When Playing Make Believe Stops Working

Another 12 inches of snow is on the way for an all day storm Wednesday. Looks like I have the day off! Plenty of shoveling to do, not that there is anywhere to put it.

Can We Sell the FED and Treasury to Bail Out the Banks?
How much do you think we could get if we sold the FED and the Treasury? Enough for a TARP 2.0? Who knows. I saw this funny sign today and wanted to put it up:


When Playing Make Believe Stops Working
It has long been a central tenet of Economic Disconnect that the US banking system is insolvent. This is factually true. Years of massive leverage and the use of wild credit instruments means that there is simply more "money" out in the world than can be accounted for by assets or production. If, as stated here, this is the case then how is it that things continue on? Surely if the situation was that dire something would happen? An outright banking collapse, an imploded government, riots by the people and social acrimony would be expected.

My answer the the awesome power of playing "Make Believe". The banks pretend that the bad assets they have are not really that bad. The FED pretends that they can print money at will, but that it is all "sterilized" with no structural implications for the dollar. China pretends that the US will ever pay them back and uses that facade for their own domestic game of healthy economy make believe. The new president pretend that an almost 1 trillion dollar stimulus plan is so important that 2/3 of it will be deployed more closely to the next election. It goes on an on.

What might things look like should the game of make believe ever run out of gas? I think we may have an answer this summer for the US. As an early indicator you may want to review two countries that are having trouble getting anyone to play make believe with them.

Iceland was the first casualty of the banking buts, and thus it has progressed the farthest in falling apart. Some excerpts from the full article:

Iceland is Burning-Day 2
The extensive protests that shook Iceland Tuesday have continued into Wednesday and are beginning to have an effect on one of the two political parties making up Iceland's coalition government.
Late Wednesday night, as thousands of protesters re-lit a large bonfire in front of the Parliament, the Reykjavik chapter of the Progressive Party voted to recommend to the party's national representatives that they withdraw from the ruling coalition, and called for new elections in May 2009. As the night wore on, though, matters descended into violence. Around 1:30 am, police dispersed the crowd with tear gas, the first time tear gas had been used against Icelanders in 60 years. The crowd soon reformed and pelted riot police with stones. One officer was severely injured by a cobblestone, the newspaper Morgunbladid said.
The protests have been sparked by Iceland's catastrophic economic collapse over the past three months, and the failure of the government to call for immediate elections or to investigate the rumored widespread malfeasance by the country's leading bankers, businessmen, and politicians. "It should be clear to everyone that a government that has failed as utterly as the Icelandic government has can neither investigate, nor clear up the past, nor forge a new path into the future," said retired professor Njörður P. Njarðvík.

I have never been to Iceland, but many of my friends have visited. The small country is not exactly populated by wild and crazy maniacs set upon chaos. The stunning collapse of the Icelandic currency and the entire banking system will have that effect on social mood.

Not to be outdone, our friends across the Atlantic seem to be very close to a major catastrophe. Some excerpts from this United Kingdom article:

Revealed: Day the banks were just three hours from collapse
By Glen Owen
Last updated at 11:21 PM on 24th January 2009
Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown's Ministers has revealed.
City Minister Paul Myners disclosed that on Friday, October 10, the country was 'very close' to a complete banking collapse after 'major depositors' attempted to withdraw their money en masse.
The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals.
Only frantic behind-the-scenes efforts averted financial meltdown.

The article has no details on what those efforts were to stop the run on the banks, but I would like to know so Ben Bernanke has a play book. More article:

If the moves had failed, Mr Brown would have been forced to announce that the Government was nationalising the entire financial system and guaranteeing all deposits.
But 60-year-old Lord Myners was accused last night of being 'completely irresponsible' for admitting the scale of the crisis while the recession was still deepening and major institutions such as Barclays remain under intense pressure.
The build-up to 'Black Friday' started on Monday, October 6, when the FTSE 100 dropped by nearly eight per cent as bad news on the economy started to multiply.
The following day, Chancellor Alistair Darling began all-night talks ahead of an announcement on the Wednesday that billions of pounds of taxpayers' money would be used to pour liquidity into the system.

In the game of pretend one cannot allow anything truthful or real to be seen or heard as this breaks the spell. One should not be angry at a banking system that is busted, but instead direct that anger towards anyone that points out this fact.

The Iceland and UK examples above really have me uneasy. When everything you have is built on illusion, you are one wake up away from having things go wrong. It is ok to feel a bit powerless and a bit angry that things have come to this.

Have a good night.