Looting the Vaults at the Central Banks

When I was a young central banker, we often spent our lunchtimes debating how best to rob our employer. Tempted by the thought of great mounds of gold ingots far beneath us in the third sub-basement, nestling deep in bedrock, we would speculate on the viability of various plans for plundering our nation’s store of wealth. The presence of sufficient security forces to defend a medium size city and enough steel around the vault for a battle cruiser only spurred our youthful imaginations. After some months of fantasy gold robbery, I began to assert to my colleagues that stealing the gold would be foolish as it would be impossible to get away with enough gold in city traffic to make the attempt worthwhile, and selling it in any sizeable amount would lead to instant detection. I argued instead in favour of stealing the wheelie bins of cash conveniently lining the hallway to the loading ramp. Cash would be faster and easier to steal and more liquid to spend than gold.

I see now that I was a central banker of very little brain – and lacking ambition. The way to rob a central bank efficiently is to be a bank executive so skilled in financial engineering that I take my bank to the edge of extinction. I can then swap all my unpriceable, illiquid, engineered credit instruments for good central bank cash and Treasuries. That’s larceny without risk, making the central bank a complicit partner in the looting of its vaults, and earning gratitude and bonuses instead of audits and indictments.

Since the credit crisis was first diagnosed last fall, the Federal Reserve has advanced more cash and Treasuries than the entire five year cost of the Iraq war – over $400 billion. It has plundered more than half its holdings of US Treasuries, taking impaired asset-backed securities collateral in their place. It has overseen the devaluation of the dollar to third world levels of instability and inflation. And all of this debasement has as its objective the re-financing of those bank and shadow-bank executives who have so looted their own institutions that they hold the global financial system hostage to their incompetence, malpractice and greed. Without consultation or review, the Federal Reserve was able to chuck out decades of transparency and accountability in favour of secret facilities, secret loans favouring secret beneficiaries of secret largesse.

The Term Auction Facility (TAF), the Primary Dealer Credit Facility (PDCF) and the Treasury Securities Lending Facility (TSLF) are all ill-transparent conduits funnelling central bank cash to bankers in the private sector free of oversight, audit or scrutiny. The recent liberalisation of collateral by the Fed means that it is now officially the market maker of last resort for securities which are unmarketable in the private sector.

And the creepy thing is that most of the establishment thinks the Fed is doing a great job. Because there will never be an independent investigation or audit, we will never know whether they are policy geniuses or criminally complicit accomplices. Perhaps it makes no real difference to either motivation or outcome.

Now the Fed wants powers to enable it to create even more credit to finance failure. It is said to be seeking Congressional authority to pay interest on bank reserves (via Forbes with a hat tip to Steve Waldman). While this might sound benign, especially in a modern era when American banks hold no non-borrowed reserves, the expanded powers are potentially very dangerous. Paying interest on reserves would permit the central bank to extend hundreds of billions more in TAF, PDCF and TSLF credit without the inconvenience of having to sterilise the monetary expansion through further sales of its increasingly meagre inventory of Treasuries.

Spies and weapons, whether real or imaginary, are asserted by the military-intelligence complex as justifying more spies and weapons. If no attack occurs it is because they are so efficient at protecting us and pre-empting many unpublished threats. If an attack occurs, it was because they were under-funded or over-constrained. In the same way, financial excess and bad credit have been used by the banking system to justify more financial excess and bad credit in a self-reinforcing loop of financial and supervisory indulgence and forbearance. If no crisis occurs, it is because there is a new paradigm and risk management models are more reliable. If a crisis occurs, it is because banks lacked access to adequate liquidity and were over-regulated. For too long the cycle has reinforced monetary laxity, permissive deregulation and regulatory forbearance on accounting and capital adequacy, with all accountability and market discipline excused by the need to forestall contagion and systemic failure.

Any crisis now accelerates the trend toward greater public laxity, private excess and central bank secrecy. A crisis, real or manufactured, is most useful to increase the amount of public money clandestinely extended and diminish public oversight and administrative review of outcomes. This has been the pattern for at least 25 years, and may continue for some time to come before a taxpayer or creditor revolt ends the American spiral downwards towards bankruptcy and corporate tyranny.

It used to be the realm of conspiracy theorists to assert that policy makers in Washington were aligned with the military-intelligence complex in promoting international conflicts for profit or that the Federal Reserve was the tool of Wall Street banks in promoting irresponsible bubbles. Now it is accepted policy, defended openly in the media as right and inevitable, as providing an efficient means for America to meet the “threats” to security and financial stability in a changing world.

The danger of embracing the spin is that the productive economy shrinks from underinvestment and distortions as an increasing share of a slower growing pie gets diverted to government and the cronies who direct government policies.

The thrift failures in the 1980s were followed by financial deregulation and increased mortgage subsidies, enabling the massive misallocation of credit and leveraging of balance sheets on an even greater scale. Further deregulation, forbearance, subsidies and bailouts can only lead to more frightening misallocation of scarce capital in zero-savings America and more fragile over-leveraged banks, but now presenting a danger of contagion to the rest of the world. It is the savings of the world’s productive economies funding American misallocation and excess, and the world’s poor that suffer the contagion of inflation from a devalued dollar.

Already the ECB and Bank of England have followed the Fed in extending good central bank funds against questionable collateral under rapidly liberalising lending facilities. While they appear slightly more resolute on prudential supervision and inflation-fighting, they are nonetheless compromised and constrained by the policies and practices of bankers and central bankers across the Atlantic. As American banks receive forbearance and largesse, the European banks shout, “Me too!”

Globalisation of banking and regulatory “best practice” was once seen as raising standards, but may be at risk now of lowering them. Just as Japanese zero-interest rate policy flooded the world with cheap liquidity from the carry trade, fuelling speculative bubbles and providing cover for low rates elsewhere, Federal Reserve forbearance and credit accommodation may flood the world with warped management incentives and credit distortions which pervert the banking sector and financial markets, undermining rationales for savings and productive investment.

Without transparency of central bank facilities and policies, there can be no accountability for misuse of public resources and abuse of the public trust. Transparency provides an essential check on bank mismanagement, even for central bankers.

When Bloomberg revealed this week that Ben Bernanke lunched with Dimon at the New York Fed on March 11 with key Wall Street bankers just three days before the emergency $14 billion financing for Bear Stearns and five days before the sweetheart $30 billion financing of JPMorgan’s acquisition of Bear (again, the acquired assets the Fed received for the cash are secret), it made me very uneasy. Suspicious minds might think the public interest and integrity of market mechanisms, including the corrective of the occasional failure, weren’t foremost in their discussions.

Whether cock-up or conspiracy, recent reforms set the scene for looting of the central banks on a scale never imagined by my younger self.


As some regulars to Professor Roubini’s blog will know already, I am a mere commenter on the blog who has been elevated to posting by invitation of the Professor. Having seen the list of new posters who will be joining us here, I can assure you that I am deeply honoured to be among them.

London Banker will continue to post anonymously. It permits me to be more forthright than I could be otherwise.

Despite being a poster, my commitment to this site is as a commenter, and I hope to see many comments from my blog buddies below so that we can continue the dialogue I have enjoyed on this site for so long.

Being new at this, I will also welcome ideas and guidance at londonbanker ( at ) btinternet.com.

103 Responses to "Looting the Vaults at the Central Banks"

  1. Medic   May 15, 2008 at 7:57 am

    LB – congratulations on the first of many columns.

  2. London Banker   May 15, 2008 at 8:07 am

    @ MedicYou’re first! It’s raining here today, so I’m back to being productive – or at least writing – again.

  3. iww   May 15, 2008 at 8:39 am

    One of those posts that I agree with completely!Congratulations, and thanks to NR for providing a forum where you can write more extensively on these issues.

  4. dr   May 15, 2008 at 8:40 am

    LB,Again, outstanding work.Here is the crux of the issue for me. I have a book of clients here in Candada, and risk management of the portfolios is paramount. Beyond asset allocation, identifying areas of growth, areas of concern and mixing in a loger term horizon, the question is simply this.As an investment advisor, and quite frankly as an investor, how do we navigate these markets understanding that fundamentally the evidence out there do not justify these prices. At what point does the street itself gets up and take account of the divergence. It smells so 2000-2003 to me.Nice fake rally up, then the grinding crushing longevity of a few percentages down every month, till at the end the indexes are down anywhere from 40 to 70%. Where in the world can one hide? Are BRICK’s immune to a downturn?Will there be a general downturn?Will commodities rally to the sun, or get burnt down?Argh!

  5. London Banker   May 15, 2008 at 9:01 am

    @ drI totally suck as an investment advisor. With government trying to rig the outcomes, possibly incompetently, it’s very difficult to make any kind of rational predictions. Presumably your clients have confidence in you. So do I.

  6. dr   May 15, 2008 at 9:34 am

    @LB,thanks for you kind words of support.And to expand further upon your comments…If the premise then is that governments, central banks, and the large bankers are in cahoots trying to rig the markets, then the markets are way more unkowable than one can imagine.They tried to say housing was not an issue. Now look at what is happening around the western world with deep corrections underway. (When does the housing correction monster visit Canada – and don’t no one tell me we are any different). Could the powers that be control people’s psychology on housing? Nope. So while they may be able to control the markets, do they have enough control of the purse strings of the market, or will the later stages of investor pyschology take place….denial, delusion, grief, rage, acceptance.There must be a mechanism out there (just as there was in housing – oversupply or significant deviation from the pricing metrics)that will trigger these markets to reverse their irrationality.I can’t imagine we can stray from fundamentals for so long and be blind to what the powers that be are doing. I have positoned portfolios to take advantage of new buying opportunities (healthy fixed income component), all the while staying invested in asset classes we can reasonably view as being rewarding over the next several years (emerging markets, energy, environmental funds, global natural resources).

