The Incredibly Stupid Hulce

OK, I'll make this a quickie...

I finally read the "editorial" piece by The Incredible Hulce. It's rolling along in acceptable fashion, cataloging past headlines from years gone by, until the final 2 paragraphs. Then she just completely blows up:

And here we are today, same issues, some different faces. But the economy still sucks and Bill Watkins, executive director of Center for Economic Research and Forecasting at Cal-Lutheran, says he doesn’t believe that sustained growth will occur any time soon. He said we may see small positive growth this quarter and the media will declare the recession over. However, the stimulus plan is not working. Government spending does not improve the productivity of private capital. Banks are still not lending. Houses, especially in Central Oregon, are selling for less than you can build them.

That said, we end this editorial with this: go ahead and declare the recession over. It’s not likely that there’s anything more that we can do to help the economy than to believe that it’s getting better and continue to operate our businesses lean and efficient and hold out for a recovery to eventually happen. If our community can lift itself up from the gloom and find some light even in the smallest of economic improvements, then that’s a very good thing. Let’s get this party started.

So everyone, including her hand-picked schmucks from some obscure-ass loser church-related global forecasting basement says that the shit is hitting the fan, and will continue to do so for the foreseeable future.

But Hulce, in her infinite wisdom, says "Let's get this party started"? Oh my God.

If our community can lift itself up from the gloom and find some light even in the smallest of economic improvements, then that’s a very good thing.

Really? So if we just click our heels together, we'll get back to Kansas... right?

This is Standard Issue Marketing Bullshit. That if you bullshit people enough, they'll start to believe anything.

But the real disturbing part of this, is the "Let's get this party started" bit. I mean, My God. Who talks like that? 85 year old white women trying to be "ghetto"?

And what's really wonderful, is that there is implied in statements like that, that The Bubble CAN, WILL, AND SHOULD get going again.

The PARTY was THE REAL ESTATE BUBBLE. And Hulce thinks the best medicine is to get it going again.

THIS is the reason Bend is doomed. There's a mentality there that isn't right. It's much like that of an alcoholic or chronic drug user: If I can just get the good feelings going again I had during the "high times", I'll be good, everything will be fine.

There are a lot of people in Cent OR who will be jonesing for a fix that never comes. "The party" is NEVER going to start again here. EVER. Well, not in my lifetime.

You've got to understand what is really happening to see why.

This is The Big Unwind.

We have made TRILLIONS in loans that will never be repaid. THAT was "The party". The seemingly unending river of credit which was used for almost everything from buying houses to paying off the old lines of credit so we could borrow anew, was "The party". The borrowing of a bit more to make payments on the old borrowings was when things started getting really dicey.

There was no more "party" at that point. Hulcey-mindset borrowers and others just started borrowing "to feel normal". This is where the drug & alcohol use is only hitting the "flatline" high... just feeling OK. Increased use, as always, is required to get "high" again.

And so you begin a spiralling vicious circle that can do nothing but end badly.

And so it has.

And Hulce wants us to ALL GET HIGH AGAIN... NOT finish rehab. The best way to handle what's happened, according to the Incredible Hulce, is we get a good shot of that what ails us, NOT quit cold turkey.

But what's just precious is THERE IS NO MORE, Hulce. That was it. We're in The Big Unwind. We're through.

So, I guess I will explain what is going to happen over the next several years, primarily for the benefit of dumbfucks like Hulce, in terms of what has already happened. And I'll try to make it painless & quick.

OK, our banking system is based on the Fractional Reserve System. If you ever had any sort of rudimentary finance classes, it's east to figure out: Let's say you deposit $100 in the local shithole collapsing bank, CACB. OK, they make money by loaning it out, but not all of it, more like $90. From wikipedia:

Central banks generally mandate reserve requirements that require banks to keep a minimum fraction of their demand deposits as cash reserves. This both limits the amount of money creation that occurs in the commercial banking system, and ensures that banks have enough ready cash to meet normal demand for withdrawals. Problems can arise, however, when a large number of depositors seek withdrawal of their deposits; this can cause a bank run or, when problems are extreme and widespread, a systemic crisis.

To mitigate these problems, central banks (or other government institutions) generally regulate and oversee commercial banks, act as lender of last resort to commercial banks, and also insure the deposits of the commercial banks' customers.

Really, those paragraphs embody a lot of info. There HAS TO BE reserve requirements, or else money creation is theoretically INFINITE (infinite inflation), and BANK RUNS can happen with ease. Imagine you have lent out all of that $100 deposit, if the person even writes a check for $1, you can't deliver.

Now, the "systemic crisis" part is what you should really be focusing on, because that is exactly what has happened.

If you read the wikipedia article in it's entirety (and you should), you'll see there is a very direct correlation between banking reserve requirements, and money creation. There is a very simple example with 20% reserve requirements which leads to a money creation multiplier of almost 5.

So the inverse of the reserve requirement is the money multiplier: 1 / .2 = 5.

