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Poor Captain's Almanac

by Captain Future Fri Oct 10th, 2008 at 04:34:24 AM EST

There are all kinds of financial experts on this site, and I am not one of them.  I am not only not an expert, I am by many financial standards, poor.

But this is what I understand about what's going on. As I write this, European and Asian stock markets are either following the American markets down, or they're leading Friday's U.S. downward plunge, or both. This fall is explained by "experts" as "loss of confidence" or fear. What it seems to me to amount to is this: rich people are cashing out. They've made as much as they're going to make for the time being from this financial house of cards, and they're taking their cards out while they still can.


Here's something else. I've heard the experts and commentators saying that surely the U.S. stock market can't go too much lower because prices are approaching the point that they reflect the real value of the companies. In other words, they are admitting that all this wealth that's being lost was never real wealth at all.

How unreal wealth translates into $4,000 a night hotel rooms (though only $500 for dogs) for government bailed-out AIG execs who promptly spent every cent of the $80 billion or so they got and are back for more, is a bit of a mystery to me, but I see that for a certain period of time, unreal wealth does translate into some kind of reality.

And if you think about it, the concept does work if you look at long enough time periods. Wealth has been created that has depleted resources and destroyed to some extent the ability of the environment to keep sustaining us, at least without a lot of work to renew it. Similarly, our built infrastructure. So the wealth created is, over time, unreal wealth.

Our only chance at sustaining civilization in the long run is to use this period of unreal wealth to organize a new economy and financial system that are sustainable and that will create real wealth over the long term.

The first step to doing that is understanding that this needs to be done, and electing the leadership to start doing it. And in this we in the U.S. are lucky: the next election is less than a month away, and we have a candidate in Barack Obama with the knowledge, the intelligence, the temperament and the political ability to get us started on the path we need to take.

But probably before that, the governments of the world are probably going to have to pass a preliminary test. They are going to have to work in concert to stabilize the global financial system. So far this crisis-laden week, the record is spotty. The European Union, which has succeeded in unifying enough to guarantee peace on a continent that pretty much sparked two world wars, is so far failing to meet this crisis as a single entity, as a United States of Europe, or even to coordinate effectively.

There was talk Thursday that the U.S. and the U.K. may coordinate policies on banks. There are meetings ahead. That George Bush is involved is not a hopeful sign, but perhaps there are statesmen (of both genders) who will step up.

Still, it seems to me what we are seeing in essence is a purging. Virtually all of the economic structures and orthodoxies that began with Reaganism are being destroyed, including the consumer economy forged in those years.

At the same time, I remember that we had a good U.S. economy in the 1950s and 1960s that included real production as well as consumption, and more equal roles for government and the "private sector" of corporations and small business. It's not impossible.

We need to move to that kind of balance, but in a whole new way: a sustainable, renewable, green economy that can create real wealth over the very long term.

I'm sure you all can tell me how I'm wrong.

The civilization will be saved: history shows that wealth disparity falls with each depression:

Most of the recent millionaires did not smell much of real private prosperity. They just saw they electronic accounts inflated temporarily.

For some reasons, catastrophic crashes do not serve wealth or power concentrators well apparently, but restore decent parity (for the next cycle of greed).

by das monde on Fri Oct 10th, 2008 at 05:10:06 AM EST
European Tribune - Poor Captain's Almanac
Still, it seems to me what we are seeing in essence is a purging.

illusions meet reality, guess which wins?
nice diary, gracias.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Oct 11th, 2008 at 07:10:57 AM EST
[ Parent ]
Popping a bubble and lancing a boil are perhaps comparable?

You can't be me, I'm taken
by Sven Triloqvist on Sat Oct 11th, 2008 at 07:21:39 AM EST
[ Parent ]
letting go a gigantic fart?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Sat Oct 11th, 2008 at 08:58:00 AM EST
[ Parent ]
You mean Bush in November?

You can't be me, I'm taken
by Sven Triloqvist on Sat Oct 11th, 2008 at 09:19:38 AM EST
[ Parent ]
Ah Sven, always seeing a layer deeper.

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Sat Oct 11th, 2008 at 09:38:28 AM EST
[ Parent ]
no, i meant all the bloated gas of toxic paper in the international financial system...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Sat Oct 11th, 2008 at 12:28:53 PM EST
[ Parent ]
The fix isn't working.  It is doubtful that it can work.  The problem is that no bank trusts other banks, and with good reason.  They don't know if they will be in existence next week or next month.  No one can provide credible assurance of creditworthiness.  No one is confident that credit guarantees will still work. Fear of counter-parties is paralyzing the financial system.  Companies and governments cannot find affordable financing for their short term obligations.  Commercial letters of credit are not credible and that is causing international shipments and trade to stop.  There is no quick way to repair existing institutions.

Therefore the best short term solution is to create new, untainted banks with government backing. If they are required to follow conservative practices and to direct their lending to commercial credit, or commercial paper, letters of credit for trade, student loans, consumer credit and mortgages the economy could be unfrozen.  Since banks in the US typically are required to have a 3% capital reserve, $267 billion from the US Treasury to new banks would create $8.9 trillion of new loan capacity.  That is over half of last year's Gross Domestic Product and it should suffice to defrost the credit markets in the USA.

Similar actions of proportionate scale in Europe and Asia will likely be required.  Once that has been accomplished the real economy will be released from its condition of being held hostage to the financial industry world wide.  Existing banks in the USA can be taken over by the FDIC as required, with their depositors protected they can be shorn of their toxic assets, which should be left with the bank holding companies, and merged with one of the new banks or recapitalized by the government in return for preferred senior stock and provided with new top management.  Former management can look to the holding company for their golden parachutes.

Solving the credit crunch isn't rocket science.  It just requires abandoning the idea of saving existing institutions as the first and only priority.  Save the economy and the existing financial sector can be left to burn.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Oct 11th, 2008 at 08:19:55 PM EST
... myself, I must say that this seems to be a reasonable reading of the situation.

One driving force in the decline in the Dow on Thursday last week was hedge funds having to sell stocks, even if they wanted to hold them while waiting for some bargain hunting correction to ease their way out the door, because the wealthy investors in the hedge funds were pulling money out.

That is quite literally "cashing out".

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Oct 14th, 2008 at 02:06:58 PM EST

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