Let them eat bad paper

"Liberté, Egalité, and Fraternité quickly descended to the towering figure of Robespierre and his Reign of Terror as the revolution spun out control and began to murder itself. First the royalists were beheaded, next the moderate Girondists, and by then the violence and suspicion was totally out of hand as the revolution devoured itself. In my opinion, after they started beheading the moderate Girondists it was only a matter of time before everyone else went to the guillotine."
-- Anonymous musings on the French Revolution

"RUSH LIMBAUGH: "[W]e found out where Daniel Mudd [lives], by the way; he's Roger Mudd's son, of CBS fame. This is [from] Braden Keil at the New York Post from just three days ago:

"As more than a million US homeowners face devastating mortgage foreclosures, ousted Fannie Mae CEO Daniel Mudd continues to live in an opulent Washington, DC, mansion [...]

Mudd, whose former company, Fannie Mae, "don't call this a company" is being bailed out by billions in taxpayer dollars, calls home a 22-room Colonial mansion on Newark Street in tony Cleveland Park built on the former property of President Grover Cleveland. The eight-bedroom, eight-bath pad includes large public rooms with fireplaces, a home theater, a gym, a wine cellar, a solarium, servants' quarters, a terrace off the master-bedroom suite, and a gourmet kitchen. The gated, landscaped property also features a pool, fountains, gardens and a guesthouse."

That from Rush's rant yesterday, How Democrat Thieves Looted Fannie Mae and Freddie Mac. I see he was in fine fettle.

John Batchelor also has fun with his rant about Mudd's predecessor, Franklin Raines. Raines tends to remind one why the French revolutionaries tolerated Maximillien Robespierre as long as they did, until they guillotined him.

Yes, Boris?

"Pundita, dear, you seem more upset about the aftermath of Hurricane Ike than the death of American capitalism. Do you think this crisis will blow over?"

Boris, there are strong parallels between the refusal to build sensibly in hurricane alleys and the situation that engulfed Wall Street.

I'm not sure what you mean by "American capitalism." Fannie Mae and Freddie Mac were never capitalist institutions. Everyone on Wall Street always knew that. So they knew exactly what would happen if regulations on short selling were removed and the markets then got hit with a surge of bad paper.

It's just that they didn't know when the worst of the surge would hit them. The ones who miscalculated can be likened to residents who refused to evacuate Galveston Island, until it was so late that Ike trapped them when they tried to flee.

There is no such thing as capitalism in bits and pieces; if part of the American investment system is socialist -- propped up by the government -- and another part is unregulated, there's always a catastrophe when the contradictions are met with destructive conditions from outside the system.

In this case, as in the case of Hurricane Ike and all hurricanes, the storm didn't arise in the U.S. but far out to sea; it arose when foreign hedge funds and banks panicked at the liquidity problems in response to the U.S. mortgage market meltdown.

The Fed moved too late to address the meltdown and had little control over how other central banks would deal with the liquidity crisis.

It was at that moment that the SEC should have restored the regulations on short selling, in the manner of huddling behind a seawall during a storm surge.

The regulations couldn't stop the storm but they would have prevented the worst effects, which included U.S. companies with reasonably good fundamentals going under.

Of course there is tremendous corruption associated with Fannie and Freddie, and a Robespierre will be dredged up to make heads roll. But this won't be addressing the systemic problem, which is that governments can't resist using financial markets for social engineering purposes.

There was a closing comment I omitted from the Christian Science Monitor article I quoted from in Wednesday's post on Galveston Island in the wake of Ike:

"Yes, these kinds of storms become memorialized and they become part of that culture," says Anthony Oliver-Smith at the Institute for Environment and Human Security at United Nations University in Bonn, Germany.

But he says, "Memories of [natural disasters] begin to diminish after 30 years, at which point development begins again to put people in harm's way."

The same could be said for financial market crises that become catastrophic when governments refuse to acknowledge that capitalism is not a potted plant.

In the wake, everyone is scared and cautious. But the memory of the debacle eventually fades, and so here we are again.

The catastrophe won't blow over without a lot of fine tuning. The Lords of the Craps Table -- the gnomes at the BIS and IMF, the central bankers and the shrewdest minds at the largest capital firms -- will patch it over somehow. A new regulatory body or several will come into existence, along with a host of new laws.

Then we can all go back to having our cake and eating it too, until reality intervenes again somewhere down the line.

Don't despair, Boris. Remember I've counseled before on the folly of insisting on competence always in all things. When it comes time to ring down the curtain on the human race, you want a dolt in charge of overseeing the termination sequence.