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Years of Magical Thinking: Our World After the Banking Crisis


A year-end review reveals how long "bad" has been "good," and considers what 2011 holds for the economy.

To these eyes in all segments of the economy, we have traded hard "choices" for denial. But I can't help but wonder if the ultimate consequences from our Years of Magical Thinking will be far greater than had we made the tough choices beginning in 2007, particularly as governments (at all levels here at home and in Europe) have leaned heavily on "financially engineered" solutions. Maybe it's just me, but QE2, the second round of fiscal stimulus, the securitization of tobacco settlements, the ESFS, and so forth, all resemble variations on the same "off-balance sheet" liability theme which began this crisis.

As I look at the world, wherever possible, elected officials have traded more contingent liabilities for time.

But beyond the financial implications of this trade, there have also been immense social consequences. As I offered earlier this month in Our Increasingly Dangerous Asymmetric Economy, I am very concerned that our Years of Magical Thinking have widened an already tenuous divide between "The Haves" and "The Have-Nots." And not just here at home, but in Europe as well.

To these eyes, 2010 represented a doubling down by developed-nation policy makers on the bet that what we have experienced is nothing more than a temporary recession which can be righted by extraordinary measures. That through financially engineered CPR, the distressed patient can not only be brought back to life, but ultimately thrive anew. But looking at bank loan portfolios, where with the exception of credit cards, delinquencies today are comparable to levels a year ago, I still have my doubts.

But I would also note that in Kubler-Ross' Model of the Five Stages of Grief, the end of the denial phase is marked by "heightened awareness" of the problem. And while others may think that what the market knows doesn't matter, the fact that everyone today "knows" and speaks openly about the problems of our cities, states, and nation (not to mention the periphery of Europe) suggests to me that rather than recovering, we are actually moving from the first to the more troublesome second stage of grief: anger. And one need only look at the periphery countries of Europe for examples of anger. (And here I would again note that phrases like "overlord" (used to describe Germany by those in the periphery) clearly capture the feelings of rage and envy of those experiencing the second stage of grief.)

Among the observations in The Year of Magical Thinking, Ms. Didion offers, "I know why we try to keep the dead alive: we try to keep them alive in order to keep them with us. I also know that if we are to live ourselves there comes a point at which we must relinquish the dead, let them go, keep them dead."

To date, and for obvious reason, we have been unwilling to relinquish The Age of Aspiration. We have tried to keep it alive and to keep it with us. And reading the financial media, there seems to be uniform agreement that 2011 can be yet another Year of Magical Thinking.

But to me that requires not just an economic recovery, but an economic resurrection. That denial transitions not into anger but to sheer joy.

Can that happen?

Based on my track record above, I am clearly the wrong guy to ask -- at least for now.

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Position in SPY, SH, and JPM.
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