The Courts and the Iceberg

Greetings from Sedona…

I have to admit that I was as shocked and surprised as anyone at the employment report issued Friday, even adjusting for my normally intense skepticism about government generated macroeconomic data.  The payroll report showed only 18,000 new jobs created in June plus hours worked and average hourly wages were lower for the month as well.  The broader (and, in my opinion far more worthwhile) household survey showed a drop of over 400,000 people employed.

I will leave it to the mystically oriented economic theologians to analyze the meaning of the minutiae in this report.  What is really important now is that we are again experiencing exactly what the mainstream, Keynesian orthodoxy said could never happen – a crappy economy and sharply rising prices at the same time.  Worse yet, the anti-capitalist cronyism dominating our economy today has created a legally coddled class of elites on top of about 65% of the rest of the population which is getting financially crushed.  In other words, all the class warfare rhetoric on both sides of the aisle has resulted in policies ruining the very people they were supposedly designed to help – small business (republican/conservative) and the lower and middle classes (democrat/liberal).

For regular readers of my posts there have been no important new developments this week, only a continuation and confirmation of longstanding and much discussed trends.  This opens an opportunity to analyze a critical but sorely neglected component of the generalized malaise – the legal system.  The best way to understand the problem is to realize that no legal system can ever be expected to handle the effective bankruptcy or insolvency of an entire nation all at once.  This is exactly what happened in 2008.

Thanks to the inevitable bust following the boom created and fueled by the explosive expansion of worthless fiat money by the Federal Reserve, all the banks were hopelessly bankrupt and insolvent.  When only a few players go bust the debits and credits can be sorted out without a system wide impact.  The courts send some creditors to the barber and others are kicked onto the street with next to nothing.  People who are not part of the proceedings just continue on about their business.  When all the banks went bust at the same time then everyone is part of the proceedings and nobody can go about any business that requires bank credit when the courts cannot handle the volume.

This is the real and always unstated reason why massive intervention was jammed through the Congress after the fall of Lehman Brothers in September, 2008.  When real estate prices plummeted all equity was wiped out and the $trillions of mortgage backed loans on the books of the banks became worth much less than the value on their books.  This alone would have caused an old fashioned run on the entire system.  In addition, since everyone is now in the habit of borrowing short and lending long, everyone was insolvent (unable to meet current obligations).  There is no way the courts could have handled even a small fraction of the mess, leaving the entire economy frozen for years.

The proper response would have been to wipe out all equity holders and have the federal government reorganize the entire system.  This would also have required debt holders to take big losses as well.  Unfortunately, in politics even more than in business, money talks and buys all the influence necessary to keep cronies cool with a bountiful bailout at your expense.  Therefore, the Fed has effectively guaranteed the debt of the biggest banks (virtually the entire system) and is in the process of trying to inflate its way out.  Nothing has been done by the government to redress the rot underneath it all, including allowing the banks to literally falsify the value of the loans on their books.

Inflation is always the knee jerk reaction to problems of the nature we face today.  This avenue always ends the same way – another bust.  This time the bust will not take as long to develop as the last go round.  The legal system will be just as unprepared as it was in 2008.  The scandal surrounding the foreclosure process in residential real estate is just the tip of a giant iceberg.  All the insiders are trying to cover up the stench, but it refuses to go away.  The courts are hopelessly mired hip deep in the muck and the states have no money to spend to significantly increase capacity.  If I were a young man instead of the old dog I am today, I would seriously consider going into foreclosure and bankruptcy work which are likely to be huge growth industries for years to come.

This sad state of affairs is now global.  Under any rational accounting, the entire world’s banking system is bankrupt and on the edge of insolvency.  Ours is not the only legal infrastructure that will crumble under the weight of the collapse.  This is the real fault line for civil disorder, even more so than economic hardship.  It is one thing to take it in the wallet during a depression, it is quite another to have your whole life tied and bound in a dysfunctional legal bureaucracy.  In the meantime everyone is arguing over what amounts to pennies to bail out Greece or come to a deal to raise our essentially meaningless debt ceiling.

All the best to you all,

Stephen Reiss
[email protected]

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