You can read tomes and countless articles trying to gain insight into the global financial meltdown and Wall Street’s incestuous relationship with the U.S. government. Or you can read this.
by Apocrypha for The International Chronicles
In a “valedictory” interview of Henry Paulson in the Financial Times of London, Mr. Paulson assessed the root cause of the credit crisis of a lifetime. He blamed “global economic imbalances” brought forth by “a collective failure to come to terms with the way that the rise of emerging markets was reshaping the global financial system.”
Bottomline: He has a tremendous amount of gall.
What’s even more enraging about his intellectually pretentious musings is that the ubiquitous, systemic hubris deludes the speaker into firmly believing that we are actually buying his latest line of malarkey.
Which goes something like this…
Borrowing from the pile of manure originally spread by Alan Greenspan regarding the “global imbalances/savings glut” as global perma-culprits, Secretary Paulson likewise assigns no credit as to how these menacing catalysts arose. Indeed he makes no reference to the origin, a tack which has got to be a willful omission. Yes, willful and clever. Because by failing to pinpoint or even suggest any source, these phenomena become nebulous, forever eluding time and date of birth. Thus, no specific blame can be laid at any specific foot. Rather, he can hide behind phrases such as this: … “years leading up to the crisis” …, etc.
What Messrs. Greenspan, Paulson, Bernanke and “a number of economists” are suggesting is that one day, we just woke up and bam, the emerging markets such as China had suddenly kicked into high gear and OPEC producers simultaneously were hitting the jackpot. These big chunks of do-re-mi, mind you, the culprits behind the current meltdown per HP et al, are comically referred to as “super-abundant savings” which happened to come along during a period of “low inflation and booming trade and capital flows”… This perfect picture, mind you, “put downward pressure on yields and risk spreads everywhere.”…
Hold it right there, Skeezix. Enough already. We’re now gonna’ put Paulson’s shine-ola into perspective.
First of all, the “super-abundant savings” of the above-mentioned foreigners are US dollars. Dollars which flowed outta’ here like a river, having been created by the googol by Mr. Greenspan’s prolonged implementation of monetary promiscuity. You remember the old whore-house dollar days, don’t you? Right. Got a problem anywhere around the globe? Not for long, you don’t! The Soviet Union collapsed perhaps? Print dollars. Asian contagion? Send in the bucks. Y 2-k? Let ‘em have it with both barrels and then conveniently forget to back ‘em out again. LTCM. The list is endless. Whatever the occasion, happy or sad, Mr. G. was on the throttle, full blast.
And while the US dollar floodgates remained open, there was conveniently never even a hint of negative fall-out from such a seemingly endless juggernaut. Read: the credibility of the US economic data releases was eroding apace with the monetary shenanigans along with the integrity of our leadership. Garbage in. Garbage out. And that sequence also applies to the mouths of the government shills who, hopefully, weren’t bein’ paid by the word. This is how the dangers inherent with such reckless monetary policy were formally waved-off; this is also how the myth of low inflation, solid growth and full employment ad infinitum was perpetuated: all via coordinated deception. Meanwhile, we were a ticking time bomb but they lulled us, nevertheless, with their non-stop piffle.
No need to delve into the bubbles that were created and re-created along the way, chiefly stocks, housing and commodities. Rather we will segue right to the hallmark of the era: rock-bottom official interest rates, unlimited credit-on-demand and the infamous, insidious, Greenspan put. (That litany in mind, how dare Mr. Paulson deflect the blame for the current, egregious state of our economy and finances by citing “investors looking for yield and mis-pricing risk.” …
Why were they desperately seeking yield? Why did they demand no risk premium? Read the litany again; the corrupted environment was tailor-made by DC.)
You know how this all backfired, so no need for more gory details. But we will stop and pay tribute to one of the trading strategies that arose from time to time as windows of opportunity were opened for the big, swingin’ international players who were encouraged by one of the by-products of those rock-bottom rates, the explosion of the use of leverage. This explosion in leverage was, of course, reinforced by official railing against the implementation of regulatory oversight, a fatally flawed m.o.
