Thursday, July 24, 2008

The Tightening Noose

"Federal officials are converging in support of a sweeping overhaul of financial regulation, making it likely that Wall Street investment banks and other major financial institutions will be subject to a tighter government grip. ... At a House Financial Services Committee hearing Thursday, Treasury Secretary Henry Paulson [HP] and [Fed] Chairman Ben Bernanke agreed that regulators need new tools to deal with financial crises and stronger oversight authority over major financial institutions. ... Officials are trying to walk the line between being prepared for the downfall of a major financial institution that would threaten the overall economy and signalling that the government would step forward with funds to bail out a collapsing firm. 'Regulation alone cannot eliminate all future bouts of market instability,' Mr. Paulson said. 'For market discipline to be effective, market participants must not expect that lending from the Fed, or any other government support, is readily avaliable.' Knowing that a government backstop exists can alter firms' behavior, interfere with markets and ultimately put the system at greater risk, Mr. Paulson said. 'For market discpline to effectively constrain risk, financial institutions must be allowed to fail.' ... The Fed recently signed an agreement with the [SEC], ... to coordinate on information sharing", my emphasis, WSJ, 11 July 2008.

"The U.S. Treasury and the [Fed], capping a weekend of high-stakes maneuvering, attempted to shore up confidence in Fannie Mae and Freddie Mac by announcing a plan that placed the federal government firmly behind the battered mortgage giants. ... The weekend's moves constitute an attempt by the federal government to ease the potential crisis at Fannie and Freddie without intervening directly. By promising bold action if needed, officials are hoping that can instill sufficient confidence in the two companeis that such intervention ultimately will prove unnecssary. ... The weekend move means that Fed Chairman Ben Bernanke ... will have even more power. ... Fannie Mae Chief Exeutive Office Daniel Mudd expressed gratitude for the government's actions. ... Both the line of credit and the liquidity backstop would be temporary, but could be in place for up to 18 months", my emphasis, WSJ, 14 July 2008.

"The [Fed] is rapidly becoming the world's largest financial garbage dump, as for months, it has agreed to accept banks' asset-backed securities, including sub-prime real estate bonds, as collateral in return for US Treasury bond purchases. ... Meanwhile, some investors are viewing the Paulson bailout not as a bid to rescue the US economy but a lifeline for his former Wall Street cronies as the country's big banks teeter towards a financal implosion", F. William Engdahl at, 16 July 2008.

Regulators need new tools? Why? To conceal bailouts, that's why. Isn't HP brilliant, "regulation alone cannot eliminate all future bouts of market instability". HP even recognizes moral hazard exists. Wow. What do we need HP for? The bottom line: many major financial institutions are at death's door and Chris Cox's SEC is looking for ways to hide this from the public. Got gold? Get more! Why do we need more regulation anyway? We have Wall Street executives making tens of millions a year, surely they know how to manage their own companies? Don't they?

Temporary? New York City established rent control in 1943 as a temporary WWII measure. It's still there. Instill confidence? Are the Feds playing three card monte with the public?

I agree with Engdahl. The Fed is a garbage dump.

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