"Those that fail to learn from history are doomed to repeat it"

-Winston Churchill, George Santayana among many others-

There is an economic catastrophe that is coming our way. We are facing a depression, and those in the halls of power and the media are either too scared, too incompetent, or too selfish to let the people really know about it until it's too late. Yes, this problem is in part caused by the subprime housing bust but only in part and it goes much deeper than that. Saying that poor people with bad credit are to blame is really a red-herring to throw you off from the rotten truth behind the matter. Those behind the scenes have been privy to just how dire things are for quite some time now but they know that there is no quick fix. No brilliant corporate whiz kid to storm in and save the day. In fact, the smartest guys in the room are currently doling out a bit of cash to the common folk to keep us occupied, while they are grabbing as much as they can while the getting's good and heading off to the waiting chopper on the roof. Just what do we face? This has happened to us before but on a much smaller scale. It was called Enron, and it should have been a wake up call for all of us.

In Enron there were some real smart guys who came in and figured they could game the system. They could cheat the machine and use something called "voodoo-economics" to create profit where actually there was debt. In short they lied, and made money because people swallowed their lies. They lied about their profits. They lied about their asset values (especially what their future asset values would be) And most importantly they created one of the most convoluted and confusing accounting structures on the planet. They had to do this so that whenever anyone asked where the money actually was, they would be shown this monolithic creation with a million whirring gears. The sheer complexity of it was enough to befuddle their OWN accountants and investors were awed, many so much so that they gladly spread the gospel of Enron as a "black box" company. It was just such a wonderfully complicated creation that an investor would be best not to worry themselves with the magic going on inside and just enjoy reaping the benefits of increasing returns coming out of it. This made a lot of money for the people at the top while in reality the company was drowning in red ink. The whole thing came crashing down as these things inevitably do, when the truth came out and people started to dig deeper into the structure that was created only to confuse from a distance. Even when serious questions were being asked by investors, Skilling and Lay intentionally tried to keep the myth of profitability alive as long as possible in a vain attempt to move as much money as they could and destroy as much of the evidence as possible before being seized with court orders and armed federal agents. Today the legacy of Enron is back with a vengeance, and the rammifications are going to be nasty to say the least.

The current problem is not exactly identical to what Enron did in practice, but it is frighteningly similar in concept. It is not something easily explained, and with 30 second sound bytes to tell a story on CNN you'll never see an economist trying to squish years of accounting theory down into a digestible talking point. In short, we've been lied to again. That's about as simple as it gets. A big part of the problem is the housing bust, but it's not the fact that homes are foreclosing or going unsold which is hurting us the most. The most damage is being done behind the scenes, in the gears and sprockets of the economy through which money is transferred. This is a part of life that most of us will never see, but it affects us daily. It is literally the machinery running in the background, concealed behind pretty stucco walls that spare us from ever worrying ourselves with having to see what's actually going on.

If you bought a home recently, what the banks did is they took your 350 K mortgage (or whatever it is) and decided that at the end of 30 years the price of your home would actually be worth, say one or two million dollars... adjusted for inflation, appreciating property values etc. Then they decided that because your home is a hard asset, existing on an even more valuable commodity, the land it's built on top of, that is something called collateral. Now collateral is a great thing, because if you have a hard asset as collateral you can use that to back up a business deal worth ten times the actual value of the collateral. That's not entirely accurate but should serve to give you an idea of where their line of thinking was going. Then they took it one step further and actually cooked up some numbers to further inflate the theoretical value of your home. So now on the banks books your 350 K debt to them is listed as millions of dollars. These millions of dollars were then bundled with thousands of other mortgages to form wonderful things called CDO's- collateralized debt obligations. These CDO's were bought and sold on the market to the tune of billions and used to fund multi-billion dollar deals. Through this, the banks managed to create hundreds of billions of dollars (or more possibly) that was essentially fake money. They did this through slicing and dicing debt from a hundred different sources and repacking it into other creations, a veritable frankenstein of accounting. This "virtual" money went into the market and was invested. Banks bought and sold to each other, with little to no regulation to verify that they were indeed honest deals that were worth the values listed on their books. So long as both ends of the deal winked and nudged and signed on the dotted line, life was good.

Now this never should have been allowed to happen. In fact in the 1930's laws were passed to prevent precisely these kinds of shenanigans from happening. But alas, these laws were seen as antiquated and "anti-business" just as the geneva convention was called "quaint" by one of the recent former attorney generals of the U.S. In mid-august the stock market almost crashed when banks stopped lending to each other, as the cat had been let out of the bag that billions of dollars on the market were essentially worthless. This came to light due to only a small percentage of rising foreclosures which made it plainly obvious that the majority of CDO's are toxic- they would be worth less than any paper you could print them on. Ever since then it's just been a game of keeping the masses happy with bread and circuses, while the fed and other financial heavy-weights try to prop up a system that's been too heavily saturated with bad money. The gears are grinding against each other and this "stimulus" package is just a squirt of oil to try and keep them going a little longer.

There are many other equally serious problems too- the manufacturing sector has largely been hollowed out in north America in the last few decades, leading to massive trade deficits with other countries. This is not good for inflation and a host of other key economic factors. The fed has been creating bubble after bubble and then over-inflating them as long as it can until they have no choice but to find another bubble. This started with the dot-com bubble to be replaced with the housing and national security bubble. Housing is now on it's way down hard and the truth is that no system can continuously grow. It's the laws of physics- what goes up must come down. They will attempt to find another bubble and then over-inflate it. My guess is that they're going to try and start a war to level the playing field but that's another topic in itself. In summary, we've been lied to folks. The media has been complicit in this lie.... they're spoon feeding us little bits of bad news rather than let us have the cold hard truth. Same for the politicos. 150 billion in tax rebates and a key interest rate cut are going to fix the problem? Nope. Truth is the experts don't know how to fix the problem but they're either too proud or too scared to say so. That, or they really are the smartest guys in the room and are busy moving their money and preparing that nice little hacienda in a remote, well guarded region.

Enron should have been a wake up call that removing regulations on big business in the name of "free markets" is a dangerous game. Instead we've gotten more greed and "wise men" who have decided to game the system. Sadly we have failed to learn from history, and now we are going to be repeating it on a much grander scale.