Article: Granularity

With the Masters over and the pirates at bay for the moment, with the tea-baggers about to be undone by the inevitable psycho sending something else in a tea bag to his governor or representative, with the Republicans sucking up the bailout and complaining about the damage to their ideology, with all that Spring brings, we are now getting a closer more detailed look at what is happening in finance, the granularity of the crisis, if you will. Of course, we are not getting the names, dates, and places where our bailout monies are going, yet, but that will be a matter of the public record in good time. Graham Bowley and Louise Story had an excellent article in the NYT describing the rats leaving their nests in the banks and brokerages. It seems that the exodus from the failed companies began early and is reaching epic proportions. It seems that the CEOs and Geithner were right that they might leave. It seems like they believe we do not know their names and where they have gone and that we cannot prosecute. Perhaps they took the evidence with them, or perhaps they are the only ones who truly understand it. We will get a better look than this in the fullness of time, I think. If Obama has shown us anything it is that he does not like being double-crossed or made a fool of. Anyway, what the article does not say is that with the so-called "stars" arranging themselves into new constellations, the reasons for keeping Tim Geithner around are fewer and less compelling. Larry Summers is dead meat, like the pheasant in "Shogun" curing in the sun. But, then comes another article in The New Yorker Magazine entitled "Cash for Keys" by Tad Friend [only the abstract is available currently], also a very interesting piece detailing life on the other end of the stick, as banks handcuffed by the paradox of deleveraging are deleveraging against one another and themselves, forcing folk of various miens and measures onto the streets or into confrontations with sheriffs and liquidation realtors. It is a pure look into how the system really works, and the system is crude and rude all over again. Frank Rich in the NYT Saturday writes of the manic Jim Cramer, whose crystal ball had given up pessimism for Lent and declared the Depression to be over. The only thing "over" is Jim Cramer, and Larry Summers, who as Frank clearly points out is past due and becoming something of an odor around the West Wing. Let us hope that no one loses their head for chopping down this pheasant. Meanwhile, if you watch carefully, the rich are moving their money and, sometimes, themselves. My wealthy friends provide me with interesting tidbits from their advisers, and the advisers are screaming bloody murder about inflation, deflation, gold, China, and buying their new books. Their main worry, of course, is a ruinous inflation that will take generations to heal. That is the mantra pried out of the ruins of their ideology. The other main worry, of course, is a ruinous deflation which will sap the vigor out of any wealth and make all debt truly burdensome, particularly the national debt. You hardly ever hear the prophets of inflationary doom talking about this, and at least one I read says the results are the same. The results are drastic and that's about all they have in common. Ruinous inflation and ruinous deflation are both ruinous, but your country and your personal life will be much, much more difficult with deflation, and the reason for that is the nature of cardinal numbers, the closer you get to zero the closer you are to an absolute standstill. From the point of view of the federal government, protecting against impossible costs of current debt, deflation is to be avoided at almost any cost. The possible cost will be an inflation that gets out of control and, like the real estate market plunging below its true bottom, will soar out of sight, reminding all the brand new historians that are abounding these days of Weimar Germany. The possibility is there, of course. China could do something stupid, the EU could do something, OPEC and Russia could do something to upset the controls on inflation. Truly, it is a gamble and yet the odds are pretty good that a reasonably sharp Fed Chairman, Bernanke, working with the Treasury Secretary in the autumn can pace the creation of fiat dollars with the deflation indexes. It won't come out even. There's almost no chance of that. There's damage already done the cost of which cannot be ameliorated by inflation or anything else but sucking it up and moving on. That's easy to write, but much more difficult to live through if you have already lost your job to the deflation. Democrats would be wise to understand this and find that posture for the mid-term elections that honestly shows they are the ones who understand that damage and do something about it ... as opposed to the Republicans who staunchly believe that the cure is a good ole whuppin' for everyone in sight for the next half a decade and then, with the "chaff" separated out, the economy will be cleansed. It has a Biblical ring to it, doesn't it! That's not a coincidence. JB