There is a story on how after famed early 19th-century German philosophy
professor Friedrich Hegel finished a lecture, he took questions from his
students.
"Herr doktor professor, pardon me, but your theories have no relation to the
facts." At this, Hegel slammed his fist down on the lectern. "Then, so much the
worse for the facts!"
Had doctor (PhD, Massachusetts Institute of Technology) and professor
(Princeton) Ben Bernanke been taking questions following Tuesday's meeting of
the Federal Reserve Board's Open Markets Committee, the Fed chief might have
faced a question like that.
"Dr Bernanke, your statement that we can soon expect 'moderate
economic growth' has no relation to the facts."
And in leaving US short-term interest rates unchanged, Bernanke bellowed out to
the markets, and to the world economy as a whole, "so much the worse for the
facts!"
For the third time since last spring, a meeting of the Federal Reserve's
interest rate setting Open Markets Committee has come and gone with short-term
rates unchanged, at 2% for the Federal Funds target rate, 2.25% for the
Discount Rate. This relative stability followed, from August 2007 to last
April, the most aggressive pace of Federal Reserve easings in almost 30 years,
with seven easings of the target rate and nine of the discount rate during that
time.
Bernanke might have noticed an empty chair at the meeting, and it wasn't
because one of his disciples hadn't gotten back from summering in Provence or
Hawaii. New York Federal Reserve Board president Timothy Geithner, in the
trenches during the brutal, hand-to-hand and ultimately unsuccessful battle to
save Lehman Brothers over the weekend, stayed behind in New York.
Apparently, even after the most revolutionary period in American finance in
over a century, things are still so tenuous back on Wall Street that Geithner
can't leave his desk for but an afternoon, even with the advanced
communications facilities one of the triumvirate that currently rules America
(along with Treasury secretary Henry Paulson and Securities and Exchange
Commission chairman Christopher Cox) would undoubtedly have access to.
A condition called "Anterograde amnesia", caused by usage of psychotropic drugs
and/or brain trauma, erases a person's memory of all events past a certain
point. One wonders if chairman Bernanke was wolfing down a fistful of pills
while getting whacked on the head with a two-by-four last Friday evening.
He seems to have completely forgotten the stresses and strains that convulsed
the financial markets over the weekend; more importantly, by proclaiming in the
post-meeting statement, "Over time, the substantial easing of monetary policy,
combined with ongoing measures to foster market liquidity, should help to
promote moderate economic growth," he seems to be essentially denying the near
certainty that these events will cross the flimsy and diaphanous barrier that
separates trauma on Wall Street from causing similar displacements on
America's, and indeed the world's, main streets.
The markets seemed to be sensing the threat; they went into the meeting
debating whether there would be 25 or 50 basis point cuts in the key interest
rates. On Bloomberg TV, the floor reporter at the New York Stock Exchange
announced that the Fed's no-cut decision was met by howls of derision and
protest; this from traders who in the spring and early summer were baying for
Fed interest rate hikes as the only thing that could save the street. The Dow
Jones Industrial Average sold off over 100 points in the first few minutes
after the decision, but then, surprisingly, rallied, closing up 141, back over
11,000, at 11,059.
What was happening? Well, we now have learned that the Fed had more innings to
play before calling it a night on Tuesday.
Reading the post meeting statement, it wasn't as if Bernanke was, much like
Republican presidential candidate Senator John McCain, channeling Great
Depression-era US president Herbert Hoover in saying that the economy was
"fundamentally sound". Far from it.
"Strains in financial markets have increased significantly and labor markets
have weakened further. Economic growth appears to have slowed recently, partly
reflecting a softening of household spending. Tight credit conditions, the
ongoing housing contraction, and some slowing in export growth are likely to
weigh on economic growth over the next few quarters."
If that wasn't enough to justify rate cuts, then one might think that the past
two days of action in the market for overnight interbank loans, the Federal
Funds market, might have sealed the deal. Far from the 2% mark the Fed wants
this rate pegged at, early this week the rate had been trading up near 6%.
