Respect Authority

I have an awkward question: does President-elect Obama have enough economic insight and instinct to lead us (as a people, of course) away from complete financial ruin?

For the past two days, Obama and his rag-tag team of second-hand economic advisors have outlined their hopes and dreams for the economy.  But what’s conspicuously absent is any address of the underlying crisis behind our budding Great Depression II.

Obama’s adorable insistence that the bailout isn’t working because of its “Main Street” negligence is naive. Yes, Americans are suffering but it isn’t because Paulson is throwing money into Wall Street’s black hole as opposed to the black holes in our wallets. The economy is tanking because we’re running out of bubbles to prop it up with.

In the 20s we had an inventory bubble, in the 80s we had a dollar-backed security bubble, in the 90s we had a fucking pets.com bubble, two years ago we had the housing bubble and now we have the CDS bubble - the final and most absurd bubble in our series of economic downturns.

CDSs (Credit Default Swaps) have been both the vehicle behind our unprecedented growth and the burden that has collapsed Bear Sterns, Lehman Brothers, AIG, Washington Mutual and now Citigroup. 

In a nutshell, Credit Default Swaps are fancy insurance contracts between investors (stay with me here) against the repayment of debt. The model behind their worth sort of follows this innovative logic: Step 1.  Sell a contract that stipulates that the buyer make payments to the seller for a debt (that the buyer does not own, nor shares any risk) in exchange for a guaranteed payoff in the event of a default (or another pre-determined outcome like bankruptcy or restructuring). Step 2. ????, Step 3. Profit.

Basically, the banks made bets with other banks that you would pay your bills and some smart asses bet you wouldn’t.  The gullible banks (otherwise known as our captains of industry) used the money they made swapping these default bets to make more loans that they made more bets on, and so on. Now that they’ve offically lost these bets, they’ve realized they haven’t been making any real money all this time and can’t pay off their own debt (O FUKIN TEH NOES!!!!!1).

That’s why they need these bailouts - to pay off their bets.  Now, why can’t we just let them default?  These are gentlemen bets right?  It’s not like Rothschild is going to bust Citigroup’s kneecaps right?  Well, it turns out that in the big leagues kneecaps are called credit ratings and if the majority of banks want to keep theirs, they’ll have to pay the bets off (read: we’ll have to pay the bets off).

Again, there are truly no innocent parties in this mess (save Kira, but not Aaron).  If those black sub-prime mortgage holders had just paid their bills, the market wouldn’t have been thrust into a storm of uncertainty and had an organizational reckoning laid upon them.  How could they have possibly foreseen a scenario in which they would be called to systemically separate bad loans from perfectly sound ones?  Now we have to pretend that all loans are toxic liabilities and, in turn, CDS buyers are forced to call in their bets randomly.  Woe is everyone (but especially the banks who are morally obligated to accept payment on their bets at the expense of Western Civilization).

Back to the Obama show!

I just don’t see how creating 2.5 million jobs is going to fix the real problem.  Obama is calling for “a jolt” to the economy, but how many times can we defibrillate a failing heart?  Even a drastic transplant would only forestall the inevitable death of our current financial system.

There’s hope that Obama recognizes the need for a new economic system built on genuine value, meaningful production and sustainable growth, but the fact of the matter is - we’re steadily losing the luxury to simply hope he can get the job done.  Especially when his hope is that a jolt will do the trick.

[Chicago Sun Times]