the visible hand

it is the theory which decides what can be observed – einstein

Bernanke stands out for 25…

Posted by ecoshift on August 17, 2007

Central banks’ easy virtue, easy money
By Julian Delasantellis

There’s an old story about the late British statesman Winston Churchill at a party. Probably on one of those many nights where never in the field of human excess had so much cognac, brandy and scotch been consumed by a person who historians now say was not an alcoholic, he staggered up to a socialite matron and posed a question:

Churchill: “Madam, would you sleep with me for 5 million pounds?” (In the 1930s, when the British pound was worth more than twice as much to the US dollar than it is now, this was a
particularly impressive sum over which to surrender one’s virtue.)
Woman: “My goodness, Mr Churchill … Well, I suppose … we would have to discuss terms, of course.”
Churchill: “Would you sleep with me for 5 pounds?”
Woman: “Mr Churchill, what kind of woman do you think I am?!”
Churchill: “Madam, we’ve already established that. Now we are haggling about the price.”

Thanks to last week’s events in the financial markets, we now know the price at which the world’s three largest central banks, the Bank of Japan, the European Central Bank and the Federal Reserve Bank of the United States, will drop their posturings about the importance of setting good examples regarding promoting sound banking, lending and credit usage policies and put their principles up for sale.

If the world’s stock markets lose, oh, say, US$2 trillion of valuation or so in a month, well, it looks like it’s at that point they start “discussing terms”. Since March, I’ve written a number of times in Asia Times Online about what has come to be known as the “subprime crisis”, but it was at the end of that first March 6 article, Rocking the subprime house of cards, where I first postulated that this situation would eventually degenerate to a point where central banks and bankers would be called on to intervene. This happened last week.

….economic conservatives say the role of government in ameliorating this crisis should be, at most, virtually non-existent.

Much like pregnant ghetto teenagers, they say that those suffering in the subprime crisis are there wholly through their own misguided actions, specifically, their greed. No government actions, including anything by the Federal Reserve, should be taken on their behalf. They must suffer the pain that is the rightful and just consequence of their imprudent actions. An editorial in Saturday’s Wall Street Journal summarized this philosophy very succinctly.

No one wants to see someone lose his home to foreclosure. But many of those most at risk bought their homes with little or no money down, and so have very little at stake economically. Bringing in the feds to bail them out would send precisely the wrong message – that risky or overly aggressive borrowing will be rewarded by the government rather than punished in the marketplace. To the extent that bad loans were made, the market needs to clear, not be propped up by federal aid programs …

With the current market turmoil, Mr Bernanke faces his first big test as chairman of the Federal Reserve. The biggest favor he could do for himself and the markets is not to give in to the temptation to do favors for Wall Street or anyone else, and to remain focused on his price-stability mandate.

What this editorial is trying to say is that the markets must be disabused of the notion that some institutions are, like those that lent billions to hedge fund Long-Term Capital Management in 1998, or the banks that lent to Mexico in 1982, “too big to fail”. Much as the ghetto teenager who loses her welfare benefits and so, like a modern-day Flying Dutchman of the service sector, is sentenced to push a broom at McDonald’s for all eternity, those who make mistakes must forever pay for their actions.

Warnings against the dangers of excessive credit utilization are also a regular part of Federal Reserve communications with the general public. In a publication titled Building Wealth, the Federal Reserve Bank of Dallas provides these dictums.

Liabilities are your debts. Debt reduces net worth. Plus, the interest you pay on debt, including credit-card debt, is money that cannot be saved or invested – it’s just gone. Debt is a tool to be used wisely for such things as buying a house. If not used wisely, debt can easily get out of hand …

Develop a budget and stick to it. Save money so you’re prepared for unforeseen circumstances. You should have at least three to six months of living expenses stashed in your rainy-day savings account, because as the poet [Henry Wadsworth] Longfellow put it, “Into each life some rain must fall.” When faced with a choice of financing a purchase, it may be a better financial decision to choose a less expensive model of the same product and save or invest the difference. Pay off credit-card balances monthly.

This is all sound, prudent and conservative financial advice; the underlying cause of the subprime crisis is that, for much of this decade, America’s financial elite has basically not practiced any of it. Do as I say, be cautious and careful, not as I do; I’m borrowing and lending like a drunken sailor with free tickets to a beer fest.

With this as intellectual background, you might have expected the conservative-libertarian economic community to have decried the Federal Reserve money-market interventions. After all, if a few or more primary dealers had imprudent connections, even if they were once, twice or more removed, with the subprime market, their insolvency and bankruptcy could only have a proper disciplining effect on the market. The example of their misery and penury will act to ensure that future market participants eschew the next upcoming financial-market inanity.

Not on your life. While it’s true that these economic conservatives are cradle-to-the-grave misanthropes who decry everything from government funding of infant inoculations to Meals on Wheels for elderly shut-ins, still they are proving themselves to be a lot more sanguine about the prospect of government assistance if the assistance is directed at members of their own elite class.

As former Ronald Reagan-era (1980s) economic official and current CNBC economic commentator, Larry Kudlow, put it in his National Review Online blog, “The Fed and other central banks are prudently injecting $131 billion of new cash to ‘facilitate the orderly functioning’ of markets. Fed chairman Ben Bernanke has the story right.”

Of course he has. Principles and ideologies are fine on a sunny day, but the subprime crisis is now threatening core institutions of the financial system that has rewarded the elite so generously – beliefs be damned, Bernanke, get in there and save our portfolios. For all the “financial education” the US Federal Reserve provides the masses, and all the verbiage about what cautious, exacting, circumspect bankers they are, this crisis, like all the rest that came before them and all those that are to follow, prove that they are, at crunch time, just Wall Streetwalkers, always available to compromise their principles to pleasure their masters.

In 1925, George Orwell lyrically described an encounter he had with a member of the sisterhood of the oldest profession in the world.

When I was young and had no sense
In far-off Mandalay
I lost my heart to a Burmese girl
As lovely as the day.

Her skin was gold, her hair was jet,
Her teeth were ivory;
I said, “For twenty silver pieces,
Maiden, sleep with me.”

She looked at me, so pure, so sad,
The loveliest thing alive,
And in her lisping, virgin voice,
Stood out for twenty-five.

That’s also sage counsel for Bernanke. As the credit crisis continues to deepen, and as calls rise for a 50-basis-point cut in Federal Reserve interest rates, he can always provide an effective palliative for his conscience by saying he “stood out for twenty-five”.

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