Re: SHORTS ON HIGH VOLUME
The “panic of 2008," therefore, wasn't a random policy error, nor was it caused by the machinations of overly-bonused bankers. In fact, the massive quantities of unsupportable debt and the vast malinvestments in housing, banking, shopping malls, office buildings, and Pilates studios, too, which came crashing down last September, were rooted in history’s other star-crossed rail car. That was the gilded club car which in November 1910, had secretly whisked away Senator Nelson Aldrich and his coterie of Morgan, Rockefeller and Kuhn Loeb bankers to a duck-hunting blind on Jekyll Island, Georgia.
The truth is, the monster that was hatched there -- the Federal Reserve System -- has always been an instrument of politics; that is, the politics of the speculative classes, whether domiciled on Wall Street, Main Street, or the Agrarian plains. Let the political chatter get fevered enough about unfairly “low” prices for goods, grains, or labor and there's invariably been a new theory and willing maestro at the Fed to print-up some easy credit. My thesis today is that monetary rot underpins fiscal decay, but that’s not to gainsay the complicity of Capitol Hill and the White House in the march to budgetary ruin -- particularly the complicity of the type of Republican Whiggery which emerged after the 2000 election.
The truth is, just as the Great East Asian Deflation called for monetary hardening, not ease, it also warranted a large increase in national savings -- including public sector surpluses. But by then there had been assembled in Karl Rove’s political assault camp, a coalition of the neo-cons, the social-cons, the tax-cons and the just-cons. None of them gave two hoots about real fiscal discipline.
The neo-cons postured as big-time thinkers, articulating a lofty policy case for an American Imperium. But unlike real imperialists, the neo-cons had nothing to say about the crucial issue of war finance.
Indeed, since DOD couldn’t seem to keep a pipeline open in the planet’s second richest oil province, the neo-cons couldn't even fallback on the imperialist’s traditional gambit of looting the colonies. Obviously, the real answer was a war tax -- especially since the war at issue was an elective. But that idea was anathema in Karl Rove’s assault camp, so the neo-cons simply ignored the fiscal consequence of the multi-hundred billion annual drain on the treasury their policies entailed. War finance, it seems, was relegated to the GOP’s all-purpose folklore -- the myth that lower taxes and more growth would cover any fiscal hole.
The tax cons, for their part, did not even think about fiscal policy; they issued Papal Edicts. Consequently, a kernel of truth -- the notion that lower marginal tax rates are economically beneficial -- became ensnared in a body of debatable doctrine, even outright claptrap.
Foremost among the latter is the alleged absence of a correlation between deficits and either interest rates or real growth. Fine. If that’s the test, let’s abolish taxes completely and put the Federal government on a regimen of 100% bond finance.
Likewise, the tax-cons have shamelessly misapplied evidence that a lower capital gains rate did generate higher revenue. True, these cuts sped the realization of gains already extant, but that has nothing to do with the revenue impact from lowering or raising rates on 95% of what we actually tax; that is, accrued payrolls and earned income.
Not technical quibbles, these points highlight the folly of elevating tax-cutting to the status of religious writ. Indeed, unwilling to cut spending by so much as a single veto in eight years, the Bush Administration needed to get revenue raising on the table as a matter of pure math. But the tax-cons, having totally befuddled what passes for GOP fiscal thinking, were able to drive the herd in just the opposite direction, slashing Federal revenues twice more during the Bush fiscal debauch. The profound financial danger, therefore, is that there's no longer in the United States a conservative fiscal opposition even worthy of the name.
Moreover, this fiscally perilous condition continues to be exacerbated by the tattered remnants of Karl Rove’s political assault camp. The social-cons, relentless as ever in their bible-thumping and immigrant-bashing, help to elect real socialists, as often as not. And the just-cons continue to turn fiscal responsibility into a bad joke. Last election, 85% of the American people were against the abomination called TARP. But on that central issue, the Republican standard bearer went radio silent while chattering endlessly about appropriations earmarks. But taken together, those 8,000 earmarks add-up to just 15 hours of annual Federal spending. The needless bailout of Wall Street engineered by Bubbles and the Henry "Hammer" Paulson, by contrast, destroyed forever any residual will to control spending that remained on Capitol Hill.
