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"...The dangerous market has been and gone. Only
the danger of government meddling remains..."
WE LOVE THIS NUGGET of
irony, idiocy or just plain cant so much, we have to repeat it –
clutching our sides and doubling-up in laughter, tears streaming down our
disbelieving faces:
"The
reality of the situation is that an open, competitive, and liberalized
financial market can effectively allocate scarce resources in a manner that
promotes stability and prosperity far better than governmental
intervention..."
So said
Henry Paulson, US Treasury secretary and ex-Goldman Sachs chief, in Shanghai
on 7th March 2007. Hank was lecturing Chinese officials (who this week
allowed short-selling on their domestic equity markets for the first time) at
the so-called China-US Strategic Dialogue summit.
Of
course, Paulson bent their ear before Bear Stearns "Enhanced
Leverage" mortgage-bond hedge funds blew up in June '07. The following
month, Ben Bernanke, chairman of the Fed, made his first guess-timate of total bank losses – "in the order of
between $50bn and $100bn" – to come from the subprime collapse.
Now the
terrified trio of Bush, Bernanke and Hank want $700bn just to re-finance the US
investment banks and their foreign landfill sites, let alone home-buyers,
mortgage lenders and house builders.
Yet five
UK
banks alone hold $175bn of qualifying junk – fully one quarter of the
sum requested. So no wonder Bill Gross – boss of Pimco,
the world's biggest bond fund, and a cheerleader for governmental
intervention ever since Bear Stearns' hedge funds went "hiccup!"
– says the "troubled auction recovery program" will need
another $500bn on top, just for starters.
(Wherever did they get that name –
"troubled auction recovery program" – by the way? Maybe
"someone" in the room...now as changed from their former self as George Bush is forgetful of his role in
creating this mess...was reminded of a drying-out clinic from long, long
ago...)
Paulson's
ideological grand-standing in Shanghai
last year preceded a few other events that may have forced his Damascene
conversion. With $700 billion...if not $1.2 trillion or the end of
civilization itself at stake...these events are worth recalling:
- The
first of five "big freeze" spikes in world money market
interest rates (Aug. 9th, '07);
- Collapse
of UK
mortgage bank Northern Rock – last visited by UK
regulators two years before (Sept. '07);
- Stan
O'Neal's resignation from Merrill Lynch (Oct. '07);
- Bush
administration launches of Hope Now to help "one million [US]
home-owners stay in their homes", plus the downgrade of "monoline" bond insurance credit ratings (both
Dec. 07);
- Biggest
one-day fall in major world stock markets since 9/11 (Jan. 21st '08);
- G7
leading nations forecast $400bn credit losses in total (Feb. '08);
- Final
collapse of Bear Stearns into the welcoming – and
Fed-assisted – arms of J.P.Morgan for
10¢ in the dollar (March '08);
- Last
gasp of 100% loan-to-value mortgages here in the UK
(Apr. '08);
- Swiss
giant UBS raises $15bn after suffering $37bn in losses (May '08);
- FBI
arrests more than 400 people, including bankers and brokers, for
mortgage fraud (June '08);
- Collapse
of IndyMac – not even on the US
watchdog's list of "at risk" banks 10 days earlier (July '08);
- First
10% twelve-month drop in average US
home prices since the 1930s' Depression (Aug. '08);
and then
- The
nationalization of Fannie & Freddie, the collapse of Lehmans,
the seizure of AIG, the fire-sale of Merrill Lynch to Bank of America,
the fire-sale of London's HBOS to Lloyds TSB, and now the collapse of
Washington Mutual into – surprise! – the
welcoming arms of J.P.Morgan (Sept. '08).
All
this while, of course, the developed world's central banks were pouring cash
into the credit market, trying to fix Problem No.1 at the top of our list
above.
It just
keeps coming back, however. Because the people who know best the liquidity
and solvency of major banks – the other banks – refuse to lend
whatever money they get, hoarding it instead for fear of a run at their own
branches.
"British
banks have squirreled away nearly £6bn [$11bn] with the Bank of England
rather than lend it to each other for more than a few days," reports the
Financial Times, "using its safe but low-interest deposit standing
facility in a sign of the fear gripping money markets."
