Bad financial paper, like rust, never sleeps.
The tropical paradise of Hedge Fund Island might seem tranquil for now, but worms are turning in the dumpsters of securitized alphabet debt (MBSs, CDOs, CLOs), and the odor blowing around the world from all this garbage grows stronger by the day in places like New York, London, Tokyo, and Shanghai.
Transfusions of loss-cover loans from the Federal Reserve and other central banks have enabled the Big Fund Boyz to spend the late summer weekends rubbing elbows in the Hamptons with transcendent beings like Diddy and Kelly Ripa. The Boyz gather along the dunes at twilight, bongs in hand, to gaze at Hedge Fund Island, looming offshore in the gray Atlantic mist, and they notice something alarming: the island, which the BFBs built themselves over the past ten years, seems to be either floating out to sea or perhaps just sinking. In any case, it’s getting smaller.
The scores of billions of dollars, euros, and other monies that central banks have recently poured into the sinkhole of losses will only paper over the essential problem for another few weeks, at most. The damage to global structured finance has been done, and there is a widespread, belated recognition that it’s not possible to get something for nothing after all. When you hold a lot of paper that represents nothing and put it up for sale, nothing will be offered for it. What a surprise!
Now the task of people with power to act in the finance sector—which itself may be a conceit at this point—is to manage the rapid dissolution of hallucinated wealth in such a way that as few people as possible notice that x-trillions in dollar-denominated pixels have vanished from the hard drives. Sooner or later, though, millions of shlubs dependent on pension checks, annuities, or monthly payouts of one kind or another will notice that something has stopped landing in the mailbox. Repo men with bad haircuts and tattoos will be seen driving other peoples’ cars to the auction barn. Young adults accustomed to thrilling paydays will discover that their services are no longer required in the mortgage origination business and will instead have to memorize dozens of excruciating formulas for different sorts of beverages more or less based on coffee. Millions of realtors will enter second childhoods as they move back in with Mommy and Daddy, who themselves must now change their plans, since it is no longer possible to flip the 1962 raised-ranch in Hempstead to buy that condo in Boca Raton.
Reality is biting hard. As with the little marmot caught in the gray wolf’s jaws, the body simply surrenders and God’s grace of physical shock softens the translation from joyful creature to dead meat. That is where we are at the threshold of autumn, 2007. Digestion follows. The Big Fund Boyz and their minions will end up as mere worm castings in the global compost heaps.
Terrible shocks are going to rip through the socioeconomic fabric of the U.S. as we turn the corner into the darkening quarters of the year. The fiasco of bad debt won’t be contained. The choices for those who find themselves financially underwater will be 1.) liquidation, 2.) bankruptcy, or 3.) destroying whatever remains of confidence in the U.S. dollar in order to erase debt by hyperinflation. People holding power don’t like the first two, which translate into Depression (let’s make it a capital “D.”) When a nation turns into a fire sale from sea to shining sea, and bankrupt citizens don’t have enough cash on hand to buy things that have become desperately cheap, well, that’s a Depression. Everybody from Fed officials to news editors has lately favored the softer term “recession” because it implies a mere pause in the inexorable march of progress toward economic nirvana. But that’s not what we’re heading into this time.
There will be so many assets up for sale across the U.S. in the months and years ahead that the very sun in the heavens will take on a K-Mart blue-light-special glow. From houses with miles of granite countertops, to Maybach automobiles, to cabin cruisers that burn 30 gallons of diesel an hour, there will be so much slightly used (or barely “pre-owned”) stuff for sale that manufacturing another unit of anything (or importing it) will seem like a sick joke. This leads to a deadly downward spiral of what the realtors have cleverly termed “new pricing.”
Of course, that creates a problem for the masses who theoretically support themselves by working to produce new things of value to be bought and sold. But let them watch Nascar! Let’s take whatever little remains of our tax revenues (or bonding ability) and build a dozen more speedway ovals around the country and use up the last remaining six inches of Midwestern topsoil to make ethanol for the race cars and shower the fans with Little Debbie snack cakes as they count the laps. Bring on Britney and Paris at halftime (Do they have halftime in Nascar?) and let Justin Timberlake cut their hearts out on the hood of a Dodge Avenger. Believe me, the public will be so deliriously entranced by the spectacle they won’t notice anything else going on in the background of our nation.
I pause for breath and apologize for what has been a rather immoderate spewage of mixed metaphors and facetious conceits, but the extreme abnormality of events has just got me going.
Let’s turn now to what this all means for American society and its prospects. Beyond the murk of financial jargon, the issue will really come down to matters of culture and national character. Are we building a society with a future? Does our culture affirm life or yearn for destruction? Are our daily ceremonies meaningful or empty? Are our dreams consistent with what reality has to offer? Can we look in the mirror and say that we are upright people?
