Bernankenstein and the Economonster from Hell (Headlines from the Meltdown)
GENERAL COMMENT FROM CARDIN:
Bernankenstein and the Economonster from Hell
Okay, so that’s a silly title for this week’s comment. But I still like it.
For one thing, I’m hugely fond of the Hammer Horror films from Britain’s Hammer Studios back in the 1950s-1970s. All of their horror series started out strong — the Dracula movies starring Christopher Lee, the Frankenstein movies starring Peter Cushing, and all the rest — and then degenerated into camp. But it was deliciously fun camp.
The last and, as it is generally thought (with some serious disagreement), the worst of their Frankenstein series was 1974’s Frankenstein and the Monster from Hell. Personally, I’m quite fond of it.
And that brings me to the other thing that made my silly title seem appropriate for this week’s comment. It’s entirely possible and quite possibly viable to picture Ben Bernanke as a metaphorical Frankenstein who is battling a monster of his own creation as he fights to save the American economy and financial economy from total implosion. Well, okay, so he didn’t create the monster himself. He had lots of help from the Bush administration, Alan Greenspan, the Clinton administration, the Reagan administration, and every other proponent, defender, and enabler of economic neoliberalism over the past three to four decades. But we can take the liberty of symbolically collapsing or centering the Frankenstein image on Bernanke, since he’s the current star of the show.
And when we do that, we can see that America’s hyperfinancialized economy has indeed become a monster. This is an image that various pundits and commentators have used in recent months. The shadow banking system, which everybody now knows and talks about thanks to a flood of articles and reports (where were these journalists when we really needed them, before the crisis exploded?), has taken on its own life and smashed or flooded through or around the safeguards and protections that were set up during and after the Great Depression to prevent its happening again. And now we’re in exactly the same spot, updated, of course, with some modifications and specifics that are peculiar to the modern milieu.
The really interesting question is whether we should conceive of Bernanke as fighting against the monster or fighting to save the monster. His recent actions give support to both views. I mean, if we want to look at it in terms of an economy or financial system that’s dying, then we can say that Bernanke has been trying to shock it back to life. He has stimulated it with lightning-like liquidity injections, newfangled borrowing options, a new form of bailout, and more. And yet the monster still looks like it’s dying.
Or we can look at the situation as if Bernanke is fighting against the Economonster from Hell. In this view, he has thrown everything at the monster but the proverbial kitchen sink, including several exotic weapons stored in some back closet or custom designed for this particular battle. And still it just keeps coming.
Read the following excerpts very carefully. The markets may have calmed down a little over the past one and two weeks but the fundamental problem is still there and just getting worse. The Economonster is still on the rampage and Bernankenstein is still frantically trying to contain his filthy daemon.
Thomas Au, Guest Commentary at PrudentBear.com, March 26
Former Fed Chairman Alan Greenspan, one of the major architects of the current crisis finally “fessed up” the other day when he referred to the current crisis as the “most wrenching since the end of the Second World War.” But the end of the Second World War marked the start of the boom times in America (at least for those who lived to tell the tale) so he must really be referring to the crisis since the beginning of the Second World War, which would be the late 1930s. And this decade is basically where we’re now at.
The modern 1930s are the logical consequence of the “New Economy” of the past decade, just as the original was a logical consequence of the “Roaring Twenties.” In each case, technology and leverage combined to create a potent but ultimately poisonous brew of wildly inflated asset prices. In essence, greedy CEOs (and investment managers) said, “we brought you the new economy, please cash us out now.” And a gullible American public affirmed this by bidding up prices to insane levels, expecting to share, rather than subsidize, the wealth of the selling shareholders. First the tech companies, then the financial intermediaries were then caught in traps of their own making, and escaped as sorely crippled entities, if they survived at all. But by this time, the more privileged players had “taken their money and run.”
….In deciding whether or not we are headed toward depression, one needs to look at the substance of economic events, as opposed to the form. Some examples of the substance: 1) A post-war record level of home foreclosures headed to 1930s levels fueled by a similarly record collapse of home prices. 2) Several major “runs on banks” as investors begin to wake up to the fact that a lot of what passes for collateral is in fact worth very little. 3) A panicked Fed trying to head off a financial panic by simultaneously lowering interest rates and injecting money into the system.
And what’s worse, we are only in the early stages of the crisis.
….Some take comfort in the fact that we haven’t yet seen soup lines, or 25% unemployment. But soup lines are merely an unnecessary (and hopefully unrepeated) appendage of the above. And anecdotal evidence suggests that many welfare agencies are now stretched to the absolute limit, meaning that new soup lines will appear if the system is tested just a bit more. And unemployment hasn’t risen because companies have so far chosen to cut health care and pension contributions rather than lay off workers. One can easily get to the 1930s 25% unemployment with a 0% headline unemployment rate — by assuming that half the work force will be “temps” working half time without fringe benefits.
