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Imagining a Post Pandemic World

How might a post-pandemic world look and feel? Let’s imagine a creative team at a New York City advertising agency pitching a campaign in 2050 for a new perfume (more than most products, perfumes are sold by attaching to the dreams and aspirations of their times).  The Big Apple, ...

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Afterword to the softbound edition.


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Silent Partners
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Affluence and Discontent
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Apes, Men, & Language
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COMMON SENSE AT LAST!


Friday January 16, 2009

We are in the beginnings of the collapse of a fiat currency. Actually, it's the collapse of a type of credit that has been treated as though it was currency, but it's rise and fall closely mimics the natural history of fiat currencies. Back in the 19th century banks would issue their own currency, backed by government bonds that would be held as security by the Treasury Department. Starting in the 1990s, financial institutions began doing something like this again, although this time around the currency has been the triple-A rated tranches of mortgage-backed securities (MBS) and collateralized debt obligations (CDO). And, while our forbears in the 19th century could assure themselves that a bank note was supported by the credibility of the U.S. government, this new currency was backed by the paid-for opinion of the rating agencies. Assured by Triple-A ratings that these instruments were money good and completely liquid, bankers thought they had discovered the philosopher's stone -- a risk-free, high-yielding asset -- and this new credit/money has found its way into every corner of the financial system from teacher's pensions to commercial paper to money market funds. Moreover, once the printers of this new fiat currency realized that there was an appetite for their product among yield-starved institutional investors, they did what every unrestrained ruler with a printing press has done since the dawn of money: they began minting more of it. In this case, credit/money was inflated through the re-securitization of already securitized assets. The Mugabes of hyperinflation in this case were the rocket scientists in structured finance, and the Zimbabwian extreme are so-called synthetic CDOs, arcane confections which invest in tranches of CDOs. These "innovations" leverage the underlying subprime assets to dizzying multiples so that tens of billions of dollars in subprime originations might ultimately support of a trillion dollars in CDO tranches. At the tail end of this whip, tiny variances from the assumptions about the performance of the underlying assets can vaporize the value of these supposedly rock solid assets. This new fiat currency exploded during the period of skyrocketing home price appreciation, but it should be noted that almost everything worked during that period. What securitizers and holders are discovering, however, is that a fiat currency rests on nothing more than the willingness of someone else to accept it. And, now that the market, most ominously the vast commercial paper market, has discovered that credit is not money, the contraction has begun. The question of the moment is whether anything can be done to slow it, much less stop it? Eugene linden [ Huffington Post ran this in Aug. 2007. I put it up now because Sheila Bair has just suggested the solution proposed in the last paragraph] If the Federal Reserve lowers rates, it risks a precipitous fall in the dollar and a big rise in long term rates, which would only worsen the situation for over-indebted consumers and homeowners. Similar risks accompany other Fed strategies by which they might inject liquidity (the only reason that the euro did not fall more after the ECB's massive liquidity injection was that central bankers around the world were all doing the same thing). Most likely, the best we can hope for is an orderly blood-letting with pain apportioned where it is deserved. The device that might help accomplish that might be a public-private corporation (largely funded by the big banks that promoted and profited from this mess) set-up to exchange currently illiquid CDO/MBS tranches for tradable notes in the enterprise. This will not solve the many other problems attending this credit contraction (including counter-party risk in the CDS market), but it will buy time, and time is everything when bills come due. We've done this before (Felix Rohayton's creation nicknamed Big MAC calmed markets during New York City's financial crisis in the 1970s), and it will help supply liquidity and price transparency in this vast market. A fix like this won't much reduce the pain for either investors or overstretched homeowners, but it could reduce the growing risk of panic, paralysis and systemic collapse. It will also minimize moral hazard by doling out financial punishment mostly to those who deserve it.

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Short Take

Relaxing COVID-19 Restrictions will Kill, not Save, the Economy


 

[This is a more developed version of the previous Short Take}

Those who want to relax mandates on self-isolation and social distancing to save the economy have got it exactly backwards. Reopen society too soon, and we risk destroying the economy as well as public order and our shaky democratic institutions. The reason comes down to two words: supply lines.

 Supply lines for necessities such as food are already under stress. Those going to grocery stories encounter random instances of empty shelves and vegetable bins. Smithfield Farms shut down a South Dakota plant that supplies roughly 4% of the pork in the nation after over 500 of its workers tested positive for the coronavirus. Other giant meat processors such as Tyson have also shut down plants for similar reasons. Farmers in the West are having trouble finding workers to harvest the crops now reaching maturity in the fields. And even if they manage to get the crops picked, farmers are out of luck if the truckers fail to show up, or the flow of packaging for their products get interrupted. 

Right now, these disruptions are episodic, but that should be concerning because we haven’t even seen the end of the first wave. What we have seen is that vital front-line workers such as nurses, doctors, EMT’s, and other first responders have had trouble finding protective equipment and maintaining morale. Some have staged walkouts over the dangerous conditions, and these are workers with a sense of mission.

By contrast, for most of the hourly-paid workers who keep supplies made, distributed, and sold, their work is a job that pays the bills. It would be appropriate if society recognized that they played a vital role, but mostly these workers encounter demanding bosses, monotony, and surly customers. If sick, they are not going to work – nor would we want them too. And they are not likely to risk their lives if going to work exposes them to contagion.

Disruption of one link, e.g. the trucker that delivers food the last mile, could halt a supply chain. COVID-19 is a threat to every link. Should a second wave hit before there is a readily available, cheap and effective treatment, it’s a very high probability that many supply lines will be disrupted and filling the gaps could easily overwhelm the nation’s businesses. 

Even today, on the evening news, we see images of vast caravans of cars lined up to get supplies from food banks. Imagine two weeks of empty shelves in the stores that feed our cities. How likely is it that civil order could be maintained in that situation? Will people suffer in silence if they realize that they can’t buy food for their kids because our leaders reopened the economy before a treatment was available because they wanted to prop up the stock market (which is how it will be portrayed)? If we want to look analogues for what life is like once supply chains break down, they’re readily available today in cities like Mogadishu, Kinshasa, and Port au Prince. 

 Thus far, the Trump administration’s response to the pandemic seems to be a mélange of Boss Tweed, Don Corleone and Inspector Clouseau. For the next act, the administration has a choice: Churchill, who bolstered British morale during the London Blitz, or Pol Pot, who sacrificed millions of his countrymen for a bad idea. Let’s hope those around Trump can convince him that the cure for the disease is the cure for the economy.
 



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