Two striking headlines this morning show that the US economic model is losing what shreds of credibility it might once have had:
Oil Min: Iran Has Halted Oil Transactions In Dollars
China central bank raises bank reserve ratio by 1 percentage point
And the very ironic headline from FT AlphaVillle yesterday:
Bush supsends capitalism, stocks soar!
If Bush administration laxity and lawlessness needed confirmation, the Bush (Goldman Sachs) bailout plan did the trick. Despite accelerating inflation, the US Fed and Treasury are determined to undermine the dollar by cutting interest rates on one hand (screwing all those deluded enough to hold dollar reserves or save prudently) and re-writing contracts unilaterally on the other (with tax breaks and taxpayer liability to follow).
International investors are incandescent with rage that MBS (mortgage backed securities) and CDO (collateralised debt obligation) contracts freely negotiated will now be unilaterally amended by those who sold them in the first place. I have never seen the economics blogs - usually dry and staid in their acceptance of capitalism's injustices - so heaving with indignation and abuse. "Crony capitalism" and "privatise profits, socialise losses" are phrases that are now appearing even on macroeconomics sites normally free of such liberal-leaning bias.
What seems to make the commenters particularly angry is the pointlessness of abandoning centuries of contract law for the limp rag of a bailout that will have almost no effect on the implosion of credit markets which must follow the years of excess and fraud. Bush's bailout - like all his initiatives since taking office - will achieve the opposite of its stated intention. By making it transparent to international investors that their investments can be rewritten by fiat of the American side of any deal, they have probably sealed the determination of many states to stop financing America's debts. As America has absorbed about 80 percent of global savings over the past few years to finance its huge deficits, this means that the collapse of credit markets will be faster and harsher than any American can likely imagine.
Think of Argentina repudiating its foreign debt. That's about what the Bush bailout means to the many banks, localities and fund managers who bought into the securitisation boom for the last twenty years.
The military cannot capture and hold financial markets. Only responsible and trustworthy conduct can make people voluntarily part with hard earned cash, and the Bush administration has just confirmed to the world that American financiers are neither responsible nor trustworthy in husbanding the savings of the world's more prudent and productive economies. (Admittedly, the world was slow to wake up here.)
The farther east you go, the deeper the disgust and policy differentiation. In the face of massive hikes in oil, commodity and food prices globally, the Fed has cut a total of 75 basis points at the past two meetings; the Bank of England cut 25 basis points this week; the European Central Bank and Bank of Japan held rates steady in the face of escalating inflation; China raised its reserve ratio by another 1 percent (to 14.5 percent that banks must reserve against lending).
This policy differentiation follows savings rates: Americans spend more than they earn (negative savings rate); Britons spend marginally more than they earn (slightly negative savings rate); Europeans save a bit of what they earn; Japanese save a fair amount of what they earn; Chinese save a lot of what they earn.
Expect the dollar to start crashing again next week and for market volatility to resume once the "spin" surrounding the Bush bailout is superceded by rational analysis. If the Fed cuts rates again next Tuesday - as the market fully expects - then the reaction internationally will be even more intense.
Just as "accountability" has become a dirty word in Washington, "recession" has become unthinkable on Wall Street. Both accountability and recession are important disciplines on excess and abuse. Trying to forestall either makes the final reckoning worse for the system.
Interbank credit markets have been steadily tightening since August as banks become wary of what may be hidden in each other's off-balance sheet grey books. Corporate and consumer credit are becoming tighter as banks husband cash to shore up balance sheets. Markets are increasingly being criticised for being ill-transparent and possibly manipulated. The actions of the Fed and Bush administration are fuelling uncertainty. The frauds, mis-selling and unproductive investment by Wall Street during the securitisation boom have undermined confidence globally in the Anglo-Saxon model of market capitalism. Expect fall-out. Expect it soon.
One of the best selling books right now on Amazon is The Panic of 1907. The authors conclude with the following lessons which seem prescient for today:
- Complexity makes it difficult to know what is happening and establish linkages that enable the crisis to spread.
- Economic expansion creates rising demands for capital and liquidity. The mistakes that accompany those rising demands must eventually be corrected.
- In the late stages of an economic expansion borrowers and creditors overreach in their application of debt. This lowers the financial system's safety margin.
- Prominent public and private figures provided adverse leadership. Their policies raise uncertainty, lower confidence and elevate risk.
- Random events shake the economy and financial system.
- Greed becomes fear.
- Well-intended responses prove inadequate to the crisis' challenge.
Some worthy reviews of the Bush bailout:
Wall Street Journal poll showing 84 percent oppose Bush bailout
Big Picture
Naked Capitalism
Seeking Alpha
RGE Monitor