You half expected George Bush to get on TV tonight and announce that the liberation of Wall Street has begun. The landing of a Marine expeditionary force at Battery Park would make for excellent television. It’s just a short push of a few blocks up to the besieged investment bankers in lower Manhattan.
The Devil Dogs versus the Masters of the Universe would pit two American legends (or mythologies) against one another. However we’ve just finished watching the President’s speech on the Internet and failed to note any call to arms. Wall Street will not be liberated from the risk managers who’ve led it to the verge of financial destruction.
Instead, Bush advocated the prisoner of war exchange program being debated by the U.S. Congress. You know, that’s the plan whereby the injured mortgage-backed securities languishing on bank balance sheets are rehabilitated in a Federal detention facility, later to be released back into the financial markets, after they have repaid their debt to society and the American taxpayer.
To be honest, the Bush speech sounded like an edition of the Markets and Money. We took notes. “Easy credit combined with the faulty assumption that house prices would continue to rise,” is what got us to this awful state. The rest of it, though, was full of unintended ironies.
“My natural instinct is to avoid government intervention,” Bush said. Seriously.
And even though too much credit is what caused the current problem, the Paulson plan is good because, “It will help American businesses and consumers to get credit.” Right. That’s just what America needs. More credit.
The purpose of today’s letter, though, is not to bash Bush, Congress, and Wall Street. That is easy enough to do. The purpose is to point out that institutions fail as a part of nature and markets. Not allowing them to fail is what’s unnatural and prolongs our suffering.
Ron Paul pointed this out in an informative exchange with a note-taking Ben Bernanke up on Capitol Hill. Paul said the Paulson plan amounted to price-fixing for assets that are falling in value. The libertarian Texan asked the former head of the economics department at Princeton how he and Henry Paulson could discover a price for mortgage backed securities when the collected wisdom of the market doesn’t even know.
Bernanke didn’t have much on an answer, other than that, “market based mechanisms” would be used (other than the ones that currently value the RMBS at huge discounts). He did unleash two jaw droppers, though. He said, “There is no need for the Fed to monetise any of this borrowing,” referring to the US$700 billion he and Hank are asking the American taxpayers for. He also said, with the straightest face a central banker can muster, “I do not expect any additional inflationary consequences from this.”
For what it’s worth, Bernanke appears to be right for a day. Gold and oil both fell in futures markets. But while Washington has become an orchestra of fiddlers, confidence continues to go up in flames globally.
for Markets and Money