Akkam’s Razor If you are wearing a 'Born-to-be-Wild' t-shirt, you probably aren't.

The news has been consistently full of disheartening records of 'lowest since' and 'highest since' for quite a while.  Unemployment is still rising if not accelerating.   12% of all homes with mortgages are either in default, delinquent, or foreclosure.  Nearly every economic metric chart looks either like a moonshot or cliffdiving.  The Dow Jones has now fallen farther and faster than the it did in 1929. It's time to stop bluffing.

photo credit: Freddy The Boy On AIG - AIG can't be allowed to fail, because if it does, the derivatives that they 'insure' would essentially be worthless.  We'd see several large banks fail, and trigger a severe global depression.  So I guess that means billions upon billions to be spent on smoke and mirrors.  If not, the whole house of cards falls. On the whole mess - I agree with Clusterstock - they don't get it.  I've been saying the same thing as they have for years:

We are not having a "liquidity" crisis in which assets are temporarily worth less than they will be soon.  We are having a solvency crisis: Our mountain of debt is finally collapsing on top of us, and most financial assets are getting crushed.

Throwing more money at the 'liquidity' problem and avoiding uncomfortable talk about nationalization merely postpones and intensifies the risk of the inevitable - the failure of several large banks, which will then destroy the currency.   At best, we buy some time by having 'zombie banks' full of toxic assets, says Paul Krugman:

Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they're needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don't need or deserve to be rescued. And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) Realistically, it's just not going to happen. So why has this zombie idea - it keeps being killed, but it keeps coming back - taken such a powerful grip? The answer, I fear, is that officials still aren't willing to face the facts. They don't want to face up to the dire state of major financial institutions because it's very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.

Surely a domestic economic failure here will ripple across the world like a tsunami.  If you are wondering what it might look like, and maybe get some insight into how we got into this mess in the first place, see this incredible article on the collapse of Iceland in Vanity Fair.

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