The
global financial system is in the eye of an unprecedented hurricane. While
central bankers are congratulating themselves on their god-like mastery of
Nature, and secretly praying to the idols of the Keynesian Cargo Cult every
night, the inevitable consequence of borrowing from the future, the
obsession with "growth" at any cost and financialization /monetary
stimulus, a.k.a. the rich get richer thanks to central banks is
systemic collapse.
The Keynesian god of growth has failed.
The Keynesian god of borrowing from the future to fund
today's consumption has failed.
The Keynesian god of monetary stimulus /
financialization has failed.
Every major central bank and state worships these
Keynesian idols:
1. Growth. (Never mind the cost or what kind of
growth--all growth is good, even the financial equivalent of aggressive
cancer).
2. Borrowing from the future to fund today's keg party,
worthless college diploma, particle board bookcase, stock buy-back, etc. (oops,
I mean "investment")--a.k.a. deficit spending which is a
polite way of saying this unsavory truth: stealing from our children and
grandchildren to fund our lifestyles today.
3. Monetary stimulus / financialization. If
private investment sags (because there are few attractive investments at
today's nosebleed valuations and few attractive investments in a global economy
burdened with massive over-production and over-capacity), drop interest rates
to zero (or below zero) to "stimulate" new borrowing... for whatever:
global carry trades, bat guano derivatives, etc.
Here is my definition of
Financialization:
Financialization
is the mass commodification of debt and debt-based financial instruments
collaterized by previously low-risk assets, a pyramiding of risk and
speculative gains that is only possible in a massive expansion of low-cost
credit and leverage.
That is a mouthful, so let's break it into bite-sized chunks.
Home mortgages are a good example
of how financialization increases financial profits by jacking up risk and
distributing it to suckers who don't recognize the potential for staggering
losses.
In the good old days,
home mortgages were safe and dull: banks and savings and loans institutions
issued the mortgages and kept the loans on their books, earning a stable return
for the 30 years of the mortgage's term.
Then the financialization machine
revolutionized the home mortgage business to increase profits. The
first step was to generate entire new types of mortgages with higher profit
margins than conventional mortgages. These included no-down payment mortgages
(liar loans), no-interest-for-the-first-few-years mortgages, adjustable-rate
mortgages, home equity lines of credit, and so on.
This broadening of
options (and risks) greatly expanded the pool of people who qualified for a
mortgage. In the old days, only those with sterling credit qualified for a
home mortgage. In the financialized realm, almost anyone with a pulse could
qualify for an exotic mortgage.
The interest rate, risk and profit margins were all much
higher for the originators. What's not to like? Well,
the risk of default is a problem. Defaults trigger losses.
Financialization's solution: package the risk in safe-looking securities and offload the
risk onto suckers and marks. Securitizing
mortgages enabled loan originators to skim the origination fees and profits up
front and then offload the risk of default and loss onto buyers of the mortgage
securities.
Securitization was
tailor-made for hiding risk deep inside apparently low-risk pools of
mortgages and rigging the tranches to maximize profits for the packagers at the
expense of the unwary buyers, who bought high-risk securities under the false
premise that they were "safe home mortgages."
Financialization-- which can only expand to dominate
an economy if it is supported by a central bank bent on expanding credit--has
two inevitable and highly toxic consequences:
-- Risk seeps into every nook and
cranny of the financial system, greatly increasing the odds of a
systemic domino reaction in financial meltdowns. This is precisely what we saw
in the 2008-09 Global Financial Meltdown (GFM): supposedly
"contained" subprime mortgages toppled dominoes left and right,
bringing the entire risk-saturated system to its knees.
-- Extraordinary wealth and
income inequality, as those closest
to the central bank money/credit spigots can scoop up income-producing assets
first at much lower costs than Mom and Pop Main Street investors.
The rising anger of the masses
left behind by the central bank / financialization wealth harvesting machine is
the direct result of Keynesian monetary stimulus that rewards debt-based speculative gambles by those
closest to the cheap-credit spigots.
As I explain in my book Why Our
Status Quo Failed and Is Beyond Reform, the only possible output of central bank monetary stimulus is
financialization, and the only possible output of financialization
is unprecedented wealth and income inequality.
The global financial system is in the eye of an
unprecedented hurricane. While central bankers are congratulating
themselves on their god-like mastery of Nature, and secretly praying to the
idols of the Keynesian Cargo Cult every night, the inevitable consequence
of borrowing
from the future, the obsession with "growth" at any cost and
financialization /monetary stimulus, a.k.a. the rich get richer thanks to
central banks is systemic
collapse.
Don't fall for the mainstream media and politicos'
shuck-and-jive that all is well and "growth" will return any day now.
The only "growth" we're experiencing are
the financial cancers of systemic risk and financialization's soaring
wealth/income inequality.
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