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Saturday, May 08, 2010

Default or Inflation (choose your poison)

Plain terms for how screwed we are and why. Like the housing crash, the open question remains: not whether it will happen, but when, and how it will play out. (And accordingly, how to hedge for it.)

Peter Schiff: Default or Inflation

With all the kindling in place just waiting for a spark, maybe 2012 will become a self-fulfilling prophecy.

Vincent DiCarlo adds:

Of course it will happen again! The problem that caused the latest crisis is the same one that caused the last three and will cause the next one. Read carefully, because this is important and I have not seen it in the public debate: the financial gatekeepers (accountants, law firms, brokerage firms, banks, and rating agencies) whose cooperation is absolutely necessary to commit really large scale financial fraud, are no longer financially responsible for the lies they tell and the fraud that they aid and abet. The system of civil liability (yes, those evil plaintiffs' lawyers) that kept financial disclosures relatively honest for the half century from 1934 through 1984, and made the financial markets the envy of the world (the story is told in the Transformation of Wall Street, by Joel Seligman) was systematically dismantled during the last thirty five years by the courts and congress in the name of fighting an overblown liability crisis. Actually, the effort was financed and promoted by the very financial institutions that are responsible for the current mess, and those same institutions own both parties in congress, which is why there is absolutely no consideration being given to fixing the real problem. There will always be someone willing to risk going to jail to steal a billion dollars. Government regulators will never be able to solve the problem by themselves (as a former enforcement lawyer with the SEC during the 1980s, when the system worked relatively well, and a current government enforcer of the laws against Medicaid fraud, I know this better than most). Until the institutional gatekeepers are held financially responsible to the investors and others who are defrauded with their aid, we will lurch blindly to the next crisis. Since that one will probably involve the financial stability of the US government, which is now the entity undertaking the liabilities to sustain the bubble, there will be no one left to defuse the meltdown.

More support for Generational Dynamics, sadly.

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Simon Funk / simonfunk@gmail.com