Page 2 of 2 Bernanke running out of ammo
By Julian Delasantellis
which the financial system emerged in a far more dire state than it was in
during mid-September. There's no guarantee that a cut back then would have
staved off the current world catastrophe, but, with federal funds now trading
so far above the target rate, Bernanke seems to think he can instill the
confidence now, with the financial system much more fragile, that he didn't
think all that necessary just over three weeks ago.
But it's a lot harder getting confidence back once its gone than to just
maintain it. The markets are not at all certain the rate cuts will resuscitate
the short-term credit markets-thus, the aggressively underwhelming response in
the equity markets following the cuts.
If the markets are now saying that the Paulson Plan is too little (even at $700
billion) and too late, and the rate cuts are like
spitting on a forest fire, what's left? Amazingly, the solution may involve
some manner or form of government nationalization of the financial sector, and
that may be coming a lot faster than previously expected.
Last week, I speculated that all the various rescue proposals being tried and
then failing might not be designed to ultimately save the system, just to keep
it afloat until the inauguration of the next US president on January 20. (See
Crisis control fit for the TV age, Asia Times Online, October 3, 2008).
Now it is possible that the required time horizons for all these band-aids and
palliatives is not January, but just four weeks away - until the day after the
US elections.
What is that solution? Amazingly enough, and now almost 30 years after Margaret
Thatcher commenced the capitalist revolution by selling off Britain's proudest
heritage of socialism, its state-owned industries, talk is returning to the
prospect of a partial, or nearly complete, nationalization of the financial
system - the so called "Swedish solution".
Two weeks ago, University of California at Berkeley economics Professor Brad
DeLong laid out this possible solution to the crisis.
Nationalization
has the best chance of avoiding large losses and possibly even making money for
the taxpayer. And it is the best way to deal with the moral hazard problem ...
Congress grants the Federal Reserve Board the power to take any financial firm
whatsoever with liabilities and capital of more than $25 billion that is not
well capitalized into conservatorship ... requires the Federal Reserve Board to
liquidate any financial firm in its conservatorship when it judges that the
firm is insolvent.
Now it is revealed that the Paulson bailout
plan passed last Friday has in its small print provisions giving the US
Treasury Secretary the right to do just that, to "take" equity positions or
warrants in the stock of financial companies.
And where can you hear sympathy for this Commie pinko Berkeley subversion?
Believe it or not, it's on the editorial pages of the Wall Street Journal. Give
this to them; they're not starting small, like proposing a partial
nationalization of some small farm bank in Iowa or something. They're going for
the gusto, with their eyes on the nation's largest financial institution -
Citigroup.
If the feds want to prevent a full-scale rescue of
Citigroup, now might be a good time to take Treasury Secretary Hank Paulson's
new powers out for a spin. If Citi needs to raise capital, let the Treasury
inject some, along with appropriate housecleaning on the management side and
upside for taxpayers.
The Wall Street Journal advocating
increased government intervention? What's next, pork sandwich recipes in the
Jerusalem Post?
This approach is already under way in Britain, under the leadership of Prime
Minister Gordon Brown's Chancellor of the Exchequer, Alistair Darling. The
question then becomes, if the US and/or UK governments take a small ownership
stake in the financial system, say 5%, and that is seen as a failure, wouldn't
the natural tendency of government be then not to stop and reassess the policy,
but to double down and go at it harder, say to 10%, 20 , or, finally, to 50%+1
- in other words, full control?
George Santayana once said that a fanatic is someone who redoubles his efforts
as he loses sight of his goals, and, as George W Bush proved when initiating
the Iraq surge, no animal on earth is as fanatical as a politician looking for
alternatives to having to admit he was wrong.
In an editorial in the Wall Street Journal, Robert Pozen of MFS Investment
Management suggested that, since the problem now seems to be centered in the
commercial paper market, a solution specific to that sector's travails should
be initiated, in that the US Treasury or Federal Reserve could guarantee
transactions just in that sector.
The problem with this proposal is that it would either have to be authorized by
the US Congress, which is in no way eager to take upon itself even more public
displeasure with another move seen as a banker "bailout", or through
another one of the Federal Reserve's remarkable unilateral interpretations and
expansions of its authority.
The Fed has been doing so many of these this year, starting with Bear Stearns
in March, then to the rescues of Fannie Mae and Freddie Mac and AIG, that one
must wonder if Bernanke worries just how much firepower, both in terms of
monetary reserves and credibility, he really has left.
Also, since the commercial paper market stretches across the globe, is the US
Fed really going to backstop transactions between, say, an Icelandic bank and
an Indian steel company? That's a tall order, indeed. Still, this could be a
short-term strategy employed from now until the US election, after which, it is
hoped, the adults might be in charge.
When the history books start to write of what has just happened in the world
financial markets, I hope plenty of space is reserved for that cockeyed
cowpuncher of capitalism, Mr All Hat and No Cattle himself, Dallas Federal
Reserve Board president Richard Fisher.
All year long, Fisher has been warning that inflation was a bigger threat to
the world economy than recession and unemployment, a contention that has now
been proved spectacularly wrong. Up until very recently, he had been advocating
higher, not lower, short-term interest rates, a policy recommendation that, had
it been followed, and knowing what we know now about just how weak the economy
actually is, would have been spectacularly harmful.
It was in September that Bernanke, evidently hoping to get Fisher back into his
flock and stop his habitual dissents from the post-meeting Fed statements,
agreed to the interest rate hold, when a cut could have provided far more
benefit than the one we just saw.
Fisher joined in the majority with Wednesday's cut, proving, once again, that
the best way to make a person see the light is to have him feel the heat. For
many American senior citizens who had hoped to be able to live out their golden
years gently drawing down their hard-earned stock wealth, these days they're
doing both, feeling the heat and seeing the light. The heat is from the
sizzling griddle at their new part-time job at a Florida McDonald's, and the
light is what they see flicking off when the next basket of French fries in
boiling oil is ready to be served.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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