  7. Vitoria Saddi   May 15, 2008 at 10:01 am

    LB,I don’t understand when you say that " When Bloomberg revealed this week that Ben Bernanke had lunched at the New York Fed on March 11 with key Wall Street bankers just three days before the emergency $14 billion financing for Bear Stearns and five days before the sweetheart $30 billion financing of JPMorgan’s acquisition of Bear (again, the acquired assets the Fed received for the cash are secret), it made me very uneasy. Suspicious minds might think the public interest and integrity of market mechanisms, including the corrective of the occasional failure, weren’t foremost in their discussions"Do you think that some people profit with it? Who? thanks for the great piece!

  8. London Banker   May 15, 2008 at 10:13 am

    @ VitoriaA lot of money is changing hands very quickly. In that one week alone, $44 billion was extended to the now merged enterprise of Bear Stearns/JP Morgan Chase. We are expected to believe that Ben Bernanke had no inkling of these transactions when he lunched at the NY Fed on 11th March, as he testified later to Congress that he knew nothing of the troubles at Bear Stearns until 13th March.Colour me sceptical.

  9. Shogi n Go   May 15, 2008 at 10:14 am

    @LBI forecast that your blog will make the RGEmonitor even more of a go-to site. Enjoy the unveneered forthrightness of your viewpoint. Looting and plunder…Everyone is feeling the unease you describe in regard to the Fed’s manoevring to forestall deep recession and their new-fangled means of getting hot money in hot banking hands. The Fed must soon attempt to fully explain themselves. If they don’t do so and demonstrate transparency soon, everyman will presume that there is a cabal inserted in our institutions whose only purpose is to reward the financial establishment to the detriment of everyone else. The Fed must answer for its reckless policies which (1) encouraged a series of asset bubbles (2) allowed capital reserves to virtually disappear while banking entities leveraged too far past prudential limits (3) looked approvingly upon complex innovative instruments that mispriced risk (4) did not seek to restrain the growth of a shadow banking system until such system presented such systemic risk that they had to acknowledge them on near equal standing with standard banks (5) presumed upon taxpayer largesse by backstopping an investment bank with mult-billion dollar commitments. This done in secrecy, overnight for a market surprise, and without the consent of the governed. Taxpayers burned without recourse, market participants burned by market intervention and unintended consequences (6) bending market reports which would force a stay of hand in the balance between price stability and growth in order to continue the course of providing liquidity despite insolvency. Again unintended consequences. (7) interfering in the free markets using poignant timing again and again to pursuade market participants to adhere to their vision of future. Many investors harmed or sometimes ruined by non-market information. Among a few…As an aside, how is your boat coming along? I’m sure it is a far superior and sea-worthy craft than our leaky leviathan of state. Best respects…

  10. Anonymous ibid.   May 15, 2008 at 10:22 am

    DR, I’m no investment adviser either. However, I have some comments that might be helpful. I generally agree with your growth equity picks (emerging markets, energy, environmental funds, global natural resources), for whatever that may be worth. 1. Currencies are another area to be considered, especially since ETFs are appearing to allow one to invest in currencies like the real, renminbi, and rupee. The advantage is that if one has to exit, it’s not too expensive, so these can serve as an additional cash cushion. There are some tax considerations, though. 2. Focus on fundamentals. Even if the next few years are very messy, if the investment fundamentals are right, it should come out in the end. But clients need to have enough cash or cash-like investments so that they don’t get caught short at the market bottom. And don’t be fooled by the financial press on what P/E is normal and what P/E makes a stock cheap. 3. As Roubini says, the economic fundamentals are not pretty for the US, with knock-on effects to the world economy likely. This is an election year, so the Fed and Congress are pouring money into the system. Next year could well be ugly. And, while the market is not the economy, it’s hard to believe that the (US) market will be happy if government spending is falling and taxes are rising, as must happen if the imbalances are to be remedied. 4. The medium term economic fundamentals for much of the rest of the world are actually pretty favorable. The one common problem worldwide is inflation, so the pressure for higher interest rates will be on, even if we do get a serious recession in the US. Countries that are in rough CA and governmental balance should be ok, while countries with high levels of debt are likely to have poor growth. And, of course, for those who are able to take profits at just the right time, those will provide high yields for fixed income. 5. Roubini’s site offers a lot of very good information, a remarkable amount of it available to non-subscribers. Of the many things I’ve read, the IMF reports are the most helpful in understanding the fundamentals.

  11. London Banker   May 15, 2008 at 10:22 am

    @ Shogi n GoYour list (1) through (7) of unexamined Fed policies is concise and scary.My boat is ten tons of steel. She may not be pretty, but in this climate I can always think of her as a commodity play.@ VitoriaFrom the Bloomberg article: Bernanke Lunched With Dimon, Rubin Before Bear RescueFederal Reserve Chairman Ben S. Bernanke lunched on March 11 with a Who’s Who of Wall Street leaders, including JPMorgan Chase & Co.’s Jamie Dimon, three days before the central bank rescued Bear Stearns Cos. from bankruptcy.Other guests included Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein, Lehman Brothers Holdings Inc. CEO Richard Fuld, Morgan Stanley President James Gorman, Citigroup Inc.’s Robert Rubin, Blackstone Group CEO Stephen Schwarzman and Merrill Lynch & Co. CEO John Thain. Alan Schwartz, the CEO of Bear Stearns, was not listed among the attendees.The luncheon at the New York Fed gave Bernanke a chance to hear from chiefs of some of the biggest U.S. financial companies and hedge funds in the middle of his most tumultuous month as central bank chief. The meeting came hours after he announced plans to lend $200 billion of Treasuries in exchange for debt including mortgage-backed securities. I’m guessing there was champagne flowing . . .

  12. bsetser   May 15, 2008 at 10:29 am

    London banker — congrats on the blog. One argument I hear with increased frequency is that this was a crisis of regulated institutions (banks; broker-dealers), not unregulated hedge funds — so the solution is less regulation not more. I wondered if you agree/ disagree and why?

  13. Anonymous ibid.   May 15, 2008 at 10:35 am

    London Banker, do you have an estimate for how large the Fed gift to the banks has been? One issue that gets blurred in these discussions is that the liquidity the Fed provides actually has to be repaid, typically in very short order. So, assuming that there are no defaults on the collateral the banks provide, the financial gain they receive is limited to the net value of the additional business they generate due to unlocking liquidity. I wouldn’t even include the financial advantages they gain from having additional time to sort out their dicey paper, since that doesn’t actually cost the taxpayer. I wonder if the change in borrowed reserves that you reference might provide an order of magnitude estimate of the size of the benefit they have received. For example, if they were able to loan out an extra $150B annually at 5%, the gift would be worth $7.5B. Any thoughts on this?

  14. London Banker   May 15, 2008 at 10:55 am

    @ BradMany thanks for popping in. I’m not commenting so much on your blog these days, but I do read it as I always learn something and I admire your rigour on following data.The question of more versus less regulation isn’t black and white. What kind and quality of regulation counts too, as does where the losses fall in the event of failure.Above I suggested that for 25 years each crisis has been used to expand the creation of credit and shrink the constraints of regulation. It would not surprise me if TPTB attempt to do so again now, to squeeze one last mammoth leveraged bubble out of the bubble machine that has replaced the productive economy. Whether it succeeds this time, however, depends less on the forbearance of captive regulators than on the forbearance of taxpayers and the Chinese and Arab creditors you follow so closely.

  15. Detlef Guertler   May 15, 2008 at 11:00 am

    @LBYou say:Without transparency of central bank facilities and policies, there can be no accountability for misuse of public resources and abuse of the public trust. Transparency provides an essential check on bank mismanagement, even for central bankers.Absolute transparency would be great for me, as I’m a journalist. But would it be great for all of us? In other words: Are there any parts of a central banks’ business that can’t, shouldn’t or mustn’t be transparent?

