The "Fight Club" Solution

One of my favorite bloggers is Rolfe Winkler over at Option Armageddon. He hits the nail on the head time and time again and I appreciate it. Among the many financial blogs I read when I can, his is the one that is the most educational and honest and forthright. This past weekend he mentioned the "Fight Club" Solution. One of my favorite movies, in which two guys plan to blow upthe buildings of all the credit card companies. Actually that is just a side plot, but it is amazingly funny how it relates to the situation we are in today. As Rolfe points out:

Few appear to recognize the depth of the crisis we face. Most still aren’t
prepared to ask the hard, fundamental questions about our economic system.
Anyone who mentions the gold standard, for instance, is treated as a
novelty. Nevermind that fractional reserve banking—or perhaps our central
bankers’ management of it—is the most important contributing factor to the
crisis.

The problem, I think, is that so many of our leaders are tied immovably
to legacy ways of doing business. A man will make himself believe most
anything if his salary depends on it. Lots of salaries are at risk, so
lots of heels are digging themselves in.

Anyway, as I’ve argued for awhile, the only way to “solve” the crisis is to let asset prices fall. And that means the balance sheets on which those assets currently reside need to recognize substantial losses. Call it the “Fight Club” solution*—everyonegoes back to $0. This would be highly painful for ALL Americans. But it would be most painful for those with the most to lose…

The good news is that this will eventually happen. In a way it already has started. Our major world banks are insolvent and it is only a matter of time before our governments are forced to recognize this fact and close them down in their present form. How do I know this and the government doesn't? Good question. I listen to what the markets tell me, and when Citi is under $2 and Bank of America is under $3, that tells me the market is only waiting for certain events to happen (nationalization among them) before dowgrading to zero. But nationalizing the banks, which even some Republicans are beginning to endorse, will not fix the problem. Because then the government would become the bank that won't write down these assets. Which will put the government in trouble instad of the banks. Not good. (Unless you are short the US dollar).

Restoring confidence in the financial system can only be acheived when the financial companies themselves become honest about their activites. Which means admitting their assets can't cover their equity/liabilities. Why why why won't/can't the government and the banks see what we americans can easily see? I used to ask this question every day, but I found my answer even though I secretly (from myself) already knew it: "it would be most painful for those with the most to lose."

The banks and the politicians are the ones with the most to lose.