Economic reality is related to gravity and excessive financial engineering has an analogy that I call economic alchemy. Rejecting the power of a dried eyeball of the newt the modern financial alchemists, rather than striving to turn lead to gold, ,turned illusionary financial solidity into leveraged fools gold.
Like all the artists of illusion, be they magicians, or politicians and clergy of all stripes, the financial engineers simply had to build the illusion and let human nature run with it.
When humans recognize a magicians illusion for what it is and while they may still be unable to see how they were tricked, they blithely proclaim that they always knew that the lady in the box was not really being sawed in half.
However, a magical illusion, performed by a professional usually has no lingering negative effect on the deceived. If anything, an entertaining illusion may offer a relatively cheap education, as it demonstrates that just seeing, may not be truly worthy of believing.
However, if the illusion causes war, consider the illusion of the "Thousand Year Reich" that Hitler sold to the German people, or causes economic catastrophe, consider the Great Depression, the price of the education is very, very dear.
History shows that such a painful education does not last for too long, generations die and the public forgets.
And that is where we are now and it is why no form of stimulus or bailout package will avoid us having to pay a very hefty price as illusion gives way to reality.
It does not mean that Secretary of the Treasury, Henry Paulson should not keep trying, shifting and revising the programs and mechanisms hoping to prevent or at least slow a systemic and catastrophic collapse, but for a long time to come our society will not have a level economic environment such as what was enjoyed until our excesses led to a bubble, an illusionary period of perpetual well being, that has indeed burst.
In the 1990's economists and "big thinkers" ridiculed Japan for failing to bite the bullet and bankrupt many banks that were swamped with billions of bad loans, many based upon crazy real estate valuations. Japan muddled through with a decade of stagnation. But the people buckled down and as only the Japanese can they endured. With our government extending virtually unlimited credits to the banks; by permitting at risk financial firms to become banks; by shoring up AIG, the insurance monster that was spawned like a financial horror creature from the black lagoon of greed and by than letting the same institutions now book their "assets" at values far greater than the assets would bring on the open market we are doing virtually the same thing we scorned Japan for.
And good luck to us! If all we end up with is ten years of stagnation we will be getting off cheap.
The real risk is cataclysmic, systemic collapse. The real risk is another Great Depression or worse. Deflation of valuations joined by inflation of currency, as we print dollars, is not a remote possibility.
While we cannot let our industrial base collapse we can no longer fund it’s current structure. If we are to bolster such basic industries as our automobile business it will take a form of bankruptcy and consolidation that forces real change on the industry. To fund more of the same from Detroit will not work in the long run. It will become a habit, a dependancy.
Testifying today before congress, George Soros, who I had the pleasure of working with and observing some thirty years ago opined that a, " deep recession is inevitable and that a depression cannot be ruled out." I remember him as a tough cookie with a remarkable mind. Not always right but very willing to change on a dime as the situation demanded. Conservatives hate him as a Liberal and thus discount what he says. They do so at their peril. First they should examine his long track record of reading economic factors as marked by his amazing long term financial success.
I believe he is right.
Hence, any and every effort, by the government, to hold our fall to that of a recession must be tried. Every remediating effort must be examined and reexamined with a willingness to get egg on our collective faces if a new approach is needed.
This is not a political or philosophical issue, this is a survival issue.