  16. MA   May 15, 2008 at 11:13 am

    “When I was a young central banker” – I don’t buy it for a second!!! I thought you were always a grizzly old fart.Well said LB. Obviously, congrats goes out to you on what may be #1 of many articles on the RGE. Also, kudos to the Great Wizard Nouriel Roubini and his advance scout team, for seeking out and harnessing the talent of so many great minds. London, or should I say Mr Banker, …that’s a funny way for you to have spent your lunchtimes. In my days over at 2 fed reserve plaza, we spent our lunchtime sneaking over to John St Bar & Grill or Jeremy’s Ale house, and debated just how many beers we could drink… without getting caught. It was a crime of passion, and we were never caught. Ahhh those were the days.Now, being the movie buff I believe you are, I think Die Hard 3 addressed one of the most feasible ways to get the gold. (the filming of this movie was also popular lunchtime entertainment working by the FED.) Hans Gruber (or his brother, I can’t remember???) should’ve just worked for a Bank! …I wonder??? …instead of Ben Bernake, maybe we just need to hire John McClain to fix the credit crisis? I can see the movie plot for Die Hard 5. Hank Paulson – “Mr McClain, what’s a little liquidity between friends???”John McClain – “hey Paulson, I’ll give you your liquidity injection right in the A… Yippee Kai Yea Mother F…. (BANG!!!)” OK… My movie idea sucks! …but it can’t be worse then Die Harder! LB, as for you analysis… I applaud you in writing what very few people would actually write. There’s so much unfortunate truth to it, and it’s a shame that we’ve grown so accustomed to accepting it. Changes are needed, but I believe highly unlikely! I tried taking on Major League Baseball (to call for a 0% tolerance to DRUG USE!!!), and I have reached the point were it has become a fruitless battle. THIS SHOULD BE A “NO BRAINER”!!! IT’S REMOVING DRUGS FROM SPORTS!!!!!! …and all my lawyers and I hit were roadblocks and stonewalling! …so to fix a more profitable entity like Wall St, and rid it of “grey area” policies, (and hold people accountable) will likely be just as fruitless.“That’s just the way it is, some things will never change” – Bruce HornsbyAs for the European Banks shouting “me too”… ???I don’t remember? …nor do I have a time line to look at (or time to research)… but didn’t the EU start the ball rolling with the first liquidity injections? …and “great” Britain started the “socializing” of bank/broker losses with Northern rock? I could be 100% wrong??? (I don’t remember) …but my point is, I just don’t see the USA being alone in their “greed, mismanagement, tyranny, etc…” The contagion along with the crime is worldwide. I see a lot of “window dressing” by foreign gov’t/institutions (whom wind up speaking out of both sides of their mouths) when we watch their ACTIONS. LB, whether or not I agree or disagree with all of what you have to say, really means nothing. I’m glad you said it regardless. Your views are always insightful, well written and extremely well thought out. (I usually agree with about 75%. I only agree with 20% of what my wife says, so LB’s marks are pretty high in comparison!) Great job.Miss America p.s. LB, stop hitting the refresh button to see if there were new posts!!!p.p.s. Anybody care to play the “Where in the world is Octovia Richetta” game? My guess is at a Dunkin Donuts not too far from the “freedom trail”.

  17. London Banker   May 15, 2008 at 11:15 am

    @ Anon IbidI’m not sure how a measure of the "gift" could be constructed given that banks are creatures that use and re-use leverage, both in credit operations and in their proprietary and client trading.@ DetlefJust as no listed company is forced to be transparent about its pending transactions and strategies where to do so would impair their fulfillment, central banks should have some latitude to take actions discreetly to prevent or minimise problems in the capital markets and among their flock of banks. But just as the public interest is served by having companies fully account in retrospect for their performance by publishing audited accounts, the public interest is served when central banks and supervisors are forced to transparently review their performance and its costs to the public purse and to the accomplishment of policy objectives.My objections to the TAF, PDCF, TSLF, JPMorgan deal, etc., would be significantly less if there was retrospective reporting, audited accounts of performance, disclosure of assets, and other common safeguards. Maybe it should be a year delayed rather than quarterly so that the banks involved have a chance to redeem themselves in advance of disclosure, but for the Fed to determine that it will never account for its actions to the public is well beyond reasonable or prudent in terms of good public policy.Even if there were Congressional oversight, perhaps with closed door testimony and controlled access to reporting as with intelligence, my concerns would be less. The complicity of Congress in rubberstamping the overreach of the Fed is almost as worrying as their complicity in rubberstamping the pre-war stovepiping of cooked intelligence.

  18. K J Foehr   May 15, 2008 at 11:20 am

    Congratulations on your first post. I respect your level of knowledge in these matters and your forthright opinions that should generate many excellent discussions and debates in the future, which I believe will be interesting and informative to all readers and writers here.So in that spirit, I have a few somewhat contrary thoughts in response to your first post.First, your assertion that the Fed, “has overseen the devaluation of the dollar to third world levels of instability and inflation”. IMO, this is more than a wee bit overstated. Devalued, yes; third world levels of instability and inflation, no.Second, rather than some conspiracy to steal from the Fed, I see the continued deregulation of the financial sector over the last 25 years, as merely the logical continuation of the free market, laissez faire economic philosophy that was put into practice following the election of Reagan in 1980 and further enabled by Republican presidents and Republican majorities in Congress for most of the time since then.Third, the recent steps taken by the Fed to inject $400 billion (your number) into the financial system are not the kind of actions preferred by the conservative advocates of free markets. Instead, these actions were and continue to be emergency actions taken to prevent a financial meltdown of the type asserted as a very real possibility by Dr. Roubini. And in a larger economic sense, the Fed is fighting the possibility of deflation with massive liquidity. This is not how the financial tycoons want to do business; they will take the money because they need it and it is an easy “solution” to their current crises, but, IMO, this is not how they intended to play the game.Bottom line: Their intention is not to loot the vaults of the Fed and the Treasury, instead it is and always has been to pick the pockets of people. And now, having gone too far and nearly killed the golden goose, they are begging for sustenance from the only sources available. IMO, The laissez faire game is over; we will now see a period of increased regulation and oversight that will reverse the trend of the previous 25 years. Good luck with the blog, and I look forward to reading your future posts.

  19. London Banker   May 15, 2008 at 11:27 am

    @ Miss AmericaThanks for checking in and pushing back a bit. Cut me some slack on overuse of the refresh button on my first day in the big leagues. I’m trying to build a fan club here by being responsive. p.s. Those who don’t know you as Rich H are going to be confused about Miss America’s career in pro baseball. I remember your anti-drug campaign, and think we are a lot alike in being intolerant of corruption or moral relativity in enterprises where we ourselves adhered to higher standards and played the game fairly.

  20. London Banker   May 15, 2008 at 11:45 am

    @ KJFYou could well be right that what we are seeing is the culmination of a trend that started with Reagan. There has been a Bush or Clinton in the White House for 28 years, and their policies toward financial deregulation and credit expansion were broadly similar. I hope you are right that the pendulum is swinging back toward a more nuanced and objective assessment of public policy, free of the ideological free market purists that ignored inconvenient reality and adverse outcomes.

  21. Gloomy   May 15, 2008 at 12:06 pm

    Go get em’ LB!!! Great work!!!Speaking of transparency, did you know that bank examiner reports are sealed in the US for 50 years!!Why shouldn’t the public have access to these?

  22. MA   May 15, 2008 at 12:48 pm

    LB… I’m just having some fun with you on the refresh button. (whenever I post, I spend the next hour hitting the refresh button about once a minute to see if I get any replies) …so my mocking was actually based on how narcissistic I am. I love that you’ve taken the time to reply to pretty much everyone. …and as for your “building a fan club”??? C’mon!!! I just recently had a bad-ass “London Banker Rocks” tattoo placed on my right shoulder! …as it turns out, it was the 3rd one the tattoo artist has done today.@ KJFoehr – Good points. I agree with (and contemplated saying parallel views) to a good bit of what you said, but didn’t want to steal away from the point of LB’s article. (Which really seems to focus on the reckless nature and nepotism of the elite decision making process.) Though I thoroughly disagree with the concept of “picking the pockets of the people” IMO – the people have just been unfortunate bystanders hit with stray bullets. The losses and ultimate losers are targeted. It’s comical to me that this isn’t more recognized. The lunches and phone calls are real. The meetings too! (I’ve sat in some interesting ones) The telephone game is REAL! …and speed of information through the media in this age of technology has enabled this process to be played out much the way a virus would attack you body. The antibodies and medicine are dolled out by the doctors who decide who to save!Miss America PhD

  23. dr   May 15, 2008 at 1:14 pm

    @ Miss America,I take it the markets are being pumped so the smart money can eixt (alluding to who will be saved). Or does it not matter which way the market moves, that those who will get paid, get paid regardless.So where does that leave the millions whom have their investments in the game thinking they stand a chance?

  24. Guest   May 15, 2008 at 1:14 pm

    A rich man with a heart, rare combo these days. The hope is that we are motivated by self love and respect for fellow enough that we create a true and fair system to barter. And one blind to corruption, immune to any abuse. Such systems and such men are rare, or non-existant altogether.But for now, let’s scrap the present flawed croupier!http://globaleconomicanalysis.blogspot.com/2008/05/want-to-fix-fed-get-rid-of-it.html

  25. London Banker   May 15, 2008 at 1:25 pm

    @ GloomyI don’t really have a problem with examiner’s reports being confidential. If they weren’t, then examiners wouldn’t be able to compel truthful and responsive answers from banks during examinations and the game would be even more twisted than it is. The public interest is served by the statutory disclosure requirements, and if those were met honestly with fair accounting practice and transparent corporate and governance structures then we’d be okay.@ Miss AmericaI blush to think of your tattoo. At least it’s on the shoulder . . .@ Guest on 2008-05-15 13:14:15I remember when good people went into government as a career and not as a stepping stone to riches in the private sector where they could peddle their influence. The system used to work quite well then, on bright line rules and well established principles. I suppose I am naive and nostalgic to wish it could be revived, but I fear that the system today, whatever it is, is too ill-defined, too maleable to influence to be effective at safeguarding the interests of the public. Some of us oldsters remember how financial failures and inflation/deflation lead to political instability, and how quickly that can lead to loss and deprivation.