But perhaps one of the better definitions of the modern 1930s was given in a previous article on this site — a two decade pullback in the American standard of living to the 1980s (the original took American consumption back to the 1910s). Such a pullback seems inevitable from the deleveraging and loss of wealth that is now taking place. Moreover, such a retreat would last for an extended period of time. That’s because we had the best of all possible worlds (relative to the true state of the global economy) for most of the past decade and half. The next decade and half will probably see the worst of all such worlds.
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Dave Cohen, Energy Bulletin, March 26
Signs of an economic meltdown are springing up all around us. The U.S. is almost certainly in a recession now, but the worst is yet to come. The full consumer price index has risen at a 6.8% annual rate in the last 3 months just as GDP growth has likely entered negative territory, raising the Specter of Stagflation. Americans have not faced such dire straits in 25 years.
When the New York Times feels compelled to reassure us that the chances of a full-blown 1930’s-style depression are low, you know something is up. See Depression You Say? Check Those Safety Nets, March 23, 2008. The Bear Stearns debacle, a classic run on the bank, took most observers by surprise. This point was brought home to me personally when Standard & Poors downgraded National City’s outlook from ‘stable’ to ‘negative’ last week, “citing risk from the shaky housing and mortgage markets.” National City is my bank. Deposits are insured, of course, but that didn’t make me feel any better somehow.
….Over the next year we’re going to learn a lot about global oil demand and prices. We’re also going to learn whether American consumption is still the sine qua non of global economic health it once was. Regardless of the outcome, Americans are in for a tough time.
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Yahoo! Finance (AP wire piece), March 23)
For months, Americans have been subjected to a sort of economic water torture — a maddening drip of bad news about jobs, gas prices, sagging home values, creeping inflation, the slouching dollar and a stock market in bumpy descent.
Then came Bear Stearns. One of the five largest U.S. investment banks nearly collapsed in a single day before the government propped it up by backing emergency loans and a rival stepped in to buy it for a paltry $2 per share.
To the drumbeat of signs that seemed to foretell a traditional recession, this added a nightmarish specter — an old-style run on the bank, customers clamoring to pull their cash, a stately Wall Street firm brought to its knees.
The combination has forced the economy to the forefront of the national conversation in a way it has not been since the go-go 1990s, and for entirely opposite reasons.
As economists and Wall Street types grope for historical perspective — which is another way of saying a road map out of this mess — Americans are nervously wondering about retirement savings, interest rates, jobs that had seemed safe.
They are surveying the economic landscape and asking: Just how bad is it? They are peering over the edge and asking: How far down? And the scariest part of all? No one can say for sure.
….On top of an economy that was already groaning under the weight of a downturn, Bear Stearns came down like an anvil. It tied together so much of what’s wrong with today’s economy — the housing crash, the credit crunch and a loss of confidence among investors and consumers alike.
Understanding how things got so bad means rewinding to the start of the housing boom…..Economists and market historians seem to agree that this is more than a typical, cyclical slump. And the X-factor that sets it apart — determining how deep the wounds from the mortgage mess really are — also makes it impossible to map the path of the downturn.
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MarketWatch, March 30
Markets may be stabilizing, but the news on the economy is getting worse. The coming week will see more dismal headlines on employment, construction and manufacturing, economists said.
“The indicators on the economy will point in the direction of pronounced weakness in domestic demand,” wrote Global Insight economists Nigel Gault and Brian Bethune.
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The Washington Post, March 28
[Cardin comments: This is truly a cat-out-of-bag moment. As the opening line below states, “the Federal Reserve, long the guardian of the nation’s banks, has redefined its role to also become protector and overseer of Wall Street.” The fact that such an ad hoc redefinition was necessary, the fact that Bernanke and the Fed were forced, in the words of The New York Times last week, to “make policy on the fly” by saving Wall Street, all for the purpose of saving the nation’s financial system from a sudden and complete collapse in the grand tradition of 1929 and afterward — this fact, these facts, shout out the dirty little not-so-secret that everybody now has to face and that many of us have already been facing for some years now: that the U.S. as a nation has sold its soul completely and without reservation to the gods of finance capitalism.
Plain old capitalism is one thing, and it’s not a bad thing at all. But this particular type is positively insane, this dizzy Faustian/Frankensteinian economic monster that’s internally driven by utter, abandoned greed and externally framed and enabled by neoliberal assumptions that inevitably focus the whole system toward the evolution of bloated megacorporations that effectively wield more power than nations and governments, not to mention average individuals. It’s this truth of America’s pact with the devil, so to speak, that recent economic and financial events, along with the Fed’s actions, have rendered undeniably evident and plain for all to see. Whether we’ll pull back from it remains to be seen. But the scope and scale at which this wholesale transformation of America has taken place naturally makes one doubtful that any real retreat or alteration can happen without serious turmoil, especially considering that the change also inheres in the rest of the world during this great era of economic globalization, which really means simply the exporting of America’s neoliberal economic philosophy abroad.]
