by Chan Akya
Asia Times

There must be some­thing about men achiev­ing power that exposes them to fre­quent mis­uses of author­ity. In par­tic­u­lar, infi­delity seems a par­tic­u­lar curse for the pow­er­ful across the world. This week’s events involv­ing the gov­er­nor of New York, Eliot Spitzer, may how­ever have helped to hide a more egre­gious mis­use of author­ity, namely that of Fed­eral Reserve chief Ben Bernanke and his cen­tral bank­ing cohorts around the world.

In another one of those nice coin­ci­dences that seem to hap­pen when­ever Wall Street is down and out, the unpop­u­lar gov­er­nor of New York was found con­sort­ing with pros­ti­tutes through a Fed­eral inves­ti­ga­tion that has all the hall­marks of a “hit job” ordered from the very top. Spitzer was deeply unpop­u­lar in the cor­ri­dors of power, and espe­cially with the cur­rent Trea­sury Sec­re­tary Hank Paul­son, for dar­ing to take var­i­ous Wall Street firms down a few notches ear­lier this decade.

After also hit­ting other sacred cows such as large insur­ance com­pa­nies, Spitzer was ready­ing ammu­ni­tion to strike at the heart of the cur­rent sub­prime cri­sis by attack­ing the mono­line insur­ers and rat­ing agen­cies. It is almost too con­ve­nient that the dis­clo­sures of his extracur­ric­u­lar activ­i­ties came this week. Still, let us take every­thing said at face value and not attempt to con­jec­ture any con­spir­acy behind all this.

Peo­ple in Europe and Asia always find curi­ous the pre­oc­cu­pa­tion of Amer­i­cans with sex, espe­cially as the coun­try appears to look askance at acts of immea­sur­able vio­lence. This has been the for­mula for Hol­ly­wood — nary a nip­ple in sight but more than a few tor­sos get­ting blown to smithereens.

Be that as it may, the focus of the Spitzer case on two sep­a­rate legal areas, namely using a pros­ti­tute and sec­ondly for poten­tial money laun­der­ing, both appear strangely exag­ger­ated in the rest of the world. So the guy was hav­ing sex with a hooker; that’s essen­tially a prob­lem between the mar­ried cou­ple rather than being sub­ject of intense pub­lic debate. Spitzer is said to have been nei­ther crooked nor incompetent.

If any­thing, his per­sonal use of pros­ti­tutes may have con­tra­dicted his pub­lic cru­sade against broth­els and pimps. In essence, Spitzer had to resign because he was a hyp­ocrite. Read­ing that line, per­haps a few of you would won­der as I did about the impli­ca­tions of other politi­cians around the world being asked to resign for being hyp­o­crit­i­cal. Nope, I couldn’t think of any­one who’d sur­vive that either.

Sleight of hand
The sorry story of the gov­er­nor and his extra­mar­i­tal affair though helped to achieve some­thing much more impor­tant, namely to hide a brew­ing prob­lem in the secu­ri­ties industry.

On Mon­day, when the Fed­eral Reserve announced a new facil­ity to help banks finance them­selves by post­ing pre­vi­ously unac­cept­able col­lat­eral, stock and credit mar­kets jumped for joy. That is, until some­one started ask­ing slightly cute ques­tions on the lines of just who was in so much trou­ble that the Fed had to rush through an ill-prepared intervention.

As with the Sher­lock Holmes dic­tum of “who ben­e­fits from the crime”, 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.

In my last arti­cle on Europe (Euro-trash, Asia Times Online, March 11, 2008) I pointed to the fail­ures of the Euro­pean Cen­tral Bank, which sim­i­larly vio­lated the Bage­hot prin­ci­ples when widen­ing the range of accept­able col­lat­eral and low­er­ing the dis­count rate made avail­able to banks at the refi­nanc­ing win­dow. The Fed has entered into an arrange­ment that is eerily sim­i­lar to that of the Euro­pean Cen­tral Bank, whose actions have resulted in parts of the Euro­pean finan­cial sys­tem essen­tially becom­ing “zom­bie” com­pa­nies, ie dead but still walk­ing around.

From where I sit, it appears that Bernanke has opened a whole new can of worms in his efforts at main­tain­ing the struc­tural integrity of the US finan­cial sys­tem. The finan­cial means used are clearly at odds with what Amer­i­cans have preached to the rest of the world, includ­ing Asia fol­low­ing its 1997 crisis.

To that extent, it is clear that Bernanke suf­fers from a sim­i­lar com­plex to Spitzer, ie that rules do not apply to them because of mag­i­cal exclu­sions that are self-derived. Once we decide that both have com­mit­ted acts that are essen­tially ille­gal, it then becomes a ques­tion of gaug­ing just who com­mit­ted the worse crime.

Spitzer through his actions hurt his fam­ily and a small band of friends very badly. That how­ever pales in com­par­i­son to the wide-ranging sys­temic dam­age being wrought by Bernanke through his ill-considered actions. The wrong gov­ern­ment offi­cial resigned this week.