is talk of falloff in visitation of perhaps 25%, the local GM lot is full of unsold Suburbans and Tahoes. The ski area at Teton Village has spent a fortune replacing its old Tram with a new 100 passenger module made in Switzerland complete with new towers and buildings. I have no knowledge of the financing involved but it is a business model that caters to only the well to do and in a world where trillions of wealth has vaporized, one wonders how long that business model will continue.
A large real estate development, the Canyon Club has gone bankrupt and we are starting to see a few residential foreclosures.
Over in another snowy part of the world in Iceland, the unraveling continues. The NY Times ran an article last week highlighting layoffs and inflation in Reykjavik: Some of her generous neighbors: The Faroe Islands, Poland and Norway have sent offers of help but I have read no significant help from the US which is odd considering that the US military long used Iceland as a North Atlantic aircraft carrier. I landed there on numerous occasions when I wore the uniform. The Times article mentioned the fall of the Icelandic Krona from 65 to the dollar earlier this year to 130/dollar. On Yahoo finance the rate this morning was 225/dollar. I get the impression reading blogs and the Icelandic press that no one has been punished and the government is unsure what to do. There are allusions to the spoiled indolent youth who couldn’t be bothered to work during the recent boom in jobs that required getting up early and going home tired such as agriculture and construction, jobs that went to laborers from Eastern Europe The layoffs have just started, but Iceland’s employment safety net precludes immediate layoffs for 90 days after which unemployment kicks in. One wonders where the money to pay these benefits will come from with an insolvent government making payments in a plunging currency. Fortunately Iceland made some really sound decisions within the past 3 decades which will at least keep them warm and help them cope. The US could learn from their prescient planning. In the 1970’s Iceland used imported coal for 3/4 of its energy yet in 2007 over 82% of its energy was met with hydro and geothermal sources. Iceland has no petroleum resources of its own yet 16% of its energy is met with imported oil , chiefly to power cars, trucks and buses and of course its fishing fleet. Paying for that oil in the krona will get increasingly expensive especially world oil prices rebound which they almost certainly will. I regard the current plunge in the world oil price as an unfortunate event which will impede US and world planning to lessen dependence upon petroleum. Renewable energy is more than competitive when oil is $150 barrel but with a drop of 50% in all the major fossil energy prices, the incentive to conserve and switch to renewable energy vanishes. I am not a conspiracy theorist but if I were a Middle East oil producer I would be doing exactly what they are doing. Keep oil high enough to continue the transfer of trillions of western wealth but not so high that those same western economies start switching to energy sources that might eventually end up bypassing their sun baked sandstorm paradises.The US citizenry is starting to get it. They for a while were using less petroleum, and the impending recession will continue that reduction in energy use, but the reduction is nowhere near enough to make a significant difference. Oil and gas supplies 65% of US energy and 16% of Iceland’s energy. Iceland uses 25% of the Oil per capita that the US uses. If the US could get to that figure we would be using 5 million barrels per day instead of 20 million per day. At 5 million barrels per day we would be Energy Independent in oil. 5 million barrels per day is our domestic production. But 5 million barrels per day is still a lot of oil use compared to most of the rest of the world.The US could get to this number if it embarked upon massive electrification of its transportation as the Swiss did 70 years ago. Now here is an amazing statistic: The US today consumes 400 times the oil per capita that Switzerland consumed in WW2. We consume about 20 million barrels/day. If we were to consume at the rate of Switzerland in the second world war we would be consuming at a rate of 1/4 of 1 % or only 50,000 barrels per day! Could the US ever get to that figure? Of course not. But I think it could get to a consumption rate 100 times that figure if we made massive investment in electrification and upgrade of our electrical grid. Of course to get to that figure we would as a nation have to end our sprawling suburban missallocation of national wealth and begin to live and work locally. But that will have to be the subject of another blog.

