Saturday, March 12, 2011

I'm gonna Keynes ALL OVER YOUR FACE

"Too big to fail" is an unfortunate colloquialism for a very real problem called "systemic risk." We faced systemic risk in late 2008. I'll give you some examples of how our entire financial system nearly came to a screeching halt, which would have resulted in failure of dozens of major corporations, the loss of tens of millions of jobs, and a deep deflationary depression that would last for a generation.

The first thing that was happening is that people were buying so many T-bills that the yield was actually negative. For instance, they were paying $10,001 to the government for a guarantee that they would get $10,000 90 days later. This is more than just a quirk--negative bond yields indicate that people with large sums of money no longer trusted the banking system at all. They were stashing their money in the only place they thought was safe--the US government.

The problem with this move is that in times like this, investors see the negative yields on T-bills and freak out and flee corporate bonds as investments. This was a serious problem for a company like GE, which had several bonds due, but the bond market was in a condition called "ask only", which meant that NO ONE was bidding on bonds. This was very, very bad, as it meant they would probably default on the old bonds. Further, defaults on those bonds would cause any corporations holding those bonds to default on THEIR bonds, and on and on and on.

When people running business start seeing THIS happen, they start to hoard cash. Oh, wait, they're doing that anyway. This is, in fact, the cause of our protracted high unemployment. With businesses hoarding cash, they're not investing in new business and hiring people.

Anyway, you can see how this can rapidly get out of control. This is why the government had to intervene. It did so very poorly, which means if we face systemic risk again, we're probably fucked.

By the way, this phenomenon makes inflation and deficit fears 100% WRONG, and trying to reduce the deficit in the current financial environment is going to take us back in the direction of systemic risk, but a slower, grinding form that develops over months and years, rather than the imminent world of shit that we faced in 2008.

The reason it is wrong is that for deficits to be a problem, there has to be investment in the private sector that is "crowded out" by deficit spending. But there is nothing to crowd out right now. The MARKET HAS SPOKEN and it says that THE GOVERNMENT is the most attractive investment at this time, yet the leaders of our government are terrified of spending money on anything actually useful (that would be--GASP--SOCIALISM!) and giving their investors a good return.

The result will be deflation, economic stagnation, chronic unemployment, and increasing misery and rage and a risk of a fascist uprising.

This is Keynes 101, BTW. 19-fucking-33 all over again.

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