Karl Denninger, "Wall Street's Armageddon Chimera"

"Wall Street's Armageddon Chimera"
by Karl Denninger

"For how long will The American People tolerate the "do what I want or we will detonate the world" claims from "Big Business"? “If the U.S. dismantles our leading institutions, then it will destroy the American financial center, which is largely anchored in New York,” said Kathryn Wylde, president and CEO of the New York partnership. “It’s just frightening.” Arrest that woman and charge her with extortion and terroristic threats made against The United States.
Then ask who would like to be next.

I'm tired of this crap. All of America is tired of this crap. The claim is: “We're trying to rally the New York congressional delegation on an issue that again goes beyond regulation and starts making judgments about business plans that we don’t think are good for the New York economy,” said Wylde. Good for the New York economy eh? Let me guess: bank robbers argue that it's good for the economy when they show up at Tiffany's with their loot?

That may be true, but it is only true while the robberies are continuing. When the bank robber runs out of banks to rob, or gets caught, if Tiffany's is depending on the revenue from those robbers they are all finished as going concerns. “We will be active on Capitol Hill, pointing out the unique and important value large financial firms contribute to economic growth and job creation in the United States,” Rob Nichols, president of the forum, told "The Hill" this week.

The only thing "large financial firms" have contributed to over the last 20 years in The United States is the asset stripping of America and the taking of risk with other people's money, most specifically the taxpayer's.

Wylde’s group sent a letter to New York congressional lawmakers this week noting that financial, insurance and real estate business account for roughly 32 percent of New York’s overall economy. I'm sure John Dillinger made the same argument during his time of playing "spin the dial", but that doesn't mean a damn thing. Of course if I steal money from people and spend the proceeds of my outrageous behavior around a given local economy that part of the economy that I spend it in will prosper.

The people I rob, on the other hand, are most likely to have a slightly different opinion regarding the wisdom - and sustainability - of my activity. If the law refuses to put a stop to the blatant ripoffs, some of them might even resort to taking the law into their own hands and, where they can't manage to accomplish "redistribution", settle for vigilante justice. Debt expansion is not economic growth, and the job creation from debt expansion is fleeting, to be followed by lots of job loss that inevitably results from the carrying costs of that debt. Said job loss is permanent, while the "gains" are both local to New York and temporary.

The problem comes back to the graph I have repeatedly posted here:

Wall Street makes its loot by expanding that spread. But expanding that spread is both unsustainable (thus leading to busts) and asset-strips the rest of America. To the extent that the government permits this to occur and then bails out Wall Street it shifts the risk of the bust to itself, instead of forcing those who did the mathematically impossible to eat their own cooking and choke on it.

I have no problem with people taking risk. I have no problem with "financial innovation." I have a major problem with gambling with the taxpayer's money, I have a major problem with shifting the risk of failure to the taxpayer's balance sheet, exposing the government to failure (instead of some fat cat Wall Street firms) and I absolutely refuse to accept the lies, scams and fraud that are inherently necessary for any of these expansions of the spread between growth and debt to take place.

The market, left to its own devices, absolutely prohibits the sort of "excess profits" that Wall Street has "earned" over the last couple of decades. Risk-adjusted returns cannot exceed economic growth over time. It is mathematically impossible. This applies literally everywhere when one looks at the longer term.

Home prices cannot go up faster than incomes. Profits cannot increase faster than revenues. The risk-adjusted return on a given loan or basket of loans can never increase beyond the point of origination, as nobody works for free and spread between borrowing and lending costs is set at the time the note is negotiated. These are mathematical facts, not suppositions.

Oh sure, there are times when profit growth exceeds revenue growth - when large productivity gains are made, for example. But the incessant demand to continue to do that which is mathematically impossible has driven millions of jobs overseas to India, such as Capital One's "call center" for their credit cards, as the mathematical reality has collided with the demands of Wall Street. The continuation of the demanded "growth" then turns into a wealth-stripping game as the company, in an attempt to force continuation of the impossible, offshores its employees, firing those employees in the United States.

Likewise with "home price appreciation." Remember the famous Lereah Books:

The claims made by "pundits" and "experts' such as Mr. Lereah were mathematically impossible. But they were sold as "good for America" and when mathematical reality intruded the housing and lending industry responded with scams and frauds to keep the game going! OptionARMs and Liar Loans became the means by which the game could be kept alive for a little while - but that "keep alive" had catastrophic consequences for America as a whole, as it turned into a raw asset-stripping exercise for the benefit of the banksters on Wall Street.

We refuse to recognize this when it comes to housing even today, and have now shifted this garbage game into the FHA, which yesterday reported that its fund is now levered at more than 100:1, which is the exact same BS game that Fannie and Freddie tried to pull. Yet all three are now seeing ridiculous levels of default as the mathematics catches up with the BS artists.

Rip-offs, scams and frauds are against the law. Most of them are felonies, and with good reason. We need no new laws - it is and always has been against the law to rob people, irrespective of how you accomplish the robbery. Yet we refuse to treat those who make terroristic threats ("let us strip off the assets of ordinary Americans or we will detonate the world!") as identical to the guy in a ski mask that sticks a gun under a teller's nose. But the essence of what someone does is not found in whether they wear a ski mask or a $5,000 pinstriped suit. It is in their actions; if you extract money by force, whether that force is presented with a gun or by threatening to blow up the economy unless you get what you want, the fact remains that the foundation of that act is the threat of lawless action should you not get what you demand."

- http://market-ticker.denninger.net/