  26. 2cents   May 15, 2008 at 1:42 pm

    @ LBI predict that your posts will wonderfully complement Nouriel’s and Brad’s. Nouriel is a smart dude who gets most things right. He got this one right by inviting you to author.As for this post, I can follow your logic but I see problems in thinking that transparency will fix things. Transparency will tend to fix the current problems with the current ‘game’, but it will just spawn a new game.Remember when transparency was implemented on the trading floor? Yes, it lowered the spreads and the profits. The big money is now handled in OTC obligations because that is where the game moved to and where the discrepancies can be profited from. So yes, transparency is a good thing and delayed transparency is a realistic choice, but the fox will just move to a new opaque hen house. I have ideas on how to promote transparency and also quarantine the fox, but they have holes in them and I haven’t figured out how to plug them. Essentially, someone or something has to be ultimately trusted. There is little likelihood to design a system of checks and counterchecks with distributed trust that works in reality.As for the conspiracy stuff, I’m more in the camp of K J Foehr on 2008-05-15 11:20:45. It’s somewhat like being a businessman and having a client over to the house for a party. The client’s kid runs rampant throughout the property roughing everything up in sight. Despite your displeasure, you bite your tongue so as not to possibly inflame the hand (client) who puts food on your table. Unfortunately, the FED has too many big clients that it needs to keep food on it’s table so to speak. It is powerless because it doesn’t have enough control to ignore the biggies. It needs them to help coral the economy. (Note: I’m not arguing for more control at the FED, rather just pointing out a fact of the current setup.)As for an analogy to sum this all up, I’ll resort to the Titanic. Yes, I know the rearranging the deck chairs one, but I think it is a little misleading. Rather, let’s expand it and say that we’re the passengers, the Titanic is the economic system, and that the crew is TPTB. We, like all good minions, are just out to enjoy ourselves as we go from here to there. The economic system (Titanic) has been engineered and honed over the years by the best minds into a state of the art specimen of robust design. TPTB have studied in the best schools, modeled the ins the outs the ups and the downs of every conceivable scenario, they have even gone through disaster drills in case the unexpected occurs. They know how to launch the lifeboats. To top all that, they carefully plotted their course across an ocean of uncertainty and maintained life lines to the rest of the world (radio contact) just in case. …… Lo and behold, a damn iceberg (reality) hit them!Everything was transparent from the start the Titanic was the best of the best but that was not good enough! I know, you all thought the Titanic hit the iceberg. Well, now the truth is out it was the other way around!

  27. ASA   May 15, 2008 at 1:46 pm

    Congrats LB!!! A home run at your first at bat.Your points are well taken. It seems we are witnessing a racket of epic proportions.

  28. Acheson   May 15, 2008 at 2:09 pm

    Hoorah for LB! I think your comments will turn out to be THE go-to part of this site. Excellent post…leaving the question in my mind: this outcome seems so rigged and predetermined. It sounds as if you think nothing will change the ultimate end. Is there nothing short of a populist uprising that will or can likely intervene?

  29. London Banker   May 15, 2008 at 2:14 pm

    @ 2centsYour Titanic analogy reminded me of a comment I posted back in December:The secret, anonymous nature of the auction proposal must further undermine any trust in fair outcomes. I fear that today with this scheme they have damaged all credibility and all authority we might have vested in them. We will no longer queue patiently and listen for instructions because we no longer trust them to ensure we are all in the lifeboats in the order expected, women and children first. We can see first class passengers are getting a whisper here and a wink there and a guiding hand up to the boats with their jewelry boxes in hand. Pensioners, steerage and crew are being invited to wait in the lounge where the curtains are drawn, the drinks are free and the band keeps playing. . .I have a very bad feeling about this. It isn’t how central bankers are supposed to behave.Written by London Banker on 2007-12-12 16:41:34At least I’m consistent, even if perhaps a bit too cynical. As you say, they may be following the path of least resistence to keep the first class clients happy and the party going as the ship slowly lists and settles.@ ASAMany thanks.

  30. London Banker   May 15, 2008 at 2:31 pm

    @ iww (who I sadly neglected upthread) and AchesonMany thanks for looking in and for your kind words. We should all admire the Professor’s insight and generosity for giving me this little corner of the blog.

  31. Consumer Advocate   May 15, 2008 at 3:58 pm

    Congratulations LB! Your insights and balance are most welcome. I look forward to reading your posts. And thanks to the professor for extending the invitation.

  32. London Banker   May 15, 2008 at 4:39 pm

    @ Consumer Advocate and AllIt’s been a good day. The butterflies as I hit the "publish" button were quickly calmed by the warm reception here. I’ll try to keep you coming back.

  33. Capone   May 15, 2008 at 4:41 pm

    @London Banker, Congrats ! computer is down at home now and no time to read all – so just printed all for great read on commute !

  34. Guest   May 15, 2008 at 5:13 pm

    "Looti" – excellent keyword, indeed.The speaker of truth, or stark reality aspire to either courage or stupidity. I personally congratulate you on whatever the cause may be:-)>.Excellent post LBNever trust a politician or bureaucrat; the purist forms of moral hazard.PeterJB

  35. tutterfrut   May 15, 2008 at 5:28 pm

    London Banker/Sailor,Glad to see you have your own little spot at Roubini Show. Hope you’ll keep kicking some a#%es from time to time.(P.S.:Have you already crossed Bernard Ducalion in Roubini’s Vault? His disappearance is still a big miss-tery to me)

  36. Guest   May 15, 2008 at 8:17 pm

    hehehe LB is a superstar nowdo you get paid by Prof??

  37. Broadcloth   May 15, 2008 at 9:20 pm

    Why is democracy so craven and weak? Enough collective foolish people both speculating and satisfying a basic need in purchasing a home get behind on payments. Or seriously become upside-down, underwater–and suddenly the system that profited immensely in prior times with minimal defaults gets deluged. Their greed of former times is overwhelmed, markets crash with the glut, values drop catastrophically, ability to collect is impaired. If the market mechanisms were equipped to handle the volume of defaults without the market tanking, TPTB would be offering no amnesty, no taxpayers stop-gap, no pressure for political solutions. They would handily foreclose properties without remorse, resell them, pocket the profits, and figuratively give the defaulter a diminutive hand sign. Because the have erred so expansively, and because the error has destroyed the traditional means of extracting value from the defaulter, they are stooping to feel-good-I’m-so-sorry empathetic manoevres to backstop their losses.This is an arrogant excuse to simply soak the less wealthy and less power-accessible masses to remedy their monumental mistakes. Sorry Nouriel, with the great respect we hold for you notwithstanding, you must pierce with an ambivalent eye the crux of this matter. Justice and mercy must be applied in this case, and learned from. Justice requires the crushing honesty of market dynamics to remedy foolhardy overreaching. The screams for mercy are generated by the creditors who realize now their lending errors. Banks, bankers, international money men have the coldest of cold, cold hearts. They care not one iota for the happiness or content of their clients. They are reaching down to make concessions only because they are in a Laocoön-like embrace with their debtors.Explosive as it may become, punishing as it may become, debtor and creditor must follow the time-held forms of resolving their issue. Losses must be absorbed no matter how injurious; deadbeats must be marked and avoided for future transactions. No head-master, nor quick-study like the crushing consequence of folly to discipline finance for its future purpose. Enabling the misjudgements of men to be passed to their lessors or peers will dilute the purgative effects which will ensure our future prosperity. WE have too long diluted our greatness to cater to the wretched ignominy of others.

  38. JP   May 15, 2008 at 9:21 pm

    @ LB – congrats on attracting the A-crowd. I was hanging out at the old haunt – and haven’t seen any new posts in forever (other than mine). So how many wheelie bins did you get???

  39. My Fellow Shipmates   May 15, 2008 at 9:37 pm

    Equo ne credite, TeucriQuidquid id est, timeo Danaos et dona ferentesMost of all Hope Now, Project Lifeline, Paulson Treasury, and Bernanke FED.

  40. Laocoön   May 15, 2008 at 9:41 pm

    With both his hands he labors at the knots;His holy fillets the blue venom blots;His roaring fills the flitting air around.Thus, when an ox receives a glancing wound,He breaks his bands, the fatal altar flies,And with loud bellowings breaks the yielding skies.Farewell life of relative ease and plenty–Hello to this great new world of strife and want…

  41. Guest   May 16, 2008 at 12:13 am

    I am so making my girlfriend get a "London Banker Rocks" tattoo

  42. Love at Madison and Wall   May 16, 2008 at 1:48 am

    So there is a market for a plan that America’s wage-earners and foreign creditors can execute to subdue America’s financial sector.More precisely, a plan that:1) enables American workers to earn more money, en route to bankrolling the campaigns of U.S. politicians who (pledge to) subdue the financial sector2) delivers sufficient ROI to motivate foreign creditors to bankroll the plan as needed3) motivates American media conglomerates to ally themselves with said workers and creditors, en route to the congloms working hard to showcase said politicians, and to educate people about the stakes more generallyEnter my BigCo-praised business plan for a maker of online markets that provide people with new and improved ways to develop, demonstrate and earn money from expertise (e.g., a market with a barter currency for buying ad spaces on blogs (a high and/or fast-rising ad rate in barter currency will attract buyers who use cash), prediction markets, a "workflow" market for customized education. For details, visit LoveatMadisonandWall.com.)As it happens, owning popular markets of the aforesaid kinds is an ideal way to increase profits for an American media conglomerate that owns a broadcast TV network.Once said congloms become aware of the markets-making opportunity, then, foreign creditors that invest in said congloms can earn the requisite ROI while facilitating wage growth in the U.S.Re: creating said awareness, I’m working on it (in at News Corp. thus far).Q.E.D.? :-)Interesting times…

  43. Anonymous   May 16, 2008 at 3:32 am

    Great entry. I am sorry to say that I do feel comfortable on Nouriel’s own blog anymore.This is of course utterly unfair since Nouriel has been so courageous (sorry for the word) confronting the bad practices in early times that I can not currently stand his recent prose. Remember his calling for regulations during US/Europe seminar at his workplace. Courageous at least!You are telling Wall Street as it is. The truth is that I feel a significant risk a fascist drift in current US political practices.I am using the word "fascism" since I can alas not find another one to tackle the fish.By fascism I mean the sort of regime that appeared in Italy in the 20s, nothing like what happened later. The money currently made in Wall Street is big money. It was of course made via regular means. IMO it could potentially transform later in a significant political power and become more than just intense lobbying.I dislike to push these words but cannot find others.

