Wednesday, April 13, 2011

Credit Where Credit is Due

Shame on Michael Lewis (apparently suffering a bout of PJ O'Rourke syndrome) for his woeful Bloomberg piece satirizing of the Fed handling of disclosure relating to liquidity provision in the heat of the moment. I am all for satire and criticism and satirical criticism is even better. But one must be careful to be "more or less right", else one becomes a demagogue - using a kernel of truth or plausibility to prey upon ignorance or misunderstanding   - say for example, like Glenn Beck.

To be certain, the US Federal reserve is not perfect. They have indeed made policy errors - sometimes in the pursuit of politics, some in defense of the moneyed class, sometimes  out of accidental miscalculation, while others in the pursuit of some strange misguided Randian philosophy cherished by the former Chairman. However, the provision of liquidity to almost any and all against well-relaxed collateral  - be they domestic or foreign - in the heat of the moment of monetary meltdown cannot and should not be fault nor belittled. In fact, everyone should take a moment and say "Thank You!" to Mr Bernanke (rather than Gordon Brown) not for savng the world, but most certainly for preventing more preventable depths of the crisis.  I wrote notes for a piece still sitting in posting drafts after I read Ron Paul's utterly inane remarks about the same upon release of the files suggesting that rather than a Thank You, his extension of emergency liquidity in the heat of the moment of the crisis demonstrated the Fed should be abolished.
If fault is to be found, it would be in the generosity of Fed pricing. They could have extracted a pound of flesh, and in my opinion, should have as a punitive slap to those surfing the edge of peak credit, or liquidity mis-match.

However, no public nor private purpose would have been served by allowing financial markets to cascade into oblivion due to system-wide requirements sell position into a falling market to make position. We would have needed to coin a new more-modern phrase for 21st century-style Herstatt risk, that would have been global, and grinded the real economy to a halt along with the financial economy. Sure, we would have recovered from that, and certain people that didn't lose (and perhaps should have) would have, but others (perhaps undeserving) would have benefitted, watering down justice. As it was, the dislocation took us way into overshoot, so imagine where it would have taken us without the liquidity provision. Is there a place where the tag line "I've fallen, but I can't get up" is true? Where is the Hayekian virtue in finding out when (the extreme outcome) is in fact preventable? Perhaps it will prove only a palliative. That is still alright as far as I am concerned, measuring "alight" against the public interest.  I am far far far more afraid of the deficits and the effect of interest rate shocks upon large, cumulative borrowings concentrated at the short end of the curve. QE still bothers me little.

So if Lewis et. al wanted to use their satire to greater advantage and good, they should give credit where credit is due, and set their sights upon diminished top-end tax-rates, a broken healthcare system, defense spending, and clipping the tail of future liabilities to restore confidence in fiscal future diminishing the risk of an interest rate ambush, or future loss of confidence causing a another cascade.


Charles Butler said...

Hey girl,

Note how imbued is the discourse with Judaeo-Christian narrative structure. You can take the J-C out of the desert, but you can't take the desert...

The Hellenic, interestingly, solves these things via divine intervention. Hmmm.

Anonymous said...

The Fed deserves praise for being ahead of the curve and understanding the gravity of the problem(s) during the crunch, especially compared to its peers across the pond given that the ECB insanely hiked rates in the middle of 2008. But the Fed, and Bernanke in particular being the intellectual architect of the low-for-long-considerable-period-deflation-threat in 2003-04 at the frenzied peak of the mortgage credit bubble, deserves a fair amount of culpability for its part in the buildup of Peak Credit. Academics have empirically demonstrated the deviations from Taylor Rule prescriptions in 03-05, money managers like Paulson and Burry who understood the rise and wagered on the fall blame the Fed in failing to regulate the mortgage market excesses, and the Financial Crisis Inquiry report also cites the Fed's easy monetary policy and lax mortgage regulation.

I agree that the Fed's generous provision of liquidity against dodgy collateral at low rates was indeed necessary and helped avert an even larger meltdown. I even thought QE1 was a bold and necessary policy (but not QE2). But perhaps they would not have found themselves in that position had Ben "housing reflects strong fundamentals (in 2005)" Bernanke, head of the NY Fed Tim Geithner, and Don "asset prices don't matter in monetary policy formulation (on the upside)" Kohn been a little more vigilant over easy monetary policy and mortgage regulation.

Funny how 2 out of those 3 are now 2 of the most powerful economic officials in the country. Angelo Mozilo did a great job raising capital early and selling his nuclear waste to BofA at a good price early on, but that does not exonerate him from his role in the meltdown. Chuck Prince, Stan O'Neal, Dick Fuld, Fred Goodwin, and Jimmy Cayne also find themselves out of a job, but Bernanke and Geithner get re-appointed and promoted. Is it any wonder why DC is so unpopular?

"Cassandra" said...

Thanks for the comments. Upon re-reading this, I realize how unwise it is to write something and post it without editing it reading or reading it over at least once more. Though my grammar, awkward sentence syntax and run-ons are atrocious, my point remains valid: Of all the things in the world to complain about, the Fed's extension of liquidity to all (whatever the collateral or political persuasion of the bank with their hat out) is NOT one of them.

Mack the Knife said...

The Fed's extension of 15x levered billion-dollar nonrecourse loans to punt on the junkiest of loans to housewives is a pretty hard thing to swallow for any taxpayer... Read the Taibbi piece linked on Alphaville and weep.

Pat Shuff said...

The verdict is not in. In hindsight one sees the mistakes made, by Greenspan, in housing finance...that were not evident at the time. The response to a popping credit bubble has resulted in a larger credit bubble. It is not impossible that what may or may not have been averted and here being praised may in future hindsight be seen as a dire mistake, a preventative smaller trainwreck at slower speed.

"Cassandra" said...

Mack, yeah I read Tabibi's piece directly (HT The Browser) and its shameful. I must say that I was not referring to TALF (nor was Ron Paul or I reckon O'Rourke as both were referncing the discount window PDFs released as a result of Bloomberg's subpoena's.

TALF raised my eyes even at the time. It seemed stupid and half-baked, not to mention unnecessary. If you're shoveling it out the discount window to prevent (in the short-run) the help the system avoid of selling assets into a falling market by replacing financing the market no longer wishes to provide, you've dealt with most of the problem. TALF should be seen in the context of the authorities trying to figure out how to help reduce perhaps the riskiest assets from balance sheets to get credit flowing again, I think they were willing to try anything, though there is little excuse for not having an anti-gaming clauses, or allowing full public transparency, or to charge higher spreads, to in effect "pay" for the puts that the Fed wrote (and volatlity was way high so the puts would have been expensive!).

Tabibi raises excellent questions, but doesn't really go far enough. What was the gestation of TALF? Who proposed it in the first place? Who wrote the regulations and rules? How many drafts? Surely there are phone calls and meetings to trace. Was it Fed staff that suggested something more restrained that subsequently got jacked by the Street and Turbo-ed? The thing is, I would have no problem with the Fed effectively lending against all the shitty collateral that so offends Paul and O'Rourke (or that was jacked by TALF). They could have demanded the haircut that they think they should get (and the price) as they were the only game in town. More over these should be repo's, which is fine since the Govt will end up owning the guys anyway if they were forced to oblivion through inability to access markets in sufficient qty. There were many things I disagreed with (Govt's equity stakes instead of financing way up the capital structure which could have provided liquidity but would have kept the taxpayer out of harms way, criticisms at bay) and so on.

There remains more story to be told, but it would be interesting to hear the accounts from mid-level Fed staff who had bird's-eye views....