Published on The Smirking Chimp (
http://smirkingchimp.com)
By Mike Whitney
Created Nov 29 2008 - 3:11pm
Things are getting crazier by the day. On Tuesday, Treasury Secretary Henry Paulson announced that the Fed would commit another $800 billion to fight the financial crisis which has spread to the broader economy and is causing sharp declines in consumer spending. The Fed plans to buy $600 billion of mortgage-backed securities (MBS) from Fannie Mae and Freddie Mac and another $200 billion of Triple A bonds from non-bank financial companies that provide financing for consumers. There's just one little hitch, Fannie and Freddie are already owned by the government, so buying the bad paper is like moving the figures from one ledger to another. It's pointless. Except for the fact, that by shuffling the paperwork, Bernanke can drive down long-term interest rates and (hopefully) rekindle flagging home sales. It's quite a trick.
And with the other $200 billion he can kick-start the securitization market by purchasing bundles of student loans, credit cards and car loans. Investors have been boycotting the asset-backed securities (ABS) markets for months now which has choked off the flow credit to consumers. So the Fed is trying to unclog the plumbing by stepping in as the lender of last resort. Of course, if the Fed really wanted to get money to consumers there are much easier ways to do it, like cutting the payroll tax or mailing out stimulus checks or issuing tax rebates to couples making under $60,000 per year. But that's not what Bernanke wants to do. The real objective is to reignite securitization because that's the vehicle the investment banks and hedge funds use to increase profits through leveraged bets on odd-sounding derivatives. (CDO, MBS, CDS). But no one is buying dodgy securities anymore because no one knows their true value. Until that can be worked out, investors will stay away. That's why Bernanke and Paulson would be better off with a little less liquidity and a little more transparency. Price discovery for structured investments is critical. If investors know the market price, then they'll jump in. If not; it's no dice.
Bernanke and Paulson are trying to tackle the financial crisis from the wrong end. This isn't about liquidity or "access to credit", its about confidence. The public's trust has been betrayed a million times over. They've been tricked with WMD, bamboozled with phantom enemies, and cheated with bogus securities. All the surveys say the same thing; public confidence is at an all-time low. As a result, fear and pessimism are more widespread than any time in recent history. People no longer expect tomorrow to be better than today. In fact, they expect it to be worse, and for good reason. The country has broken loose from its moorings and is adrift. There's no accountability at any level of government anymore; it doesn't matter how big or heinous the crime, no one pays. The justice system is a sham. In fact, the D.O.J. is just a weapon for destroying political enemies; that's it. The one noteworthy conviction in the last 8 years was home-decorating guru Martha Stewart. What a joke. In his memoirs, Bush can boast, "At least we got Martha Stewart off the streets."
And it's not just the justice system that lacks credibility either; it's the financial system, too. The stampede out of the stock market to US Treasurys shows how quickly trust can turn to panic. The downward spiral of the economy reflects the mood of the country; dark and gloomy. That's not something that can be changed with more liquidity. After all, the economy is more than the sum of its parts, just like people are more than just consumption machines that can be zapped like rats into spending themselves into oblivion. They're sentient beings who can see the deteriorating economic conditions closing in on them and threatening their security. They're scared. Bernanke--the academic--sees the economy through the lens of his research on the Great Depression. He, like many other monetarists, believe that the depression was the result of the one-third contraction in the money supply during the 1930s. It is a widely held view and it could be true. But if that's the case, than why haven't the Fed's myriad lending facilities--which have flooded the financial system with trillions of dollars of liquidity--stopped the markets from crashing and the recession from deepening. Could it be that there were other factors besides just money supply? People are hunkering down for a reason, and its not just lost revenue. They've lost faith in their institutions--the government, the banks, and the media; everybody is in it for themselves, and it shows. Even now, with the economy teetering at the brink of disaster, high-ranking officials like Paulson are still diverting hundreds of billions of dollars from the Treasury to their Wall Street buddies leaving nothing behind but a few scraps for the working stiffs. And Paulson isn't alone either; his Darwinian "dog eat dog" creed is the prevailing ethos of the corrupt oligarchy that runs the country, Republican and Democrat alike, it makes no difference. It's "me first" and the public be damned.
<snip>
The fact is, the Obama star-studded economic recovery team emerges from the same ideological petris-dish as Bernanke and Paulson. Their world view is shaped by the same strong sense of entitlement which will ultimately prevent them from enacting the regulatory reforms that they need to be put in place to restore transparency, confidence and credibility. Instead, they will unleash a torrent of stimulus spending (infrastructure and green technology mainly) followed by unorthodox monetarist/fiscal chicanery (like purchasing stocks on the equities market or buying long-term Treasurys) all of which will hide the fact that they are not forcing the bad debts out into the open so they can be written down and the markets can reestablish equilibrium.
No one disputes that Geithner, Summers and Volcker are smarter and more competent than Team Bush, and that, their Keynesian plan to inject massive doses of stimulus into the economy will have a positive effect. But that's as far as it goes. The men behind these remedies are limited by institutional loyalties that will keep them from overhauling the system in meaningful way. Neither Summers, nor Geithner nor Volcker would ever dare to tamper with the revenue-producing system which maintains the orderly division between rich and poor. That just won't happen.
http://smirkingchimp.com/print/18939/
Printer-friendly format
Email this thread to a friend
Bookmark this thread
(1000+ posts)
Send PM |
Profile |
Ignore