Why fatally flawed? Because it was predicated on the fallacy that the hedge funds merited exemption from any surveillance since they were the permanent suppliers of liquidity to the markets. (Strange how that flow came to a crashing halt to where the US taxpayer is now the provider of all liquidity, eh?) Thoughts turn, then, to the global impact of the carry trade. Which started out as a clever and largely innocuous way for the resourceful to pick up basis points (bps) here and there. But as is always the case when money is virtually free, regulation non-existent and the government “has your back” 24/7, the strategy got carried away to new, complex extremes, ultimately morphing into ugly scenes. Example: Hungarians bought homes funded by Swiss-franc denominated mortgages which as you know, were carry-trade originated. By the time they got done laying waste to Hungary, the forint had been nebulized and the government debt market had ceased functioning. Indeed, we have all witnessed the carnage left in the wake of a massive, global “unwind”.
And knowing how the popularity of this ostensible “no brainer” arose and was facilitated by misguided monetary policy to the point where it eventually evolved into a much more complex network of transactions (Icelanders taking massive, unsecured personal loans denominated in baskets of currencies comes to mind), we can see firsthand the folly of lack of oversight. And that folly becomes that much more repugnant as it is likely the result of political quid pro quo, influence-peddling or outright graft. You are not so naïve, are you, to think that our legislators are above such, er, mischief? I’ll be blunt: One way or another, they have all been bought. Get over it.
Taking this no-regulation folly a next step further, feel free to guffaw out loud, slapping your knee … at Greenspan’s feigning of surprise that the banks did not regulate themselves while this party was roaring and the booze was flowing, non-stop.
And in the extreme, the no-regulation, no-risk, no personal responsibility, free-money love fest eventually paved the way for the wildest of grossly overpaid miscreants to detonate the last explosion which ultimately caused our demise. We’re talkin’, of course, about so-called “structured finance” which fomented the gross delusion that once risk is spread around enough, i.e., “layered” … it simply goes away.
We, of course, know that the damage is yet to be quantified and is ongoing in the form of gun-shy consumers, burgeoning unemployment and sharply declining economic growth.
So what have we here, Mr. Paulson? Nothing but a lame attempt to evade castigation by pointing to the “excess” that was years in the making and over which you had no control.
Look: … “This argument [that excess led to crisis] – advanced by a number of economists and largely endorsed by Ben Bernanke, the Federal Reserve chairman – suggests that the roots of the crisis do not simply lie in failures within the financial system.” …
Agree. The failures within the financial system are the result of years of disgracefully-flawed policy, moral bankruptcy and unbridled greed. Indeed, the wheels have been in motion for decades to where the superstructure of our economy gave the outward appearance of some brave, new paradigm. But the foundation itself was woefully unsound. I mean catastrophically so. Doomed as it were.
Case in point: US manufacturing wages had been running at say, an average approaching $20 bucks an hour. China? Oh, let’s say about .46 cents not so very long ago. Jobs were eliminated here by the thousands in response to this global reality. So to appease the displaced American worker and keep him off the White House lawn, credit flowed like water; it did the trick. John Q. was able to buy tube socks at 6 pair for a buck ninety-nine. And a new Ford F-150 with zero down and a 72-month loan. A big, screen plasma TV and a house. So he kept his mouth shut.
What he did not realize was that part of his standard of living was being transferred to China, for example, with every pair of tube socks that he bought at Sam’s Club. And the more tube socks he bought, the more infrastructure needed to be built in China to accommodate John Q.’s insatiable appetite for cheap manufactured goods. So for the first time, the US saw itself vying for energy products and other resources (including food) of which the earth has a finite supply.
