Karl Denninger, "More Validation for Tickerguy: Consumer Debt"
"More Validation for Tickerguy: Consumer Debt"
by Karl Denninger
by Karl Denninger
“Now this is funny... “Federal policy makers, they suggest, should broker what amounts to an out-of-court settlement between institutional bond investors, banks and consumer advocates - essentially, a "great haircut" to jumpstart the economy. What some are envisioning is a negotiated process in which cash-strapped homeowners get real mortgage relief, even if it means forcing banks to incur severe write-downs and bond investors to absorb haircuts, or losses, in some of the securities sold by those institutions. "We've put this off for too long," said L. Randall Wray, a professor of economics at the University of Missouri-Kansas City.”
You're just figuring this out now? What was your clue? Did you look at one of my charts, perhaps?
Like, for example, that one? There's no need for a "grand haircut" - there's just a need for the government to quit allowing the lies to continue onward in the balance sheets of pension funds, banks and others.
You know, the "Kanjorski scam"? Yeah, that. Reverse that and it's over. Yes, we have to close banks if we do that. We have to admit the truth. We have to admit that pension funds who claimed 8% "growth" over long periods of time were pushing a pyramid scheme that was impossible to maintain and thus those "benefits" will not be paid. We have to admit that the claims made to retirees and soon-to-be-retirees as a sop to allow our "2% inflation" were also lies, and that we thus must stop institutionalized inflation.
We have to admit that trees to do not grow to the sky and that the fundamental nature of exponents is that as long as debt grows faster than the economy you are in fact engaged in a pyramid scheme that must, mathematically, fail. And we must demand that those so-called "economists", central bankers and media personalities who pushed this meme for the last 30 years come on-air, in person, and apologize for running this scam and the damage it has done to our economy.
Everyone pines about "moral hazard" but there is no moral hazard involved in truly fixing this. Moral Hazard only comes when you protect some of the people who should get screwed due to their own bad behavior. Protect nobody except one group: Bank depositors under the FDIC limit.
Everyone else? You made your bets, you loaned money to people when you bought their bonds, and you should face the consequences. Our nation's refusal to allow the market to work and clear bad debts dates to the 1980s bailout of Continental Illinois. And yes, it was a bailout - they got broken up and taken over, but their bondholders were protected. It is that singular event that marked the sea change. The belief was instilled in the institutional and individual investor that if you loaned capital to a bank and they did something stupid - or even criminal - with the money, you would not lose anything.
The solution to this problem is simple, it is elegant, and it is mightily-resisted by the monied class, because they believe they're entitled to be protected from their own stupidity.
You know, the "Kanjorski scam"? Yeah, that. Reverse that and it's over. Yes, we have to close banks if we do that. We have to admit the truth. We have to admit that pension funds who claimed 8% "growth" over long periods of time were pushing a pyramid scheme that was impossible to maintain and thus those "benefits" will not be paid. We have to admit that the claims made to retirees and soon-to-be-retirees as a sop to allow our "2% inflation" were also lies, and that we thus must stop institutionalized inflation.
We have to admit that trees to do not grow to the sky and that the fundamental nature of exponents is that as long as debt grows faster than the economy you are in fact engaged in a pyramid scheme that must, mathematically, fail. And we must demand that those so-called "economists", central bankers and media personalities who pushed this meme for the last 30 years come on-air, in person, and apologize for running this scam and the damage it has done to our economy.
Everyone pines about "moral hazard" but there is no moral hazard involved in truly fixing this. Moral Hazard only comes when you protect some of the people who should get screwed due to their own bad behavior. Protect nobody except one group: Bank depositors under the FDIC limit.
Everyone else? You made your bets, you loaned money to people when you bought their bonds, and you should face the consequences. Our nation's refusal to allow the market to work and clear bad debts dates to the 1980s bailout of Continental Illinois. And yes, it was a bailout - they got broken up and taken over, but their bondholders were protected. It is that singular event that marked the sea change. The belief was instilled in the institutional and individual investor that if you loaned capital to a bank and they did something stupid - or even criminal - with the money, you would not lose anything.
The solution to this problem is simple, it is elegant, and it is mightily-resisted by the monied class, because they believe they're entitled to be protected from their own stupidity.
This is the cause of literally everything what has gone wrong. Borrowing money is supposed to be expensive in real terms. Nobody ever acts intentionally in an economy to make a loss; they all aspire to make a profit. Therefore, absent government interference lending will always be done at an interest rate that compensates for the risk you will not pay, the time value of money, an implicit deflator on the expected rate of currency debasement (inflation) and a profit.
Central banks and governments can distort this process, and have. That has to stop. Part of making it stop is removing the protection that bondholders have and collapsing the pyramid schemes. Yes, this will result in house prices cratering - probably to 1x incomes. If you don't own a house this is good, not bad. If you own a house as a durable place to live, you don't care. If you own a house as an "investment" you did something stupid, you deserve to lose money, and you will. If you're*****ed about this go talk to the industry groups that sold you the claim that houses were investments with imputed long-term returns. That was always bullcrap - a house is and always has been a consumer durable good - period.
If you're over-levered - you took on debt with no ability to pay except through selling to a bigger sucker - you're going to go bankrupt. You should go bankrupt. Bankruptcy clears your debt, and forces the lender to eat the loss they made by foolishly loaning you money that you couldn't pay. They had superior information and made the loan anyway, and deserve to suffer for it. You also did a dumb thing, however, and do not deserve to profit from your own foolishness.
The solution to this problem is this simple and yet this difficult, as it means telling those who have managed to bribe, extort and cajole government and quasi-government actors that they're not going to get away with it any more, and that we are all going to have to recognize the embedded and hidden losses we've been pretending don't exist.”
Central banks and governments can distort this process, and have. That has to stop. Part of making it stop is removing the protection that bondholders have and collapsing the pyramid schemes. Yes, this will result in house prices cratering - probably to 1x incomes. If you don't own a house this is good, not bad. If you own a house as a durable place to live, you don't care. If you own a house as an "investment" you did something stupid, you deserve to lose money, and you will. If you're*****ed about this go talk to the industry groups that sold you the claim that houses were investments with imputed long-term returns. That was always bullcrap - a house is and always has been a consumer durable good - period.
If you're over-levered - you took on debt with no ability to pay except through selling to a bigger sucker - you're going to go bankrupt. You should go bankrupt. Bankruptcy clears your debt, and forces the lender to eat the loss they made by foolishly loaning you money that you couldn't pay. They had superior information and made the loan anyway, and deserve to suffer for it. You also did a dumb thing, however, and do not deserve to profit from your own foolishness.
The solution to this problem is this simple and yet this difficult, as it means telling those who have managed to bribe, extort and cajole government and quasi-government actors that they're not going to get away with it any more, and that we are all going to have to recognize the embedded and hidden losses we've been pretending don't exist.”
- http://market-ticker.org/
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