Weekend Update

The first winter snows have already arrived and we will see more fresh snow this weekend. The pond is beginning to freeze, a metaphor for the world carried a recent survey that said 50% of Icelanders age 18-24 would consider emigrating compared to 33% aged 18-75 . These are stunning numbers especially when you consider that just a few years back Icelanders were considered among the planet’s most wealthy and fortunate, at least on a per capita income level. Iceland must be suffering. But consider her neighbor Sweden especially if you are a Volvo Truck AG employee.In the 3rd quarter of 2007 Volvo trucks for export to Europe totaled 41,970. The 3rd quarter 2008 figures recently released total……..are you ready for this…..?…155!!. That is not a misprint. Here is the link:
Any you thought only US car makers were in trouble. More evidence comes from the Baltic Dry Shipping Index, which is a measure of world shipping costs. It is down 90% year to date which means it is 90% cheaper to ship cargo on the world’s oceans now than it was on Jan 1st of this year. I have posted the apocalyptic news about the credit collapse in Eastern Europe and the news continues to be even bleaker. Even Italy which somehow escaped the toxic waste of US Subprime is sinking on world credit markets as the government is finding it harder to peddle its bonds compared to comparable Eurobonds. Italy has had to price its bonds 108 basis points(1.08%) higher to unload them.
Back in the US, Paulson’s shameful and shameless bailout of garbage is picking up speed. More money is flowing to AIG and the 9 big banks who are going forward with enormous bonus plans for their executives and plans to buy out weaker rivals with our taxpayer money.That first bailout sure worked good. In the first 9 months of this year $108 billion was set aside for bonuses by those banks and Paulson just gave them $125 Billion. Whew! Just in the nick of time for Christmas. What will it take to get the attention of these clueless crooks? Mobs with torches and pitchforks marching on the Hamptons? With the exception of a few watchful congressmen like Henry Waxman, nothing is being done. My final item will get your attention if you are one of those sub prime or alt A borrowers. On the books is a proposal to offer lower interest fixed government mortgages but the bankers have slipped in one slight catch. If you take the bait you are offered the mortgage as a recourse loan. The mortgage is now not secured by the house as collateral but by the immortal soul of the borrower. If the borrower loses his job or health and defaults, he will owe that money for the rest of his days!! No one but no one should ever accept such an offer from these Faustian bankers. I would urge all voters in this country to vote their representatives out of office if they voted for TARP. My Wyoming senators voted against it and so it appears I will be voting Republican this year.

Why Jackson Hole needs to be worried

The worldwide economic and financial collapse could be coming soon to a town near you. In case you haven’t noticed the entire world is enveloped in an unprecedented deflationary collapse of equities, real estate and commodities. It is not just the magnitude and breadth of the collapse that is stunning, it is the rapidity of the meltdown, which is sweeping like a Santa Ana driven wildfire all over the world and the impact here could be severe. With the exception of Corpus Collosum’s Jonathan Schechter, I see very little mention in our local publications of how this collapse could impact Jackson Hole. In talking with friends and acquaintances, I have been stunned by the level of ignorance and insouciance from these very intelligent people about the factors causing this economic crisis and what consequences it might pose to our isolated alpine valley far from the madding crowds of Wall Street.. How did it happen? The proximate cause began within the last decade as deregulation of financial markets and a flood of cheap money from Al Greenspan’s Fed led to a credit and debt bonanza as mortgage brokers rushed to offer loans to anyone with a pulse. These loans were then repackaged as CDOs and other securities baptized by wink and nod credit rating agencies who reaped huge fees which were then marketed by poorly regulated investment banks to the entire world as high yield low risk securities virtually backed by quasi government agencies within the Federal Government. Just to be safe, the buyers utilized the insurance from CDS(credit default swaps) another entirely unregulated enterprise which purportedly insured these CDOs against default.. CDS’s were offered by scores of companies including the world’s largest insurance company, AIG. Unfortunately, the reserves were nowhere near sufficient to cover the risk of default. The amount of leverage to market these securities exploded as the Bush administration lifted leverage limits about 5 years ago. It was a classic bubble with asset prices rocketing skyward fueled by greater profits fueling more investment and borrowing by consumers as they borrowed on these assets to fuel yet more consumption and investment until “Poof!”. It ended. But the problem didn’t end there. The bankers and their political allies using a “shock doctrine” developed from the Iraq War shocked the congress into a sudden massive taxpayer bailout of the greedy incompetents who caused this fiasco, putting on yet more debt onto the American public which has seen the national debt double under the Republican Bush administration to over $10 trillion. And it is nowhere near over. These defaults and the ensuing deflation is rippling around the world in an interconnected world financial system of derivatives, credit and other forms of leveraged debt which is threatening to bring this world to its knees. The response here and abroad has been to flood world markets with more debt and credit to try to jumpstart a world economy dependent on debt and credit. But these solutions pose a huge risk of inflation longer term and even failure in the near term. Einstein once said” We can’t solve problems by using the same kind of thinking we used to create them”. So now we have a world tottering over the precipice of what could turn into a world deflationary depression. And yet there is one more piece to this puzzle of how and why these distant events may soon impact our lives here in Wyoming.

