Monday, January 7, 2008

Transparency and the Fed

"Transparency is a hallmark of modern capitalism, and [Fed] Chairman Ben Bernanke has made transparency a hallmark of his new regime. Yet among our leading financial institutions, opacity, not financial transparency, has been on the rise. ... In theory, securitized markets are supposed to operate on the basis of accurate and readily available prices. ... Securitization also has been supported by a dazzling array of new quantitative analytical techniques that are capable, according to practitioners, of defining risk probability down to decimal point levels. ... Financial intermediaries quickly recognized the process of securitization held the potential for enormous profits--from underwriting, distributing and trading the newly commodified obligations, as well as from managing them for others. ... The new credit entrepreneurship paid off handsomely. ... Power and decision-making increasingly resided in the middle ranks of leading financial institutions. ... Incentive systems within financial institutions offer few restraints. ... [T]here are no claw-back provisions to recoup any of the losses incurred by the former managers. As financial markets have become opaque and risk-laden, the [Fed] has touted its own growing transparency. ... But the Fed seemed satisfied to allow [SIVs] as long as it determined that the value-at-risk procedure employed by these holding companies fell within generally accepted parameters. Rather than focus on the threat posed by the lack of transparency, the Fed has focused on mechanical deficiencies in the market. ... how can [massive infusion of new funds] not reduce market discipline before the collapse, or incite a quick return to speculative activities after the Fed rescue? ... [L]arge financial institutions are the custodians of the public's temporary funds, savings and investments. They cannot be allowed to fail", Henry Kaufman (HK) at the WSJ, 3 January 2008.

I have been a "Dr. Doom" fan for about 30 years, and second most of his observations, but say again, "either the Fed destroys the banks or it destroys the dollar". "[M]echanical deficiencies in the market", say it ain't so. Is the Fed run by a bunch of bookeepers? HK writes, "They cannot be allowed to fail. The costs--financially and economically, socially and politically, domestically and internationally-- are unacceptable". I respect HK's judgment, but disagree as the German mark's collapse, 1922-23, led to Hitler's rise and WWII. Let the banks die. Yves Smith has a nice post on this at, 3 January 2008. As to increased Fed transparency, I don't believe it. Where is M3, for example? Helicopter Ben can't show his hand when his job is: to swindle Uncle Sam's creditors into holding dollar denominated debt which cannot be repaid! As for the banks, their money creation and investing activities must be separated. See also my 19 November 2007 post referring to a Gary North post.

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