Government Lies

Governments lie.

Well maybe not every government all the time. But certain governments lie sometimes.

In case you need reminding/convincing, please look here, here and here (this list could of course be expanded on substantially).

Some lies may be good. Maybe it is best to downplay swine flu if its spread is inevitable. Personally, I do not adhere to the school of thought which appears to think that the people are too stupid, emotional or short sighted for the truth but I understand the argument. However, I can by no means bring myself to believe that the amount of lies and propaganda being produced regarding the current situation in the global economy will result in a beneficial outcome.

But first some lies:

'No one should be confused about what a bankruptcy process means. This is not a sign of weakness but rather one more step on a clearly charted path to Chrysler's revival.'
— President Obama (MW)

No real need to comment on this one it must be apparent that it is total nonsense.


"I remain confident that the economy will start to grow before the end of the year."
- Alistair Darling (Reuters)

The UK budget, and Darling's comment has been almost universally derided so I will merely provide a link.

This list could also go on and on, but I gather most people would get bored and may commence smoking some good ol' green shoots. So - enough propaganda nonsense. Let's look at a truism: "A depression is a self fulfilling prophecy".

Confidence is key in economics. If people think they are wealthy, they consume more, leading to more aggregate demand, leading to more aggregate supply, leading to economic growth, making people feel more wealthy...

This mantra has been repeated for many years now. Central Bankers have used this as the rationale for allowing ever more debt and leverage to dominate the economy, in turn bloating the financial sector and attracting ever more of the best and brightest to the global game of musical chairs with structured credit derivatives. This game has gone on and on, leading to where we are today with an amazingly intransparent derivatives bubble of nominal value of many times the size of the global economy.

Now that we have experienced a blip in this ponzi-esque system of ever increasing cross-leverage and debt bubbles, we should take a step back to reflect on what would be the best way to operate moving forward.

Currently, the approach being chosen to fix the bursting of the bubble is to reflate the global bubble. This was the path chosen when the Tech bubble burst - easy money then led to the real estate bubble. Maybe the next bubble will be in green technology equities? In order to maintain "con-fidence" in the system we are led to believe that everything is alright.

Everything is not alright. The financial system remains largely insolvent even though taxpayers have already bought trillions worth of inflated credit at significant premiums to what any rational investor is willing to pay and despite bankers taking bonuses of sizes that appear ludicrous to anybody who is not used to burning trillions worth of value that does not belong to them.

Despite the fact that the financial sector is too big for its own good, Governments have gone far beyond covering insured deposits and ensuring the flow of debt to important, producing firms. No, they have decided to take on the inflated debt of so-called risk takers in the economy so that other "risk takers" are not impaired on their "investments".

This although much of this exposure was only taken on in light of an expected government bailout, and some of the largest recipients of government bailouts claim to have been "fully hedged", in the knowledge that they had bought a nonsensical financial product in an unsustainable game of ever increasing debt.

We may be in a difficult time of chaos, but cushioning supposed "risk takers" from the consequences of their own actions makes no sense. The only rationale for bailing out institutions which do not hold private deposits and do not engage in direct lending activity could be that they are indeed too intensively linked to systemically fundamental financial institutions via derivative exposure that they are too large to fail.
Should this indeed be the case, the solution is not to pump trillions of taxpayer monies into exactly these entities, further increasing moral hazard and apparently encouraging the largest, and correspondingly most dangerous risk taking in the financial history of mankind.

Here I would like to mention Goldman Sachs, the systemically important "bank holding company" which is essentially a hedge fund with preferential access to federal reserve liquidity, which undertakes no direct real economy lending nor holds retail accounts and just got over 20 billion USD in TARP money due to apparently being insolvent, is now the no. 1 proprietary trader on the NYSE, larger than the next 14 institutions put together.
Conspiracy theorists claim this is a concerted effort by GS and the US government to prop up the market to retain confidence. I gather that this is more likely a desperate attempt to make back losses in the credit markets to avoid insolvency. Whether it is one or the other, what is clear is this is being done by a firm that took government money, despite GS employees averaging more than 360'000$ of compensation (including janitorial staff!) in 2009.

Propping up markets with taxpayer money is maybe not illegal, but highly questionable. Bailing out private financial institutions and their equity and bondholders who made bad debts is ludicrous, and makes no sense whatsoever if you believe that markets are the best way to allocate resources, which is what these guys have been telling us at least for the last 20 years. The distributional consequences of these actions are horrendous, and show a complete disparity between government elites and people who actually have to do honest work for a living. Socialism for the rich is inexcusable, and makes no economic sense.

However, governments are taking the riskiest and most likely to fail approach possible: Whilst they preach confidence and green shoots, they are subsidizing reckless risk taking by those who need it least, truly destroying the last bit of equity or market control in the financial sector. The banks will not provide credit to companies given the macroeconomic outlook of deflation that they created themselves. Indeed, they will attempt to exploit the last days of the game to the absolute maximum whilst paying out as much compensation as they can get away with. This is going on with very little government control or oversight, especially in the United States.

Given this outlook, it the systematic creation of confidence in an already failed system on its last legs, which will inevitably sucker some fools into the financial markets is not just cynical and dangerous, but downright criminal. Not only will they fail to save the financial system, which, given it's current form, is actually a good thing, but it will also inflict long term damage on the prestige of the political system, making the rise of radical solutions all the more likely.

We must reform the financial system, and we must do it according to certain basic principles previously laid out here. Merely perpetuating the current inefficient, fundamentally unfair and wide open to abuse system is not an option.

The best way to fix the crisis would be to immediately separate the deposit-insured banking sector form the highly risky, speculative investment banking activity. The withdrawal of the Glass-Steagal acts was indeed a short sighted act.

Keep small business loans running, keep deposits insured, put aside some extra cash for large firms needing short term liquidity and THEN:

Let the market run it's course. Let the Investment banks who made bad, leveraged bets fail. The good guys can then start/get hired by hedge funds who CAN fail and who get capital in the market not from the FED or some other taxpayer funded corrupt gravy train. The other guys who don't get hired can then go to activities which actually bring a benefit to society unlike parasitical and useless overpaid musical chairs playing with structured credit derivatives.

This should have been done right from the beginning. Insuring GS speculative trades and bonuses with FED, TARP and FDIC cash is a scandal, and tantamount to daylight robbery. Eventually the moral hazard and failed incentives will lead to a greater crisis down the road. The bill to the taxpayer increases with every day the corrupt Geithner crew neglects true reform.

Too large to fail is too large to exist. We need smaller banks and more competition not enormous intransparent and immensely powerful state sponsored dinosaur banking behemoths.