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Forget Spitzer, fire Bernanke

by Chan Akya
Asia Times [1]

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.