  44. Alessandro   May 16, 2008 at 6:07 am

    London Banker: "It used to be the realm of conspiracy theorists to assert that policy makers in Washington were aligned with the military-intelligence complex in promoting international conflicts for profit or that the Federal Reserve was the tool of Wall Street banks in promoting irresponsible bubbles. Now it is accepted policy, defended openly in the media as right and inevitable, as providing an efficient means for America to meet the “threats” to security and financial stability in a changing world.The danger of embracing the spin is that the productive economy shrinks from underinvestment and distortions as an increasing share of a slower growing pie gets diverted to government and the cronies who direct government policies."For every bright and talented researcher who specializing into financial derivatives and developing the models for CDO securization (now worth pennies on the dollar!), we have one less bright and talented researcher building useful know-how and developing something actually useful for the world.For every plant in China that specializes into luxury consumer goods that none will buy should they actually pay upfront for them (as opposed to put them on their revolving credit card), we have engineers and workers that are not producing something of real worth (that people would actually exchange their labor for).The financiarization of the western society is a grave and permanent harm done to the world economy. The massive distortions introduced by the growing houses of cards of modern finance move capital and labor out of productive enterprises and move research out of ‘enhancing productivity’.

  45. Gloomy   May 16, 2008 at 6:38 am

    @LBHow about this instead. Lying to a bank examiner should be a felony offense. Wouldn’t that better ensure full disclosure? Why should the public not be privy to anything a bank examiner uncovers? Why all the secrecy.

  46. Alessandro   May 16, 2008 at 7:20 am

    Gloomy: "Why all the secrecy?"Very simple, because fractional reserve banking is, by its very nature, unstable. Funding long term commitments with revolving short term liabilities is subject to runs. No matter how you slice it.Once you accept fractional reserve banking in your economy you have planted the root of instability. And I don’t believe those who claim banking is actually essential to economic prosperity. What is essential is the the savers have a place where to meet the borrowers based on duration matching. The owners of the meeting place is entitled of a slice of the deal, and that’s fine by me.Once you allow the instability into the system you can permit fluctuations or doubts about the system, because a relatively small fluctuation may be enough to make the whole economy implode.

  47. Alessandro   May 16, 2008 at 7:21 am

    oops… "can permit" should read "can’t permit"

  48. OuterBeltway   May 16, 2008 at 8:41 am

    LB:First, I’m delighted you decided to commit some time to blogging. You’ve got the background, the instincts and the temperament to be quite good at it. Remember, though – the more difference you make, the more brickbats you’ll get. That, in a way, is the true measure of a change agent.You raised the topic of resource allocation in your indictment of Wall Street, above. Alessandro gave it another hard knock, and [email protected] is already well down the road toward imagining fundamentally different solutions to this most strategic of our economic problems.What’s the problem? Simple. We are spending our wealth on things that don’t generate wealth. Instead of a generative system, we have a diminishing-returns system. That is why the American economy is crumbling. We have a resource-allocation decision-making problem.In our society, banking has somehow abdicated responsibility for allocating capital to its best uses. The last place I’d go with a new idea is to my local bank. They’ll be glad to lend me money for a car or against my house no matter what I use the money for, but for a new idea? Forget it. That’s not what they do.Some will say "why is it the bank’s responsibility to make sector allocation decisions?". The American culture isn’t demanding it, so why should the banks provide that service? Good question, and I’ll sidestep it momentarily to make this parallel point: Even if Wall Street is corrupt, and selfish, etc. – if they’d allocated the mis-spent house mortgage money (consumption) into alt-Energy projects or basic-research/tech re-training projects (production), they’d be heroes. We would tsk-tsk about their excesses, and get on with things. But these horrendous excesses of Wall Street – and of finance in general – occur mainly because the general public can’t distinguish good-from-bad econ policy.The solution isn’t going to come top-down, because the top has it the way it wants. It’s going to be bottom-up. Little-guy gets a clue, changes buying behavior, contributes to a tide. I don’t believe our society will permit an "authority" to make our resource-allocation decisions for us. But if the current "annoited priests of the temple" aren’t doing the job, where’s that leave us?Think for a moment about what micro loan projects are doing for under-served segments of Asian economy. Now look at the American economy through the same lens: it’s one huge under-served market! While the temple staff absconded with the loot, they forgot to perform their function of efficient resource allocator. The cynics will not be shocked, of course. I hope you don’t spend too many more years trying to play more-regulation, less-regulation Whack-A-Mole. Rather, I hope you’ll take a hard look at what technologies like Facebook, Craigslist, Google, Ebay, Alibaba, and Amazon have done to established, old-model businesses, and think about what might be done in the business of finance.We’re at the point where we have to ask: does it make sense to keep patching a system that’s fundamentally broken, or do we start concentrating resources on the next generation of technology?

  49. Alessandro   May 16, 2008 at 9:06 am

    OuterBeltway: "What’s the problem? Simple. We are spending our wealth on things that don’t generate wealth. Instead of a generative system, we have a diminishing-returns system.In our society, banking has somehow abdicated responsibility for allocating capital to its best uses. The last place I’d go with a new idea is to my local bank. They’ll be glad to lend me money for a car or against my house no matter what I use the money for, but for a new idea? Forget it. That’s not what they do."I second every single word. Very well said.

  50. London Banker   May 16, 2008 at 10:32 am

    I can see that I’m going to have to plan to free up more time for this blogging gig!@ Capone, PeterJB, tutterfrut, Broadcloth, JP, My Fellow Shipmates, Laocoon, Love at Madison and Wall, and of course, every Anonymous and GuestGreat comments! I have been busy today trying to bring sweet reason in to sorting financial failures in the real world, and this has sadly kept me from the blog world, but I am grateful for your comments here.@ Guest on 2008-05-16 00:13:25I blush to think of the implications.@ Alessandro and Outer BeltwayGreat stuff! We agree that America’s low growth rate the past two decades can be substantially attributed to the misapplication of scarce savings into unproductive houses, cars, consumer goods and financial engineering rather than into productive and remunerative long term investment in product/service development that could strengthen longer term economic performance and broaden prosperity.And no, Guest on 2008-05-15 20:17:41, I don’t get paid for this, though if it takes up much more of my time, I’m going to regret that.

  51. London Banker   May 16, 2008 at 10:47 am

    @ Anonymous on 2008-05-16 03:32:35Just between you, me and our close friends here in my little corner, I agree that the Professor hasn’t been the same since Davos. I don’t know what Kool-Aid they were serving up at altitude, but he’s been promoting generous interventions and bailouts a bit more freely than I’d expect ever since.

  52. Alessandro   May 16, 2008 at 10:51 am

    @London Bankerit’s not just the US. We in Europe have been learning fast. I’ve never heard of ‘consumer credit’ before I come back to Italy around 2000 and now you get relentlessly bombed by advertising that invite you to pile up debt for anything including the next vacation. A friend working at a car dealer says he can hardly believe how many SUVs are sold on credit to people barely making €1000 per month. And UK has what looks like a bigger RE bubble than the US.We are not far behind in the squandering of resources for futile reasons. It’s all very sad.

  53. London Banker   May 16, 2008 at 11:07 am

    @ AlessandroIndeed, British consumers are now more indebted than their American peers, and our real estate market is set for a nasty correction. That said, there are differences that are going to play out in the recession. Britain is still a largely socialist country, with public healthcare, housing and income support to cushion consumers from crashing into poverty, and a government that is still broadly responsive to public concerns. Also, the British take a perverse pride in coping with adversity, perhaps more bad tempered than it used to be, but still an important trait in a downturn. Finally, a huge amount of emigration into Britain from Europe and elsewhere continues to drive real estate values and commercial growth here, to the general benefit and flexibility of the economy. As jobs disappear here, some of those folks will return home, and some Britons will emigrate elsewhere too, relieving some of the stress.

  54. Taxpayer   May 16, 2008 at 12:49 pm

    Preview of your CommentCongratulations on your new blog, London Banker."The financiarization of the western society is a grave and permanent harm done to the world economy.The massive distortions introduced by the growing houses of cards of modern finance move capital and labor out of productive enterprises"Written by Alessandro on 2008-05-16 06:07:03It is odd that despite the enthusiastic adoption of technology, the consumer side of the finance industry never sees any productivity dividends from the automation.For example, most people use plastic and every transaction carries the 2-5%? merchant charge in the price of whatever they buy.This fee level is far too high for an automated system.Economies of scale are also ineffectual in providing consumer benefits.The benefits of competition never seem to materialize…..The commission system also allows enormous fees to be generated whenever money is moved.The very size of the finance sector in some economies is an indication of it’s inefficiency.The combination of state, finance and insurance bureaucracies are an ever increasing cost to the rest of the economy.And the service hasn’t improved either, more inflexible, rapacious, impersonal, and, we now see, reckless and irresponsible.The rate spread on different types of debt is nothing short of breathtaking.If the system wants consumers to take on large amounts of non productive debt, it needs to provide it at rates that are sustainable, and that’s not 20%.The production of goods and services has outstripped the purchasing power to the consumer and we keep trying to sustain the momentum by increasing debt levels.This approach has run out of steam.It seems we have two choices, reduce production or increase purchasing power.It is ironic that the construction juggernaut in the US can produce millions of houses but the system is unable to efficiently distribute the production.And that is due in large measure to the cost of finance.We seem incapable of managing the distribution of the increased production brought about by our recent technological advances.

