Money Sage

The official mantra regarding the economy, the financial system, and the way to heal the banking system crisis, the paralysis in key credit markets, and to heal the economy has been sanctified by the generality of economists, financial pundits, and stock market gurus. Essentially, a combination of Keynesian deficit spending, tax cuts, and aggressive money creation by the Federal Reserve will bring the multiple, interrelated crises to an end "with all deliberate speed," or to employ the newly fashionable defensive and expectation lowering rhetoric, in due course.

This doctrine gives us more than slight pause. In the first place, we are dubious about the reliability of predictions, prognostications, and assurances from the professional economist community -- including and especially economists who wear the hat of FED policmaker (Bernanke on down). Our skepticism derives primarily from the track record of this community. In brief, they have been dead wrong from the gitgo. They have rather consistently and gravely misjudged the direction of the economy and of prices, which is, after all, their primary justification for existence. The cycle of erroneous prediction and grossly incorrect monetary policy springing from inept analysis and forecasting has exacerbated, by orders of magnitude, the severity and acute danger posed by the current crisis. Why then should we place any store in this selfsame community of "experts"? It is kind of like entrusting the captaincy of a large vessel to a clone of the captain of the Titanic.

Secondarily, there is the actual experience we have had over the past eighteen months of largely futile Federal Reserve, Treasury, and government efforts to end this crisis. Indeed, the authorities on whom we are told to be confident in staking our economic future have not even been able to prevent a wildfire-like spread of the crisis, to every nook and cranny of the GLOBAL financial system. Each move, when judged retrospectively, seems to have made matters worse. The totality of measures has not prevented a massive deterioration of the situation. The avoidance -- thus far -- of a complete collapse of the financial system of the United States -- has been "achieved" only via the outlay of trillions of taxpayer money and taxpayer-backed government guarantees.

Certainly, there is one decision which the authorities have taken which has had decisive consequences. Unfortunately, it was the wrong decision and has had grievous consequences. We refer, of course, to the FED/Treasury decision to allow a systemically important bank -- Lehman Brothers -- to fail. This was equivalent to exploding a hundred thermonuclear devices in the heart of the financial system. If a single decision can be identified which amplified immeasurably the acuteness of the credit market freeze and the banking system collapse, it was this. Prior to the Lehman collapse the credit markets were largely functional, and the rate of interest on investment grade bonds and loans was reasonable. Post-Lehman, and post the multi-trillion dollar bailouts, guarantees, and FED money-printing rates for would-be investment grade borrowers and bond issuers are punitive to the point of compressing corporate profit margins drastically, and in many cases to the point of forcing corporations which must roll over large quantities of maturing debt into bankruptcy. In plain English, whatever motivated the FED and the Treasury to allow Lehman to fail -- an inability to stand up to political, editorial, and conservative pressure, indecisiveness at the crucial moment, failure to think through the implications and likely consequences of their decision, panic, careerism, or whatever -- had the UNINTENDED CONSEQUENCE of annihilating the remaining confidence of bond investors, creditors, banks, stock investors, corporate executives, and the entire range of corporate businesses in America. The FED/Treasury decision thereby created the credit collapse, and placed our economy at serious risk of falling into a severe deflationary depression.

There were numerous lesser missteps as well, where failure to think through an issue in all its likely ramifications, ignorance, or plain stupidity had very unfavorable "unexpected" consequences. One such decision was the suspension of short selling of 700 plus bank and financial stocks. Leaving aside the history of failure of such foolish efforts, there was a serious "unexpected" consequence. The $400 billion convertible bond market collapsed into illiquidity; new issuers found themselves blocked off from another avenue of credit. No one, it seems, told Dr. Bernanke, Mr. Paulson, or Mr. Geithner that major players in this market are willing to acquire and maintain substantial positions in convertible bonds only because they can HEDGE these positions by shorting the stocks of the issuers, thereby limiting any loss which might accrue due to a drop in the price of the convertibles they hold. Watching the government pull the rug out from under holders of bank and financial company convertibles, no investor could be certain whether the government would prevent the shorting of other stocks; consequently, the convertible bond buyers disappeared into the woodwork and the market froze solid.

The inconsistency, unpredictability, irrationality of government interventions and decisions, as well as the abrupt policy reversals, have destroyed investor confidence, investor willingness to purchase any securities save for government bonds.

We have been told by our political and financial leaders that we are in an unprecedented, unique, unparalelled situation, etc etc. Consequently, drastic, unconventional, untested measures are necessary.

Our basic problem with this the inevitability and pandemicism of the law of unintended consequences. This law, as we have seen, has operated with deadly ferocity and efficacy over the past year of unprecedented central bank and government activities, programs, and interventiosn. Leaving aside the question we posed earlier -- why should we have any confidence in the selfsame captains of disaster who have brought us to this wretched pass -- lies a much larger question.

This, simply put, is the question of GOVERNING PRINCIPLES. It seems to us that the conduct of any enterprise, great or small, should be conducted in accordance with the dictates of PRUDENCE, COMMON SENSE, AND CAUTION. Basing policy on best case assumptions, hope, wishful thinking, or the presumption that something -- anything -- must be done regardless of the risk violates the MOST BASIC CANONS OF PRUDENCE, RESPONSIBILITY, COMMOM SENSE.

Unfortunately, it seems as though our leaders are fixated on acting without thinking, on throwing caution to the winds.

As the ancient Greeks said: "THOSE WHOM THE GODS WOULD DESTROY THEY FIRST MAKE MAD"

Moneysage 2009 - copryight