Inevitable Catastrophe: The Fruits of Moral Hazard on a Global Scale

Our political and economic systems are de-legitimizing themselves before our very eyes through massive fraud, manipulation, and pervasive governmental intervention on behalf of a small number of citizens and corporations. These current public policies intend to prop up bankrupt corporate entities, bloated bureaucracies, and endless narcissistic speculation on a global scale.

These observations are shared by a number of savvy and prescient bloggers outside the mainstream Media, Internet and propaganda machines that dominate our news and opinion. Of course one of them is Mr. Charles H. Smith. I featured him a few weeks ago in one of my TMV posts. His post of today is a good read on this subject, along with a few of his other posts from earlier this week. You can find the below-quoted text at http://www.oftwominds.com/blog.html.

Our economy cannot repair itself until our ruling elites in government and business admit the truth and stop trying to perpetuate a completely broken status quo. Unfortunately any sane policy changes won’t happen because too many well-connected and powerful people are invested in perpetuating various bubbles and avoiding any hard choices – whether it be fundamentally restructuring our economy or our Federal budget.

Inevitable Catastrophe: The Fruits of Moral Hazard on a Global Scale
June 24, 2011 – Charles Hugh Smith – Of Two Minds

Insulate participants from risk with policies like the Bernanke Put and you guarantee destruction of both the market and institutional legitimacy.
Identify the common characteristic of these three statements:

1. The Federal Reserve will never let the stock market decline, i.e. the “Bernanke put”

2. The Chinese government will never let property prices decline

3. The European Central Bank will never let Greece default

The answer of course is moral hazard: a person who is insulated from risk will have an insatiable appetite for risky bets because any gains will be theirs to keep but any losses will be covered by the central bank or government. The global financial authorities’ success in propping up assets (stocks in the U.S., real estate in China, banks in Europe, etc.) over the past three years has strengthened this asymmetric disregard for systemic risk into a dangerously quasi-religious faith that central banks and governments have essentially unlimited power to keep asset prices aloft via printing money, manipulation of markets and financialization of their economies.

What happens if markets crumble despite massive, sustained central bank and government intervention? The institutions that created moral hazard will be revealed as false gods, and that faith will be destroyed.

This loss of faith in the transparent functioning of markets will trigger what I call the de-legitimization of both the markets and the institutions which have essentially promised a permanent upward bias in assets.

We can see the global scale of this central bank-central State induced moral hazard in the tight correlation of all markets: the stock exchanges rise and fall in near-perfect unison, oil and gold rise and fall in parallel with equities, and so on.

As I have noted before, beneath the surface there is really only one trade in the entire global marketplace: all assets on one side and the U.S. dollar on the other. Correlation is not causation, of course, but it is more than peculiar that every decline in global equities is matched by a concurrent rise in the dollar.

Transparent, independent markets do not move in lockstep. The campaign to prop up all asset classes with implicit guarantees of intervention has completely insulated institutions and punters who believe that the Bernanke Put and the Chinese government’s equivalent prop under real estate is not just policy but a guarantee of god-like power.

Thus the gains from gargantuan speculative bets are yours to keep, and any losses will be made good by the central bank or government. This is the ideal recipe for misallocation of capital and speculative derangement on an unprecedented scale.

Moral hazard is the ultimate perverse incentive: it rewards all that is unproductive and risky and punishes long-term investment and prudent risk assessment.

A second feature of the global central bank’s moral hazard is the necessity to punish any punters who dare to bet against the banks’ manipulations. Thus Fed Chairman Bernanke could opine that oil would decline and presto-magico, a “surprise” release of oil by central authorities occurs the next day.

This second feature of central bank manipulation leaves a market devoid of short sellers and thus of any buyers as markets crumble.

Once trust is lost, it cannot be won back. Once participants’ faith in the markets and in the god-like power of central bank intervention is crushed, the markets will lose participation on a grand scale. The authorities’ favorite game, goosing asset prices to create an illusion of recovery and rising wealth, will be revealed as a global fraud.

Announcements of future interventions will be scornfully dismissed and thus they will have lost their power to prop up the markets.

All of this flows from the very nature of moral hazard: insulate participants from risk and give them unlimited leverage and “free money” to play with, and what you eventually end up with is catastrophe. There is no other possible end state.