I think we are in trouble. Traveling around the country, you can read it in a thousand things—in the miserable sprawlscape wastelands that have become our everyday environments; in the astounding obesity and ridiculous demeanor of adults lumbering down the airport concourses in oversized nursery-school togs; in the tattoo and piercing craze among people who believe they will never reach a stage in life where others might judge them by their self-mutilations; in the depravity of wealth deployed in Las Vegas, Hollywood, and East Hampton, where anything goes and nothing matters; in the meth-crazed trailer enclaves of the heartland; in the warrior-culture-as-entertainment confusion of hip-hop gangsterism; in the bottomless cloaca of TV “reality” programming…
Our adventure in Iraq is self-evidently a troubling thing. But what astounds me about our intellectual classes is how they complain about our military presence in the Middle East while they enjoy lifestyles based utterly on supplies of cheap oil imported from the Middle East—and therefore on our continued influence over affairs in that region. Missing entirely is any sense of consequence, and even more particularly of what the overall situation means for our behavior at home. Based on how we live, we got the war we deserve. We’ve run out our string of stunts and tricks in the money rackets. We’ve spent our political legitimacy. The rest of the world will strive mightily to get free of their obligations to us, including their respect for the value of our currency. Events are in control, not personalities.
I doubt we can give up our current behavior without going through a convulsion. The psychology of previous investment is, for us, a force too great to overcome. We’re stuck with the bad choices we’ve been making for half a century to misallocate our resources in an infrastructure for daily life that has no future. Like the addicts we are, we will sell the birthrights of the next three generations in order to avoid changing. We will blame other people who behave differently for the consequences of our own behavior. We will not understand the messages that reality is sending us, and we will drive ourselves crazy in the attempt to avoid hearing them.
The meta-cycle of suburban development, including “housing” and all its accessories in roads and chain stores, is hitting the wall of peak oil. The suburban build-out is over. This will come as an agonizing surprise to many. The failure to make infinite suburbanization the permanent basis for an economy will rock our society for years to come. Hundreds of thousands of unemployed men with pick-up trucks and panoplies of power tools will feel horribly cheated. I hope they don’t start an extremist political party when the repo men come to take their trucks away.
Even under the best circumstances, with a nationwide change of heart and really wise leadership, America would find it difficult to make the necessary changes that new reality requires. Of course, reality will force us to make these changes whether we’re on board with the program or not. The only variable is how much turmoil may ensue in the process. If we resist doing what reality commands, our trouble is certain to be worse.
What does reality command? Well, first of all—and especially for the benefit of the enviro-progressives I have met recently, who want gold medals for buying hybrid cars—we’d better drop the idea that there is any way whatsoever to preserve our system of happy motoring. The car as a mass-market phenomenon and enabler (dictator, really) of all our daily life arrangements is finished. We’d better find something else to talk about or the American future will amount to little more than a Chinese fire drill on an increasingly unfixable freeway. I am hugely worried that even the intelligent and educated fraction of our society cannot focus on anything but how to keep all the cars running. A failure to drop this, and move on to more practical endeavors, will lead automatically to a failure of reasonable politics. It is already manifest in the abysmal failure of the candidates for president to address the looming oil-import crisis that will certainly be underway as soon as any of them is inaugurated.
Reality commands that we prepare to rebuild our small towns and small cities and downsize our gigantic metroplexes. Reality commands that we get serious about local food production and local economies. Reality commands that we rebuild the kind of public transit that people will be grateful to travel on. Reality commands that we prepare to restore our harbor facilities for a revival of maritime trade, using ships and boats that do not necessarily run on oil. Reality commands that we put an end to legalized gambling in order for the public to re-learn one of the primary rules of adult life: that we should not expect to get something for nothing.
The trouble we are seeing in the financial sector is largely a result of blowback from tens of millions of people who tried to get something for nothing. It is a circumstance that is now beyond the control of the Bushes, Paulsons, and Bernankes. Their intended-to-be-soothing utterances and actions will not hold back the implosion of cascading defaults and cumulative insolvency. A few poster children may be symbolically rescued to try to prop up confidence in this or that paper, but an awful lot of other people and institutions will just go down because of their own bad choices.
We will see the ruined people and feel bad about them, but we will not be able to undo what they have brought upon themselves. This is how the idea of moral hazard returns to a society that has lost its way. Meanwhile, there is too much to do for the survivors to sit around being crybabies.
Perhaps then we can start by taking all the mental effort we are currently wasting on the subject of cars and how to run them on fuels other than gasoline and focus instead on how to rescue our political institutions so that a truly informed public can reconstruct a bankrupt society into a living and credible republic.
James Howard Kunstler is the author of The Long Emergency and other books.