Deleveraging, Sooner or Later

Metals up. Dollar down. Stocks up. That’s more or less how the last 24 hours played out on the global economic stage.

After digesting Act I of this week’s financial melodrama – the World Bank’s growth forecast downgrade from “soft” to “limp” – investors are bracing for Act II: Bernanke & Co. Will the Federal Open Market Committee (FOMC), who meet today and tomorrow to discuss the fate of the world’s reserve currency, be able to stay investors’ shaky hands? We have no idea, as usual, but it probably doesn’t matter anyway. The world will have to deleverage its house of cards one way or another. Sooner would be easier in the long run; later would be easier in the short term. Either way, tens of trillions of dollars worth of mal-investments need to be wiped from the books. That takes time.

That EZ-credit and over indebtedness are the root causes of the current debacle notwithstanding, most economists expect interest rates will stay put, in the “free to 0.25%” range. If you want to find the source of an idiot’s problem, just look at the solution he keeps applying to try and solve it.

What might our elected and unelected public servants do differently to avoid sinking deeper into the same mess, we wonder. For starters, they might try listening to people who actually got it RIGHT during the heady days prior to the collapse, rather than reenlisting the terminal inadequacy of those who got it so very, very WRONG.

A few months ago, two guys who saw all this coming appeared in front of a panel who didn’t. The entire video can be found here, but here is an overview of how the discussion went down:

“Even if we do everything right…” Nouriel Roubini told a panel of scoffing neckties on CNBC back in February, “we’re still going to have a sever u-shape recession [which will] last two years.”

“Yeah, but that’s not the end of the world, is it?” interjected one necktie from behind the safety of the studio desk.

“No, in that case it’s not the end of the world…but it’s still a recession that is three times as long as the previous two and three times as deep as the previous two. And, if you don’t do everything right, and I think there’s a large probability that’s going to happen, then we may end up in a multi-year near-stagnation or near- depression like the one Japan had, meaning an L-shape recession…and that is ugly.”

Next up, Nassim Nicholas Taleb, author of The Black Swan and another guy who “got it right.”

“What I see here is the same symptom that caused me to worry about the system. We have the same people in charge, who did not see the crisis coming who took humungous amounts of hidden risk, they’re still around; the bankers that got us here are still around, and we’re giving them more money, so I don’t see that we’re doing something to get out of the crisis.”

Mr. Taleb continued, “I would like to see the responsible people [for the crisis] not just punished, but out of office. Mr. Bernanke did not understand the risks the system was taking. I want him out of there.”

The “doom and gloom” tolerance level on the set must have been at fever pitch around this time, because they had to cut for a commercial break. Before they did, however, Mr. Roubini and Mr. Taleb were asked whether they thought Timothy Geithner’s plan might remedy the situation.

Mr. Taleb: “I don’t think much of all that class of people managing these plans in society. They failed and they’re going to fail again.”

Mr. Roubini: “I agree.”

Was Mr. Bernanke flicking through the channels that morning? Did he happen to catch any of that? Again, it probably doesn’t matter either way. Federal reserves do what federal reserves do: enable unsustainable, government-sponsored currency thrashing. It is infantile and delusional to think that the same ingredients will produce a different sausage. And, in an environment where more of the same means more of the same fraud and deceit, the smart few will take their dwindling dollars elsewhere.