What is it?

By James Howard Kunstler

Guest writer for Greg Hunter’s USAWatchdog.com

The New York Times ran a story of curious import this morning: “Mel Gibson Loses Support Abroad.” Well, gosh, that’s disappointing.  And just when we needed him, too. Concern over this pressing matter probably reflects the general mood of the nation these dog days of summer – and these soggy days, indeed, are like living in a dog’s mouth – so no wonder the USA has lost its mind, as evidenced by the fact that so many people who ought to know better, in the immortal words of Jim Cramer, don’t know anything.

Case in point: I visited the Slate Political Gabfest podcast yesterday. These otherwise excellent, entertaining, highly educated folk (David Plotz, Emily Bazelon, and Daniel Gross, in for vacationing John Dickerson) were discussing the ramifications of the economic situation on the upcoming elections. They were quite clear about not being able to articulate the nature of this economic situation, “…this recession, or whatever you want to call it…” in Ms. Bazelon’s words.  What’s the point of sending these people to Ivy League colleges if they can’t make sense of their world.

Let’s call this whatever-you-want-to-call-it a compressive deflationary contraction, because that’s exactly what it is, an accelerating systemic collapse of activity due to over-investments in hyper-complexity (thank you Joseph Tainter). A number of things are going on in our society that can be described with precision. We’ve generated too many future claims on wealth that does not exist and has poor prospects of ever being generated. That’s what unpayable debt is. We have such a mighty mountain of it that the Federal Reserve can “create” new digital dollars until the cows come home (and learn how to play chamber music), but they will never create enough new money to outpace the disappearance of existing notional money in the form of welshed-on loans. Hence, money will continue to disappear out of the economic system indefinitely, citizens will grow poorer steadily, companies will go out of business, and governments at all levels will not have money to do what they have been organized to do.

     This compressive deflationary collapse is not the kind of cyclical “downturn” that we are familiar with during the two-hundred-year-long adventure with industrial expansion – that is, the kind of cyclical downturn caused by the usual exhalations of markets attempting to adjust the flows of supply and demand. This is a structural implosion of markets that have been functionally destroyed by pervasive fraud and swindling in the absence of real productive activity.
     The loss of productive activity preceded the fraud and swindling beginning in the 1960s when other nations recovered from the traumas of the world wars and started to out-compete the USA in the production of goods. Personally, I doubt this was the result of any kind of conspiracy, but rather a comprehensible historical narrative that worked to America’s disadvantage. Tough noogies for us. The fatal trouble began when we attempted to compensate for this loss of value-creation by ramping up the financial sector to a credit orgy so that every individual and every enterprise and every government could enjoy ever-increasing levels of wealth in a system that no longer really produced wealth.
     This was accomplished in the financial sector by “innovating” new tradable securities based on getting something for nothing. That is what the aggregate mischief on Wall Street and its vassal operations was all about.  The essence of the fraud was the “securitization” of debt, because the collateral was either inadequate or altogether missing. That’s how you get something for nothing. The swindling came in when these worthless certificates were pawned off on credulous “marks” such as pension funds and other assorted investors.
Tragically, everybody in a position to object to these shenanigans failed to issue any warnings or ring the alarm bells – and this includes the entire matrix of adult authority in banking, government (including the law), academia, and a hapless news media. Everyone pretended that the orgy of mortgage-backed securities, collateralized debt and loan obligations, structured investment vehicles, credit default swaps, and other chimeras of capital amounted to things of real value.
     Certainly the editors and pundits in the media simply didn’t understand the rackets they undertook to report. You can bet that the players on Wall Street made every effort to mystify the media with arcane language, and they succeeded beyond their wildest dreams. (Making multiple billions of dollars by trading worthless certificates based on getting something for nothing must be the ultimate definition of succeeding beyond one’s wildest dreams.) It’s harder to account for the dimness of the news media. I doubt they were in on the caper. More likely there is a correlation between their low pay and their low capacity. But I wouldn’t discount the fog of assumptions and expectations about the way the world is supposed to work that can disable even people of intelligence.
     I’m as certain as the day is long that the folks on Wall Street, from the myrmidons in the trading pits to the demigods like John Thain, with his thousand-dollar trash basket, knew that they were trafficking in tainted paper. Many of them deserve to be locked up in the federal penitentiary for years on end, and they probably never will because president Barack Obama lacked the courage to set the dogs of justice after them and now it is too late.
     The most confused of any putative authorities are the academic economists, lost in the wilderness of their models and equations and their quaint expectations of the way things ought to go if you can tweak numbers. These are the people who believe with the faith of little children that if you can measure anything you can control it. They will go down in history as the greatest convocation of clowns ever assembled, surpassing all the collected alchemists, priests, and vizeers employed in the 1500 years following the fall of Rome.
     It’s harder to tell whether the elected officials and their appointees in sensitive places like the Securities and Exchange Commission and the FBI had a clue as to the scale of misconduct in the financial sector, or if they were bought off plain and simple, or just too stupid to understand what was going on all around them. The term “regulatory capture” provides valuable insight. How could Christopher Cox at the SEC fail to notice the stupendous malfeasance in the mortgage-related securities rackets. Why isn’t he working for fifty cents a day in the laundry of Allenwood Federal Correctional Facility? Why is the grifter of Countrywide mortgage favors, Christopher Dodd, still free to guzzle the fabled bean soup in the Senate lunch room? I could go on in this vein for two hundred pages, but you get the drift.
     The collective failure of authority, whether of intention or oversight or mental deficiency boggles the mind. And it leaves us where we are: in a compressive deflationary contraction, a.k.a. the long emergency.  This is not a cyclical recession. It’s the end of one thing and the beginning of another thing, another phase of history in which people will have to learn to live differently or perish. I’m convinced that just about very elected official who can be swept out of office will be swept out of office – even if their replacements turn out to be a very unsavory gang of sadists and morons who will certainly make things worse.
     But these dog days of summer nobody will be paying attention, even as the markets themselves roll over and puke, as I rather imagine they will between now and Halloween, if not next week.
     P.S. I have not come to any conclusions about the fate of the Macondo blow-out and the claims of Matthew Simmons, though I have certainly got a lot of mail about it, some of it very intelligent. The BP oil spill has vanished from the news headlines again as the world waits for the final push at the relief wells. We do know that we are entering the heart of the hurricane season and that will make for some excitement.
This article was reprinted with permission of Mr. Kunstler.  To read Mr. Kunstler’s bio click here.  Click here to go to Mr. Kunstler’s web site.
A sequel to James Howard Kunstler’s 2008 novel of post-oil America, World Made By Hand, will be published in September 2010 by The Atlantic Monthly Press.