That is the almost certain reality of a peaking in world petroleum production. The International Energy Agency (IEA) will release its long awaited World Energy Outlook in a few weeks that may mark a huge change in the perceived availability of oil. Many governments and government entities and consulting firms, among them the USGS, CERA, the EIA, and energy officials in the UK have projected stable supplies out as far as 2030. The Financial Times of London recently leaked excerpts of this IEA paper, that suggest a significant decline in worldwide oil production with or without massive investment in exploration and infrastructure. The worldwide credit collapse is already curtailing such projects worldwide. Within as little as 2 to 5 years we may see production falling behind demand even with huge investment. That will mean big price increases for oil and likely all energy sources. These increases may start to occur just as the world is trying to work its way out of what could be a deep recession. Any way you slice it, the United States and the World are saddled with stalled growth and huge deficits and a good many of us will be suddenly poorer. This country and the world are almost certainly looking at rising unemployment and bankruptcies on a scale not seen since the great depression. So let’s get to the crux of this essay. How will it affect us here in Northwest Wyoming?

We are a region dependent upon discretionary spending and tourism. We make nothing of value and we are at the tail end of many supply chains. We cannot feed ourselves. We cannot even feed our subsidized elk herds. We are a long way from where our visitors live. We started to lose visitation when gasoline hit $4 a gallon and most people still had their homes, their jobs and some money. How many will come when that changes, when fuel costs climb to $5,$10 or $15 a gallon or worse becomes scarce or rationed? When those people begin to lose their jobs? When their 401K and IRA accounts don’t bounce back ?

I certainly have no idea how the current situation will play out but I take it as a given that this is a pause in our real estate boom and a real estate decline going forward seems inevitable. As a community I hope we can come together to do contingency planning for coping with what could be a pronged and deep recession and trying to design a valley economy and an even more livable community that is not so dependent upon wealthy visitors for its prosperity and survival.

IEA World Energy Outlook

The International Energy Agency headquartered in Paris is an organization that looks at all aspects of world energy use. On November 12th they will release their widely anticipated World Energy Outlook report. It seems that the Financial Times in London yesterday leaked a portion of that report and the numbers if true are stunning.

    What the report allegedly says is that world petroleum production will be declining 9.1 %/year unless investments of at least $360 Billion /year
in exploration and infrastructure are made……………………………………for the next 22 years!!!. That is almost $8 Trillion.
      Now get this next figure. If this level of investment occurs, the decline in world petroleum output  will only be 6.4%!
     The world has just entered a severe recession and these figures may be subject to revision I would assume but this is stunning data which directly contradicts projections from many world government agencies including   CERA(Cambridge Energy Research Associates) and the USGS in the US and projections from the UK which assume sufficient petroleum supplies out to 2030. In light of daily reports of financing difficulties being experienced by oil and gas producers world wide I think we can conclude that the annual decline rate will be from 6.4 to 9% per year for the foreseeable future. There are a number of oil fields coming on line within the next3 to 5 years which will offset these figures but there is little on the drawing board after that.
 I have included a  graph posted above from yesterdays Financial Times with a graph of world oil production going forward. I believe the data is from Chris Skrebowski who is a consulting editor for The Petroleum Review.
      The consequences of this magnitude of a drop in world production to the large industrialized economies could be severe. If ever there was a wake up call for a national energy plan to wean the US off imported oil, this is it.

