Friday, April 17, 2009
Moldbug's Zombie America
"For example, everyone knows what a zombie bank is these days. They have also heard of the shadow banking system, which the Obama administration is doing its best to resurrect. ... To put it succinctly, America is a zombie nation because it is no longer possible to imagine her without zombie finance. ... Zombie finance is the financing of zombies. To be more exact: you commit an act of zombie finance when you lend money to a zombie. ... The zombie's creditors must therefore meet, divide up its assets pro rata and sell its executives as white slaves to the salt-pans of Tangier. ... If the zombie is an inherently unprofitable institution, the majesty brings its axe instead, and has a grave handy. ... But what I don't understand is what happens when we break this [natural] law. ... Again, a zombie loan is a loan to an institution which is unable to pay its obligations. ... So who would make a zombie loan? The answer is simple: only another zombie. But why would even a zombie loan money to a zombie? ... Zombie finance is a money-losing proposition; zombies are money-losing institutions. The symmetry is striking and perfect. Of course zombies lend to zombies. This is one of the best ways to lose money. ... The first fact to understand is that zombies lie. There is no such thing as a truthful zombie. ... And therefore, in the view of both the zombie borrower and the zombie lender--both of whom are zombies--the borrower is just engaging in the natural practice of refinancing its debt. ... For example, a common zombie sructure is that of patronage. In a patronage hierarchy, money flows downward and power flows upward. ... Another common zombie structure is that of bureaucracy. Bureaucracy can be seen as a form of patronage in which the commodity distributed is not money, but power--personal importance. ... The truth is that zombies act differently. Again, they have ulterior motives, and they are fundamentally dishonest. ... What we observe about the two voluntary forms of live transaction, profitable and charitable, is that both impose some discipline on B. It is this discipline that zombie finance destroys. ... Charity--true charity--produces discipline because true charity is in all cases a paternal relationship. In exchange for the gift of charity, the recipient surrenders his independence to the benefactor. ... In true charity, affection is always matched by obedience. If B surrenders himself to the care of A, he becomes the ward of A. A, his sponsor, assumes the obligation to support him, and also takes responsibility for any misdeeds B may commit while under his sponsorship. In return, B gives up his freedom, or at least his freedom to disregard the wishes of A. ... Freed from the discipline of profit or charity, the zombie lender becomes a free radical, an agent of destruction. ... My theory is that Dilbert and Brezhnev are the same thing. I call it the Dilbert-Brezhnev syndrome, or DBS. While we are certainly not the Soviet Union, my theory is that America has contracted a rather serious case of DBS. ... The Soviet Union was a world in which business bore no relation to profit. ... Nothing in America today is Brezhnev bad, but it is getting there. Furthermore, we cannot compare the America of 2009 to itself--we must compare it to the America of 2009 that should exist. Where is the iron broom of competitive discipline? How can pointy-haired managers, HR red tape and sensitivity seminars survive it? ... Let's take the loans that created the housing bubble. ... The loans were made because they could be securitized and given AAA ratings. Their AAA ratings were assigned by Moody's, S&P, and Fitch, the three major NRSROs, which are not in any sense private corporations. They might as well be a Department of Ratings. ... When resource allocation is not subject to the discipline of profitable exchange, everything decays and becomes foul. ... Since only a zombie will lend to a zombie, and the USG certainly lends to plenty of zombies, it must be a zombie itself. ... Thus, all zombie loans are ultimately government loans. ... A bank run is the banking equivalent of burying the corpse. ... This entire structure is dependent on that wonderful modern innovation, fiat currency. ... By the standards of 1909, Americans have no money at all. ... Often, when evaluating the solvency of an institution, no reliable accounting exists. ... So let's consolidate America into two separate balance sheets. Balance sheet A: USG and the banks. Balance sheet B: households and all other businesses. ... The most plausible explanation of an economy that is continually borrowing more money, and taking on more debt, is that the entire economy, as a whole, is a money-losing proposition", my emphasis, Mencius Moldbug (MM) at Unqualified Reservations, 9 April 2009, link: http://unqualified-reservations.blogspot.com/2009/04/america-zombie-nation.html.
Bravo MM. I have said many of these things myself. No axe though. The CNC guillotine. Tom Selling uses the largest possible entity concept at his Accounting Onion, my 30 January 2009 post: http://skepticaltexascpa.blogspot.com/2009/01/financing-bailouts.html. Yes, we need bank runs to discipline banks. I have attacked bank accounting as inadequate, particularly cost of capital allocation, on 21 February 2009 post: http://skepticaltexascpa.blogspot.com/2009/02/goldman-sachs-fools-or-knaves.html. One quibble: you write, "If the zombie is an inherently unprofitable institution". I say paraphrasing Henny Youngman, "for who"? The banks are profitable, for their managers who have no, or very little capital tied up in them. As I have said, "Interest is what the government promises to pay you to steal your principal". Well done MM.