As I write today, the U.S. government has announced yet another massive emergency rescue, this time of AIG, one of the nation's largest insurance companies, with an $85 billion "bridge loan". This supposedly demonstrates official concerns about the danger an AIG collapse could pose to the entire financial system.
We've heard that rationale before in recent days: the rescues of Fannie Mae and Freddie Mac, the semi-official mortgage guarantee giants, and of Bear Stearns, (but not the dismembered Lehmann Brothers). Then there was the "emergency rescue by acquisition" of Countrywide and Merrill Lynch by my own bank, (Now, I'm getting a bit nervous!), Bank of America.
Meanwhile scavengers like Barclays are picking the bones of Lehmann as the Federal Reserve pumps tens of billions into the teetering banking system almost daily, fueling inflation further.
If this is what the phrase "free market" means, then "free" has become enormously expensive.
It would appear that the true "bank of America" is the American taxpayer -- the tens of millions of us who must pay the hundreds of billions, (if not trillions) in bailout costs, in one way or another -- by deficit spending, inflation, dollar devaluation, more taxes, even in lost stock and other investment values.
But history should have taught all those financial experts.
History
George Santayana, writing in "The Life of Reason" (1905), gave us an aphorism so memorable that it's carved into the facade of the National Archives in Washington, D.C.: "Those who cannot remember the past are condemned to repeat it."
Four years ago I recommended that my readers obtain and study a then new book Financial Reckoning Day, authored by Bill Bonner and Addison Wiggin. The apt subhead: Surviving the Soft Depression of the 21st Century. (Bill heads Agora Communications, Inc., parent company of the Sovereign Society, and Addison is his able editorial assistant).
If you didn't read it then, read it now. It explains what has happened. With the current Wall Street economic collapse the authors have earned their right to say: "We told you so!"
This book presents a realistic, therefore, disturbing review of economic and political history. It showed that fiat currencies, as the U.S. dollar has become, inevitably collapse. The authors predicted the dollar was on its way to disaster, as were many parts of the American financial sector. They history-hopped to France, Japan, Holland and elsewhere recalling supposed financial geniuses, such as John Law, France's infamous paper money swindler of 1720 who bankrupted the country. The 1990s U.S. tech bubble was dissected and exposed.
In the book the Fed's then head, Alan Greenspan, came off not as a wizard, but as an economic chameleon, shedding his libertarian past in a calculated effort to please several transient occupants of the White House, all the while smiling benignly as the housing bubble inflated to its inevitable bursting point.
Disastrous Paper Shuffling
I happen to love the study of history.
I took every undergrad history course Georgetown Foreign Service school offered. Over the years, I've read books on history and biography by the yard. But I was particularly taken with the indictment Financial Reckoning Day imposed on Wall Street and the banking community when it was published in 2003.
One salient point was hammered home, that in a rush to rake in millions in fees for what amounted to paper shuffling, banks and investment houses, in America and abroad, willingly wallowed in esoteric instruments that few understood, most without substantial economic backing of any kind. Financial deregulation just made all these shenanigans easier to pull off -- and to hide.
As the authors said then: "It is all too wonderful -- while it lasts. But it is a boom built on deceit and cannot continue forever...And the more successful the central bankers are at keeping it going, the greater the embarrassment and dislocation when it eventually falls apart."
Well folks, the eventual has become present reality.
Politics As Usual
If it weren't so sad, it would almost be entertaining to see the politicians, especially of the presidential variety, scattering like roaches under a light -- playing the blame game, trying to distance themselves -- while they each have taken millions in campaign contributions from the very Wall Street and banking culprits they now denounce, those who produced this national, nay global, economic mess.
Of course the populist cry is now for more and better government regulation.
But Fannie Mae and Freddie Mac were probably the world’s most heavily supervised financial institutions, subject to a special agency, the Office of Federal Housing Enterprise Oversight that employs 236 bureaucrats. OFHEO did not fail because it was understaffed or not well informed about Fannie Mae’s activities, but because it lacked authority. The entire staff earned less in aggregate salary than did leading Democrat Franklin Raines, the aggressive chief executive who masterminded Fannie’s ill-fated expansion.
Let Government Do It?
Sure, it’s easy to claim that the solution to market failure is more regulation.
But as John Kay writes in today's Financial Times, "If regulators were all-knowing and all-powerful; if they were wiser than the chief executives but willing to do the job for a fraction of the remuneration awarded to such executives; if they understood what was happening in the dealing rooms of Citigroup, Merrill or Lehman better than Chuck Prince, Stan O’Neal, or Dick Fuld; then banking regulation could protect us against financial instability. But such a world does not exist."
As Bill Bonner and Addison Wiggin predicted, what's happening now is going to be worse than when the 2000 stock market bubble burst. As they foresaw, the United States is destined for a long, slow and very painful financial readjustment -- one that could be as severe, and likely even more protracted, than the Great Depression of the 1930s. (It took a World War to pull us out of that one).
Same Old Blame Game
OK, so U.S. unemployment is at a five-year high. Financial firms that withstood the Great Depression are failing. A Democrat Congress and a Republican lame-duck president are grid locked.
So when John McCain dared to declare the truth -- that "the fundamentals of our economy are strong," it drew only ridicule from Democrat Barack Obama. The latter wants to hand out government checks to 95% of all Americans in a redistribution of wealth he pretends is a "tax cut." Some solution!
But Nariman Behravesh, chief economist at Global Insight, a Lexington, Mass., forecasting firm, told the AP: "If the issue is whether the U.S. has a dynamic, resilient economy, and that the long-term trends are positive, I completely agree...It's important not to get carried away with gloom and doom." And David Wyss, chief economist for Standard & Poor's, said that while there is a serious financial-sector problem "the fundamental economy actually isn't in that bad a shape."
In fact, the numbers suggest that while the housing and financial sectors are in near meltdown, the larger national economy is plodding along.
After turning negative towards the end of 2007 and growing at an anemic 0.9% in the first three months of 2008, the nation's gross domestic product grew at 3.3% in the April-June quarter. A relatively weak dollar has helped boost U.S. exports. High prices for food and other commodities have helped agriculture and the energy and mining industries, and oil price per barrel, (if not gasoline prices), are falling.
Financial Catharsis
In psychiatry a catharsis is a psychotherapy that encourages a discharge of pent-up emotions to alleviate unwanted symptoms. When it works, out comes the Kleenex.
In medicine, a catharsis is a purging of the digestive tract that allows a purifying or cleansing of the human system. Perhaps that’s why the Chinese habitually burp at table.
At best, a catharsis can become an experience of spiritual release, even of purification.
And that's exactly what the American financial and banking system needs. In this historic self-immolation, that's what it is getting.
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