High priority report: a geopolitical sitrep on the financial crisis

We now enter the third phase of the crisis.  Past events along the way, milestones on the road, each generated headlines and thousands of articles – are forgotten as we move to the next phase.  And rightly so.  The overall process is the important thing to see, so large that it is visible only in our mind’s eye.  This is the end of the US debt supercycle and the post-WWII geopolitical regime — these are the domestic and international sides of the same coin.Contents

  1. The 3 phases so far of the crisis.
  2. We have squandered the “golden hour.”
  3. What will happen in this third phase?
  4. The Election

The story to date, in three phases

(1)  Collapse of the mortgage brokers, starting in December 2006 — met with laissez faire (indifference).

(2)  Collapse of flawed financial institutions (Countrywide bank, Bear-Stearns, the government-sponsored enterprises) — met with massive intervention and bailouts.

(3) Contagion and failure of healthy institutions.

Note that the first two phases were characterized by confidence.  Confidence that the problems were contained.  Confidence that the government had the wisdom, knowledge,and power to solve these problems.  Confidence that the worst was over.  Happy talk by our leaders fueled this confidence.

Larger, sterner measures will be needed now, as confidence fades.

The golden hour

In emergency medicine doctors speak of the “golden hour”, a concept created by Dr. R Adams Cowley:

There is a golden hour between life and death. If you are critically injured you have less than 60 minutes to survive. You might not die right then; it may be three days or two weeks later — but something has happened in your body that is irreparable.  (source)

{For more on this see Wikipedia; for its possible origin in study of WWI battlefield treatment see here.

Global leaders, both business and government, have squandered the golden hour — during which large and bold actions might have arrested the downcycle, or at least resulted in a controlled landing.  Their actions have been reactive, incremental, and ineffective.  Leaders take small steps in order to keep their options opened.  That’s a delusion; time inexorably closes options.  Their remaining options are both difficult and problematic.

The key error has been to address this as a series of unrelated interventions to help individual firms.  A microeconomic response to a macroeconomic problem.  As I have said so many times on this site, correct diagnosis must precede effective treatment.

Phase 3

How will phase 3 differ from the first two?

(1)  We enter the third phase with considerable downward momentum.

(2)  The credibility of business and government leaders has been expended, fruitlessly — and may be difficult to rebuild.

(3)  Fear is appearing.

(4)  Private sources provided much of the new capital to support ailing financial institutions; that will no longer be possible.

(5)  The public policy tools used in phase one are exhausted — complex maneuvers with hidden costs (assurances to the public of a small price to pay):  Fed loans, Fed purchases of junk assets, bailouts short of explicit nationalization, etc.

(6)  The recession (US certainly, perhaps global) will become more severe, exacerbating the crisis.

Treatment of the financial system, not its parts, will be needed, IMO.  This may come in phase 3, or be delayed to phase 4 — by which time the crisis will have grown more serious.  What sort of actions might we see?

  • massive fiscal and monetary stimulus programs,
  • large scale and explicit nationalizations,
  • coordinated central bank action to adjust relative currency values and control capital flows.

The change of Administration may halt or slow rescue operations at a critical point, esp. if there is a change of control in either or both Congress and the Executive branches.

Failure of the major nations to agree on a coordinated response to the crisis would have large and unpleasant consequences.

The Election

Unless its tenor changes soon, historians will marvel at the 2008 election.  With so many great events taking place, the US public debates trivia.  The major foreign and domestic issues of our time, immediate and pressing issues, remain almost invisible.  I can recall no similar episodes in the past, either the US or other democracies.  Does this mark our unfitness to govern ourselves?

Fortunately there is time.  The election is our opportunity to influence these events, whose resolution might shape America’s destiny.  Make your voice heard.  Donate your time and money.  Discuss these things with everyone you know, by every media at your command.  The clock is running.

Update #1 — this is the glop both sides feed us

McCain speaking today (AP story):

“Our economy, I believe, still, the fundamentals of our economy are strong, but these are very, very difficult times, so I promise you: We will never put America in this position again. We will clean up Wall Street” … “The McCain-Palin administration will replace an outdated, patchwork quilt of regulatory oversight and bring transparency and accountability to Wall Street. We will have transparency and accountability and we will reform the regulatory bodies of government.”

Please share your comments by posting below.  Please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

A few of the most important posts about this subject

  1. A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
  2. The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
  4. Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  5. Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
  6. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  7. What will America look like after this recession?, 18 March 208  — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
  8. The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
  9. The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

Originally published at Fabius Maximus and reproduced here with the author’s permission.

2 Responses to "High priority report: a geopolitical sitrep on the financial crisis"

  1. Guest   September 19, 2008 at 8:58 am

    I am not a gold bug but they make a good point. Money created through debt with the occult-like properties of compound interest added (there’s nothing really there but its getting bigger on its own) combined with herd behavior makes the boom-bust-bubble cycle a certainty.Pop goes the weasel. It’s easy to tell the monkeys but who are the weasels”Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.” – Mark TwainIt is hard to separate incompetence from design. Hard to tell about Greenspan – ideology leading to idiocy? -… “Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.”I would have liked the Fed to be a leader” in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial wit Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board. “He was opposed to it, so I didn’t really pursue it,” Wall Street JournalSome of the inhabitants in the upper reaches of international finance are like those locals living on the shores of a busy maritime trading route who would move the beacons during a storm. A good living could be made selling the cargos of wrecked merchant ships found on the beach.So when we read Eliot Spitzer and notice what happened to him when he pointed out that the FEDs were actively stopping the state regulators from doing their job.it becomes a little clearer that there might have been a plan.Could Engdahl be correct?…all major US policy from the 1970’s through the misnamed sub-prime crisis today, had a connecting continuous thread. Key Fed and Treasury and other US policymakers always held their ‘eyes on the Prize.’• The ‘Prize’ was untold financial gains to be won through a rollback of major concessions to the working blue collar and middle income Americans. The concessions were granted during the Great Depression by powerful establishment circles led by the Rockefeller and Morgan banking groups, to forestall a more radical revolt. William Engdahl• They were continued during the Cold War to prove the superiority of capitalism over communism but“Yesterday’s gone. Yesterday’s gone.” Fleetwood Macgepay

  2. artichoke   September 20, 2008 at 9:47 pm

    I don’t think you have actually proposed anything here. Until you do there is nothing to evaluate.I have more confidence if the Reps win the Presidency, because I believe in divided government. Furthermore I think Obama is too internationalist for our needs. It may be us or them, and our government at least should be in favor of us. That doesn’t mean I advocate going to war, although wars will probably continue under either administration.I don’t think your emphasis on the political process is appropriate. After the election the people’s voice will have been spent. NOW is the time to force some improvement in the government’s response. If the puerility of Paulson’s bill shocks you, wait til after the election it will get worse. We should not spend our voice trying to get the presidential candidates to focus. We should do whatever it takes to make Congress do their proper job now, and hold hearings rather than pass this giveaway in the dead of night.