Who Do We Believe / Trust?

Stoneleigh at The Automatic Earth raises some tough questions. These questions are unpleasant to consider, but ignoring them puts us in the same boat as the executives in the investment banks.

Link: The Automatic Earth: Debt Rattle, December 1 2008: Trying to avoid the unavoidable, but at what cost?.

It was recently revealed that Citigroup's analysis of their credit default swaps deliberately ignored the risk of a declining housing market. These are all indicative of the same reasoning, exactly the kind of reasoning Nouriel Roubini has been talking about – raving about – on TV panels for the last few weeks. This is exactly the kind of reasoning that all of the now-failed financial institutions have been relying upon and that has driven the derivatives bubble. If the risk of failure is minimal, this reasoning went, then it need not be accounted for, nevermind that the consequence is of catastrophic and systemic collapse. This debt crisis should teach us many things, only one of which is that risk assessment must include an assessment of the consequences of failure, however remote the likelihood of occurrence may be. The final irony, of course, is that the choice to systematically ignore those risks is what made their occurrence inevitable.

The financial industry bought into the ridiculous idea that risk which is low probability can be safely ignored. Now the federal government, whose advisors and actors come from the same blinkered pool, is doing the exact same thing. Is it lunacy to say that these hundred-billion dollar guarantees against balance sheets with unknown assets are in fact bluffs at serious risk of being called? In addition, now every big company is coming hat-in-hand to the government. States and municipalities are also at the door. But the only thing going on here is debt being shifted around. Privatize the profits, socialize the losses – a familiar refrain lately.

One might ask, why bail Citigroup and not American Auto? A cynical answer might be that because the people doling out the money are white collar Wall Street banksters, they don't care about blue collar workers, and because the people helping them dole out the money are government cronies, they don't like unionized blue collar workers. Can it go deeper than that? This Grand Theft America isn't just about class divisions and distaste for unions, as real as those motivations may be. This is about continuing the failed prescriptions of a consumer fantasy – that money could be made from money ad infinitum without the need to actually produce anything. Unfortunately, money chasing its own tail generated a mountain of debt large enough to threaten the integrity of the system.