What goes on in Iceland, does not stay in Iceland

I felt I was remiss not to share the beautiful currency of Iceland which at the moment is frozen for the purposes of international exchange.
Today’s news from Iceland is the big jump in the national interest rate from their central bank from 12% to 18%. It was just 2 weeks ago that the rate was cut from 15.5 to 12%. This 50% increase is the result of conditions imposed on Iceland by the IMF who has tentatively offered $2 Billion to the besieged nation. Meanwhile Prime Minister Geir Haarde is on a tour of other Nordic capitals hat in hand seeking additional loans. Back in Reykjavik there is a display in a shopping mall of Icelandic “Terrorists” photographs: pictures of women and children in colorful native garb mocking Gordon Brown’s use of terrorist legislation to freeze Icelandic assets in the UK. Icelandic citizens are pretty angry at what the nations incompetent and greedy bankers have done to their country. A particularly good column by guest columnist Hafdis Erala Hafsteinsdo’ttir in today’s icelandreview Daily Life section shows the resentment of the government using the image of the ship of state Tjo’darsku’ta, to excuse their blundering. The image portrayed by the nation is that of a ship encountering an unforeseen storm. Hafdi’s is having none of it nor is a good part of the nation that is increasingly demanding accountability for the mess that has led the country to the brink of bankruptcy.
Back on the continent the latest shoe to fall is the currency crisis involving the huge losses of European banks who had recklessly lent to emerging(‘submerging”) markets in Asia, Latin America, and Eastern Europe and not so emerging nations like Iceland and Russia. And the losses are immense: an estimated $4.7 TRILLION with the bulk of the losses held by European banks. The losses in Switzerland are equivalent to 50% of the entire GNP of Switzerland. Austria with an estimated 85% of GNP was hit the hardest. But Germany, the UK, Sweden and Spain all have losses approaching 25% of their respective GNPs. Source: BIS. If there is any good news for the US, our losses to submerging markets only amount to about 4% of our GNP. The US has other ways to lose money. The list of the emerging markets perilously close to default is growing daily and IMF is shuttling from one capital to another imposing harsh terms as it doles out its billions. The IMF which amounts to what seems like an International Federal Reserve Bank is going through it’s reserves of $200 Billion at a rapid clip and the big question is where will it obtain additional funds when the reserves are depleted. It’s Faustian choice is drawing from donor nations or the printing press. In the midst of world deflation is the spectre of future world INflation. Neil Mellor at NY’s Mellon Bank says that this is “biggest crisis the world has ever seen.” Those are strong words and I hope Neil’s hyperbole followed an evening of drowning his sorrows at a local pub. Meanwhile back on the campaign trail nary a word from erratic john who has long admitted he knows nothing about economics but that hasn’t kept him from telling crowds he will bring the economy and the markets back if he’s elected. Barak is finally starting to drop hints that sacrifice and pain may be in the nation’s future. It’s high time someone starts stating the obvious. Nowhere do we hear from our politicians the magnitude of the financial collapse which I have dubbed The Panic of 2008 and what it means to our nation’s future. Maybe they know better. TS Eliot said “Mankind cannot stand very much reality.”
I hope Barak can bring the nation to the table to discuss our dwindling options going forward, constrained as we are by shrinking resources and catastrophic debt. Sadly, all I see are solutions using the same way of thinking that got us to this precipice in the first place: more lending, more credit, more cheap printing press liquidity, more lack of oversight, more drilling, more energy independence, more infrastructure and more destruction of our children’s financial future by larding on yet more debt and deficits. In the midst of the biggest housing collapse in the nation’s history, McCain and others are calling for a bailout of profligate irresponsible house buyers who took the free money and bet the farm…..and lost. Responsible American homeowners will keep their homes. Bailing out the foolish and the overextended home buyers is ludicrous and all talk of such a bailout should stop. We must let real estate values revert to the mean. When they do, at least our children might be able to afford a home of their own someday. It’s a zero sum game and it should be. What to do about the 18 million vacant houses in the US is any body’s guess. Jim Kunstler in “The Long Emergency” called the huge American suburban housing build out with it’s network of highways and ring beltways “the biggest misallocation of resources in the history of the world.” John McCain calls it the American Dream. If you want a definition of “unsustainable” it’s living in a distant 3000 square foot vinyl sided chipboard McMansion accessed only by automobile on failing bridges and crumbling highways. That is not a dream. It is an American nightmare and with soaring energy prices in our future, it is an unsustainable nightmare. We have dug a hole for ourselves and it’s time to stop digging. The country will need good jobs, good housing, good transportation and good communities but with a new model . We need a national inventory of critical transportation hubs and links, critical housing stock and critical food growing areas and resource and energy regions. Perhaps it could be modeled after the Pentagon base closing model. Some highways and airports and suburbs will have to be abandoned or downscaled for different uses. The Interstate corridors offer an obvious route for a national Interstate Electrified Rail network which would be vastly cheaper to build and maintain than the sprawling interstate concrete and asphalt highway system. We will always have steel. We are running out of cheap asphalt very rapidly. Fortunately, we will always have gravel. Moving cargo by rail is significantly cheaper than by truck per ton mile and rail networks and steel bridges are far less expensive to build than huge fragile short lifespan rebar and concrete highway bridges which are destroyed in only a matter of years by salt and heavy trucks. That’s my vision for the future for the US. It will require a massive upgrade of the electrical grid and changing how we travel and live and work and eat but what we have now wont work very well for much longer. I hope we can make this change. Don’t ask me where we will get the money. This little financial thing kinda caught me by surprise.
The picture to the right is my wife Karlene in the Rome terminal by the Eurostar.
And finally click on the youtube link to hear a great blues singer from Iceland:Lovisa Sigrunadottir singing her hit “please don’t hate me”.

