"Conceive my guile, my duplicate duplicity, my play on ignorance and gullibility! Is it any wonder that I have gone into the banking business?" - Flann O'Brien.
It is hardly an exercise in superstring theory to reach the conclusion that the current Depression bears many similarities to the one that began in 1929.
Bubbles, greed, disinformation, insider trading, the cornering of markets etc, all in a lightly regulated environment.
And the institutional responses have been virtually identical too.
The slashing of interest rates, political support, officials buying into the market in order to support the price, playing the currencies, quantitative easing...
The differences are merely those of magnitude.
We understand that Ben Bernanke is an expert on the 1929 Depression, but we didn't realise that his expertise are in the implementation of such a financial crisis rather than its effective prognosis and treatment.
Neoclassical free market economists are a menace.
Their greed is psychopathic and their modelling is simply not robust.
We start this post by looking at how the banks have mismanaged risk.
George Soros: "We are in a far from equilibrium situation."
When the various protagonists were employed in profiting from the selection box of bubbles that were being globally inflated, their entire risk assessment was based on a naively linear form of mathematics.
The statistical treatment of risk was thus set so that it covered 99% of potential hyperrealities. To extend this percentage further leads to efficiency issues, in a capitalist's eyes at least, and risk/return assessment is short-termist in a psychopathic marketplace with the result that the 1% of incidences that are not covered by the normal distribution are neatly swept under the carpet and dutifully ignored.
Consequently, the system is primed to engender Black Swan uproar events.
But this is only a tip of a colossal iceberg.
Fractal mathematics renders the normal distribution useless as a risk management tool.
Benoît Mandelbrot, for example, has shown that the stock market should show daily volatility greater than 7% once every 300,000 years. In the last century, 7% volatility was breached 48 times. We could quote numerous other comparisons of similar instances.
The outcome, inevitably, is a steady flow of systemic crises that are not only not predicted by risk management but are, in many cases, exaggerated by the internal processes for accommodating risk.
And even where the risk may be monitored to a desirable degree, the repackaging and reselling of risk around the financial marketplace leads to all market participants failing to anticipate where the real risk lies.
This, of course, was the foundation of the credit crunch - financial institutions would not touch one another with a bargepole for fear of contamination.
Markets are functions of psychological and economic mechanisms, but evolutionary selection underpins the former and undermines the latter.
This produces various windows where the markets are primarily psychological in format.
We are currently in such a window.
Edmund Phelps: "Risk assessment and risk management models were never well founded. There was a mystique to the idea that market participants knew the price to put on this or that risk. But it is impossible to imagine that such a complex system could be understood in such detail and with such amazing correctness... the requirements for information... have gone beyond our abilities to gather it."
In the short period since we last updated the progress of the Depression, or 'downturn' if you are a BBC viewer, the onslaught of catastrophe and even more catastrophic response continues without remorse.
* The American Stimulus - Despite obstructionism from the previous regime, the US has revealed the latest handout to save the financial world.
Obama - "Democrats and Republicans came together in the Senate and responded appropriately to the urgency this moment demands, and the scale and scope of this plan is right."
Paul Krugman (this year's Nobel Prize winning economist) in response: "No, they didn't, and no, it isn't."
The plan has been hijacked by the middle ground.
It will not succeed.
* The Bubble in Government Bonds - January was the worst month for government securities in decades. But if the US selects an inflationary strategy to magic away its debt, government bonds will be directly in the path of the ensuing hurricane.
* Quantitative Easing - Both Britain and the US are responding to the crisis by quantitative easing or, in the English language, printing more money.
Now, where's that wheelbarrow...?
* Goldman Sachs estimate (and thanks to Hank Paulson, they should know) that the total value of troubled bank assets ie toxic assets is $5.7 trillion. The government handouts are simply a giveaway. They are not substantial enough to dislodge the systemic dysfunction.
* In Britain, Slack Jaw and his cronies are actively devaluing the pound in order to make British manufacturing more competitive. Our savings are not safe and their relative value is deteriorating, while our taxes are utilised to save the perpetrators of the crisis at our expense and, much more importantly, significant future risk.
And yesterday, the British government's Architect of the Depression appeared before a committee of MPs to be quizzed on his mismanagement of the financial sector.
But the occasion was, as expected, a neoreality.
Slack Jaw had been provided with the questions ahead of time and is too poor an actor to learn his lines without repetitive and excessive use of a script.
What a pseudo-democratic farce that charade turned out to be...
* Bad Banks - Both the US and Britain are introducing the concept of Bad Banks - do we not already have such entities in munificent abundance?
Joking aside, this is a very very very bad idea indeed.
All responses to the current crises have been reactive, there is no auxiliary to supplement the non-sustainability of the free market system.
The Bad Banks idea comes from Sweden, who utilised such banks to deal with their financial crisis in the 1990s.
The differences between the crisis in Sweden and the global Depression of today are paramount here.
The Bad Banks idea cannot be scaled up.
Both Britain and the US have excessively large financial sectors that, inevitably, contain equally large amounts of toxicity.
The amount of rubbish that the government would have to accept in order to establish Bad Banks is not viable.
As The Economist states: "The real worry is that the ultimate public price tag is much bigger than today's figures suggest."
* The Free Market Hit - It is the Friedmanist territories who continue to suffer the most in this Depression due to their inability to factor in risk and their excessive greed and idiocy. All countries who embraced free market ideology are being exposed to not only the Depression but also an assault on their currencies. Nowhere near enough money has been released to rescue the Good Ship Neocapitalism with the result that it is in these territories that the largest job losses and the most business failures are to be found.
* Disinformation - The deeper the mess, the greater the economy of truth in the mainstream media.
Two examples...
Firstly, British officials are buying into the stockmarket to support prices. There has been no public disclosure of this tactic (one would have to hesitate to call it a strategy) and yet a threshold has been drawn and officialdom will repeatedly intervene to prevent the markets plummeting below these barriers.
For now...
Secondly, in Asia there is political censorship regarding the state of the markets. For example, in the US client state of South Korea, when critical brokers' opinions are quoted in the media, regulators now want an explanation.
This has an impact on the hyperrealities in that, in 2008, South Korean brokers published 17,335 reports, of these there were 14,903 "buy" signals and precisely zero "sell" signals.
Despite this gross abdication of governmental and journalistic duty, the stock market still fell by 41% last year.
* The Lunatics have taken over the Asylum - When everybody with a strategic view was questioning the risk management of the markets, Alan Greenspan attempted to put us all at peace: "Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary."
Of course, Greenspan has since entirely altered his mind about the Reality of free markets.
But, throughout the build up to and the onset of this Depression, inappropriate free market ideologues have been in charge of policy.
Paulson has skulked off with his bonuses, while Bernanke continues to fail to see the big picture.
The new Treasury secretary Tim Geithner was involved in the conveyor belt of incorrect responses to the crisis implemented by Paulson/ Bernanke.
Geithner is the past.
He has already been a considerable part of this "flood-tide of corporate larceny".
If Obama or Slack Jaw had serious intentions to address the Real state of the planet and the financial system, they would have utilised non-neo economic input.
But Obama is in the hands of the Chicago School, while Slack Jaw takes advice from hedge fund managers and the like.
Where is the input from Joseph Stiglitz, Nouriel Roubini, George Soros etc?
In the second part of this post, we will look at the year ahead in the global markets as the Depression deepens.
André Sapir: "Government policy should not be aiming to avoid a repeat of 1929: it has already failed to do that. Instead it should aim to avoid 1930-32."
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