  55. Anonymous   May 16, 2008 at 12:52 pm

    Great Post, LB, Well Done!There are lots of documentaries in youtube that exposed the real aim of the central bankers in usa and europe possibly…and that is, to take money from all people and governments. Some even said there is no more gold reserves in the usa as they had been pledged to cover the deficit.In light of what you said above, what should average investors do to protect themselves in coming years? Would you mind giving us some advice?Thanks in advance

  56. London Banker   May 16, 2008 at 1:04 pm

    @ Anonymous on 2008-05-16 12:52:33Perhaps the best advice was from that old master of human nature, William Shakespeare, via Polonius in Hamlet: Neither a borrower nor a lender be;For loan oft loses both itself and friend,And borrowing dulls the edge of husbandry.As I said above, I totally suck as an investment advisor.@ TaxpayerYou are right in observing that no amount of investment in automation ever appears to lower costs to the consumer or to decrease the overall cost of the financial sector as a share of economic activity. Curious and disturbing.

  57. David   May 16, 2008 at 1:06 pm

    Hi LB,Do you see any chance that the professor has been BOUGHT after the DAVOS meeting?I agree with some fellow comments on professor and that I really cannot stand some of the professor’s swift turn lately.Money can buy conscience…and everyone has a price!

  58. London Banker   May 16, 2008 at 1:20 pm

    @ DavidWhat you suggest is unfair and unpleasant, and I don’t want to encourage criticism of the Professor as a guest here. Perhaps I was unwise to follow up on Anon’s comment, but it would be very wrong of me to let you abuse his character unchecked. I believe that the Professor remains principled, but that his background in interventions in Latin America gives him more sympathy with those who promote interventions in the current conditions.

  59. Detlef Guertler   May 16, 2008 at 1:35 pm

    @David, LB:That’s not a question of money, is a question of responsibility. If you have been an academic also-ran and a nobody for the public for decades with no-one listening to you – and all of a sudden you’re a global player, hundreds of thousands of people listening to you, TV stations, magazines, newspapers, politicians etc. invite you and all of them listen to you, and a lot of them even tell you you’re right, what happens? You can go on saying "I told you so years ago, and I was right and you were wrong". That’s what NR did for a long time. And then the people ask you: Okay, you were right. So please tell us what we shall do now? You develop some kind of responsibility for saving the world and the financial system.I think that’s what happened to NR, and it’s okay that way. The rest of us may lag behind, because we didn’t have that experience, at least not in the same amount.

  60. London Banker   May 16, 2008 at 1:39 pm

    @ DetlefGood point. Thanks. He’s a superstar, and scared politicos and business people are asking him for answers. He can use his authority to influence events for the better, and hopefully that is why he is endorsing interventions, whether we agree they are wise or not.This discussion really belongs on his thread, not here, as I don’t want to be seen as inviting adverse comment behind his back over here.

  61. lenny   May 16, 2008 at 1:48 pm

    I liked your analogy to the military-intelligence complex and how threats are used to justify repeated abuse of the system. What amazes me is that even when the political assassinations and false-flag terror attacks have been exposed, the repetition continues to an absurd degree and those who least deserve power gain more at every turn. The looting you describe so well is increasing the power of financial capital even while its abuses are being exposed, making a revolt against it less likely and inviting still more abuse.The academics at the Fed give the impression of being above reliance on underhanded methods, but in a pinch the two forces–the military-intelligence complex and financial capital–could collude implicitly to sustain their power. The weaponry and techniques at the disposal of the former are beyond most of our imaginations and could be used in the service of the latter. I suspect they have been in the past and nothing can stop them in the foreseeable future. Although individual firms riddled with spies, such as Enron, can implode, the overall powers of financial capital and the military-intelligence complex suffer little.No response needed. Just expressing frustration that these powers are so well-entrenched that their crimes pay over and over again.

  62. bmh   May 16, 2008 at 2:05 pm

    Being more of a reader and learner than a poster on this occasion I would like to join the line of congratulators to your own blog. As obviously so many others I am looking forward to reading and learning from it.All the best BMH

  63. OuterBeltway   May 16, 2008 at 2:06 pm

    LB:I agree that it’s unfair to suggest that N. Roubini’s sold out or is otherwise influenced by his new-found acclaim. He’s done some very thorough lambasting of the finance industry, and central banking in general. He’s earned his "outsider" stripes, and that’s why people are listening to him. He documented his views back when they were unpopular, and he stuck to his guns. He ought to get credit for that.I don’t agree with his bail-out scheme, though. I understand all his rationale, but I’m of the opinion that a solid crack-up punishes the thieves, and it hastens the moment when the broader public really gets a clear view of what happens "behind the curtain". Until that happens, the dysfunctional resource allocation will continue.After the full disclosure occurs, innovation will happen quite rapidly and at a fundamental level, and we can all start moving forward again.To Dr. Roubini – thanks for this excellent forum, and for attracting the likes of LB to it. Keep up the good work. That doesn’t mean I agree with all you say, but I sure appreciate the opportunity to listen to others that know more than I do, and to express my opinions.

  64. ST   May 16, 2008 at 2:10 pm

    Looks like you guys need a defender of intervention over here.I for one expect that the Fed has realized all along that it will have to come up with "an exit strategy" from its current role of carrying the whole financial system. I’m willing to give the Fed some time to develop an understanding of the problems that caused the crisis, before demanding that they put the banks on a stricter diet. Yes, I think the current central bank lending policies are feeding a commodity bubble and stock market effervescence. But I also think that might be the right thing to do in the short run, in order to slow the unwind of a deleveraging process that could be disasterous.In short, if it turns out that you are right and the Fed never finds the strength to reel in the financial system, but instead lets another outrageous bubble grow, the Fed’s actions in March will indeed be shown to have participated in the looting of the Treasury. However, if as I expect the Fed before the end of the year reigns in the financial system, then the Fed’s actions may be shown to be part of a brilliant rescue.I too am pleased to see that you’re blogging here. And I think it’s crucial for the Fed to get some scathing criticism, if only to remind the decision makers that they can take a breather and get some sleep for a few weeks, but if they grow complacent, they will breed disaster.Congratulations on your first RGE column!

  65. London Banker   May 16, 2008 at 3:01 pm

    @ lennySay no more! A nod’s as good as a wink to a blind bat.@ BMH, Outer Beltway and STMany thanks.

  66. vikas   May 16, 2008 at 9:35 pm

    Congrats, LB.This will be my first stop on RGE now. The bail out of Bear (and JPM) would have been acceptable to me if it had been done after or at the same time as bankruptcy, or if the equity holders AND the creditors had taken a serious haircut. I don’t buy that the "pain" for senior management of having tens of millions instead of hundreds of millions avoided moral hazard. This issue is not going away, and anymore bailouts are gonna have to be biased in favour of regular folks — though of course that has the quality of the flock fleecing itself. I hope NR agrees — but this has to be CLEARER in the public discourse.On another note, LB, your comment re the Saudi’s on NR’s blog uncharacteristically doesn’t ring true to me. Saudi production may be at peak now or soon, but I just don’t see the Saudis having the wherewithal at many levels to take control of Iraq’s oil. Maybe I’m just too much of a conventional leftist, but I see Cheney’s Mesopotamian adventure mainly as a US attempt to place a permanent tourniquet on China’s jugular.The issue of how much financial leverage the PRC has on the US is not straightforward. A big chunk of the value added in Chinese production flows to MNC’s— the margins which do flow into the domestic Chinese economy being smaller, the need for absorbing labour migrating into the cities likely trumps the need to realise the highest returns on their foreign reserves. They don’t look ready yet to pull the trigger.A question for you central banker types from a cardiologist struggling to understand this stuff. If the Fed starts paying interest, how does that avoid sterilisation, and is this a noninflationary way of expanding the balance sheet?BTW all, Octavio is en route to Venezuela and will likely sign in soon. We nearly met up in Boston— the internet is quite something.Cheers,vikas

  67. Guest   May 16, 2008 at 9:44 pm

    Some words for the day (written in March 1934) by James Paul Warburg:We must build up the banking business as a profession and eliminate any tendency to make it a racket. To do that we must keep politics out of the banking business and let the courts be merciless in the enforcement of an intelligent banking law…. If we do not do those things, and do them soon, we shall invariably suffer again as we hasve suffered in the past.

