Things were a bit slow at my office today, and during one of the dead spots, Gretchen crept in from the reception area and caught me visiting Second Life on my Linux AMD 64.
“Mr. Collins?” Gretchen spoke softly as she sat down in the chair next to my desk.
“What’s up?” I replied.
“That’s exactly what I was going to ask you,” Gretchen smiled. “What’s up with this stuff the government is doing, buying all those bad mortgages?”
“Actually,” I explained as I logged out from Second Life and swiveled in my chair to face her, “the government is buying up securities based on bad mortgages.”
“Why?”
“Oh, that,” I sighed. “Well, it all began when the banking industry started bundling mortgage debt into derivative instruments…”
“What’s that mean in English?” Gretchen looked at me imploringly, drawing a confused pout.
“They were making up stuff to sell each other, essentially,” I explained, “and creating markets for the stuff they made up based on the Greater Fool Principle.”
“Which is?”
“Anybody who buys derivatives is a damn fool, and the only reason they buy them is that they are confident they can sell them the next day to someone who is a greater fool than they are.”
“But,” Gretchen observed, quite correctly, “that system sort of fell apart earlier this year, didn’t it?”
“Yes,” I agreed, “and it did so because the speculative real estate bubble burst, like speculative bubbles invariably do, and for the same reason all speculative bubbles ultimately burst.”
“What’s that?”
“The supply of fools ran out,” I expounded, “just like it always does.”
“So,” Gretchen pondered, “is it like there have been lots of them throughout history or something?”
“Oh, yeah, definitely,” I assured her, “and the subject of speculation has ranged from things like stock in the South Seas Company in England to tulips in Holland.”
“Tulips? There was a speculative bubble for tulips?”
“Absolutely,” I confirmed. “And the more ridiculous the item, the more worked up about it everybody gets.”
“And these real estate derivatives,” Gretchen followed my thoughts, “they were pretty ridiculous?”
“Utterly ridiculous. They were based on mortgage loans made to people who didn’t have an ice cube’s chance in Hell of paying them, written on houses that were absurdly overpriced.”
“GZPZ,” Gretchen exclaimed, using an expression she must have picked up hanging around with folks from Prince George’s County, “that’s beyond fools, Mr. Collins – it sounds like the financial industry is populated by [expletive] idiots!”
“Call it,” I suggested, “the ‘Greater [Expletive] Idiot Principle,’ then. You won’t get any objections from me, that’s for sure.”
“And that’s why I can’t get a car loan,” Gretchen frowned, “even though I’ve been trying for, like three months to find someone who will lend me the money?”
“Right,” I confirmed. “Because of the real estate bubble collapse, the machinery of credit is locked up and running much more slowly than usual.”
“Like the economy,” Gretchen pointed out.
“Exactly like the economy,” I replied, “because the American economy runs on credit.”
“Like ‘I. O. U. S. A.,’ and stuff,” Gretchen nodded. “We aren’t happy unless we’re all up to our eyeballs in debt.”
“And neither are the [expletive] idiots in the financial industry,” I elaborated, “because when you’re like that, they get to charge you interest on interest.”
“Don’t I know it,” Gretchen muttered ruefully. “So, why’s the government buying up all those worthless mortgage derivatives, then?”
“Because the United States government is the biggest [expletive] idiot of all,” I proclaimed in a proud and cheerful voice. “You see, Gretchen, Uncle Sam is the [Expletive] Idiot of Last Resort. When all the other [expletive] idiots are cowering in piles of their own [expletive] and [expletive], expelled in a conniption fit from getting hammered by the collapse of yet another speculative bubble, along comes Good Old Mister American Eagle, hip boots on his noble golden clawed feet, shovel, mop, bucket and moist towels in tow, to clean up the God-awful stinking mess and wipe the filthy hinders of Wall Street’s spoiled, bawling babies.”
“Gee,” Gretchen remarked in a slightly awestruck tone, “when you put it like that, it almost sounds… patriotic.”
“Just a knack I have,” I modestly confessed.
“And so,” Gretchen reasoned, “when Uncle Sam proves he’s the Greatest [Expletive] Idiot Who Ever Lived and spends a trillion dollars on pieces of paper that the little [expletive] idiots on Wall Street don’t want to play with anymore, will doing that make those pieces of paper valuable again?”
“Well,” I answered, as clearly as possible, “yes – and no.”
“Huh?”