The upshot: the US got a quick, cheap “high” while the longer-lasting benefits of this global ménage went to China and Saudi Arabia. They got the do-re-mi. Our do-re-mi. Piles of it. And those US dollars received by goods-exporting countries and oil producers for the most part, wended their way back into US Treasurys, keeping US yields in check and one more thing, rarely mentioned. By sending the dollars back out of China to be invested here in US paper, downward pressure was maintained on China’s own currency. Foxy, eh? You bet. Taken together, this set us up for one of the longest bouts of vendor-financing in memory.
Now let’s recall some verbatim lines from Mr. Paulson’s valedictory interview which assessed the reason for the credit crunch, shall we?
He placed the blame on: “super-abundant savings”, “low inflation and booming trade and capital flows”… which “put downward pressure on yields and risk spreads everywhere.”…
Now let’s put a face on that haughty bunkum using a limited number of examples, but knowing that you will do the extrapolation yourself!
“Super-abundant savings” = US Dollars which have flooded the earth
“Low-inflation and booming trade and capital flows” = cheap imported goods which made WalMart, to name just one example, responsible for 11% of the growth of the total US trade deficit with China between 2001 and 2006.
*WalMart’s trade deficit with China alone eliminated nearly 200k jobs in this period. [Ref: http://www.epi.org/content.cfm/ib235]
“downward pressure on yields and risk spreads everywhere” = with our own currency flowing back into US paper from abroad, of course, rates were held down. Risk spreads? Why wouldn’t they collapse? Did you forget? The Greenspan put. Sheesh.
Like I said, the superstructure looked fine. It was the peek below the baseline that should have made us cringe. But those who peeked and warned were relegated to sit the game out in the area designated “lunatic fringe only”. So Mr. Paulson looks to exit without takin’ too much of a rap, eh? No problem. We have acknowledged time and again that ours is likely a 50 chapter saga. And #24 or so is likely still runnin’ its course. Or is that #3 or #38? Maddening, isn’t it? Meanwhile, we also acknowledge that Mr. Paulson only came on board Treasury in July of 2006. So by the book, he is absolutely free to aver that it all didn’t suddenly happen on his watch. His official watch, that is.
The part where our man Hank goes after the net capital rule…ha, ha, ha…
Here we go again, the same old story, i.e., according to Mr. Paulson the net capital rule had been a hindrance to the US competitive edge as it drove biz offshore. Its elimination also drove the Wall Street Five out of the investment banking business, but what the heck, eh? Mr. Paulson insisted to the Senate Banking Committee back in the year 2000 that the US is a laggard as Europe already enjoys “risk-based capital standards”. Imagine the audacity of such a thought? Risk-based capital standards. I decide what my risk is and how much capital I need to support it. Neato! The relaxation of the net capital rule was what allowed these jackasses to take their leverage ratios to nosebleed levels. The rest is history, natch. Tragic history. Mr. Paulson was paid handsomely while running Goldman Sachs and getting the net capital rule shelved. Now we’re payin’ for what his dastardly championing has wrought. (Grab onto that end of the stick and don’t let go until further notice. Good. You’re a natural.)
We don’t have to remind ourselves that while under his watch, Goldman Sachs also blossomed into one of the largest commodity swaps players on the Street, do we?
Okay, so we’re on the same page. The “valedictory” interview has been trashed. And along with it, Mr. Paulson, Mr. Greenspan and Mr. Bernanke as well as those “economists” who continue to grossly underestimate our tolerance for buffalo chips. Particularly when they’re plastered all over the Financial Times of London shortly after the New Year has begun.
So if you really wanna’ know what caused the credit crisis, we’d make a case that it absolutely was a long time comin’. But the camel’s back was no doubt broken by something that has been around since the dawn of time: Man’s distrust for his fellow man.
You know this drill, no doubt. They were all luggin’ crap and mis-markin’ it wildly, egregiously. But they all knew that they were in the same or at least very similar boats. And as repo agreements are the life’s blood of our system, well, once every last shard of confidence is removed that these agreements will be honored, the system is kaput. And then the malaise metastasizes. Next thing you know, we’re outta’ business. It’s that simple.