You can see the actual reserve requirements for US banks here. It's a tiered system, but on all decent sized banks, it's about 10%. So the multiplier is about 10, but in actuality it is slightly lower due to other factors

Now, this system works great and can be actually used to spur spending by the Fed buying and selling a relatively small amount of bank-held securities, like government debt, some of which is always on the books of banks as "cash".

But there's something "Golden" about that 10% reserve number. It represents the amount beyond which losses become a vicious cycle of contraction vs it's usual virtuous circle of prosperity.

Once you loan losses go beyond 10%, you are pretty much fucked. Even if your losses approach 10% of your loan portfolio, you are in some deep shit. Because your depositors CANNOT get their DEMAND DEPOSITS. You are broke and cannot pay them.

You're in some Big Shit at that point.

Now, typically this sort of thing is a localized phenomenon. Big local business goes down, or some regional butter-fuck hits the local economy, like oil in the 80's or S&L commercial lending. And the shit goes down hard.

But this time it is WILDLY different.

The ENTIRE American housing base is down WAY over 10%. Commercial is down over 10%. THOSE 2 things represent TRILLIONS in loans.

The entire collateralized base of the American banking system is DOWN beyond the reserve point. This is the point where the "systemic crisis" begins.

The banks ARE NOT LOANING, not because they don't want to, but they can't. Even with the TRILLIONS flooding the system, the ENTIRE US BANKING SYSTEM IS STILL INSOLVENT. THAT is the problem. That is why we cannot "Get this party started".

We have gone WELL BEYOND the point of utter collapse. And the government response was really all it could be: FLOOD THE SYSTEM WITH TRILLIONS.

Because, you see, we have an entire banking system whose demand deposits are, say $10 trillion. But the loans and other securities that we have to pay each other off, are only $7 trillion. The gov't hawks were right: If we all tried to Get Our Money, the US banking system would have ceased to exist. Every single bank in the US would have to close.

So the governments only choice was to flood us with trillions.

But now the problem shifts from "I want my money" to "I want this economy to grow", and there my friends we are well & truly fucked. Because growth relies on money, and money comes and goes with the whim & weft of confidence in the fractional reserve banking system itself.

10% reserve requirements were NOT ENOUGH to avert one of the greatest crises in 100 years. So what do we do?

Lower it, as advocated by Hulce? THAT actually ENSURES it will happen again!

Or raise it? THAT actually ensures a TERRIBLE SLOWDOWN, by collapsing the lifeblood of our economy, money. A 20% reserve requirement would throw us right into a depression.

Even leaving it where it is portends that what we face today will happen again.

Fucking rock and a hard place, that is.

And so those are The Real Choices: Lower our reserve requirements to "Get the party started", but have an even more fragile banking system that will succumb to destruction almost instantly. Or raise reserve requirements, and face the prospect of a near-immediate and crushing depression, but a banking system that can in the far-future probably sustain almost any economic slowdown... once it stabilizes.

Or leave it as-is... and face a scenario that is a little of column A, and a little of column B.

Which is what we'll do.

So there will be no real growth in the next decade or so. And government will have to be on-call to forestall collapse for the foreseeable future. We will be in high-wire mode for at least 10 years, with even the slightest disturbance threatening our very existence.

Which is what will happen. We will be in low-or-no growth mode for 10 years, and banks will continue to fail. For years.

Look to Japan to see what happens. Moribund growth that never seems to take off.

When will it take off? When loan losses are so crushed that what actually remains is solid. And loan volume actually begins to exceed deposit growth, and money is created again. The Great Unwind ends when banks stop calling in loans (to pay depositors or "reserve" up), and actually start to lend again, which only happens AFTER we hit rock bottom, and they KNOW that their loans are solid, and repayment is assured. We aren't even close to that. AND THAT, my friends, is WHY banks are not loaning. They have raised their OWN implicit reserve requirements to SURVIVE.

It bears pointing out that I am not one of those psycho, Anarchy-types that believes the best thing is ZERO LOANS, and eating of home-grown beans & tomatoes. Well, I'm closer to that than many people I know, but I do believe there is a place for the modern banking system.

But I also acknowledge that this system can and will cause it's own implosions by it's very nature. And it's near collapse is what we are witnessing now. It makes the peaks and valley's higher & lower. But it does have it's merits.

But when it is systemically participates in a bubble, it literally ensures it's own destruction. There's really nothing else that can happen. And the bigger the bubble, the bigger the collapse IN PROPORTION to the leverage (financial crack-meth) used to create it.

And the leverage used to create our current debacle was almost infinite, because not only were banks going "off balance sheet" to create more money, the amount going into homes as downpayments was LESS THAN ZERO. People would actually get money at closing via all kinds of schemes, namely liar-loan fraud, appraisal fraud, and just about anything else they could get away with... ask Tammy Sawyer.

So our REAL reserve rate was far, FAR less than the OFFICIAL RATE of 10%. It was probably down around 0%, which means 2 things: Incredible fragility and the magnitude of the collapse will be unbelievable.

And THAT is where we are.

That there is GRILFY hotness, hbm.

Damn, I need to get laid.

Ahhhhh, the chubby quasi-pregger MILF. Is there anything better?