[NYTr] Nothing Hurts Like a Big Crash. Now Is the Time for Dissent

[All the News That Doesn't Fit]

[An interesting column. Forget the war, forget the Congress and the
Constitution, forget impeachment and politics. When people lose
their little boxes made of ticky-tacky and are liviing in cardboard
boxes at the strip mall, MAYBE something will happen. -NY Transfer]

Counterpunch - Aug 24, 2007
http://www.counterpunch.org/farago08242007.html

The Pain of Paper Millionaires

Dissent, the Housing Crash and the Next President

By ALAN FARAGO

 "Everybody just standing round 'neath the tree
  shooting pigeons on the limb, 
  But when Quinn the Eskimo gets here,
  them pigeons will go to him."
  -The Mighty Quinn, by Bob Dylan, 1967

A thousand and one bearish pundits have been leaping on the staggering
bull of the housing market. Even the presidential candidates are on the
sidelines, wondering how to place their bets.

The bull rises to shake them off, nostrils flaring. The infusion of
hundreds of billions by the world's central banks lubricates its joints.

This is what taxpayers must want, for the world central banks to be
commanding liquidity and the printing presses forward, faster, harder.
It is a great bull that can summon such resources.

But is there a plan? Is there an end in sight? Is there a candidate to
be president who can seize the moment?

Losses in hedge funds and investment banks around the world dwarf the
last great financial debacle, nearly a decade ago, when Wall Street and
the Federal Reserve came to the multi-billion dollar rescue of one of
their own, Long Term Capital Management.

The news is filled with investment banks and mortgage firms announcing
big layoffs. Still it will take months even quarters for the extent of
damage to world debt markets to reveal, with so much investment tied up
in hedge funds and private equity opaque even to investors.

It is a seeming paradox: how federal regulators are fanning across Wall
Street like NIH teams sniffing for bird flu, while financial executives
egg on the bull: "confidence is returning to credit markets".

What else could they say and who would listen, given that fellow
citizens never cared much about tomorrow so long as their gas tanks can
be filled at a reasonable cost today. That is what the presidential
candidates know to be true.

But this is what I know to be even more true.

For a decade, the state of Florida has been sniffing glue from the
paper bag of the multi-billion dollar construction and development
industry. This is not hyperbole.

>From the governor's mansion to the state legislature, straight down to
the scurrying and scratching of local city and county commissions, the
thrall of the bubble in Florida has most people and media casting a
wistful glance backwards in time.

Meanwhile, the Everglades and tens of thousands of acres of wetlands
and billions of dollars in coastal real estate have turned forever
pale. Aquifers are so depleted in sandy parts of the state that the
local growth industry is sinkhole insurance.

This is how the confused dream of compassionate
conservatism-exemplified by former Governor Jeb Bush-played out: that
the best way to "protect" the environment is through economic growth
and stifling dissent by the way.

So it is no surprise that Florida is hip-deep in red algae washed
ashore, furious environmentalists, and the dominant concern of the
Chamber of Commerce is; can't we just get the machines, and the
graders, and the nail guns going again?

No, we can't. Not until there is a discussion about what forms of
economic growth can sustain and nurture a democracy that is wobbling on
its knees.

Of course Americans are so conditioned to passivity bred by the triumph
of the inconsequential that accountability has more or less disappeared
as an anchor for democracy.

But nothing hurts like a recession or worse. Now is the time for
dissent.

Incipient anger is rising in the United States, but the deep stresses
underlying the world's largest economy, transformed by the force of
globalization, remain poorly observed.

Here is the simple version: as jobs and manufacturing poured from the
American heartland to low-labor cost nations like the tide ebbing at
the Bay of Fundy. (click here, for a visual representation.) The US
economy became increasingly reliant on growth generated by housing and
construction: a stool built on two legs.

This was the genius of the Republican gains in Congress and control of
the White House: the growth machine provided political contributions
through the funnel of construction and development, primed by historic
low interest rates of the Federal Reserve and marginal, ineffective
supervision of lending practices and financial derivatives.