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  1. John Bernard

    This article is very entertaining, even though the horse has bolted. I am always amazed and bemused by academics and leftist nuts who yearn for the economic days of the the 50’s and 60’s. The idea that prosperity was the result of unions and confiscatory taxes is near and dear to their hearts. They are morons who know nothing of history. Mr. Kunstler nails it. The rest of the world was destroyed by World War II. In effect only the USA had the productive capacity and gold reserves to ensure prosperity.

    Yes, the basic tax rates were very high, but generous deductions reduced the effective rate to something like it is today. I remember the late 50’s we hit a bump known as a recession; panic ensued. Kennedy reduced taxes and things began to return to “normal”.

    Vietnam broke the bank, fiscally and as it turns out morally. The US has never recovered from that divisive time. I am not sure I agree that the swindling started then but I wouldn’t be surprised. I do know that it was not possible to buy a house without a large down payment unless using a VA loan.

    I attribute the criminal credit and banking period’s birth to the Carter era with the Community Reinvestment Act. That and the difficulty in coming to grips with the racial problems have crippled the economy since. No doubt Mr. Kunstler is correct in many of his assertions and I am afraid there is more duplicity than stupidity at work.

    I spent many years in the communication industry and during that time our government encouraged the out-sourcing of production to boost the economies of Asia. Of course this has backfired as most government programs do as they are based on theory not experience.

    The only saving grace is that as the left mounts their dream of socialist conquest the USA is broke and no longer the wealthiest nation ever. It has been destroyed by left and right, most by human nature. The rest of us are left to pick up the pieces as best we can.

  2. Stephen Clifton

    That was an extremely well written article on our financial sector and how much of a sham it really is. IT’s ironic to me that our nation has grown so arrogant in becoming a “service economy” that we are too good to get our hands dirty. The whole time these people fail to realize that you can’t move the same money around in the nation and create wealth. It’s simply being swindled from the middle and upper middle class into investment banks. While they get richer by creating these “investment” vehicles the middle and upper middle class get poorer. While the banks loan money and get if off of their books through securitization the taxpayer is left to foot the bill when these investments fail. Profits are private while losses become public.

    I disagree with one point on this article. I do happen to believe the bankers who have perpetuated this mess are the ones who have gained the most from it and are likely to have in some form or fashion engineered it. If only 2 people get together and create a plan to engineer something like this it can be called a “conspiracy”. Simple as that. And if you follow the money you can quickly see that campaign contributions point this direction.


  3. Diane Carol Mark

    He says in the 5th para. that we as a nation lost production of goods, and although we did decline in some industries, other new industries have emerged. I would cite all software, biotech, films, the gaming industry, green products, and more.

    It’s true that the financiers have behaved disgracefully.
    🙂 D

    • Greg

      Good points.

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