  68. London Banker   May 17, 2008 at 4:20 am

    @ vikasThanks for the update on OR. The Steve Waldman piece has the best explanation of why the Fed wants the new powers and why Congress should attach some hefty protections and riders to them.And what does all this have to do with the question that will soon be put before the Congress, whether the Fed should be permitted to pay interest on deposits? Everything, as it turns out. Suppose the Fed decides it wants to swap more than the $300B in Treasury securities it currently has available in order to support the financial system. Given its current tools and practices, the Fed would have to print money in order to buy more Treasuries to swap. But if it did that, the extra cash would drive interest rates below the Fed’s target level, quite likely provoking inflation. The Fed cannot simultaneously swap away more than its existing stock of Treasuries and satisfy its legal mandate to promote price stability, unless it resorts to something weird.But suppose Congress gives the Fed the authority to pay interest on reserves. Suddenly the Fed can print cash to buy all the Treasuries it wants to swap for troubled assets. When banks find they have more cash than they need, they lend the money back to the Fed, collecting the "floor" interest rate and removing the currency from circulation. Since interest rates can be held to any level by adjusting the "corridor," the Fed would retain the flexibility to respond to inflation. At the same time, it would be able print cash in any amount that it pleases — "to infinity and beyond!" — in order to fund asset swaps (or outright purchases) at taxpayers’ risk. This strikes me as a delegation of Congressional authority that would not only be undesirable, but arguably unconstitutional.So, should we simply refuse the Fed’s request? Probably not. Brad DeLong makes an excellent point: The Fed may also want to raise the general level of interest rates in order to fight inflation–which requires that it sell its Treasuries for safe bank reserves rather than temporarily swap them for risky MBSs.The Fed is already rubbing pretty close to its "balance sheet constraint". If, after exposure to gamma radiation from televised images of food riots, Ben Bernanke were suddenly transformed into The Incredible Volcker, he might lack the tools he’d need to jack rates up into the muscular high teens, unless he’s given this new authority. So what should we do? James Hamilton has an answer: Congress has a quite proper role in determining the magnitude of the fiscal risk that the Fed opts to assume… [A] statutory limit on the non-Treasury assets that the Fed is allowed to hold might make sense. Perhaps the outcome of a public debate on this issue would be a decision that the Fed needs the power to lend to private borrowers even more than the $800 billion or so limit that it would run into from completely swapping out its entire portfolio… Or perhaps after deliberations, Congress would decide that the business of swapping Treasury debt for private sector loans is one that is better run by the Treasury rather than the Federal Reserve.I agree. I think that Congress should grant the Fed’s request, but it should simultaneously impose constraints on the composition of the Fed’s balance sheet that cannot be violated without express legislative consent. This will be a complicated exercise, unfortunately.Besides government debt, central banks quite ordinarily hold precious metals and foreign exchange, and limitations on non-Treasury assets will have to take this into account. Plus, restrictions would have to be written carefully to apply to off-balance sheet arrangements such as TSLF, and contingent liabilities like the insidious reverse MBS swap proposal. Finally, Congress must consider restrictions on the Fed’s ability to enter into derivative positions, whether directly or indirectly via special purpose entities, including how the bank’s existing derivative book should be managed and whether the bank should or should not guarantee the liabilities of current Fed-affiliated SPEs.Congress might also limit the quantity of reserves on which the Fed will be permitted to pay interest.@ GuestGreat quote! Very timely.

  69. David   May 17, 2008 at 8:33 am

    @LB, Detlef,Thank you for your comment.It is not my intention to criticise NR’s character but to raise question as to "WHY" his sudden change of course or mind. It is very unusual to me.One thing we are all old enough to know is: A person’s character/mind will never change unless something really important happened to him. Have you known any famous economists who changed his mind/or long held belief for year that easily and quickly as NR? I would like to know.Please read through NR’s own blog and see for yourself the reaction or surprise of NR’s change of mind.Deep down, I’m afraid the "Bankers" may have NR in their bag and have him to be the cheer leader for all these baitout programs…transferring people’s wealth to their pockets…or as you said, looting the bank reserves legally. Again, I must stress the comment comes from my own Conspiracy Theory, there is nothing personal against NR.

  70. London Banker   May 17, 2008 at 1:04 pm

    @ DavidI don’t begrudge you your opinion, but I ask that you not peddle it here where I am a guest on his website. If you want to raise a discussion, or ask him directly, the right place is on the Professor’s own blog.From what I know of his writings, including the book Bailouts or Bail-ins: Responding to Financial Crises in Emerging Markets, the Professor has always been a proponent of flexible intervention to pre-empt liquidity crises and manage systemic threats. He sees a big crisis pending for US banks, and he is sympathetic to big interventions by the Fed and government. I don’t see any inconsistency, even I disagree with him strongly on the wisdom of some of the interventions he supports.Read some of his earlier work. You may reach a better understanding of his views and motivations.@ AllSteve Waldman has put up a further piece on why Fed powers should be limited and subject to oversight. Fed Authority: Capabilities, Constraints and Confidence

  71. DocBerg   May 17, 2008 at 7:37 pm

    London Banker I am very pleased that the Professor has given you your own blogging platform. It is a very worthwhile addition to an already outstanding service. You add a perspective that one such as I would otherwise not have on economics. I also do not think that Professor Roubini has "sold out" there at Davos. I suspect that he got a clearer picture of what is impending, and after looking into the abyss, he has since been calling for far stronger measures than before. I disagree with some aspects of his proposals, but in no way consider his character to be besmirched.

  72. AfA   May 17, 2008 at 8:53 pm

    Congrats LB, and nice to see everyone here.I have a question, though I don’t know how to formulate it. Many people say that inflation is still contained because, even though the Fed swapped half of its balance sheet, it didn’t yet monetize it, since all the securities thru TAF, TSLF … are only temporary, and banks ultimately have to swap them back.Understood.However, from an opportunity cost point of view, if the Fed didn’t intervene the way it did, banks would have been forced to right down much more of worthless securities and go thru a deleveraging process, with many probably facing bankruptcy. That through its impact on leverage and fractional reserves (money creation) in addition to stricter lending requirements would have significantly decreased the money in circulation (supply). Add to that the possibility that some banks could default on their loans from the Fed. Even though the possibility of monetization is only in the future, the results are felt here and now; high inflations differential (more inflation than it would have been otherwise) due to higher inflation expectations in the future.

  73. OuterBeltway   May 18, 2008 at 7:04 am

    @AfA:Thanks for helping frame the bailout/no bailout issue more clearly. @LB:I think it’s important to speak in plain English about what’s happening in the U.S. economy, and then to ask how the Fed’s actions help or hinder the further positive evolution of the economy. The Western economies have, and will continue to have reduced incomes and buying power until the labor and hence manufacturing-location arbitrage story plays out. That’ll take another 30 years. The cheap energy and easily-extracted natural resources (fish, timber, etc.) era is over. The knowledge delta between rich and poor countries is imploding due to the Internet. We are facing a world of equals, with rapidly diminishing competitive advantage. A "commoditized" market, where pricing power is eroding on all fronts at a frightening pace. If natural resources is the remaining bastion of pricing power, what will the U.S. and the U.K. trade for them? Home mortgages? In that context, instead of creating wealth based on productivity gains here in the U.S., the easy-money-encourage-debt policy of Congress, of the Banks, and therefore by instruction the Fed have borrowed against the productivity of future generations. Wall Street then falsely-labeled that debt as AAA, traded on the former good standing of the U.S., and sold it around the world. Once the Ponzi scheme finally broke, the purpetrator member-banks arranged for their trade association (the Fed) to take much of the toxic debt remaining on the balance sheets of the member banks and load it onto the backed-by-the-taxpayer balance sheet of the Fed.In summary, the thieves were exposed, and rushed to unload the remaining toxic inventory they’d not yet fobbed off on the "rubes". In plain English, that’s where we are.The advocates of the bail-out say "but if we don’t bail out, then we must face the full consequences of our economic decision-making!" I am unwilling to watch my country get pillaged again. I want to face the consequences of our collective stupidity now, rather than get worse later.But you (LB and NR) seem to be advocating a bail-out.I haven’t seen you write much about the fundamental fix, other than "better regulation". Regulation innovation is not going to fix the economic fundamentals. Debt is no longer feasible as an engine for GDP fudging. What’s the next trick? Who is going to lend us money?We have two fundamental options: steal from others or become productive and sell to others. Colonialism and its latest incarnation (e.g. our "mid-East foreign policy") is the "steal from others" method. Is it working? Are the victims "hip" to our game yet?Central banking is theoretically about matching money supply to the underlying growth/contraction of the capital stock (accumulated wealth) of a nation. It has somehow mutated into a huckster facade for financial speculators – relying more on appearances and secrecy than it does on accurate, full disclosure of fundamental economic data and policy. There should be no bailout. Furthermore, it needs to be made clear that the Fed is not the instrument of national economic policy it poses as; it is a Trade Association of Bankers. We need to establish a bona fide, transparent Federal Government agency of national economic policy. It should have control of the money supply, and it should be mandated to balance the Federal budget, like so many state legislatures already do. It should be responsible for educating the public about how the economy works, and what we have to do in order to have a health one.That’s the fundamental fix I want to see. No bailouts for thieves.

  74. Guest2   May 18, 2008 at 11:29 am

    @Outerbeltway,well put, in plain english.