So now there are no fiscal rules. None. Cash for clunkers -- and for pig farmers, homebuilders, real estate speculators, and GE’s (GE) green machines, too -- will never stop flowing. Eventually -- perhaps soon -- there will be more Treasury bonds to sell than the world’s shrinking base of dollar holders can possibly absorb.
Then the Big Panic will come. In the event, some will look back and wonder why we destroyed our capacity for fiscal governance in order to save the likes of AIG (AIG), Citibank (C), and especially Goldman during the comparatively minor disorder of September ’08. Certainly, the so-called “systemic risk” will have been exposed for the cover story it was.
None of AIG’s alleged CDS time bomb, for example, really mattered. The European banks who were wrapping dodgy assets with AIG’s bogus AAA cover would have gotten bailed out by their own socialist governments, anyway. For Goldman, the loss would have meant six months of bonus accruals. For the big insured US depositories, losses would have meant their Sheila-gram would have come sooner, rather than later.
Then there's the specious claim that the money market funds would have come unglued. Well, they did, and investors in the largest of them, the Reserve Primary Fund, appear to be getting about 98 cents on the dollar -- the Lehman losses and all
The question thus presents itself: Did a few thousand institutional money managers who should have been watching out for their own risk -- especially the kind which accompanied black box enhanced yield -- really need to be spared even two cents of loss?
Here, it's said that it wasn’t the two cents of money fund loss but the $2 trillion of commercial paper it funded which was the real systemic risk -- even down to the specter of skipped payrolls, had the paper been unable to roll. Let’s see. About a trillion of that commercial paper was credit card, auto, and other types of ABS -- the financial equivalent of a twice-baked potato. Had it not rolled, no one would have repossessed the autos or refused a Visa (V) authorization. Instead, the underlying bank issuers would have found new credit card loans building up on their balance sheets -- a modest bulge that they could have readily funded with virtually free consumer deposits.
Another $300 billion was industrial commercial paper. It’s a good thing no senator ever asked the Hammer to name even a single industrial issuer that couldn’t have funded expiring paper out of its back-up credit lines. He couldn’t have answered.
That leaves about $700 billion of Finance company paper -- a goodly portion of which was accounted for by the likes of GE Capital, Household Finance, GMAC and CIT (CIT). Here the lessons taught by JP Morgan himself, ninety-nine years earlier almost to the date, are more than instructive. Wishing not to allow undercapitalized brokers, who had gone all-in speculating on margin loans, to go unpunished, Morgan allowed the call loan rate to soar to 30%, even more, on some days during the panic of 1907.
Needless to say, loan books resting on 30% overnight money, not real capital, got liquidated and fast. While the economic sky didn't fall thereafter, more than a few holders of the brokers’ junior debt and equity capital got rudely torched.
Nevertheless, ten decades later came the panic of 2008, and GE Capital, like the feckless brokers of JP Morgan’s time, found itself caught short with $100 billion of commercial paper propping up its $ 700 billion of asset footings. Yet we're now supposed to believe that capitalism’s very foundation had become so frail that GE couldn't be allowed to take the required haircut for its foolish asset/liability mismatch. Well, we shouldn’t believe the financial system would have gone tilt had taxpayers not propped up GE’s shares and debentures because the claim simply isn’t believable.
Thus, “systemic risk” was but a fig leaf for aggrandizement of the state, and especially its central banking branch. The resulting waste of resources and ballooning of moral hazard was palpable. But the real cost was in the final destruction of political discipline which resulted from the mad rush to TARP.
The Bush era had already aggravated the nation’s fiscal predicament immeasurably. Now the few remaining fiscal stalwarts still in the trenches, such as Senators Shelby and Bunning, were fragged from behind by their own officers. And now, too, the Democrats and socialists had every place to run and no need, politically, to hide even their most wanton raids on the Treasury.
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Originally Posted by Alechko
