The cover story in the March 25, 2009 Financial Times discussed the conundrum created by the ill-conceived FDIC and Federal Reserve “Toxic Asset” purchase program. By establishing a heavily discounted “fair market” reverse auction price for these assets, reserve liquidity required by banks post sales will actually need to be enlarged in a market where capital flows are already severely constrained. It came as no surprise that neither Citi nor Bank of America would comment to FT on this fly in the ointment. It came as no surprise that the market celebrated the government’s plan with the same lack of critique that they accepted, well…, no-doc loans, CDO, CDS, TARP, and any other acronym you can imagine and the market lurched forward on shrilled enthusiasm that we may have turned a corner.
Well folks, we haven’t. As the AIG bailout remains a diaphanous money-laundering exercise to pad CDS alleged counterparties at the taxpayers’ expense (the Treasury couldn’t officially just give them money), so the “Toxic Asset” program is a less-thinly veiled racket that, in the final analysis, may temporarily create the illusion that the Federal Reserve and FDIC are not as insolvent as they actually are. After all, as a partner in the purchase of these heavily discounted “assets”, the resulting accounting scams that become options to create illusory variable value assets for both the Fed and FDIC come at a critical time in both organizations’ histories. And the best part about this is that the newly constructed Bair, Bernanke & Geithner LP Hedge Fund is that Congress has no mechanism to oversee or control its actions. Seldom, if ever, have so few been granted such unsupervised control. After all, Congress is only now considering whether it should regulate hedge funds while the Executive branch of government is creating the mother of all hedge funds! And, are we surprised that the same fund managers who tanked billions of dollars of managed funds in the now discredited, careless CDO and CDS mess are stepping to the front of the line saying that they’re in on this scam?
While I’ll write more on this linguistic cultural observation, I thought I might introduce a tiny window into an observation which may bear deeper consideration. We may benefit from a consideration the terms “credit” and “debt” as I believe that has been in the blurring of these important words and their attendant constructs that we may have lost our way. Credit (from the Latin term meaning to confide or entrust), a term that implies a productivity or character based future option, was created to provide capital in the present for a bountiful, more than adequate return derived from accretive value. A farmer received credit in the spring which would be repaid – with return – from the excesses of the harvest. And a letter of credit – made ubiquitous by the Knights Templar – was a conveyance of trust ensuring that there was adequacy in provisions at either end of a counterparty exchange. Debt, on the other hand, was an instrument of scarcity and bondage. Inherent in debt was the control by those who minted the lendable resource over those subordinate to them by virtue of scarcity or station. Anecdotally, you never heard of a credit prison did you? In our less-than-a-full-century addiction to balance sheets, we blurred the line between debits (not to be confused with debts) and credits. And when we took the industrial revolution’s balance sheet, for which this accounting innovation was a means of measuring industrial output efficiency, and applied it to the financial markets, we fully confounded the notion of credit and debt.
When the Nixon administration formalized our modern belief that without debt markets, neither our currency nor our wonton consumption could be supported, we lost our way. When CNBC, CNN, Fox News and others say that we need to open the credit markets, unfortunately neither they nor the politicians for whom they serve as mouthpieces get it. We haven’t had credit markets since we decided to discontinue our productivity-based GDP in favor of debt-ridden, knowledge and service-based consultancies which generate value in the immediate with limited future excess productivity and value. Our plan to repay our debt doesn’t come from an abundant surplus. Rather it comes from our ability to refinance. And that’s the bet that BB&G LP are banking on. In short, the whole system is wired to keep in place a dependency which, in a perverse sense, can only survive when consumers blindly spend themselves into ever deepening holes. The way this mythical Colossus falls is when one component of the scam disengages from the madness.
Last night on CNN’s Larry King, I watched Ed Norton promoting the energy-conserving hour long black-out known as Earth Hour scheduled for this Saturday evening. Let’s take it one step further and give the over-taxed raw materials of the earth a breather too. For one day, let’s agree to go debt free. Let’s learn from our religious friends (Mormons, Muslims, and others who fast routinely) to go a day consuming nothing save the gifts that nature has given. Spend nothing that you don’t have in your pocket. Finance nothing. Extend credit only when and where you know that more than adequate bounty is befalling a counterparty. And then watch to see the Colossus crumble. After all, if we cannot model a life free from the debt-laundering nonsense that has enslaved our leaders, we’re ill-prepared to condemn it.
And one more thing – look around your community and find someone who still makes things – a small factory, a bakery, a printing shop, a semiconductor facility, a steel mill, an artist – and spend a few minutes seeing what productivity is again. And then ask yourself – isn’t it time that America re-discovered the value of credit linked to a bountiful, productive future?