“Theoretically,” I continued, “yes, Uncle Sam functioning as the [Expletive] Idiot of Last Resort and buying up all those pieces of paper the lesser [expletive] idiots on Wall Street don’t want anymore does indeed get them out of the way so the financial community doesn’t have to look at them lying all over the place and worry about what to do with them anymore, but no, that’s hardly any guarantee those pieces of paper are ever going to be very valuable again.”
“Okay,” Gretchen conceded, “I’ll buy that, no pun intended. But isn’t raising that trillion dollars they’re talking about on the news going to make our taxes go up?”
“It could, but I don’t think it will.”
“But where else,” Gretchen protested, “can Uncle Sam get that kind of money?”
“Selling United States Treasury Bonds.”
“Treasury Bonds?”
“Yeah,” I informed her, “you’d be surprised how popular that particular alternative to taxation is with Congress and the Executive Branch.”
“Uncle Sam sells them? Are they anything like savings bonds?”
“Sort of. They’re really big, though – they come in denominations of ten thousand dollars, minimum.”
“So who buys them?”
“Various kinds of people and institutions – including lots of wealthy foreigners, for example.”
“What? Uncle Sam is selling us out to the Saudi Arabians and the Chinese?”
“Sure – and the Japanese, the Koreans, the Nigerians, the Indians, you name it, they buy them.”
“Oh, great! So, bottom line, what are these Treasury Bond thingies?”
“Debt.”
“Hey, wait a minute,” Gretchen exclaimed, “thinking about this is making my head hurt. Uncle Sam is going to solve the debt crisis by going into debt?”
“By going further into debt, anyway,” I vouched, “the national debt, which is what Uncle Sam owes on the T-bills he’s already sold, is something like nine and one-half trillion dollars already.”
“Oh, my God,” Gretchen blurted out, astounded. “And this business with the government buying worthless mortgage-backed papers is going to add another trillion, so Uncle Sam will owe, like, ten and a half trillion dollars? How much is that per person?”
“Right now,” I estimated, “it’s about thirty thousand dollars each for every man, woman and child in the United States. And after… let me see here… yeah, it would be about thirty four thousand.”
“Oh [expletive],” Gretchen grimaced, “I owe like, thirty grand, and when the Greatest [Expletive] Idiot of All buys those mortgage derivatives, I’m going to owe, like another four thousand bucks?”
“Unless, of course,” I reminded her, “you’d rather pay an extra thirty-four thousand dollars in taxes.”
“Eeek!” Gretchen recoiled at the thought. “What the hell would I live on – ramen noodles until I’m ready for Social Security?”
“If you just ate ramen noodles,” I surmised, “you wouldn’t live long enough to qualify for Social Security.”
“You call this living?” Gretchen shrugged indignantly. “I can’t even get a car loan. How on earth did things get so [expletive] up?”
“Well,” I analogized, “Wall Street is like a Little League baseball game. You have Rampant Greed up for bat, Animal Fear on the pitcher’s mound, Unrestrained Mendacity catching, Rabid Excitement on first, Total Panic playing second, Moral Turpitude playing third, Mindless Ego at short stop, Outright Thievery in left field, Ubiquitous Ignorance in center field, and way, way, way out in deep right field, you have the Securities and Exchange Commission, picking the scabs off his elbows and chewing on them while he counts the petals on the daisies.”
“Like the World’s Biggest [Expletive] Idiot,” Gretchen nodded.
“Of course. All those people at the SEC are in the United States Civil Service – they have to be a bunch of the biggest [expletive] idiots in the world, or it wouldn’t be a proper Civil Service organization.”
“So, okay,” Gretchen muttered, “Uncle Sam is going to sell those T-bill thingies to raise most of the money to buy all the…”
“Illiquid mortgage-backed securities,” I helpfully interjected.
“Right,” she agreed, “but why would anybody want to buy the Treasury Bonds in the first place? What makes the T-bills any better than the… ah, illiquid mortgage-backed securities?”
“The T-Bills are better,” I told her, “because they are backed by the full faith and credit of the United States of America.”
“Which means what?”
“They can’t default – T-Bills are considered an essentially risk-free investment.”
“Now how, in the world,” Gretchen demanded, a bit skeptically, “can the United States government make a claim like that?”
“Because,” I concluded, “Uncle Sam is the Big [Expletive] Idiot who prints our money.”
“And everybody believes that Uncle Sam’s paper money has value,” Gretchen remarked, “so it does.”
“Paper fiat money is the biggest collective mass illusion in human history,” I solemnly intoned.
“Which makes me wonder,” Gretchen mused, “who’s the bigger [expletive] idiot – Uncle Sam – or us?”