Two Points

The complexity of what is going on right now is pretty staggering. Still we can pick out a couple root problems: hubris (see yesterdays post) and the lion tamers syndrome (today). The Fed's reaction is going to be largely predicated by how pissed the foreign Heavies, who's money is tied up in these CDO/CDS/CD-everythings are, and how agitated Americans become. Let's look at the Lion Tamer syndrome, ask a couple questions, and then speculate on how this will affect american politics in the coming week.

It appears the problems at AIG were from the derivatives trading unit (which stems from the early 2000s) and not its insurance business. This is too text book for words. It’s Coca-Cola changing their formula after a hundreds of years of success and billions of dollars of profit.
Here’s a hypothetical. Say all the actuarial accountants at AIG decided they were tired of the Insurance Business and wanted to do something more exciting. So AIG launches a new branch: The Lion Tamers Branch . AIG purchases massive circus tents, lots of ferocious man-eating african lions, and then sends its accountants out with leather whips and chairs to tame the lions. Financial pundits would poo-poo this arrangement, they would say accountants know nothing about taming lions, and AIG should stick to insuring people (not participating in circus spectacles). Yet nobody seemed to mind when AIG launched its derivative trading branch. Hypocrisy runs deep.

And as the situation broadens and worsens and deepen and widens we get to see the hypocrisy of free market ideologues. It is as utopian a stance as socialism. Wall street runs amok but if things go wrong they turn to the federal government. When things are good the calls to de-regulate are deafening. When things go bad they go running home sobbing with scraped knees to mum and dad.

So it goes. Sometimes you're up sometimes you're down. I really didn't use to mind die hard capitalism. It was this notion of wealth generation which sold it for me. Sure Goldman Sachs was handing out bonuses bigger than the combined GDP of however many african nations you can name. But these casinos were really generating wealth. Right? All these complex financial instruments helped a rising tide of prosperity for all?

So where is the real tangible wealth? That golden bed rock.
It’s hard to see what is there and what isn't. This system managed to generate excessive liquidity and access to funds, but didn’t that just promote gross amounts of consumption? Massive suburban building projects, highway networks, and wallmarts aren’t real wealth... As I reflect on the opportunities which may have been missed by too much dogmatic laissez-faire compared to actual investment in infrastructure my worries abound.

But grand philosophical reflection comes later. Today we must exercise our right to speculate and mock.

Uncle Sam will be opening up his pockets again next week when Washington Mutual starts shaking. The whole secret to this mystical mess lies in the real value of what Uncle Sam has bought and what alot of other people are holding and desperately trying to get rid of. What is the value of the securities held by AIG, Bears Stearns, Fannie, and Freddie? That is the question and that is what markets will decide.

As the markets act the Fed reacts. They can't just let these banks all tank. If the do they will be getting some very pissed off calls from people wondering what happened to their guarenteed investment. China would not be cool with a 300 billion dollar default.

I only started following the world of mystical capitalism in July of last year. That was a funny period: like being on a big ship cruising along. Suddenly, in the middle of the night there was a bump and a long, worrying metallic groan, then silence. Everything seemed fine, the boat continued steaming along in the moonlight, but then a few people went below deck to survey the damage…

Anyway to contextualize and make relevant; The Wall Street Ship Wreck has got people talking. And because of John McCain’s yahoo stylings he doesn't look like the rationale sort of human being who should be in charge these days. Big Bad Barry Obama has had this served to him on a golden platter. When things go bad and people are panicked they veer left. After undergrad at Columbia and Harvard Law school politicking and demagoging from the left will be right up his alley. If he keeps getting angry this will translate into votes.