02 April 2008

The Nature of the US Financial Crisis

The US financial crisis is not one of liquidity or a credit crunch.

That could only be a symptom of some other problem in a fiat monetary system with low interest rates and wide acceptability on Treasury debt. Liquidity is just a symptom and one cannot cure the disease by trying to relieve the symptoms. You have to treat the illness, or hope that the patient can cure themselves through the natural processes of the body while you relieve the symptoms.

What has happend, what no one in the financial business seems willing to say, is that a number of corporations have been caught in a massive and pervasive financial fraud (or as their lawyers would prefer, a sustained lapse in judgement). This includes a number of the Wall street banks, big accounting firms, and in particular ratings agencies.

Who will lend or buy when the judgement of those who create, sell, and rate the product has been shown to be corrupted, false, and not valid? If you were on eBay, and the seller had a rating that showed repeated deceptively false product descriptions, would you buy from them even if Paypal offered you a favorable discount on interest rates? Of course not.

The problem is accountability and credibilty. Integrity and honesty.

Any of us would not do significant business with anyone who has shown a lack integrity and honesty in their recent business, especially knowing that they will not be held to account for any frauds they may commit against us. At least most of us would not, and at some point the supply of greater fools is exhausted.

The banks are no different. They are reluctant to deal with each other without a third party guarantee from the Fed or the government. They know that THEY have been imprudent at best, and intentionally deceptive at worst.

Have we become so used to corruption and deceit that we cannot even notice it anymore, like a family that lives near a train or a busy highway?

Until serious steps are taken to restore integrity all we are doing is perpetuating a financial system that is broken, and stumbling into a real and serious collapse that may be catastrophic when the rest of the world walks away in disgust.

The public in the US is running out of credit and cash, after many years of wage growth supression and degradation of the productive economy, and can no longer sustain this almost parasitic arrangement which Wall Street has created. The banks' solution is to find new and healthier subjects to feed upon in Asia and Europe which is what they were doing when the subprime scandal surfaced.

That is the heart of the problem. And we won't hear the truth because the boys with the cookies in their hands are afraid of getting punished by having their cookies and bonuses and maybe even their freedom taken away. And besides, they have gotten away with it before, and are trying to bluff their way out of another tight spot.

Let's see what happens, but start thinking what we can do if the system is not capable of repairing itself through the actions of our representatives in Congress. Dropping them a quick note or call to let them know what we expect would be an excellent first step.

If you wish to do more, walk away. Stop buying non-essential purchases for the rest of this month. Buy only what you absolutely need to live. Pull your money out of any of the big money center banks and broker/dealers. Stop using credit cards from the big money center banks. Pull your money out of the US stock market. Bring your money closer to home and put it into a sound local bank.

At the worst, you'll have some extra money saved. And at the best, maybe we'll feel better and see some change and help to break this cycle of fraud, bubble and bust.