I don’t have the excess funds, inside information, powerful computers, endless government insurance, and other appurtenances of those who dominate our Stock Markets. Therefore I haven’t traded stocks on any Wall Street exchanges since 1999. I would recommend most people avoid the same as the market is now a fixed casino where the house always wins and small investors are perpetually taken to the cleaners.

Of course real estate is not a viable investment opportunity. Keeping money in banks that pay 1% or less in annual interest is not a good alternative. Perhaps eBay may enlighten us on what collectibles may have short and long-term value. Endless speculation in and hoarding of precious metals may result in discovering we have bought and sold more on paper than they really exist on the planet, and none of them are edible or potable to sustain even basic human life.

As basic living expenses continue to climb but are not part of any governmental calculations of inflation, the fiat currency we hold in bank accounts and paper notes we carry around in our wallets continue to lose their purchasing power. This is not due to the lack of a gold standard but because of the systemic fraud and across-the-board mistrust of our banking, financial and political systems.

A currency reflects the strength of a nation’s economy and ours is simply stagnant due to many factors including declining demand, national misallocations of resources, extreme income and wealth inequality, corrupt central government, massive and unpayable public and private debts, and crony capitalism – all aided by a distracted and uneducated electorate and a perpetual internal war of attrition between every possible group in this nation in a quest to selfishly secure its privileges vis-à-vis all others.

The underpinnings of all legitimate economic and political systems are the vast majority of people living up to moral and ethical standards in all their endeavors while seeking the common good. However, it is completely foolish to put blind faith in markets, human nature, endless technological progress, unfettered greed and narcissism, the questionable wisdom of our elites, or a variety of outside forces to accomplish what we want and need. Only we can produce a just and sustainable society, and achieve our long-term goals, only if we act collectively in our best common interests.

The status quo won’t last and the eventual crash will be painful for everyone – despite the delusional beliefs of many that think they still possess any actual financial security in the 21st Century.

Submitted 6/24/11 by Marc Pascal from Phoenix, Arizona.

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  • JSpencer

    “The underpinnings of all legitimate economic and political systems are the vast majority of people living up to moral and ethical standards in all their endeavors while seeking the common good.” – MP

    Words to live by. The loss of standards people once took for granted has left the US defenseless against the mainstreaming of greed and ignorance. When the sense of what is truly valuable in character and society (meaning values instilled at an early age) are no longer taught? I think we are seeing the result.

  • Don Quijote

    The Busts Keep Getting Bigger: Why?

    Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present
    by Jeff Madrick
    Knopf, 464 pp., $30.00

    Suppose we describe the following situation: major US financial institutions have badly overreached. They created and sold new financial instruments without understanding the risk. They poured money into dubious loans in pursuit of short-term profits, dismissing clear warnings that the borrowers might not be able to repay those loans. When things went bad, they turned to the government for help, relying on emergency aid and federal guarantees—thereby putting large amounts of taxpayer money at risk—in order to get by. And then, once the crisis was past, they went right back to denouncing big government, and resumed the very practices that created the crisis.

    What year are we talking about?

    We could, of course, be talking about 2008–2009, when Citigroup, Bank of America, and other institutions teetered on the brink of collapse, and were saved only by huge infusions of taxpayer cash. The bankers have repaid that support by declaring piously that it’s time to stop “banker-bashing,” and complaining that President Obama’s (very) occasional mentions of Wall Street’s role in the crisis are hurting their feelings.

    But we could also be talking about 1991, when the consequences of vast, loan-financed overbuilding of commercial real estate in the 1980s came home to roost, helping to cause the collapse of the junk-bond market and putting many banks—Citibank, in particular—at risk. Only the fact that bank deposits were federally insured averted a major crisis. Or we could be talking about 1982–1983, when reckless lending to Latin America ended in a severe debt crisis that put major banks such as, well, Citibank at risk, and only huge official lending to Mexico, Brazil, and other debtors held an even deeper crisis at bay. Or we could be talking about the near crisis caused by the bankruptcy of Penn Central in 1970, which put its lead banker, First National City—later renamed Citibank—on the edge; only emergency lending from the Federal Reserve averted disaster.