Digging Holes in the Desert

Those of you who have seen the movie Casino probably remember De Niro's early line about the desert being the place where Las Vegas's real problems got solved. The movie was a (mostly) true-to-life depiction of how business was done when the Mob ran the city, and problematic people were disposed of in holes out there in the vast, dark expanse of the windswept desert...never to be seen again.

I lived in Vegas for a few years, and while I never saw any mobsters, I did hear about how, with the irruptive growth in the real estate market and suburban sprawl on steroids, Vegas Valley builders would occasionally unearth some old corpse from those notorious days.

Wall Street today has some real problems, with the decimals several places to the right of the worst problems the wiseguys ever had in running Vegas, and the high rollers have decided on the same outcome: digging holes in the desert. Like the Mob buried its "liabilities" in the dead of night, so the high masters of finance usually do their dirty work on the weekend, when the markets are closed.

We've already had some small holes dug and some lesser banks dropped in. That seemed to work, so now apparently the thinking is, no matter how big the corpse, it can be disposed of in an orderly fashion, and life can go on as if nothing is amiss. Now the idea has been broached of digging the mother of all holes (maybe we'll call it "MOAH") and just dropping all these subprime mortgages into it.

The line of thinking involved in creating a "financial entity" to absorb all of this and then quietly taking that entity out into the desert some night is classic Mafia mentality. The subprime mortgages, collectively, represent a great big fat blabbermouth that just won't shut up. Here the politicians keep glad-handing us and telling us "the fundamentals are strong," while this pesky trillion-plus in bad debt that was the froth on the bubble that propped it all up screams out otherwise, that we've got a major problem, that easy money and credit bubbles are no substitute for fiscal discipline, financial responsibility, prudent regulation, and common sense. So before the ultimate "gaming control board"--the American voter--starts to hear this blabbermouth "talking" about how one hand has been washing the other lo these many years, it's best for business if the blabbermouth were "silenced" permanently, and with extreme prejudice.

So look in the next couple weeks for this "entity" to be quickly named, and all of the bad debt to be sluiced into it. Then, probably sometime after the election, when the spotlight is elsewhere, the Powers that Be are going to duct-tape the entity, stick it into the trunk of a Buick, and drive it out into the financial desert.

However, the bad debt is only a symptom, not the actual problem. The problem still exists: the financial system is badly out of balance with reality. Houses are still overpriced. Eliminating the symptoms of imbalance merely encourage more imbalance. Moreover, the ability of even the Federal Reserve to dispose of this "corpse" without serious repercussions elsewhere in the system is questionable, given we're talking over a trillion dollars here.

What's worse is that The Powers That Be appear to be still stubbornly clinging to the mentality that houses must be an investment and must always increase in value so that Joe and Jane Consumer can cash out tens of thousands in equity every few years to finance cars and boats and vacations and whatnot out of thin air and "stimulate" the economy. As long as that fantasy is held so dear, the laws of economics will continue to have to be bent to make it come true...and we will have more meltdowns, more corrections, more Fannie Maes and Freddie Macs.