|
|
In his latest piece, Frank
Shostak approvingly quoted Jeff Tucker's earlier rhapsody as follows:-
But as wonderful as the daily shifts
and movements are, what really inspires are the massive acts of creative
destruction such as when old-line firms like Lehman and Merrill melt before
our eyes, their good assets transferred to more competent hands.... This is
the kind of shock and awe we should all celebrate. It is contrary to the wish
of all the principal players and it accords with the will of society as a
whole and the dictate of the market that waste not last and last. No matter
how large, how entrenched, how exalted the institution, it is always
vulnerable to being blown away by market forces -- no more or less so than
the lemonade stand down the street.
While I approve of the
sentiments, I am forced to demur at their application.
"More competent
hands"? Do me a favour! More like hands privileged with more political
clout, greater regulatory support and enshrouded in more opaque accounting
regulations...
JPM has more risk on its books than any other (large) bank in America, both numerically and proportionately, yet it has somehow come thru' with shining
colours. Was this all due to the superlative entrepreneurial skill of its
management? It hardly seems likely. Citi paid an enormous price to buy a
hedge fund manager who promptly closed his old shop the minute the
embarrassed departure of his 'dancing queen' predecessor left him in charge.
BoA? Well, who knows whose mess it was they were actually covering up when
they took on that nest of vipers which was Countrywide?
Nor have Merrill's assets been 'transferred to more competent hands' either -
they have been bailed into a more friendly fold where the same senior
managers who got them into the mess (and who were probably selling much of
their exposure to their new co-managers over the past few years) will still
reap fabulous remuneration as the guiding lights of the new bastard
offspring.
The US Govt has effectively decided that its corporatist national champions
in the coming forced consolidation will be JPM, Citi, BoA and now GS and
Morgan Stanley - the latter pair newly transformed into banks where the teat
of succour runs more profusely and where the Fed/FDIC accounting regulations
are less onerous than those of the SEC; where they can sit, jaws agape
waiting, not to be explicitly bailed out from their funding difficulties, but
to pick up cheap deposits from the authorities at the expense of an arbitrary
denial of the contractual rights of debt and stock holders in those small fry
firms who are seized the moment they totter.
I have to say this next piece of special pleading also made me involuntarily
spit my Assam half way across the room, too:
No massive disruptions?!? A 'swift and almost invisible adjustment'? The god
of the market doing its work?
We had a $200 billion run on money
funds; a plunge in many commodity prices; a jump in credit risk premiums to
unprecedented levels; renewed stresses at regional banks; bail outs in all of
the UK, Russia, Iceland, Denmark, Belgium, Germany and, effectively, Ireland;
a near global criminalisation of short selling; wild and damaging gyrations
and more central bank interference in foreign exchange; what is feared will
be the decimation of whole cohorts of hedge funds (many of whom have not only
had their business model outlawed but had their assets frozen at Lehman,
their prime broker); a further freeze of money and capital markets; the
launch of government stock support schemes in Asia and, even before
yesterday's rout, what I think is now in excess of $1 trillion of global
central bank injections to try - so far to no effect - to prevent the whole
house of cards falling in one quick heap!
I confess that I don't quite see where the 'free market' was at work in any
of this. Moreover, I should well imagine that it might just prove 'very
costly in terms of real resources', indeed, by the time its ramifications
become clear. As Fritz Machlup once wrote: "the bust always starts as a
monetary crisis and then becomes a real one".
To call a spade a spade, Lehman was an ill-judged gamble at restoring a
little macho credibility to a clueless team of dirigistes which has been
swinging drunkenly between paying handsomely for Bear to be folded into JPM,
putting FNM/FRE into 'conservatorship' (whatever THAT actually means in
practice), semi-rescuing AIG, summarily dumping Lehman (on the ludicrous
grounds that, unlike the others, the market 'could see it coming'!),
brokering a Merrill wedding, elevating Goldman to unimpeachability,
expropriating WaMu debtors, then taking over Wachovia as a fictional 'open
bank'.
All of this, too, despite a long
litany of expressed false optimism and prevarication, not to mention the
subtle diplomatic pressure aimed at inveigling America's long-suffering
foreign creditors into pouring more money into these sumps of moral
corruption and managerial ineptitude. Failing a positive response from their
would-be 'marks' abroad, the domestic authorities have meanwhile broken every
rule and violated every custom in the urge to lend to them on ever easier
terms, all without once demanding that they account consistently for what is
on their books as a quid pro quo.
Therefore, to add to liquidity problems, deep suspicions about the asset side
of the balance sheet, and worries about the future income stream, all this
flip-flopping has now engendered an even more debilitating opaqueness about
the regulatory treatment of the whole legal ranking of liabilities, to the
extent that proper market solutions seem, sadly, ever more remote.
In addition, the investment
world has become paralysed between what it sees as a starkly binary outcome;
a crushing debt deflation if the banks fail (one made inconceivably difficult
to unravel thanks to the $700 TRILLION web of derivatives which enmeshes
them), or a highly inflationary rebound due to the extreme fiscal and
monetary overkill being committed during the rescue and surely not to be
redressed any time soon thereafter. In such a world, not only is further
credit expansion being precluded (Hip hooray!), but the flow of capital from
savers to promising entrepreneurial prospects is also being staunched - a
matter for the most intense concern, not sophomore celebration.
So while you might cheer all
this, let's not pretend that it has been serene and untroubled or else our
ideological foes are going to be able to strike back to good effect by
quoting such La-la land outpourings of joy when the bankers' problems become
those of a whole host of otherwise blameless enterprises and families, as
they inevitably will.
In a ringing condemnation of Wall St welfare I am fourquare behind you: in singing false paeans to an impossibly
Panglossian reading of events and in trying to gloss over the wrenching - if
ultimately salutary - consequences of a collapse, I suggest you are being
naively counterproductive.
Our enemies are on the run, so a little less hysteria and a deal more calm
ratiocination and sober exegesis might prove far more profitable than all
these ill-judged - and, frankly, jejune - bromides which are being loosed off
willy-nilly by people who - judging from both the blog and the mailist - are
in many cases not in any way current with either the institutional framework,
the policy implications, or the international repercussions of what is going
on and who (perhaps understandably) reveal themselves to be totally unversed
in the perverse functioning of modern financial markets, for all these same
commentators' undoubted academic brilliance.
It seems that a sizeable faction
of the Mises group has become so intoxicated at the chance of getting a date
at last with the girl of its dreams, that it has dipped too deeply in the
punchbowl of 'I told you so' and has ended up goosing her mother instead, in
front of all the family. Come on guys, get real - and leave the empty
hosannahs to the Collectivists!
I am sorry if this sounds abrasive, but I strongly feel that, in many
instances, the rush to print is being undertaken amid a rush of blood and I
fear that immoderate language and the blind quotation of Misesian scripture
during what is clearly one of THE great upheavals of our irretreviably flawed
monetary and political system can only be to the detriment of the cause over
the longer haul.
Sean Corrigan
Sean Corrigan is Chief Investment
Strategist at Diapason Commodities Management (Lausanne and London)
Copyright © 2006 - Copyright
© Diapason Commodities Management - Sean Corrigan
| |