This was being caused by an unprecedented withdrawal of liquidity in this
market; nobody wanted to do a deal, even an overnight deal, with another major
bank for fear that the next day it would be revealed that the bank they were
waiting for repayment of the loan from had just gone belly up. That would open
a huge black hole on the owed bank's balance sheet, with an event horizon so
big that no light or matter, and certainly no hundreds of thousands of dollars
in stock options owned by some wing-tipped bond trader, could ever escape.
In response to these events, the Federal Reserve and other central banks
attempted to drench the markets with so much liquidity that the well-worn and
repeated "firehose" cliche seems trite - US$140 billion of short-term liquidity
provided just by the Fed in two days, $300 billion in total by it and the
world's other central banks. This was an inundation, a tidal wave, a deluge -
just to get interest rates back to where they were just three days ago.
What was happening was that the global financial crisis was beginning to look
like a videotape of an American automobile demolition derby run at very high
speed, a veritable operatic, ever-more violent orgy of devastation, destruction
and ruination. The time between, in which new victims of the crisis are being
felled, is now being measured in hours - early last weekend Lehman, late in the
weekend Merrill Lynch, late Monday and all day Tuesday, AIG, America's largest
insurance company.
I commented on how AIG popped up on the crisis' radar screen late Sunday
afternoon in my Monday article on the weekend's travails (see
Silences say it all, Asia Times Online, September 16, 2008) but neither
I, nor, as far as I can tell, any other informed observer ever thought that the
powerful monster of destruction would be back this early, hungry for more
carrion so soon, not having its appetite sated with the huge takedowns of
Lehman and Merrill. It now seems that so great is the loss of confidence in the
world capitalist system's institutions of financial intermediation that mere
rumors of an institutions' balance sheet weakness is enough to blast it towards
perdition.
Late in the afternoon, the other shoe dropped. The New York Times web site
reported that the Federal Reserve was loaning $85 billion to AIG, a company
that before today would not have been allowed even in the same time zone of the
Fed's Discount Window, in exchange for an 80% equity stake in the company. Not
only was the Fed loaning to an insurance company, it was buying an insurance
company!
I can just imagine it now. It's after dinner, and we're settling in for a quiet
evening. There's a knock on the door, it's Ben Bernanke, pushing a fistful of
brochures in my face.
"Mr Delasantellis, have you ever considered who would provide for your family
if something happened to you?"
What about the proud, moral stand of the Paulson Treasury, that capitalism
would from now on be allowed to run its doleful course, and no institutions
would further be considered too big to fail? I suppose that after the $700
billion in stock market equity wiped out on Monday, ethics and morals got
thrown into the back seat and their mouths taped shut.
The institution that had to be protected from failure now was Republican Party
control of the US executive, a prospect that, even with Democrat presidential
candidate Barack Obama's lackadaisical campaign, was being put very much into
question with all this financial system turmoil.
Taken together, the interest rate hold and the AIG bail/buyout reveals the
Bernanke strategy. He wants to put on his fire chief hat and keep riding around
on his big red shiny Federal Reserve fire truck, putting out the financial
system's fires. The underlying cause of all the continuing conflagrations, the
destruction of liquidity and wealth caused by the persistence and exacerbation
of the financial crisis, is not really being addressed here.
This is essentially the policy that the Fed has followed since freezing
short-term rates in April, and it is the policy that, demonstrated both by the
continuing financial crises and the sharp rise in US unemployment, along with
the developing world economic slowdown, is clearly failing.
But for Bernanke, one serendipitous benefit of Tuesday's events was the
re-establishment of his total control over the Fed board. Like an old-time
cowboy, he's got all his "little doggies" back into the pen. Dallas Federal
Reserve Board president Richard Fisher, the leader of an anti-Bernanke
insurgency calling for higher interest rates to fight inflation since spring,
fell in line this time with the rate hold, making the statement unanimous -
with the noted exception of Geithner, who we now know spent the afternoon
shopping for insurance.
Still, if the choice was between the health of the economy and the restoration
of Bernanke's authority, it seems that the economy got the nasty end of the
stick.
A Fed rate cut might not have done much; it might have only bolstered
confidence a bit, but, to paraphrase Jackie DeShannon's 1965 pop song "what the
world needs now is love", what the financial system needs now is confidence,
sweet confidence - it's the only thing that there's just too little of.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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