So with a view towards restoring that confidence to the system, the Federal Reserve in conjunction with Treasury and various political factions, have banded together to step in and try to make things work again. (That the innumerable, coordinated efforts of these geeks are causing our currency to be debased by the minute and us to be robbed 24:7 is not the issue today, but keep it in mind for future, indignant reference.)
What is the m.o. for 2009? Well, once the US Senate manages to overcome its abominable penchant for playing a most dangerous game of Constitutional relativism in determining who is worthy to be seated from Illinois and Minnesota …and we are able to get a Commerce Secretary candidate who didn’t choose an out-of-state underwriter for his own state’s transportation bonds which was preceded by hefty political contributions … and find the wherewithal to secure a Secretary of State candidate whose husband’s foundation didn’t receive a $100k contribution in advance of a specific donor-friendly bill being passed under her aegis … well then maybe we could get down to the task at hand which is to fix that which is so irreparably broken.
Meanwhile, here’s the deal they’re handin’ us so far:
Official rates absolutely pounded. As you may have read, there is an effort afoot to give us 4.5% mortgages. Which is down from 5.10% currently and vs. 6.07% a year ago. [Ref.: MarketWatch]. I also see where once GMAC got the promise of the government do-re-mi, that they dropped their required credit score from 700 to 621 and were offering a new round of low-rate financing, including zero percent on some models. [Ref. NY Times.] So easier and more abundant credit, right? Cool. This will all be supported by what is being billed as an $850 bil (!!) economic stimulus proposal. Meanwhile, various existing mortgage modification programs continue to try to ameliorate the ghastly foreclosure rate. Last but not least, just last week, Treasury detailed yet another initiative to “rescue companies in the finance and auto sectors”. That’d be the TIP (Targeted Investment Program). This is the deal that allowed them to validate the notion that Citi was “too big too fail”. And will be coming to a bank near you one of these days, perhaps, but on a case-by-case basis. Here’s part of the criteria for eligibility: … “whether the institution is sufficiently important to the nation’s financial and economic system that a loss of confidence in the firm’s financial position could potentially cause major disruptions to credit markets … or lead to similar losses of confidence or financial market stability that could materially weaken overall economic performance.” So whether it’s individual mortgage modifications, the TARP or the TIP, we sure have a big, old “put” goin’ on, don’t we?
Geez, Louise. That whole roster sounds familiar, doesn’t it? Indeed. Cut-and-paste from above:
… “Rather we will segue right to the hallmark of the era: rock-bottom official interest rates, unlimited credit-on-demand and the infamous, insidious, Greenspan put.”
Indeed, the m.o. of an ill-fated era is being replayed in the present with a view towards fixing that which rock-bottom rates, easy credit and moral hazard … shattered in the first place.
Bottom line: It is this writer’s express feeling that the powers-that-be fully recognize the thin line they are walking in taking this repetitious route. Here’s why they can’t deviate, though: We have been programmed for years to live beyond our means. It’s that simple. It is encouraged and emulated and in the case where it might fail, there is no shame associated with it.
So they give us more of the same poison, hoping that by throwing us plums such as zero-interest car loans and token tax relief, we will be appropriately distracted. We won’t ever make the effort to ferret out the reason why our biggest asset, our home, has deteriorated significantly while the cost of one of the necessities of life, food, is rising like crazy. (Energy could be another surprise; stay tuned.) At least they hope that we remain ignorant and unquestioning. So far, the appeasement tack has worked. Because the day that it doesn’t, that’s when all hell is gonna break loose.
APOCRYPHA is former Lieutenant Governor of Rhode Island, part-time tuna fish sandwich-shop operator, and a semi-professional golfer with over 30 years of experience on Wall Street. Her vast “insider” knowledge and unassailable wisdom allows her to confirm the fact that the U.S. government is Wall Street’s concubine, and the Federal Reserve a criminal operation that needs to be disbanded immediately.