I have to say, I’m increasingly repulsed when I read these stories:
Central Banks Take Action, March 11, 2008
American and some Canadian banks have suffered big losses as mortgage securities plunged in value. One result is that banks and other financial institutions have become gun-shy about lending, causing a cash crunch.
Bank of Canada Injects $4B into Financial Markets, March 12, 2008
The Bank of Canada is joining an international effort to help ease the global credit crisis, injecting $4 billion in liquidity into capital markets over the next few months.
Forget Spitzer, Fire Bernanke:
… it is clear that this week’s moves were intended to help beleaguered brokers. While it is perhaps impossible to speculate just which company is in most trouble because of poor disclosure and the use of opaque valuation techniques, the most important brokers whose failure would have systemic implications include the likes of Bear Stearns, Lehman Brothers, Merrill Lynch and Morgan Stanley. Coming as it does so close to the expected announcement of first-quarter earnings (most brokers close their financial year in November, hence their first quarter ends February), the fear being expressed on the street was that it had to be one of the bigger firms as otherwise the Fed would not have bothered.
Brokers hold billions of dollars in the very securities that are suddenly eligible for refinancing with the Fed, such as mortgages and other securities that have proven well nigh impossible to sell to investors for the past few months. This has spilt over into the rest of the financial system, hurting various cities and towns across the US as they try to refinance themselves. That in turn must have gotten the government and its central bank all hot under the collar.
At this stage perhaps readers will be wondering why I implied a crime had taken place on Wall Street when all that seems to have happened is that a central banker has tried to quietly save one of the large financial firms in its backyard. The answer is a little more complicated than that, and touches upon the curiously ignored principles of central banking.
Walter Bagehot, the patron saint of central bankers, suggested the following basic principles for central banks to help the banks under their supervision to avoid liquidity runs.
A. Only lend against good collateral to avoid losses for taxpayers at a later date.
B. Lend at extremely high interest rates to avoid the facility being used willy-nilly by greedy bankers.
C. Make public the availability of such facilities, so as to prevent doubts and suspicions in the minds of depositors and other creditors.
This week’s announcement by the Fed violates EVERY one of those principles. Firstly, the collateral being accepted by the Fed is tainted as the market’s complete lack of appetite (at any price) for the securities shows. By providing the ability to liquefy these securities, the Fed has effectively signaled that it would accept just about any junk.
Secondly, the cost of borrowing is not punitive; indeed it is agreeably low for anyone who cares to fill out a couple of forms. Thirdly, this facility was not used previously; therefore the market has been in some doubt about really how useful it could be.
In essence, this is a US$200 billion facility that is being misapplied to rescue a specific part of the financial system at a preferential rate, and without any disclosure required on usage. Given all this, it is impossible for anyone to expect that the ultimate cost of this facility will not be borne by US taxpayers.
A lot of people keep saying that this ‘credit crisis’ – which I believe to be manufactured so as to faciliatate the last, most massive transfer of wealth from the middle class to the masters of the universe – will end soon, but I disagree. It will continue as long as the Fed can keep printing money and short-sighted businessmen keep showing up on their doorstep, exchanging bad debts for good cash.
This is the tip of the iceberg. The cause of the debt crisis is not the borrowers. It’s the entire economic structure of the US and we’re casually watching it dissolve into oblivion. No one is willing to lend the US money any more. The Chinese, the Japanese and everyone else are packing their bags and going home, finding greener, more stable pastures in which to invest their savings.
The US has spent its last dollar, but is trying to borrow five to print another one. There’s no one to tax. This is what you get with Friedman-esque economic policies. Corporate taxes have been slashed to the bones and individuals just don’t make enough money any more to float the corporate glut that has taken over the mindset of American policy makers.
Inflation will begin to take heel and spiral out of control as exports – especially oil and other commodities – become unafforable. Americans will not accept $5 or $8 per barrel, but it will be their only choice as they watch the value of their currency plummet. More and more savings will be used to cover the daily cost of living.
Similar patterns have occurred before and we all know what happened to Germany in the years that followed their hyperinflation.
