Government Intervention Run Amuck No. 20: Bank Intervention

My list of examples of the unintended consequences of government intervention in the marketplace gets longer and longer. This time, I'm going to point out the latest irony: Investment banking's profitable last quarter.


[Thanks to Thevoiceforschoolchoice.wordpress.com for the photo.]

This would be wonderful news if it were genuine, but looking a little deeper reveals the truth. First, in one of Barron's feature articles by Andrew Bary, we learn about a little-discussed fact: Goldman Sachs has only been able to issue low-cost debt due to the backing of the FDIC through a program called the TLGP, or Temporary Liquidity Guarantee Program.

I suppose this program is no secret, but somehow it had escaped me that Goldman, JP Morgan, Morgan Stanley, and others are relying heavily on it to survive, at the same time as they are declaring profits and claiming that they want to return the TARP money in a show of strength. In fact, it's all show and no strength when you look at the facts.

Here's another thing that raises my cockles. Goldman has stated first quarter earnings as $1.8 billion. As Alan Abelson points out in his weekly Up & Down Wall Street column, Goldman's profit statement all but ignores results for December because of a fluke fiscal-year switch. "Goldman lost some $780 million in December," says Abelson. This brings the four-month profit down to $1.02 billion, which is still respectible; but somewhere else in Barron's (I can't find it now) we learn that Goldman made most of that profit through a risky bet on bond futures.

Isn't risky betting what got us into this mess? And aren't firms like Goldman now gambling with our tax dollars? Aren't we rewarding and encouraging the very behavior that helped get us where we are today? And is there any guarantee that they will make good bets (with our money) in the future? Shouldn't these people be market-dead?

Abelson conjectures, furthermore, along with his source Zero Hedge, that some of Goldman's $1.8 billion profit may have come from payments by AIG, who "'gifted the major bank counterparties with trades which were egregiously profitable to the banks.' This would largely explain, according to Zero Hedge, why a number of major banks actually, as they claimed, were profitable in January and February. But the profits, it is quick to point out, are of the one-shot variety, and ultimately, they entailed a transfer of money from taxpayers to banks, with AIG acting as intermediary."

My free-market instincts have always told me to hold onto my resentment of big bonuses and the new divide between the rich and the "middle class," as illustrated in the supplementary section to this weekend's Wall Street Times, with glossy pictures of dozens of fabulous mansions for sale around the country. And echoing my own sentiment, Gregory J. Millman chides me in his Barron's piece this weekend, "let's not go ape about fairness." He's right--or he would be, in a free-market society.

But Mr. Millman, this market isn't free and hasn't been for decades. How can we talk about free market when the banking barons are divvying up our hard-earned tax money, thanks to the largesse of those who didn't earn it, our legislative representatives? How can we talk about fair competition when the playing field is rigged in favor of the big boys, and the small businessmen and women just have to suck it up when they learn from their subsidized bank that they can't have any of the handouts? How can we talk about a deflationary correction, elimination of the unhealthy business models, and a return to saner plain-vanilla banking, when our legislators continue to reward foolhardy risk-taking?

We're headed in the wrong direction. More limited government is the answer, not bail-outs of bankers who should be dead by any Darwinian-Schumpeter standard; not Treasury-instigated bank "stress tests" that will soon go bang in the night, raining multiple unintended consequences; not back-room cronyism in the name of "saving the system."

The 2008 Bailout: The Pandora's Box of All Pandora's Boxes

If there ever was a Pandora's Box, the Big Bailout of 2008 has to be it.


[Thanks to 2highfestival.com for the image.]

How did we get here?

After a difficult time in the early 1900s, we began our drift away from sound monetary and banking policy by turning towards government for the prevention of business cycles.

We thought we were doing the right thing in creating the Federal Reserve. Since then, it has evolved into the monster it is today.

It started as a tool for maintenance of the stability of the banking system, but it has become the all-knowing, all seeing Poobah-Controller of the Issuance of Purchasing Media, in the place of what we had back then, the gold standard. In fact, we've gotten so far away from this standard that we officially abandoned it in 1971.

Today, it is increasing clear that the Fed has no real control of the money-creation process. Meantime, Congress has decided to come to the rescue of one failing institution after another, most recently General Motors. Ford and Chrysler will not be far behind.

Where will it end? How will this turn out?

No one knows; and the more the government messes around with this, the murkier the future becomes.

We are already in a good recession (see the statistics of the American Institute for Economic Research), and it may start out to be deflationary. But our leaders will not let price deflation happen. They will pump as much credit into the system as they think they need to keep prices and the economy stable. After all, that is their mandate. (See what I have to say about their mandate here.)

Yet deflation enriches us through lower prices. (It also means reducing the supply of purchasing media, but that's a separate story. See my discussion of this definition confusion.) If prices were to decrease, we would all be better off. For example, do you prefer the price of tuna fish at $3.99 a can, or $2.99? Duh.

Deflation (i.e. lower CPI) is not bad in and of itself. What is bad is what usually accompanies deflation. In most deflationary episodes we have recession and/or depression: Bankruptcies, decreased consumption, loss of jobs, stock market losses, bank closures.

But the Fed is forgetting that by "curing" the symptom of recession (i.e. by stopping price deflation) they are not necessarily curing the cause of that recession.

To cure this recession, Congress must allow the market to rid itself of a century of inflation. That can only be corrected through a deflationary process, even if it means we must undergo some recession. If the Fed and the Treasury try to keep it from happening, they will maintain the distortion of inflation instead of allowing it to cure itself.