Little
surprise that inter-bank lending rates are holding near an eight-month high
for US Dollars – despite the Fed now offering more than $290bn to
foreign authorities for their own domestic money markets – while the
banks' price for borrowing Euros has reached a record high for the single
currency, launched in 1999.
And all
this while as well, of course, the Federal Reserve has been busy slashing US
interest rates...finally joined by the UK, Aussie and New Zealand authorities
in making debt cheaper even as the free market – both the interbank
market and the commercial market of home-loans, overdrafts and corporate
lending – pushed in the other direction.
This
privilege, allowing central banks to set the price of money whenever it
thinks the economy needs tweaking, might seem to jar with Paulson's tidbit from Shanghai.
But
shepherding the free market is why central banks, regulators and government
itself exists today. And as they've proven so adept at this task, guiding the
lambs of Wall Street to the slaughter of Florida
and California
condo's, it would surely make sense to extend their
powers – and shepherd the free market a little more closely –
from here.
Right?
"We
thought Resolution was just suspended, not delisted," said a spokeswoman
for City watchdog the Financial Services Authority last Friday.
You'd
think they might know. But no; Resolution, a UK
insurer, was delisted in London
after being bought out in May. Yet it still found its name on the banned list
of 29 "no shorting" stocks proscribed by the FSA.
"It
will be removed," said the all-powerful watchdog. "A revised list
will be up on our website later today."
Meantime
in New York
– where Hank Paulson's "open, competitive, and liberalized
financial market" is also taking a break – the Securities &
Exchange Commission (SEC) has banning short-selling of GLG, the giant
London-based hedge fund, along with 798 other financial stocks and 100 or
more stray sheep like GE, GM and Ford.
Funny,
but GLG itself paid a $3.2 million fine in June '07 for "multiple
violations" of the SEC code, after shorting some 14 public offerings in
the US
and making $2.2m over two years in "illegal" profits.
Still,
there is more rejoicing in heaven over one lost sheep found, eh?
"Markets
are usually right," says Anatole Kaletsky in the London
Times, "but sometimes they are
dangerously wrong – and they need to be managed with decisive and
competent government intervention."
Ignore
Polly-Ana's morality if you can; fact is, markets often get dangerous. Whether
they're right or wrong doesn't matter much if you're buying high and then
forced to sell cheaper.
Danger
came in Tokyo real estate priced so highly,
the Emperor's Palace was worth more than all of California in 1989. It returned to the
markets when the Nasdaq got so high, it was
discounting tech-stock earnings until A.D. 2146
back in early 2000. Markets got dangerous once again when the average house
here in the United Kingdom was valued at 8.5 average earnings in the summer
of '07, just as WaMu teetered above $45 per share,
AIG bounced back towards $80, and Lehman Bros. announced record quarterly
earnings for the last ever time.
Here and
now, the market – right or wrong – is pricing toxic debt and
derivatives at zero or worse. US subprime mortgage bonds, if marked-to-market
– rather than against the apparent "final redemption value"
used to help pay $66 billion to Wall Street staff in 2007 – are also
worth zilch. That's why there's no danger of anyone buying them, no one
outside Washington,
that is. And there's the true danger today.
The
dangerous market has been and gone. It popped when Florida condos stopped selling to
buy-and-flip wannabees without a red cent of cash
but one million in debt. Only government meddling – just like Hank
Paulson said – risks further danger; the danger that US taxpayers
will pay through the nose (and through inflation) for $700bn of utterly
worthless "investments".
Hell, he
did run Goldman Sachs, after all. What did you expect! But is there any
danger of letting the free market do what needs doing?
Adrian Ash
Head of
Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash is head of research at www.BullionVault.com –
giving you direct access to investment gold, vaulted in Zurich, on $3 spreads and 0.8% dealing
fees.
Current gold price, no delay
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Note: This article is to inform your thinking, not lead it. Only you can
decide the best place for your money, and any decision you make will put your
money at risk. Information or data included here may have already been
overtaken by events – and must be verified elsewhere – should you
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