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Conformist Self tries to defend current economic news

March 27, 2012

See previous conversations between Contrarian Me and Conformist Self here and here.

Conformist Self: Where have you been, Me?

Contrarian Me: I have been here. 

Conformist Self: So, why haven’t you been writing surly little notes in your blog? It’s kind of hard when all the financial and economic news is going against you, huh?!?

Contrarian Me: The equity markets are up, so what? 

Conformist Self: Up… ? So What… ? Man you are thick!! The S&P 500 hit an all-time high; unemployment continues to improve month after month; home sales are up; the consumers are back…  You just can’t stand success can you!!!!!

Contrarian Me: I still say the fundamentals; the issues that started this whole economic calamity, have never been dealt with.  

Conformist Self: According to whom? Oh, I almost forgot, you are an Ivy League economist, aren’t you!!

Contrarian Me: I have said all along that I expected that our economic activity would pick up simply as a result of monetary policy so a lot of these things aren’t really that surprising to me. 

Conformist Self: Oh, I see, you knew that the S&P would be setting a record high did you?

Contrarian Me: No, that is a bit of a surprise, but I believe much of the economic activity we have seen is the result of the Fed opening the liquidity floodgates. If you throw enough money at the economy, it will respond, but what is the final outcome of this experiment. I don’t think we will know its full effects for many years.  

Conformist Self: I like how you dodge the question, or at least skip over it rather quickly. Why can’t you just admit that you were wrong and we are in a full-blown economic recovery? Is the glass always half empty to you?

Contrarian Me: To the contrary, my glass is full, but I am concerned about the average family and the average worker; I think our actions now will affect them for many generations. 

Conformist Self: I know I will regret asking this question, but what could you possibly find at fault with all the positive news happening in our economy? Better yet, in one word, what could you possibly say to bring our current recovery into question?

Contrarian Me: Can I have two words?  

Conformist Self: No!

Contrarian Me: Thanks! Those two words are derivatives and liquidity.  

Conformist Self: Oh brother! Should I act surprised like you have just unveiled some new revelation?!? You are a broken record! If derivatives and liquidity are so bad, why hasn’t your prediction of apocalypse happened yet?!

Contrarian Me: Well… 

Conformist Self: You do realize, don’t you, that I’m not really asking you for an answer!!

Contrarian Me: As I was saying, derivatives were the untold story of the 2008 financial meltdown… 

Conformist Self: Oh PPPLLLLLEEEEAAAASSSSSSE!!!!!!!!!!!!!!!!!!!!!!!!!!

Contrarian Me: …and when the credit default swaps started a chain reaction meltdown, the Federal Reserve at the behest of the biggest banks knew they would have a bigger meltdown if they did not come to the ”rescue,” so they convinced our federal government that they needed to ‘act swiftly and boldly’ …  

Conformist Self: I’m sorry, were you saying something, I didn’t hear you…

Contrarian Me: …or they would be responsible for something worse than the Great Depression. You see, credit default swaps (derivatives) are highly leveraged, unregulated bets. Worldwide there are more than $700 trillion (that is with a “T”) of derivatives spread around the financial markets. In the United States there are about $250 trillion in these derivative bets and the “Too Big to Fail Banks” own over 95 percent of these highly leveraged and complicated instruments… 

Conformist Self: Let’s just pretend I’m actually listening to you — aren’t derivatives a zero-sum game?

Contrarian Me: Yes, I believe most derivatives act just like a bet, so there are some that are winners and others that are losers who take out derivative contracts. 

Conformist Self: So, if I’m not investing in derivatives, what do I care if some guy loses his shirt betting on derivatives? That’s not my problem!

Contrarian Me: Oh really? Who is it that bailed out these financial institutions?

Conformist Self: The government. 

Contrarian Me: With taxpayer dollars. And what is worse, just how does the Federal Reserve get their balance sheet back in order after doubling it in their effort to bail out the Wall Street casinos? You see, when the Fed pushes the print button on their computer, they are not printing some document like you and me.  No, when they hit the print button they end up infusing trillions of new dollars into the economy.

Conformist Self: Do you take yourself seriously? Everyone knows the Fed is printing money and thank goodness they are, because we would have been in much worse shape if they hadn’t; our whole financial system would have melted down. 

Contrarian Me: So that is what they say.

Conformist Self: Oh, but you know better don’t you? You know something no one else knows. You know better than even the financial markets, experts and paid professionals because you are so darn smart!

Contrarian Me: Short term, they have stimulated economic activity, but long term they will leave us with a severe hangover, which will certainly affect more than our immediate generation.

Conformist Self: I have heard enough. You are a helpless dweeb!

Contrarian Me: But wait, there is so much more…

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