In the past two weeks, the Federal Reserve, long the guardian of the nation’s banks, has redefined its role to also become protector and overseer of Wall Street.
With its March 14 decision to make a special loan to Bear Stearns and a decision two days later to become an emergency lender to all of the major investment firms, the central bank abandoned 75 years of precedent under which it offered direct backing only to traditional banks.
Inside the Fed and out, there is a realization that those moves amounted to crossing the Rubicon, setting the stage for deeper involvement in the little-regulated markets for capital that have come to dominate the financial world.
Leaders of the central bank had no master plan when they took those actions, no long-term strategy for taking on a more assertive role regulating Wall Street. They were focused on the immediate crisis in world financial markets. But they now recognize that a broader role may be the result of the unprecedented intervention and are being forced to consider whether it makes sense to expand the scope of their formal powers over the investment industry.
“This will redefine the Fed’s role,” said Charles Geisst, a Manhattan College finance professor who wrote a history of Wall Street. “We have to realize that central banking now takes into its orbit everything in the financial system in one way or another. Whether we like it or not, they’ve recreated the financial universe.”
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The U.K. Independent, March 23
The Western world is in an economic crisis similar in scale to the oil shock of 1973. What we are seeing is nothing less than the unravelling of neo-liberalism — the dominant economic and ideological model of the last 30 years.
The disintegration of Anglo-Saxon-inspired markets has come about largely because of the confluence of two tendencies of the “free market”: speculation and monopoly capitalism. Contrary to received opinion, free markets — unless subject to civil regulation, asset distribution and persistent intervention — always tend to monopoly.
Similarly, there is nothing inherently efficient about free markets — they do not of themselves promote sound investment or wise management. Rather, when markets are conceived wholly in terms of price and return, and when asset wealth and the leverage that this provides becomes as concentrated as it was in the 19th century (which is a scenario we are approaching), then markets encourage nothing other than gambling masking itself as sound investment.
….This incalculable level of speculation is abetted by the huge concentration of wealth that has occurred since 1973. Why? Because if markets tend to monopoly then smaller groups of people control larger amounts of assets. The latest figures demonstrate this admirably: the richest 10 per cent of the UK population increased their share of the nation’s marketable wealth (excluding housing) from 57 per cent in 1976 to 71 per cent in 2003. Over the same period, the speculative capital that could be deployed or inves-ted by the bottom 50 per cent of the British population fell from 12 per cent to just 1 per cent. Indeed, the wealthiest 1 per cent of the population, on current government figures, now control more than a third of all the marketable wealth — and this ignores the vast sums held in offshore tax havens.
The New Economics Foundation has shown that global growth has not aided the poor. In the 1980s, for every $100 of world growth, the poorest 20 per cent received $2.20; by 2001, they received only 60 cents. Clearly neo-liberal growth disproportionately benefits the rich and further impoverishes the poor.
Real wage increases in the top 13 countries of the Organisation for Economic Cooperation and Development (OECD) have been below the rate of inflation since about 1970 — a situation compounded in Britain as the measure of inflation massively underestimates the real cost of living.
Thus wage earners — rather than asset owners — have faced a 35-year downward pressure on their standard of living. Indeed, the golden age for the salaried worker, as a share of GDP, was between 1945 and 1973 — and not this vaunted age of liberalisation.
The trouble is that nobody in power recognises this crisis for what it is — an asset insolvency crisis brought about by massive debt leverage. Neo-liberals are still reacting as if the emergency was one of liquidity. They are wrong. Governments should bail out not banks and speculators but the customers who now have every reason to fear for the future.
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Martin Wolf, Financial Times, March 25
Remember Friday March 14 2008: it was the day the dream of global free-market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Joseph Ackermann, chief executive of Deutsche Bank, that “I no longer believe in the market’s self-healing power”. Deregulation has reached its limits.
….Yet the extension of the Fed’s safety net to investment banks is not the only reason this crisis must mark a turning-point in attitudes to financial liberalisation. So, too, is the mess in the US (and perhaps quite soon several other developed countries’) housing markets. Ben Bernanke, Fed chairman, famously understated, described much of the subprime mortgage lending of recent years as “neither responsible nor prudent” in a speech whose details make one’s hair stand on end [Fostering Sustainable Homeownership, March 14, 2008]. This is Fed-speak for “criminal and crazy”. Again, this must not happen again, particularly since the losses imposed on the financial system by such lending could yet prove enormous.
….“Some say the world will end in fire, Some say in ice.” Harvard’s Kenneth Rogoff recently quoted Robert Frost’s words in describing the dangers of financial ruin (fire) and inflation (ice) confronting us. These are perilous times. They are also historic times. The US is showing the limits of deregulation. Managing this unavoidable shift, without throwing away what has been gained in the past three decades, is a huge challenge. So is getting through the deleveraging ahead in anything like one piece. But we must start in the right place, by recognising that even the recent past is a foreign country.