Auschwitz Guards

You might think this photo a bizarre image to be in a blog dealing with Peak Oil and striving toward sustainability. But it was the quote from a reader of Richard Heinberg in the Post Carbon Institute web site that inspired me. I had talked to family and friends this weekend concerning who was culpable in this ongoing tragicomedy I have chosen to call the Panic of 2008. As I have previously stated, we must punish the perpetrators who not only have destroyed our American economy, but the the world’s economy by their greed, fraud and incompetence. I don’t think we should close Guantanamo in Cuba yet. The blog respondent said:” Just like the Auschwitz guards: Let them be known. Let them be hated. Let them be hunted for the remaining days of their miserable lives.”
A bit harsh perhaps. But not harsh enough. Bush never could find Osama but I’ll bet Henry Paulson and his gaggle of rogues will be easy to track down. In September of 2001 with twisted girders and toxic dust in the streets of NY, we had a president who offered a useful response for the nation:SHOP!
A national united response to a horrific terrorist act should be to go shopping?
Any fence sitters out there who had any doubt about whether America was on the right track or not were no longer in doubt. And you know what? We did just that. And now we sit here in the United States contemplating the rubble of our economy wondering how all this happened and why everybody is so mad at us. Naomi Klein has a best seller entitle “shock Doctrine:The rise of disaster capitalism” which has been a recent best seller which certainly describes today’s events.
And it will take a huge shock to get this country moving away from a Las Vegas mentality of something-for-nothing to a society where honest work that produces products of real value. But in the meanwhile we will have to figure out what we are going to do with 18 million vacant homes, $10 trillion+ of public debt, $10 trillion of commercial debt, $2.6 trillion of credit card debt and unfunded debt from medicare and SS debt of over $42 trillion. Over $13,7 trillion of that debt is owed to foreign lenders. And the news over the weekend from China wasn’t exactly encouraging. The communist online newspaper the People’sDaily called for banishing the US dollar from direct trade relations and relying upon local currency. And over across the Taiwan Straits in the non communist china, Taiwan government regulators were calling on national insurance companies to reduce government exposure to US agency debt such as Fannie and Freddy which was $55 billion in 2007. As I’ve repeated here several times, the real thing to fear is not falling real estate values or a drop in your 401K or $5 gas. The real thing to fear is when the world stops buying our debt. The financial bobbleheads in Bobbleonia rend their garments reminding us what a crisis it is when banks wont lend to each other. What do you think will happen when no countries will loan to Uncle Sam? Does the word “default” come to mind? How about insolvency? Could it happen here? Could this increasingly interrelated tightly globalized net work within a complex society collapse? Of course it could. It’s happened to complex societies for millennia. A society built on out of control consumption of resources in a finite world is going to collapse eventually. Whether the collapse begins in 2008 or 2108 is in some ways irrelevant. At some point we as a nation will have to realize we must stop over consuming, over sprawling and overeating and decide that there is no such thing as something for nothing. As a nation we must live within our means, develop tight local communities and use far less energy in transportation, in housing, in manufacturing, and in food production. The unspoken US goal of controlling the world’s energy by military occupation and invasions must cease before we or the world is destroyed.
Meanwhile over it Reykjavik it has been a slow news day except for some flag burnings and demands to sack the bankers and a good part of the government. The good news was that the snow is early and heavy. It is shaping up as a good ski year.

