The Market Played, You Lost

We're watching the market play, lala, we're watching the market work.

[To be sung to the tune from "Alice In Wonderland", the movie, "We're painting the roses red."]

Or at least that's what the Elite aka Superclass are thinking impatiently while they try to deal with that nasty public affairs thingie. I quote again from Laura Miller's review of the book "Superclass" by financier David Rothkopf: ""We must resist the temptation to reflexively attack elites," he writes, since human societies need leaders and this is an able bunch, but elites ought to be more accountable to the millions of people whose lives they affect."

That effect is playing out as we chat. The bailout in progress is too late, because the laws that were carefully put in place to prevent economic collapse were blithely violated by that Elite that invented itself in our compliant media. The inevitable knowledgeable quote has been at the ready, shopped out to any media outlet that they could find, by the aspiring 'authority'. The same expert witnesses that switch from one side to another depending on the dollar amount in court are available for any quote the journanimal needs, it goes into the resume - for more dollars.

From those authorities, liberally sprinkled with winger thinktank types, the press got and gave its economic 'policy".

Southern Belle posted a speech that the worst executive in history made - on June 18, 2002 - this morning at Eschaton.

...the private sector needs to help, too. They need to help, too. Of course, it's in their interest. If you're a realtor, it's in your interest that somebody be interested in buying a home. If you're a homebuilder, it's in your interest that somebody be interested in buying a home.

And so, therefore, I've called -- yesterday, I called upon the private sector to help us and help the home buyers.

We all know now that all that help, or 'innovation', was in the form of subprime loans that could only be repaid by rolling over the houses continually, never building up equity. Those desperately bad loans then got packaged as good bets, AAA rated by ratings agencies whose interest was in selling the package instead of in making sound investment, to investors who were accustomed to belief in the soundness of the system. With totally undermining our laws, this occupied White House thought it was launching a Star Wars economy, with no bounds - i.e., no regulations. The Free Market was launched, and it has crashed.

As I have noted before, the new gold standard the administration endorsed was one of "consumer confidence" and its mantra "Go Shopping". When those lame chickens come home to roost, we see the Alan Greenspan retreat that Atrios reported at Eschaton this morning.

The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities.

Home price stabilisation will restore much-needed clarity to the marketplace because losses will be realised rather than prospective. The major source of contagion will be removed. Financial institutions will then recapitalise or go out of business. Trust in the solvency of remaining counterparties will be gradually restored and issuance of loans and securities will slowly return to normal.

This is the ultimate bubble life, when satisfaction occurs from the purview of human suffering. Look, folks, you are homeless for a good cause, you are the cogs and the wheel is turning Just Like We Said.

Problem is, the current crunch disproves the concept that regulations are just inconveniences and inhibit market fairness. It isn't fair, and it isn't right, that the very Elite that were weaseled into positions of public trust violated that trust. It is that trust that the system depends on. It was wantonly destroyed, and that is why no one can borrow, and no one will lend. Without trust, the dollar is worthless, or, less than 96 yen, $1.59 to the Euro (12 ET), less than .33 gallon of gas.

What is going on in the bailout is well explained at Roubini's Global EcoMonitor.

Unless public money is used on a very temporary basis to achieve an orderly wind-down or merger of Bear Stearns this is another case where profits are privatized and losses are socialized. By having thrown down the drain the decades old doctrine and rule that the Fed should not lend or bail out non-bank financial institutions the Fed has created an extremely dangerous precedent that seriously aggravates the moral hazard of its lender of last resort support role. If the Fed starts on the slippery slope of providing massive liquidity support to non-bank financial institutions that have recklessly managed their risks it enters into uncharted territory that radically changes its mandate and formal role. Breaking decades-old rules and practices is a radical action that seriously requires a clear public explanation and justification.

The laws were carefully written over centuries because they provide the protections we all need. We all includes business interests. The world is in a financial crisis because the bases of the whole system, the laws, were violated.

The prosecution for this crime against humanity, which actually parallels that of the violation of every standard, must proceed.

309 days is too long.

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It isn't just the family budgets that are facing shortfalls. States administer most of the programs that affect us directly, schools, roads and the like. With tax bases decimated, tax revenues are shrinking.

Programs for the elderly are being slashed in Maine. Government jobs are being eliminated in New Jersey. Prison construction has been put off in Virginia. Some schools in California will end their music programs.

About half of the state legislatures nationwide are scrambling to plug gaps in their budgets, shot through by rapid declines in corporate and sales tax revenue, distressed housing markets and a national economy on the verge of a recession.

Many states are reporting their largest budget shortfalls since the recessions of 2001 and 1991-2. In some states where tax increases are generally anathema, including Maryland and Kentucky, governors are looking to raise some levies.

“It is not just the standard downturn where unemployment rises for a while, income tax and sales tax revenues are weak, and ultimately the economy recovers,” said Iris Lav, the deputy director of the Center on Budget and Policy Priorities, a liberal research group in Washington that tracks state budgets.

Ms. Lav pointed to a confluence of factors — including weak consumer spending, high energy prices, dropping housing values and growing foreclosure rates — that suggest states will face a protracted struggle to keep their budgets afloat.

“This all will make it harder to recover,” she said.

Too bad the Elite aka Superclass doesn't have kids in school or elderly parents.

Watch the market working.