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Banbury Cross

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Post details: Thelma and Louise: the Wall Street Edition

Thelma and Louise: the Wall Street Edition

Imagine a bus riding on a smooth paved road. The countryside whizzes by in a comforting monotony, the engine contentedly purs and passengers are busy reading, napping, chatting, watching the scenery or munching on their Doritos. Quite an idyllic journey. But hidden from view, two clouds are looming just underneath the horizon: a few miles ahead the road suddenly ends at a steep cliff and the driver is personally motivated in maintaining or increasing the speed. Let's say that it has been arranged that his base salary is proportional to the reading on his speedometer. The edge of the cliff approaches. The driver could slow down, or even stop (reducing his salary rate to 0), but he could also step on it, and make a good use of the last stretch of the road for his personal benefit. If you wonder why he would engage in such self destructive behavior, let's just say he may have a golden parachute stashed in his side bag and that will spare him the unflattering impact of the ground. But here is the strangest part. Guess who is going to eventually pay for the totaled bus. Yep, you got it: the surviving bus passengers.

As the epic economic disaster unravels, many people wonder why the financial whiz kids on Wall Street didn't see it coming. Well, I suspect that they saw it, but chose to look the other way, as their remuneration was crucially dependent on the ever-expanding credit bubble. Their cold statistical models may have been marvels of risk assessment, but failed to take into account one elementary fact. Just as every Ponzi scheme reaches a saturation point, every credit binge sooner or later depletes the pool of credit worthy debtors and has to turn to lower rungs on the ladder of affluence. Venture capitalists become adventure capitalists and that is when the house of cards starts to tumble. If you need to rush meager-income fruit pickers into 500k homes in order to sustain the housing prices, then you either see what is coming or are monstrously incompetent.

Plenty of voices were warning about the impending catastrophe as early as 2005 - a presidential candidate Ron Paul or a host of independent economists (Roubini, Shedlock, Fleckenstein, Faber) to name just a few. But the economic elites were so infatuated with the cash stream generated by the late real estate bubble that they kept kicking the can down the road, hoping that the laws of economy and common sense will temporarily be suspended. CEOs became heavily invested in their own pipedreams, regulators were lulled into complacence by the glut of good times, managers at all levels depended on the commissions from exotic and poorly understood financial instruments, politicians were happily cashing in fat contribution checks from the whole real estate complex, consumers grew more and more addicted to drinking the lethal credit cocktail, and insurers were insuring away, protected only by the good faith that bad things never happen. They all decided to keep the pedal pressed to the metal as long as they saw road underneath them.

So here we are - dashing down a scree, having lost control of our little bus and not really knowing what awaits us. Will there be a merciful meadow at the bottom, where we tumble a few times and come to a complete halt against a robust haystack or will we hit an unforgiving rock and ruin all that was built by generations before us? Judging by the speed with which the global financial system unravels, we will know very soon.

(By the way, what exactly is the purpose of this global financial system? Can't we just have a transparent network of local banks that take deposits from people and lend money to enterprises with sound business plans?)


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