Critics of this point of view argue that the dispersion of risk,
through derivatives, is a net good to society, making global economies
safer: that is only true if risk is clearly priced. But there are so
many external costs of growth-like carbon emissions-that are not
included in pricing risk, that even if financial derivatives were
clearly packaged, the underlying models still won't work.

Others argue that technology and productivity gains represent important
fuel for economic growth: the third leg of the US economic stool.

But technology gains serve the American consumer whose purchases are
determined, mostly, by preferences in housing and construction.

The epitome of these preferences, suburban sprawl, is described by
advocates as "what the market wants". Clearly, humans were not created
to live in zero lot line subdivisions: suburban sprawl is what the
market can easily finance, not what the market wants.

Patterns of construction and development in the US act in the same way
as chutes for cattle: steering, herding, moving Americans into strip
malls, platted cul de sacs, and cities serving the purposes of
automobile executives and not ordinary people who haven't been blessed
by sales training programs, seminars, and other techniques to market
features as benefits and wants as needs.

In this sense, the gains to the economy from technology and
productivity represent a better-designed chute.

That the two-legged stool has been sold as a three-legged stool is no
less remarkable than the conversion of an ordinary mortgage by Wall
Street bankers and fresh-faced MBA graduates into structured financial
derivatives worth ten or a hundred times the original value.

Democratic and Republican candidates to be president might be vaguely
or even acutely aware that the crisis in the nation's housing markets
has something to do with billion dollar bonuses garnered by Wall Street
executives goading armies of lawyers, consultants, and engineers; teams
that conjured an ocean of debt from the hard labor of American
homeowners and workers, not to mention unions largely oblivious, as
unions are to any other way of doing business.

"An unstoppable force!" is what Jeb's former campaign finance chief, Al
Hoffman, called the growth machine to the Washington Post in 2003.

And even though the engine of growth in Florida is sputtering as
elsewhere, even though Al Hoffman is ensconced in a sinecure
ambassadorship in Portugal, even though Hoffman's company, WCI
Communities, staggered into an agreement earlier this week with
corporate raider, Carl Icahn, even though another sinecure ambassador,
from the era of George HW Bush, Charles E Cobb Jr., is vice-chairman at
WCI; no one became king, recently, by arguing as prince that something
is rotten in the heart of Denmark.

And so, let dissent help interpret what is happening in world financial
markets.

Firstly, understand that attributing the world-wide credit debacle to
lowest quality home mortgagees, represented as "subprime", is a red
herring.

If the credit derivative problems are contained to homeownership-and
that's emerging to be a big 'if'-who is really of consequence are
America's paper millionaires, numbering according to Marketwatch in
2005, 8.9 million people. Many of these paper millionaires are readers,
wondering if they have bitten off in housing expense more than they can
chew.

Since so much of the American economy is wrapped up in housing and
construction, whether these paper millionaires are valuing their
holdings as real estate wealth or stocks of companies like Home Depot
or Countrywide Financial or Thornburgh Mortgage: the pain of the paper
millionaires has yet to be accounted for in the presidential campaign.

Secondly, be sure in the knowledge that the reading public is only
getting half the story as world-wide financial markets pulse with
uncertainty.

We know as much about what is going on today in consideration of the
risk to the global financial system as the public knew about Jekyll
Island in 1910 or Quinn the Eskimo in 1967.

The problem of financial derivatives is a lot like taking several
origami models made of paper, unfolding them, laying them on a single
plane, cutting them into four squares, shuffling them, and asking teams
of lawyers to put them back in their original shapes as cranes or
butterflies.

Wall Street appears to believe that lowering the key interest rate of
the Federal Reserve is a better task. It certainly is an easier one.

What's wrong is that the federal government allowed financial
institutions to spin without friction solid assets into a confection of
liabilities so complicated, so vast, so difficult to unwind, that world
credit markets are in a "coalition of the willing" whether they want to
be, or, not.

The world's biggest sumps for excess liquidity-China and oil producing
nations-are struggling to keep their own demons in check.

That a Fed interest rate cut, or even a series of cuts, could lure the
American consumer from his or her home into more debt--or help to elect
the next president of the United States--makes very little sense.