The feigned cluelessness in Paul Krugman's Sunday New York Times column [below] about the meltdown in finance is a good index of the cringing mendacity now emanating from those in service to the centers of power. I doubt an editor, or the publisher, Mr. Sulzberger, had to whisper in his ear to soft-pedal the situation. I don't even believe anything like his job depends on it. Krugman's glossing-over the truth is just social cowardice. He doesn't want to be called out dissing fellow members of his club.
Krugman avers to the Federal Reserve's two previous big efforts since August to bail out the insolvent banks, insurers, and hedge funds with cheap loans as "slaps in the faces" of these wobbling corporations — "yo, wake the fuck up!" — as if narcolepsy was their only problem. (Try that with a wino on the sidewalk outside the Port Authority bus terminal and see if he immediately signs up for rehab and a high school equivalency program.) Krugman calls the club's latest plan — for the Fed to just suck up their impaired and worthless collateral in exchange for more cheap loans — as a "third slap," saying, with all the panache of a midwestern Rotary Club secretary, that "the third time could be the charm." Had the monkeys already flown out of his butt as he wrote that, I wonder.
The line in Krugman's column I love best, though is this one: "Last month another market you’ve never heard of, the $300 billion market for auction-rate securities (don’t ask), suffered the equivalent of a bank run." His presumes that his readers go along with his pretense of innocence. We've never heard of the municipal bond market and it's too complicated to explain so "don't ask." Is he writing for the "newspaper of record" or Highlights For Children? Maybe it would be a good thing if readers of The New York Times asked what the fuck was going on in these markets so they could yank their depreciating dollars out and deploy them elsewhere or convert them into something of value.
Well it was a bad week on the money scene in what is sure to be a worsening year. Paul Krugman and his fellow club members can pretend that the hallucinated finance economy is not really flying to pieces. After all, he / they are trying to avert panic. But, as noted previously in this space, the only thing we have to fear is not fear itself. We have to fear the consequences of actions by a banking leadership that has shown the grossest irresponsibility (and an American public that has been conditioned to expect a steady diet of getting something for nothing).
The US faces a pretty stark choice right now: it can let the losers take their losses — both the big institutions who created and traded in fraudulent securities, and all the "little guys" who borrowed too much money trying to get rich quick, or trying live like the millionaires they see on TV. We can let them go down, and suffer the consequences of their bad choices (and maybe prosecute some of the culpable bankers and corporate executives), OR, in an effort to let these losers off the hook we can wreck the whole machinery of capital by making our medium-of-exchange worthless.
The people in charge — both in and out of government — can't face the losses, so for now they've apparently decided to wreck the currency. The dollar has lost two percent of its value against the Euro just in recent weeks, as cheap loans from the Fed pour into the black hole on Wall Street (never to be seen again). Other soft-peddlers in the media claim that the financial markets have "already priced in" yet another expected .75-point interest rate drop by the Fed this week, but I'm confident that such a move will only accelerate the dollar's vanishing act.
I'll admit, it's hard to believe what's going on in the American finance sector. But incredulity in the face of a rare catastrophe isn't the same as pretending that it not happening. A whole flock of black swans is flying in front of the sun. Don't expect to work on your tan this month.
source: 10mar2008
Friday’s employment report — which was so weak that it had many economists declaring that we’re already in a recession — was bad news. But it was actually less disturbing than what’s going on in the financial markets.
The scariest thing I’ve read recently is a speech given last week by Tim Geithner, the president of the Federal Reserve Bank of New York. Mr. Geithner came as close as a Fed official can to saying that we’re in the midst of a financial meltdown.
To understand the gravity of the situation, you have to know what the Fed did last summer, and again last fall.
As late as August the favorite buzzword of financial officials was “contained”: problems in subprime mortgages, we were assured, wouldn’t spread to other financial markets or to the economy as a whole.
Soon afterward, however, a full-fledged financial panic began. Investors pulled hundreds of billions of dollars out of asset-backed commercial paper, a little-known but important market that has taken over a lot of the work banks used to do. This de facto bank run sent shock waves through the financial system.
The Fed responded by rushing money to banks, and markets partially calmed down, for a little while. But by December the panic was back.
Again, the Fed responded by rushing money to banks, this time via a new arrangement called the Term Auction Facility. Again the markets calmed down, for a while.
But again, the respite was only temporary. Last month another market you’ve never heard of, the $300 billion market for auction-rate securities (don’t ask), suffered the equivalent of a bank run. Last week two big financial companies announced that they had been unable to raise the cash demanded by their lenders. Even Fannie Mae and Freddie Mac, the giant government-sponsored mortgage agencies long regarded as safe places to put your money, are now having trouble attracting funds.
One consequence of the crisis is that while the Fed has been cutting the interest rate it controls — the so-called Fed funds rate — the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that’s sure to worsen the economic downturn.
What’s going on? Mr. Geithner described a vicious circle in which banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing “significant collateral damage to market functioning.”
A report released last Friday by JPMorgan Chase was even blunter. It described what’s happening as a “systemic margin call,” in which the whole financial system is facing demands to come up with cash it doesn’t have. (A financial joke making the rounds, via the blog Calculated Risk: “Who is this guy Margin that keeps calling me?”)
The Fed’s latest plan to break this vicious circle is — as the financial Web site interfluidity.com cruelly but accurately describes it — to turn itself into Wall Street’s pawnbroker. Banks that might have raised cash by selling assets will be encouraged, instead, to borrow money from the Fed, using the assets as collateral. In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities.
Some observers worry that the Fed is taking over the banks’ financial risk. But what worries me more is that the move seems trivial compared with the size of the problem: $200 billion may sound like a lot of money, but when you compare it with the size of the markets that are melting down — there are $11 trillion in U.S. mortgages outstanding — it’s a drop in the bucket.
The only way the Fed’s action could work is through the slap-in-the-face effect: by creating a pause in the selling frenzy, the Fed could give hysterical markets a chance to regain their sense of perspective. And to be fair, that has worked in the past.
But slap-in-the-face only works if the market’s problems are mainly a matter of psychology. And given that the Fed has already slapped the market in the face twice, only to see the financial crisis come roaring back, that’s hard to believe.
The third time could be the charm. But I doubt it. Soon, we’ll probably have to do something real about reducing the risks investors face.
A plan to restore the credibility of municipal bond insurance would be a start (how crazy is it that New York State, rather than the federal government, is taking the lead here?). I also suspect that the feds will have to get explicit about guaranteeing the debt of Fannie and Freddie, which really are too big to fail.
Nobody wants to put taxpayers on the hook for the financial industry’s follies; we can all hope that, in the end, a bailout won’t be necessary. But hope is not a plan.
source: 10mar2008
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