March 16, 2008
Fed Chief Shifts Path, Inventing Policy in Crisis
WASHINGTON — As chairman of the Federal Reserve, Ben S. Bernanke has long argued that a central bank should base its policies as much as possible on consistent principles rather than seat-of-the-pants judgment.
But now, as the meltdown in credit markets threatens major institutions on Wall Street and a recession appears inevitable, Mr. Bernanke is inventing policy on the fly.
. . . That move (the Bear Stearns bailout) came just days after the Fed announced a $200 billion lending program for investment banks and a $100 billion credit line for banks and thrifts. In a move that would have been unthinkable until recently, the central bank agreed to accept potentially risky mortgage-backed securities as collateral.
. . . Fed officials expanded the program to $60 billion a month in January and $100 billion a month in March.
It is too archaic an argument that the Fed's job is to regulate the (existing) money supply, defend the value of the dollar and work to discourage market bubbles. The latter was a requirement before such terms as 'bubble' actually existed, but the clear message after 1929 was to rein in unrealistic exuberances.
Memories are unrealistically short.
Stock-markets are, by definition, unrealistically exuberant. But they have recently become infused with foreign capital, as China, Japan, the oil-rich producer states and a recovered Indonesia became capital exporters. Essentially, the world was flooded with money and only so many outlets for its investment. Infusions are not cool. Infusions are to investing, as chumming the water is to fishing.
Let it never be said that America is not an innovator, as chummy a chummer as has ever come down the economic highway.
Hedge-funds were the innovation of choice. The brand new and undefined hedge-fund industry (plowing the fertile fields of Congress and seeding them with money) convinced the oversight committees within government that they needed no such oversight.
Hedge-funds invented themselves on the fly, just as Ben Bernanke is now inventing on the fly. Their rationale, the story they told, the spin they spun was that hedge-funds were only open to the rich and the rich could take care of their own risk.
The rich have suddenly eschewed that vanity. The waters in which they back-stroked their way to billionaire status has suddenly become very cold.
Hedge-funds are the camel with its head in the economic tent. Director of Research at the Fed, Patrick Parkinson, testifying ten months ago before the Senate Banking Committee, said in part;
Hedge funds often are characterized as unregulated private funds that can take on significant leverage and employ complex trading strategies using derivatives or other new financial instruments. Private equity funds are usually not considered hedge funds, yet they are typically unregulated and often leverage significantly the companies in which they invest. Likewise, traditional asset managers more and more are using derivatives or are investing in structured securities that allow them to take on leverage or establish short positions.
The key wording there is 'unregulated' and 'leverage,' two of the bad old words from the bad old days following the '29 depression.
Although several databases on hedge funds are compiled by private vendors, they cover only the hedge funds that voluntarily provide data.1 Consequently, the data are not comprehensive. Furthermore, because the funds that choose to report may not be representative of the total population of hedge funds, generalizations based on these databases may be misleading. Data collected by the Securities and Exchange Commission (SEC) from registered advisers to hedge funds are not comprehensive either. The primary purpose of registration is to protect investors by discouraging hedge fund fraud. The SEC does not require an adviser to a hedge fund, regardless of how large it is, to register if the fund does not permit investors to redeem their interests within two years of purchasing them.
Translation--for those who might still need it--no one is watching the store. Not the Senate, the Fed, the SEC, the major exchanges or our esteemed Secretary of the Treasury. Mr. Paulson has been busily occupied elsewhere, mostly in China where he tries to convince those lenders of last resort not to take all their marbles and go home.
He has had some success, but it was strategic on the part of the Chinese (Saudis, UAE, et al) and hopelessly tactical for the U.S. Strategically, China has been getting their marbles out of Treasury Bills (as quickly as they can) and into ownership of American firms (equally quickly). Tactically, Paulson and Bush have framed this shift as a good thing for America, although the recent 10 Year Treasury Bill auction (where there were no buyers) might argue otherwise.
Rather than allow the hedge-fund collapse that would quite properly sting all those rich who could take care of their own risk (along with your pension fund), Bernanke has opted to print his way out of this one.
Weimar Germany and the Argentine hyperinflation were apparently discussed at Harvard and MIT on days when Ben slept in.
$200 billion merely to kick it off, another incidental $30 billion for Bear Stearns and then $100 billion a month to keep the wolf from the door until Bush leaves for the ranch. Over a trillion bucks in the first year and not one of them the storied buck that stops here.
After that, disaster--but disaster on the next president's watch. Or, as Nick Roerich titled a book of poems, "Death, But at a Good Price."
The watchword of this failed eight years will be "if they had only stayed the course." Mr. Bush will wag his finger over this line for years to come, riding off into the sunset. (He will ride a pickup truck, the rancher-president, unlike Reagan, does not ride a horse)
Not to worry that the two subjects of his admonition are up against the cold, hard fact that;
No world power in history has ever overcome an insurgency
No world power has ever printed their way out of an economic meltdown.
Ben Bernanke doesn't have the $!.3 trillion it will take to see Bush safely to the ranch next January. David Petraeus doesn't have the Iraqi political will to ease our withdrawal from Iraq. Those hopes and expectations are running on empty. Bernanke has no choice but to print the money it will take to keep us afloat on both fronts--the military in Iraq and the Dow Jones at or around 12,000. Hundreds of thousands dead, hundreds of thousands wounded, hundreds of thousands losing their homes, hundreds of thousands bankrupt is the legacy of hubris, the bitter taste of impeachable offense that is no longer on Nancy Pelosi's table.
When you're wounded and left on Afghanistan's plains, And the women come out to cut up what remains, Jest roll to your rifle and blow out your brains An' go to your Gawd like a soldier. ---Rudyard Kipling
Apparently no one read this poem or checked out the Russian experience in Afghanistan before invading.
When the money's all gone and there's no more to lend Don't look to your gov'ment, nor tap on a friend The perverts whose adverts kept makin' you spend Have gone to their Gawd with a profit ---Jim Freeman
Unless of course the United States goes against its recent Bush inspired left-handedness. It may finally hit the mother-lode of chance coin-tosses, find the pea under the shell, or proverbial peanut turned up by noted blind pigs--and printing money finally redeems itself. Could happen. I certainly make no claims to the word-smithing of Kipling, nor (thank god) am I Ben Bernanke.