Again, I would urge readers to step back and take a broader view; a bird's eye or arch-macro view, if you will. What is seen is not too pleasant. Consider the following.
The Fed's big mistake
To look at what it has done, you would think the Fed has been battling a major on-going liquidity crisis. While we did have a bit of a squeeze once along the way, that clearly has not been the major problem. Our big problem which the Fed and the Treasury have not really addressed is the insolvency crisis. It is on-going, but with the help of suspension of the mark to market rule, it is being too largely ignored.
The consequences are the financial system remains in the hole, with the Treasury holding its finger in the dike. Liquidity is no solution for insolvency. In fact, it induces the very problems which have led to insolvency. Too, as I have explained earlier, the Fed’s mortgage debt purchases have only shuffled a small portion of the bad debt from the balance sheets of the banking system to the balance sheets of the Federal Reserve Banks. This is no solution at all.
Several smart people agree, including Anna Schwartz, co-author of the monumental work, A Monetary History of the United States, Paul Krugman, a Nobel Laureate economist and James Galbraith, also an economist. Efforts to prop up the price of toxic assets and shuffle them between institutions is not helpful they contend. I agree.
Covering up the real problem
Too, the Bank for International Settlements -- the banker for central banks -- has been highly critical of the approach taken by the Fed, claiming the real failure earlier on was not to better regulate Wall Street and mortgage brokers and by the Fed making easy credit too available. The BIS argues that the Fed is now just using “gimmicks and palliatives” to mask over the problem. Such were the bailouts as well; they were largely band-aids for the officers of those banks.
The Fed and Treasury have done considerable damage by acting as they have. First, they have not addressed the insolvency crisis. Second, they have diverted attention away from the problem. Third, they have cost present and future taxpayers megabucks without delivering a solution. Fourth, they have drowned the banking system in liquidity, creating a huge asset bubble and the need for a messy and crucial exit strategy.
Fifth, they have loaded the Federal Reserve banks down with bad debt. Sixth, they have done little to aid or even recognize that the lack of Fed and Treasury regulations for mortgage brokers and Wall Street is a key reason for the mess we are in. Seventh, they have created a bad vulnerability for the U.S. economy, according to Reinhart and Rogoff, who explain the difficulties and potential instabilities an economy faces when it is loaded down with debt.
Creating a new bank oligopoly
This laundry list is not much for the Fed and Treasury to write home about. In fact, it is an embarrassment, in further part for a reason most have not addressed; it is this. Many, many smaller and medium sized banks are going to go under before this escapade is over. About 700 banks are now on the FDIC’s troubled bank list. To whom will their market share and customers go? The large and favored banks, of course.
The Fed and Treasury are building an oligopoly of big banks here, in case no one has noticed. Blankfein or his successor and his counterparts can then go for even higher salaries and bonuses. Fees to customers will then be more easily controlled and increased. We are buying buckets of headaches we haven’t even thought about publically yet.
Stupidity or malfeasance?
So what do you get if you are a public official in America and you have been getting it wrong? Usually reelected, I am sorry to say. The electorate simply is not well enough informed to know better and keys too much on charisma, ad campaigns and code word sound bites. This is a sorry situation. And to talk about people not listening, consider this.
Nobel Laureate George Akerlof predicted in 1993 that credit default swaps would produce a major crash in financial markets and, further, that future crashes are guaranteed unless the government stopped letting Wall Street place bets that they can never pay off if there is a systemic collapse. Even now, with Congressional Republicans fighting tooth and nail against regulation, we are not listening to Akerlof. Not to smart, I say. Or is it stupidity?
Worse than not listening, William K Black, a professor of economics and law and a former bank regulator, argues that the government’s current strategy “is to keep people from finding out the facts.” In other words, we have a cover-up. Black argues that here has been no honest examination of the crash because it would embarrass too many C.E.O.s and politicians. Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well.
As economist Dean Baker argues, “Instead of striving to uncover the truth, [Congress] may seek to conceal it” and tell banksters they’re free to steal again."
As a recent front-page story on ABC explained:
Even as many Americans still struggle to recover from the country’s worst economic downturn since the Great Depression, another crisis – one that will be even worse than the current one – is looming, according to a new report from a group of leading economists, financiers, and former federal regulators.
In the report, the panel, that includes Rob Johnson of the United Nations Commission of Experts on Finance and bailout watchdog Elizabeth Warren, warns that financial regulatory reform measures proposed by the Obama administration and Congress must be beefed up to prevent banks from continuing to engage in high risk investing that precipitated the near collapse of the U.S. economy in 2008.
The report warns that the country is now immersed in a “doomsday cycle” wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management – and when the risks go wrong, the banks receive taxpayer bailouts from the government.
“Risk-taking at banks,” the report cautions, “will soon be larger than ever.
“Without more stringent reforms, “another crisis – a bigger crisis that weakens both our financial sector and our larger economy – is more than predictable, it is inevitable,” the report says. The report was commissioned by the nonpartisan Roosevelt Institute.
The institute’s chief economist, Nobel Prize-winner Joseph Stiglitz, calls the report “an important point of departure for a debate on where we are on the road to regulatory reform.”
The report blasts some of Washington’s key players. The story also explained,
Our government leaders have shown little capacity to fix the flaws in our market system. Two other panelists, Simon Johnson, a professor at MIT, and Peter Boone of the Centre for Economic Performance, voiced similar criticisms.
Moving beyond doubt
Nobel Laureate Joseph Stiglitz is much too charitable, I think. My take and that of a growing number of others is we are slipping from misfeasance or stupidity into overt malfeasance, especially among Senate Republicans, many behind the scenes and by the leaders on Wall Street.
This is not a good situation.
Disclosure: No positions
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