The Next Crisis

Excellent interview, transcript here, with John Rubino and Chris Martenson.  They begin with their continued amazement over the total lack of law enforcement from the last crisis.  Sometimes I think that only Matt Taibbi feels the same outrage that I do over it, but apparently so do these guys:

John Rubino: That is one of the things historians are going to have a ball with when they look at these times. The same guys who caused the problems are the ones who are then tasked with fixing the problems. There is not any kind of allocation of blame here. In most of the world if you are the coach of a football team or something like that and your team loses because you make bad decisions, you get fired. Same thing with the CEO of a corporation, but the people who are in charge of the economy seem to be able to escape blame. I cannot explain that. It probably goes back to general ignorance on the part of the population. We just do not understand what is happening so we do not know who to blame for it. You see somebody like Greenspan who is still taken seriously in the world, he writes bestselling books, he charges huge amounts of money for speaking engagements, and yet he is the guy who was the architect of the beginning of the biggest financial bubble in human history.

The same thing with the people running investment banks. By any rational legal definition of what the banks have done in the last ten or fifteen years, they are criminal enterprises and the guys in charge should be put in jail, they should be treated accordingly. As were the guys who ran the S&Ls back during the savings and loan crisis in 1990. Something like eight hundred S&L executives ended up being prosecuted and sent to prison after that relatively small hiccup in the financial markets, and what has gone on lately is so much worse and nobody has gone to jail for it. In fact, hardly anybody even loses their jobs, they continue working and making huge amounts of money and living really prestigious lives after basically blowing up the economy, and now putting us in danger of another 2008/2009 times two or three in the near future. I do not know, it really is shocking that these guys are getting away with what they are getting away with. I think it comes back to financial education. We are not able to separate normal market fluctuations from financial crime and so the crimes are being kind of subsumed within bear markets and bond market fluctuations and things like that and they are not seen as the crimes that they should be seen as.

Chris Martenson: These are not just financial crimes in my mind John. HSBC was laundering drug money, massive quantities of cash, drug money. Got caught and nobody went to jail and of course there were people who specifically oversaw that program it was not like, “oh somehow we just lost track of who was overseeing these cash disbursements and their laundering through the system.” Those all had names associated with them, not one of those people as far as I am aware has lost their job, been demoted or fired or let alone gone to prison. We have really horrible cases too coming out of other U.S. banks where they do things like put people into the home owners mortgage modification program, homeowners assistance, the HAMP thing, and shove them into that whole thing. Then maneuver to make sure that those people get lost in the system so that the checks that they are sending in to it do not clear in time. So now, they are technically in default and then seize their property after knowingly putting people into default situations. Whether there is a law against that—which I hope there is—the lack of moral compass in that story is extraordinary. So when you say our banks are too big to jail and are doing some funky things, I am detecting a severe lack of espirit de corps that we are all on the same team in this particular story.

John Rubino: Yeah, I mean you nailed it basically, there are actual people doing these things. Corporations do not do things, they are just a place where people do things. Individuals have done each one of these things and presumably, they knew they were illegal. Because it is pretty clear in retrospect that this stuff was at a minimum unethical, and usually, overtly breaking the law.

Then they go on to explain how the next crisis will be much worse than the last one, and why.  If you want to understand the fundamentals of the equity market bubble, read John Hussman as well.  He has been warning of the many issues since early 2010.  He may be early, but he is not wrong.

If things get as bad as doomsday types predict, including all of the above, then we may be in for some weird government action as well, and they are kind of saying so already.  Christine LaGarde of the IMF has already come out in favor of some form of confiscation from savings (“wealth tax”), and the newest idea from Europe is to unilaterally modify terms of government bonds – that is, to extend them so that they don’t have to pay you!!

Possible remedy. The preliminary ideas in this paper would introduce greater flexibility  into the 2002 framework by providing the Fund with a broader range of potential policy responses in the context of sovereign debt distress, while addressing the concerns that  motivated the 2002 framework. Specifically, in circumstances where a member has lost  market access and debt is considered sustainable, but not with high probability, the Fund would be able to provide exceptional access on the basis of a debt operation that involves an extension of maturities (normally without any reduction of principal or interest). Such a “reprofiling” operation, coupled with the implementation of a credible adjustment program, would be designed to improve the prospect of securing sustainability and regaining market access, without having to meet the criterion of restoring debt sustainability with high probability.

Here in the US, some Fed officials have suggested that in order to prevent a run on bond funds, it might be a good idea to add a redemption fee.  That’s horrible, and it’s just another way to steal from savers.  Of course the bond fund sponsors are all in favor of it.

Then you have the switch from fossil fuels to renewables.  Previous post showing that Australia is already nearing a tipping point. It’s pretty obvious that as soon as there is a breakthrough in battery technology, and it is commercially available, the entire fossil fuel industry will pretty much implode.

From the Telegraph:

In any case, staggering gains in solar power – and soon battery storage as well – threatens to undercut the oil industry with lightning speed, perhaps in a race with cheap nuclear power from a coming generation of molten salt reactors. The US National Renewable Energy Laboratory has already captured 31.1pc of the sun’s energy with a solar chip, but records keep being broken.

Brokers Sanford Bernstein say we are entering an era of “global energy deflation” where gains in solar technology must relentlessly erode the viability of the fossil nexus, since it goes only in one direction. Deep sea drilling will become pointless. We can leave the Arctic alone.

Once the crossover point is reached – and photovoltaic energy already competes with oil, diesel and liquefied natural gas in much of Asia without subsidies – it must surely turn into a stampede.

The Telegraph article also details current issues with energy companies from the standpoint of poor returns on investment NOW.   And describes why the dislocation from this change is going to be incredibly painful:

Data from Bank of America show that oil and gas investment in the US has soared to $200bn a year. It has reached 20pc of total US private fixed investment, the same share as home building. This has never happened before in US history, even during the Second World War when oil production was a strategic imperative.

On the bright side, the dollar is still looking like the cleanest dirty shirt.  There are a lot of naysayers, and with the current global turmoil which is proving to be either out of US sphere of control, or else completely mishandled, lots of people see evidence of other countries trying to get away from the dollar as the global standard currency.  Marc to Market explains some pretty good reasons why this is not close to being a threat to the dollar at this point, which is certainly a positive.  At the same time, all of the pressure on the dollar is also a good reason to continue to be diversified.  It can remain at the top of the heap while being chipped away at, a little at a time.



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