  75. London Banker   May 18, 2008 at 3:53 pm

    Welcome Doc Bert, AfA and Guest 2.@ Outer BeltwayI am not a proponent of the Fed’s interventions, as should be clear from my comments over the past six months. I find most of what they are doing appalling and dangerous. If the Fed is not already corrupt, it must soon become so when there is no transparency, accountability, audit or oversight of its increasingly expansionary actions to cover up the criminal malfeasance in the banking sector of recent years.I agree with you: "No bailouts for thieves."Where I think we differ is in thinking that regulation can make a difference. I have seen the system work, and work well. Sadly, that system has been dismantled since the 1980s and the result is predictable catastrophe.Some of what I would do would include the following:- Make it practical to sever a bank’s deposit liabilities cleanly from its other business with a statutory lien over assets to compensate so that if the bank ran into trouble the Fed/FDIC could sever the systemically important customer side of the business while letting wholesale creditors eat their lossses.- Require transparent, full disclosure of all assets and liabilities, including all off-balance sheet activity. The home state supervisor would be responsible for full accounting of all global activity, including tax haven and bank secrecy jurisdictions, or face liability for losses to despositors elsewhere.- Banks and investment banks securitising assets would be required to retain at least 20 percent of any securitised debt for their own account, and this would have to be transparently marked to market, and holders of the asset would have a right to put the asset back if the value fell below a certain threshold during the first five years of issue.I’m sure I could come up a few other good rules, but that will do for a start.

  76. OuterBeltway   May 18, 2008 at 7:38 pm

    @LB:Your latest set of rules are attractive, especially given the recent episodes of bank activity. I have the feeling, though, that they’re a bit reactive – we’re always closing one door or another after the horses are gone. What I didn’t see in the rules was "these are the attributes of a sound economy, and this is how banking contributes to it, and therefore here is our nation’s banking policy". Proactive, goal-oriented legislation … in a word, policy. Policy with simple, easy-to-measure metrics and the transparent reporting necessary to keep the herd in their swimlanes. I respect your careers’-worth of experience, and hence your faith in a good contract (e.g. the regs). Can you find a way to expand the terms of the contract to direct behavior not just away from clearly detrimental actions, but toward the maximum beneficial yield achievable from the finance sector? For example, what if bankers got really, really good at identifying and developing local entrepreneurs? What if they figured out a way to significantly increase the reliability of early-stage investments? Take it a step further, what if they stepped beyond collateralized debt for consumer items, and moved into unsecured (graduated-scale, start small move up as indicated) equity investments? Just move more out of the consumer sector into the productive sector?Now, that’s not so much a regs change, as it is a market-segment change, and if successful (key words, I admit) it would have a profound impact on the host economy. Finance would again start to allocate capital where it’s needed.Both the U.S. and the U.K. are at pivotal points in their development. The old is being pushed aside at an astounding rate, but the velocity of innovation in key areas such as finance, health care and energy are simply not keeping up. From your vantage point, do you see examples of velocity-of-adaptation that is keeping up with velocity-of-environmental change? I am not seeing it, but I’m hopeful that it’s just because I’m not looking in the right places. I’ll get off the hobby-horse of Fed- and Finance-bashing, as it’s only useful once. What I’d like to do is to provoke some thinking around what fundamental changes are nec in the Finance sector in order to make end-of-industry-lifecycle economies such as U.K. and U.S. viable again. We have to invest in something new, and it’s not visible at the top; we need a mechanism for allocating resources to the unknown, new, uncharteds so we can find the next economy’s superstars.

  77. London Banker   May 18, 2008 at 8:29 pm

    @ Outer BeltwayYou are correct that I was too limited on policy objectives. The system has been skewed so long toward consumption and inefficiency, reorienting it back toward growth is needed.- First, let’s imagine that we could eliminate the mortgage interest tax deduction and other incentives to pointless investment in unproductive assets (already done in the UK ten years ago but possibly impossible in the US).- Second, the tax system could promote start-up and early stage investment (as it does here in the UK) with low corporate taxes for small firms and capital gains taxes that reward risk taking and longer term early stage investment.- Third, the tax system as a whole should be radically simplified so that the average person does not require professional assistance to prepare and file taxes, leading to a lower threshold for business formation and business administration rather than scaring possible entrepreneurs and small business people off with complexity.- Finally, get with the rest of the developed world in bringing in socialised medicine for all people in the USA so that small businesses can form without the proprietors or staff being forced to either forego health insurance or forced to meet the huge overheads of the US health insurance rip-off.The banking system should be forced back into the box of credit intermediation at reasonable rates of return to support the growth of the productive economy, but how we do that from where we are in a globalised financial market is going to be tricky. Too much of the Wall Street financial system is now offshore to either achieve higher returns or to avoid taxes. However, the US still has 6,000+ local banks and credit institutions which could be incentivised to local investment and local business formation.Give me some time, and I’ll think of a few more, but these would do for starters.

  78. DocBerg   May 18, 2008 at 9:43 pm

    London Banker, I would like your opinion of U.S. credit unions in terms of safety of deposits. I have read a fair number of articles concerning present and upcoming solvency issues for small and medium size local banks, but very little about credit union problems.

  79. Guest   May 20, 2008 at 1:37 am

    Hi London Banker. Thank you for being here.Maybe I should post this question on the professor’s blog, but I think you are mor likely to respond. What do you think of what Dean Baker has written re "Low-Income Renters to Pay for Housing Bailout" Monday 19 May 2008 "….Congress’ answer to this problem is a complex bailout scheme in which it would have the Federal Housing Authority guarantee new lower interest rate mortgages. The new mortgages would pay off the first mortgages at 85 percent of the appraised value of the house. While the banks will still lose money under this plan, they will almost certainly end up much better off than if the situation was just left to the market. In fact, since the banks decide which loans get into the program, it is virtually guaranteed that they will come out ahead. Homeowners can benefit also, in that many will be able to stay in their homes with more affordable mortgages. However, in many of the bubble-inflated markets such as San Diego, Los Angeles and Boston, the new mortgages are still likely to cost far more than renting comparable units, draining money away from other necessary expenses, such as health care and child care. Furthermore, since prices are still falling rapidly in these areas, it is unlikely these homeowners will ever accumulate equity. For homeowners in these bubble-inflated areas, the banks will be the main beneficiaries of this bailout. It would be possible to prevent this problem by restricting the guarantee prices to some multiple of rents. Rents never got out of line with fundamentals even at the peak of the bubble. For example, if the guarantee price was set at a multiple of 15 times the appraised rent on a property, it would offer greater assurance the homeowner was not paying too much on their mortgage and might also accumulate some equity in their home. Congress has shown little interest in ensuring the new guarantee prices reflect fundamentals, making it likely many of the people "helped" under the program will end up facing foreclosure a second time. However, to make matters worse, they came up with the idea of financing the plan by taking away a stream of funding that had been dedicated to help low-income renters. That’s right; Congress wants to take away money from low-income renters to help bankers that made bad loans in the housing bubble. As we all know, when the banks are in trouble, it is not the time to talk about the free market. The real painful part of this story is it would be very easy to help the real victims in this story: the low- and moderate-income homeowners, who were suckered into buying homes at bubble-inflated prices with bad mortgages. Congress could just temporarily change the rules on foreclosure to allow moderate-income homeowners facing foreclosure the option to stay in their home paying the fair market rent. This would provide these families with housing security. At least as important, it is likely to result in many of these families remaining in their houses as homeowners, since banks will have a strong incentive to negotiate new terms on mortgages in order to avoid becoming landlords. And the best part of this story is that families would benefit from this change the moment Congress passed the law. There is no need for a new bureaucracy or any taxpayer dollars…"

  80. London Banker   May 20, 2008 at 2:26 am

    @ Guest on 2008-05-20 01:37:48Things will get worse before they get better because the system has spent 25 years becoming progressively less regulated and more accommodating to the directions of Wall Street. The politicians and regulators are habituated to doing what they are told by those who fund their campaigns and those who built and fund the lobbying machine that turns the wheels in Washington at all levels – executive branch, Congress, agencies, FASB, etc.Many Americans participating in the Obama campaign are taking heart from a new style of populism that organises from the ground up, but it will take at least five years or more for this populist machine to make a real difference in the way that Washington works at the level of detail relevant to bankers’ serial abuses of the system.In the meanwhile, expect Wall Street to win all the early battles (e.g., looting the Fed, diluting transparency or reporting, accounts and capital adequacy, looting FHLC/FNMA/SLMA, etc.). Then expect them to win most of the mid-term battles (e.g., tax breaks, subsidies, bailouts). Then expect them to start losing a few battles and threatening dire consequences. Then expect a flood of fraud to come out and a popular backlash that re-establishes oversight, regulation and the other protections we once took for granted. This is the long cycle playbook, and I’ve no reason to believe we’ll see anything different now, except perhaps accelerated by improved communications and media.@ DocBergI don’t know enough about credit unions to offer an opinion. @ AllI’m going to aim for Friday postings here most weeks so that the chitter chatter over here can continue through the weekend when the Professor is usually enjoying a well earned rest. Stay tuned.

  81. Miss Italy   May 20, 2008 at 11:30 pm

    LBI’ve just read your interesting post. Sorry to be late with the compliments, I was on vacation (in Italy, were else?).We enjoyed very much your thoughts on Nouriel’s blog, even more now that you are allowed more space and depth.I just wish I had more useful comments to make. Anyway, one thing is stuck in my head, about mis-allocation of resources: if we had used those few hundreds of billions of dollars to give to some poor, but hopefully bright, physicists to build and play with a few machines to master the energy from fusion, we could probably be very close to energy independence. OK, never mind……let’s just keep flying to Italy while oil is only 125$/gallon…….To those free market extremists: free market is always the solution? Ma mi faccia il piacere! (free translation: you are kidding, right?)Miss Italy