What method will they use to accomplish this? They will try their darnedest to prevent deflation/recession/depression by turning on the printing presses (issuing fiat currency and credit) to whomever needs it the most, or cries the loudest, or threatens to close. They have borrowed billions, and created billions, in this effort. Where will it stop, now that the presses are running full speed?

Businesses are quickly learning that they must start screaming for cash. The cash is available. First come, first served. Yet by continuing the inflationary process and handing out cash, our own elected officials are fleecing us on a daily basis.

They will fund these bailouts with the raises we will not get, with the value we are losing on our houses, with the pension investments we bought at inflated prices and that have vanished.

Our salaries are now in negative growth, banks steal our savings every day through poor interest remuneration (they get cheaper money from the Fed), and our social security incomes and pension allotments are not keeping pace with the CPI. As my Dad used to say, "Stand still, little lambs, to be shorn." (For more about him, see my last post.)

In the longer run (when, I don't know), we the people must reject these shenanigans and turn to gold as a refuge against government destruction of the monetary units of the world.

That's the day Pandora will close her box. I hope I live long enough to see it happen.

America's New-Found Socialism: The Mother of All Government Interventions

I have been having fun over the last few months citing examples of government intervention run amuck. This weekend, I think we've hit the motherload.

Hank Paulson has become the new symbol of American socialism at work. He, with the help of his colleagues Ben Bernanke and some legislators, has become what some are labeling the "bail-out tsar."


[Tweaked image taken from Wikepedia.org, who got it from Rossia.org]

The French leftist newspaper Liberation is labeling our country, once the symbol of the free market, the USSRA: United Socialist States of the Republic of America.

Yes, the free-market pretense seems to be over, folks. The chips are now on the table. Whatever happened to the so-called "Reagan Revolution"?

As one congressman describes it in a citation pulled from MarketNews International by Prudent Bear:

"U.S. Senator Jim Bunning today issued the following statement regarding the Treasury Department's bailout of Wall Street. ‘Instead of celebrating the Fourth of July next year Americans will be celebrating Bastille Day; the free market for all intensive purposes is dead in America. The action proposed today by the Treasury Department will take away the free market and institute socialism in America.'"

This would be true if it weren't for the fact that we've been creeping toward socialism since the First World War. This latest is only the most recent leftist push.

I suppose there is a slight chance that Paulson--who does know investment banking--might have played the taypayers' hand well. By this I mean that there may be a tiny possibility that the toxic waste he will be buying for us (if Congress gives him the power he seeks) could in the long run be worth more than the taxpayers will pay for it.

But why is it that I just don't believe that? Well, a look back at history tends to substantiate that whenever the government intervenes into the market, it mucks it up. It's just a rule of thumb. Why should this case scenario be any different?

(Don't sell your gold yet.)

Freddie and Fannie Bail-Outs: The Denouement

You may recall my Example No. 17 of government intervention run amuck. I told you about the mess in which our mortgage industry finds itself, helped by our semi-governmental agencies, Freddie Mac and Fannie Mae.

We now have this piece by Deborah Solomon and Damian Paletta at the Wall Street Journal, giving us an update of their situation.


[Thanks to Tootstubing.com for this image.]

The bail-outs keep coming in this financial saga, and Freddie and Fannie will be no exceptions. A few months ago, Teasury Secretary Henry Paulson obtained our permission (through Congress) to bail them out, and apparently he didn't do it for nothing.

So now we have Government Intervention upon Government Intervention, both now running amuck in tandem. Not only was the very creation of these two organisms unwise, as I explain in my earlier post linked above; but now we have one more in the string of wrongs that government officials are having to commit in their effort to right the original one. To wit:

"Mr. Paulson's push to win authority was meant to reassure investors that the government wouldn't allow Fannie Mae and Freddie Mac to fail. But some believe it ultimately forced Treasury's hand. The federal government's involvement complicated the companies' already-difficult task of raising capital through the sale of common or preferred shares. Investors were leery of buying either while the government's intentions were unknown, because they feared the newly issued shares might become worthless as the result of federal action."

And look for more wrong runnings-amuck from this problem. For example, here's one I can see from a mile away:

"Among the issues with which Treasury has been wrestling is whether to make an investment at such a low price that shareholders are effectively wiped out. Mr. Paulson is cautious about any plan that appears to benefit shareholders because he doesn't want the government to be seen as bailing out investors who for years profited from the companies' success."

Bloomberg also gives their version of this news.

Ah, it would all be so entertaining if it were fiction.

Fannie About To Fall on It?

[Thanks to Pyzam.com for the image.]

Both Fannie Mae and Freddie Mac are way over their head in potential debt at this point. The legislators have seen fit to burden them with saving the country from the bursting mortgage bubble (actually a monetary bubble in my opinion).

The problem is that we, the taxpayers, will be called upon to cushion that fall, because the only outcome of a falling Fannie would be for our government to take her over and foot us with the bill.

See this great graphic at the New York Times, linked through this informative article by Charles Duhigg, linked through this great blog post at Peter Viles's LA Land blog at the LA Times.

And like dominoes, Freddie Mac, Sallie Mae (student loans), and the Federal Housing Administration are not far behind; then who knows, maybe even the FDIC (Federal Deposit Insurance Corporation) and the PBGC (Pension Benefit Guarantee Corporation)--but whoa, let's not panic yet.

As econonomists say, it is always easier to spend money when it's not your own. Legislators are not immune to this economic rule.