Economy- macro

Mack has been busy, busy, busy, writing papers and giving talks and fleshing out his analysis of the problems in our speculative economy.

I love to talk with Mack about these things, because while he goes off into concepts and jargon that I am completely unfamiliar with and cannot directly address (securities, commodities, these are his things), we eventually come to places where I feel solid footing, and we tend to agree on end points.

Anyway: we've been talking a lot about structural problems, and I want to get into them in more depth here, but I have to read and think first. My essential position is what I've written about before: betting the proverbial farm on deregulation and rampant speculation, and this is deeply flawed, and we keep acting suprised every time our bets are called and the bank can't pay.

As we autopsied dead savings and loans, we were absolutely amazed by the number of ways thrift rogues were able to circumvent, neuter, and defeat firewalls designed to safeguard the system against self-dealing and abuse. One of the favorite methods was to link up like-minded thrifts in the daisy chains through which they could circulate inflated assets and hide their rotten loans to each other and to each other's customers from regulators.

Banks that need to get money to a troubled securities affiliate will do exactly the same thing. By linking up three or more banks, each with its own securities subsidiary, a daisy chain will facilitate a round robin of reciprocal loans in times of need. Then, the next time we have a Black Monday on Wall Street, this daisy chain will swing into action as a handful of mega-banks try to prop one another's securities subsidiaries and their customers as the market plummets.

In such a scenario, billions of federally insured dollars will disappear in the twinkle of a few program trades.

That will happen, not might happen but will happen, and when it does these too-big-to-fail banks will have to be propped up with Federal money. In the smoking aftermath, Congress can stand around and wring its hands and give speeches about how awful it is that these bankers violated the spirit of the law, but once again, the money will be gone, the bill will have come due, and taxpayers will again be required to cough it up.

That was testimony given before congress in 1991 by Stephen Pizzo, and recounted recently by Andrew Leonard on his (very excellent) blog, How the World Works.

If you're looking for some homework and you want to stretch your brain, try some commodities reading. Here's Mack.