06 May 2009

Red Pill or Blue Pill?

You take the blue pill, the story ends, you wake up in your bed and believe whatever you want to believe.

You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes."

Morpheus in The Matrix

Blue Pill

Dick Bove was on Bloomberg Television this morning justifying a bullish outlook for the big banks, and the Bank of America in particular.

As you know, the story is that Bank of America has to raise many billions of dollars in additional capital according to the stress tests.

Dick Bove reasons that Bank of America will raise this additional capital, handwaving the costs and any contingencies a bit.

This additional capital will be leveraged, so Dick believes, in profitable transactions in trading, lending, and the extension of credit.

These transactions will generate a spectacular boom in bank profits. Mo' capital, mo' profits. Just do the math and including plenty of leverage.

And as we all know, more credit means economic growth and national prosperity.

Red Pill

The problem that the financial system has is an outsized financial sector with too much capacity for credit and financial assets. This excess capacity led to speculation and extension of credit in deals where the risk was not adequately balanced.

Hot money chases unreasonable risks. Too much capacity lowers the bars for deals which cannot possibly be profitable in any realistic model. Bubbles tend to distort the models for growth assumptions.

The only way to achieve a sustained recovery is to reform the financial system, break up the big banks, and return to a more balanced economy.

The elite and their acolytes seem to believe that by sustaining the illusion of the Financial Matrix that we create a confidence that will support a national economic system that is based on a credit bubble and a mass illusion of wealth based on paper.

The money center banks are the instruments of national policy, and the power to control not only the domestic economy but the nations of the world.

All we have to do is believe, and act as though it were true. After all, its so confusing, who can understand it? Better to just believe.

Can we delude ourselves to prosperity? Can a powerful nation and otherwise intelligent people be that venal, faithless and craven?

Yes we can. We have been doing it for years. And it can only continue if we gain more control over the real world and the people in it, and bend them to our increasingly irrational will.

The triumph of the will.