Speed and Complexity

I continue to study previous panics and depressions and the search for pictures to illustrate this blog has been an education. There is a paucity of images from depressions previous to the 1930’s, which limits my choices. It is the sheer pace of economic events that astound, not so much the actual events themselves. I must now veer off the path of pattern comparisons of the Panic of 2008 with other panics and today focus on what I see as a great danger and I will be wandering in areas out of my realm of competence into for example systems theory, economics and networks. Simply put I think the two greatest risks to our economic and financial system is the near instantaneous pace at which information is exchanged, and the complexity of the components. Systems theory began almost 100 years ago as a way to try to explain the interrelationships within biological organisms. It developed legs and began to be utilized to explain non-biological systems and it spawned many related disciplines and in turn was influenced by them. A biological organism has many systems. Let us take the example of the cardiovascular system. There are redundancies built into this system. In the heart for example oxygen can be carried to the same area of heart muscle by several blood vessels. It has redundancy. If one vessel becomes blocked by a plaque or clot, the redundant vessel will carry the blood and the heart muscle will not be damaged. In this sense, the cardiovascular system is not optimized. It is not efficient. But by virtue of redundancy, the heart has protection from failure. A network is a collection of nodes linked together by pathways. If there is just one pathway from one node to another, failure of that pathway is catastrophic much the same way if one city has only one road to an adjacent city, failure of that road is catastrophic to transport. It is more efficient to have just one road. If you need more transport density, it is more efficient to build one very large multilane fast road than a myriad of little roads but failure of the one optimized efficient road collapses the system. So system speed trumps system stability. Our current economic system is a tightly coupled, optimized and interrelated network of financial nodes linked by high-speed connections. Money isn’t money the way it was in 1930 or 1873. Money and capital is an abstraction, a digital abstraction. Mortgages and credit and debt are abstractions. George Bailey doesn’t hold your mortgage at the Building and Loan as was portrayed in the Capra movie It’s a wonderful life. Everyone knows by now what happens to mortgages. They are sliced and diced and bundled into securities that might pass thru Freddy and Fannie and be sold to the Norwegian Teacher’s Union. That mortgage ahs become not a obligation to pay off a debt but a security, much like a stock but it is a type of structured investment vehicle. I am using this example to show how the mortgage market is now very much more complex than it was in the time of George Bailey. It’s not efficient to hold millions of mortgages in thousands of Building and Loans when Goldman Sachs can do the whole thing with a few dozen servers and a few thousand computers. But in this process a simple system has been optimized and made more complex and more fragile. It is more fragile for a variety of reasons among them cybernetic. Cybernetics is a broad field but in a general sense studies structure and regulation in systems. The feedback loop is one of those regulatory mechanisms. By shipping and slicing and packaging mortgages, a hugely important feed back loop is lost. In fact one of the most peculiar and absurd features of this CDO market has been the discovery by lawyers that finding who actually holds the mortgage can be impossible. So say the lawyers and the judges in defending some clients, “You want to foreclose? Produce the Mortgage!” In many cases this has brought the foreclosure process to a standstill.

Banking and finance has become globalized and financial transactions and information is exchanged worldwide at the speed of light. It is a fast and complex system and it is layered with risk derivatives from interest rate and currency derivatives to credit default swaps(CDS) and many others totaling in the trillions of dollars! None of which would have been possible without high-speed computers and acres of server farms all over the world. This is not George Bailey’s world. It took a long time for a bank run to develop at the Building and Loan. Now collapse of banks and countries can occur almost in the blink of an eye. I contend that our next depression will be blazing fast. In 1929 the stock market crashed. It took years for the bottom to be reached in 1932. People had time to prepare and consider their options. In the optimized linked globalized economy of today, collapse could be very rapid, much like a tsunami. . The water recedes and villagers rush out to see what is happening and suddenly a wave appears on the horizon and all are swept away.

I do not of course know how this recession will play out and whether it will progress to a depression but I do contend that we have an overly complex world financial system, which is teetering, and if collapse ensues, it could be very rapid.

Iceland has just concluded the tenth annual Iceland airwaves music festival that had to be a welcome break for that besieged nation. But Iceland’s problems are in no way unique and as someone said, “What happens in Iceland does not stay in Iceland.”

Similar fires are popping up seemingly everywhere: Belarus, Ukraine, the Baltic, Pakistan, and Argentina. The list keeps growing. IMF firefighters will be busy.

Now as the natives in SE Alaska used to say “I jokes……”

What is the worst hit sector in employment in Iceland? Bank robbers.