Observations On Financial Heroin From Don Coxe
More lucid insight from the brilliant mind of Don Coxe, who this month focuses on Ben Bernanke's one and only specialty: the soothing short-term affect on pre-terminal symptoms of addictive, and very deadly, financial heroin.
On those who dispense heroing to soothe the symptoms, and on those who actually make things better.
If Ben the Heroin Hero stops the infusions in time, he will deserve to be mentioned in the same breath as Paul Volcker—a real hero….
Because he will have done the brave thing—at the risk of the loss of his job and of the Fed’s independence.
Already the Pelosi Congress is considering legislation that would (1) subject Fed monetary policies to review by the Congressional Budget Office, and (2) strip the Fed of its supervisory authority over financial institutions, handing that power to a new agency created by Congress—presumably in the image of its Creator. The same politicians who applauded so vigorously as Fannie and Freddie debased the lending requirements for mortgages and expanded their balance sheets so recklessly, now seek to apply that expertise to supervision of the entire banking system.
Last week, Volcker, the man who has done more than anyone in modern history to design and deliver sound regulation to international banking, told a London audience what he thought was good and what was bad about today’s banks.
Volcker said the “single most important contribution” they’ve made in the last 25 years was introducing ATMs. ATMs meet, he said, the test of being “useful.” Apart from that, he had nothing good to say about commercial banks that behaved as investment banks. He agreed with the head of Britain’s Financial Service Authority that such banks are “socially useless.” He said derivatives, such as credit swaps and collateralized debt obligations, had taken the economy “right to the brink of disaster.” He noted that the economy had grown faster during the 1960s when such instruments didn’t exist.
One shocked member of his fi nancial audience challenged his dismissal of modern finance, and the magisterial Volcker huffed, “You can innovate as much as you like, but do it within a structure that doesn’t put the whole economy at risk.” He reiterated his support of Soros’ view that “proprietary trading should be pushed out of investment banks to hedge funds where it belongs.”
On weapons of financial mass destruction:
Volcker is right. The collateralized debt obligations, collateralized mortgage-back securities, and other computer-spawned complexities and playthings were not the solutions to basic needs in the economy, but to unslaked greeds on Wall Street. Without them, banks would have had no choice but to continue to devote their capital and talents to meeting real needs from businesses and consumers, and there would have been no crisis, no crash, and no recession.
Bernanke would doubtless concur, although he doesn’t dare say so in public. He is engaged in a multi-trillion-dollar rescue operation to save the global economy from collapsing under the weight of toxic derivatives and bad trading bets.
When will he take the risk of stemming the heroin flow?
As the 1970s demonstrated, the longer central banks wait to scale back on above-trend money growth, the worse the ensuing infl ation—even when the economy slides back into recession. It would seem that the appropriate year-end advice for levered bettors on US stocks and corporate bonds is, “Enjoy yourself, it’s later than you think.”
Lots has been spent: yet it is seemingly never enough:
After previous deep recessions, the snapbacks were dramatic, as inventory liquidation turned to inventory accumulation, and layoffs turned to callbacks. Despite all those trillions spent and all that monetary stimulus, the US economy has moved only from the critical care ward to the ambulatory convalescent wing.
With winter coming on, Bernanke, Obama & Co. could soon be of the same view as the despairing Lady Macbeth: “Nought’s had; all’s spent.”
And how to invest in the face of an endless bubble:
In brief, as long as you don’t try to delude yourself that you’re a value investor when you’re buying the typical non-commodity and cyclical components of the S&P or the Russell 2000, you can console yourself in the knowledge that this particular bubble may not be ready to burst for some months.
However, the amount of Bernanke pumping needed to keep it afloat is increasing, which suggests even he can’t keep this bubble alive much longer if the real economy fails to take wing. Despite a huge upside breakout of the Monetary Base in the past two months, the S&P has moved up just a tad. Even that move is suspect, because it has been accompanied by a plunge in short sales of non-financial stocks, and lackluster volumes.
Today's must read