Selling Zero

The end of the post consumer economy may be in sight. For decades we have lived on credit. We have borrowed money from the Chinese to buy Chinese goods. Lately the Chinese have openly stated that they hate us for devaluing all those dollars they are holding. They have threatened to stop buying government bonds.

Closer to home our banks actually lowered the number of loans they give out despite the bailouts and bonuses.

Paradoxically, the government is trying to ease credit, even though it was easy credit that got us in to this mess. At the behest of liberal legislators banks and regulators allowed and encouraged loans to people who didn't have a chance in hell of paying them back.

An examination of the the whole credit and loan system involved a practice I like to call selling zero. Through something called the fractional reserve system, when you deposit money in a bank they keep part of it and loan out part of it. If you come back to the bank and ask for your money back they would have to honor that request. In theory the bank could lend out more money than they have deposited. The additional amount they can lend out is controlled by the federal reserve bank and appears to us as money created out of thin air. Some call this a kind of Wall Street Ponzi scheme. Nonetheless, our economy has been built on it. Since the money is created out of thin air I like to call it selling zero.

There has been a practice in the loan industry of selling loans. Infact, a home owner might have found that every couple of years, or in some cases every year, the address to which his monthly payments were sent has changed because the loan was sold.

Taken together, these monetary practices have led us to our current impasse. Some financial wizards reasoned that if banks could sell zero by creating money from deposits. Wouldn't it be a neat idea to sell less than zero? Wouldn't it be cool to sell something that was worth less than nothing? Now where oh  where could they find such a thing? Ah, here it is. A loan which under no conceivable circumstances could ever be repaid. At last the unHoly Grail had been found, they repackaged  bad loans into instruments that no one understood and they sold minus one. Heck since it was all funny money you could say they were selling the square root of minus one which mathematicians call an  imaginary number.

And so these toxic assets  where spread far and wide and worse than that, they were not properly valued and regulated either in the United States or overseas. Whole countries began to construct financial edificies out of these toxic assets.

There were those who understood the principles underlying this toxic Ponzi scheme who bought and sold this septic tank funny money anyway. Why you may well ask? Well they relied on a principle called the Bigger Fool Theory. The Bigger Fool Theory roughly  states that no matter how stupid you were to buy shear and utter crap there is a bigger fool than you who will pay more money than you did to take that fermented steer manure off your hands.

The problem comes when some government bureaucrat regulator who, upon removing his shoes, can count to twenty, opens the package that, as they said to the transporter,  was never meant to be opened, and takes one whiff of the rancid offal inside. Once this red tape jockey starts screaming the emperor is naked, the shout gets heard round the world. Hey, everyone every where says, we bought a boat load of crap sandwiches here too.

And western civilization teeters on the brink.