Capitalism 2.0: Burning Cortez’ Boat

This is a post about Safety Nets, and Cutting the Cord.
 
It’s about what I call Capitalism 2.0, a schema for figuring out, documenting and executing the going-forward economic paths and corresponding public policy positions needed to get to the other side of our Economic Storm in direct, honest, rapid and (wherever possible) market-driven fashion.  
 
What follows is a true story to frame what’s going on.
 
A friend of mine is a member of the Top 100 Club in his Industry. A wheeler-dealer, his industry group had a conference to probe everyone’s outlook for the year ahead. Government and private sector economists also took part in the session.
 
The event yielded some interesting conclusions. One, there remains a lot of overhang within the system.  By overhang, I mean a few things:

1. Assets where a preponderance of artificially high valuations support a financial myth. This has lead to a market where banks sit on falsely valued assets interminably because they expect the government to step in and make them whole.  At the same time, they are reporting record profits, a disturbing asymmetry if you think about it.
2. Assets that have loans coming due for which there is no one else willing to re-finance, including the CURRENT lender. Logically, this suggests a wave of massive capital calls and foreclosures is coming.
3. Lenders have been playing a game called Extend and Pretend whereby they avoid foreclosing on underwater assets so as to avoid the day of reckoning.
4. The bubble that burst in Residential Real Estate is actually dwarfed by the one yet to burst in Commercial Real Estate.
   

And this does not even touch upon the consumer spending side of this equation, which I will get to in a bit. 

So with that framing, what was the outlook of the attendees, all Big Cos and Experts in their fields?

1. One third of the attendees think that the year ahead will be better than the last;  
2. The next third think that we are at bottom, but that we will continue to traipse along the bottom in the year ahead; 
3. The last third think that things are only to get worse in the year ahead.

In other words, there is no consensus viewpoint. 

The most telling read: an old timer saying that his view of the road ahead has never been so cloudy.

Ruminate on what that means in terms of National Agenda 'plan of record' thinking for a bit.  How do you solve a global problem when no one can agree on the cure and/or effectiveness of different treatment protocols?

 
The Come to Jesus Moment Awaits Us
The above is an explicit admonition that there is no obvious answer; no clear precedents; and in some cases, that what is broken cannot be fixed.
 
The fundamental reset is that Cheap and Easy Credit is being replaced by rigorous, transparent underwriting standards, and that this reset will change our economic footprint moving forward.
 
And to be clear, credit availability contraction will not be pain-free, as we have seen in the past year.  
 
Given that, we need to holistically re-think things like safety nets, universal services and cost-inflation containment mechanisms with a 20-year horizon in mind, as the 2-4 year horizon variety will not get the job done.  
 
Why? Because the alternative is a slow unwinding and de-leveraging, which history shows us from Japan's lost decade.
 
In parallel, we need to improve upon our policing, enforcement and punishment levers so as to: A) Ensure fair pricing levels; B) Protect against fraud; and C) Make 'service-level' expectations and results transparent to the market.  
 
Sidebar: To help you marinate on the complexity of the topic, watch this 60 Minutes segment on Medicare Fraud.  Just shocking.

 

 
Burning Cortez’ Boat
So many of our consumption patterns have been driven by a lifestyle enabled by cheap and easy credit. As that pattern unwinds, it will materially change the flow of funds through our economy.
 
At the macro level, this means that we must take write-downs aggressively, but factor in the appropriate safety nets.  

In parallel, maybe we also need to re-think the construct of Moral Hazard by holding people personally responsible for the ethics of their companies (versus perennially hiding behind the corporate shell); something we can only honestly do if we have tort reform.
 
This is the fundamental challenge of our time. To stand up as a society and say, “Let me pay the true price NOW so my kids and their kids don’t have to in the future.”
 
When you net that out, it’s akin to Cortez’ Boat; burning the boat so that there is no turning back.

Related Posts:

1. Engine Failure: When Financial Markets Fail
   
2. Capitalism 2.0: TED Spreads and Lessons from Japan’s Lost Decade
   
3. Getting Real: On Doomsday, the Demise of So-Called Experts and the New Arbitrage