Wednesday, September 05, 2007

On uncertainty of the Orwellian variety

During times of universal deceit, telling the truth becomes a revolutionary act. George Orwell

I suspect when Frank Knight wrote about uncertainty he was referring to that which occurs inadvertently. There is, however, another variety of uncertainty which is evoked by language intended to deceive- the uncertainty of which George Orwell wrote. War is peace. Freedom is slavery. Ignorance is strength- you get the picture. The aim of those who employ these tactics is to confuse the masses, which they do. But, as Orwell warned, if thought corrupts language, language can also corrupt thought. This type of deceit usually backfires because to tell a lie convincingly you must believe it yourself.

Take the most recent case of Sen. "wide stance" Craig, who wants us to believe that a resignation is not a resignation, or to be fair, an intent to resign is not really an intent to do so. The cynic in me argues that his true intent was to give the masses what they wanted and when things calmed down to remind us that he didn't really resign. While I find the gestapo tactics of the police in this matter to be a bit harsh I find his attempts to wriggle out from under even worse. Better, I think, to be straight up front- of course this is difficult when you're trying to distract people from the skeleton in the closet (who apparently doesn't want to come out).

Moving to economics, I find the linguistic gymnastics deemed necessary by the powers that be quite comical. Having massaged the statistics, or in the case of M3, dropped them down the memory hole altogether, and having declared the economy to be strong, robust, best ever (take your pick of positive adjectives) and not wanting to shout "fire" in a not yet burning theater, our economic solons are in something of a bind. They can't say that the financial infrastructure of our nation is teetering on the brink, or that the sub-prime loans problem is becoming a mess for the broader economy so they declare it contained. Heck, we can't even use the phrase "bail-out" when the government bails out the banks and their victims. If our economic managers ever wish to get ahead of the game they are going to have to try to tell the unvarnished truth and avoid managing expectations.

On the topic of sub-prime loans, I wonder if our foreign creditors would have been so eager to buy them in packaged bulk if they had been properly named- poorly collateralized loans to people unlikely to repay. I suspect bonds bearing that name would not have sold nearly as well.

Of course, the fun doesn't end there. The whole infrastructure of finance has been torn apart by Orwellian confusion. Banks, by virtue of all the linguistic gymnastics, as Paul Krugman and then BBK President Axel Weber put it, are no longer banks. Paul Kedrosky calls the current mess a non-bank bank run, a styling of which Orwell would be most proud.

The root cause of the mess, in my view, was a desire to do an end run around the Depression-era baking regulations by changing the names. If a bank was forbidden to do something a new entity was created, think Mahonia Ltd. and Enron, and it was done, all off balance sheet and outside of regulations. The US government is no slouch in this department either, although they simply declare more and more deficits to be off balance sheet. Thus a US$425B (through July) increase in the public debt becomes a deficit of US$157B.

Of course, as we are now learning, just because something is off the "official" balance sheet does not mean it won't have an effect. Rather, it means that the traditional tools we had used to solve such problems are no longer effective because the problems are "hidden" in the newly created non-bank financial sector. As Axel Weber put it:

The current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside the traditional banking sector.... the only difference between a classic banking crisis and the turmoil under way in the markets is that the institutions most affected at the moment are conduits and investment vehicles raising funds in the commercial bond market, rather than regulated banks. These entities were inherently vulnerable to a sudden loss of confidence on the part of their funders because “there is a maturity mismatch” on the part of financial institutions that have invested in long term mortgage-backed or asset-backed securities using short-term finance.

The rhyme from Sir Walter Scott's Marmion comes to mind: Oh what tangled webs we weave when first we practice to deceive.

I'm glad I stuck with my Gold, which, by the way, isn't non-Gold gold, but the physical variety.


kahunabear said...

Suprime? Aren't your referring to non-performing non-conforming loans? Ha.

STS said...

Gold is starting to shine a bit ... maybe your patience is beginning to pay off.