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Gold and oil investors on the other side of the trade roared back after cowering in the corner for a few weeks after the US Treasury, the Bank of Japan and a few other friends of the Fed ganged up on the short financials/long commodities trade popular among the world's hedge funds, desperate to protect their clients' wealth from the ravages of currency value destruction. That intervention sent oil and gold tumbling, but with the prospect of an exchange of a trillion bonars for a pile of now worthless high-concept securities, the trade is back with a vengeance.
Over the weekend our Finance Minister Hank Paulson poured out promises of a quick fix and return to "normal" – endless asset price inflation and over-consumption funded by it. All it will cost is the next generation’s savings on top of the current generation’s already committed.
In for a penny in for a dollar.
Yesterday our Congress shocked us not only by showing up for work but showing the audacity to step up to – gasp! – ask questions about the Treasury's power grab. Here on C-SPAN, US Congressman Peter DeFazio puts on a rousing Mr. Smith Goes to Washington performance. The golden key is a nice touch.
For the first time since this crisis started in the spring of 2007 Congress pushed back on our Finance Minister’s demands. If not directly confronting or even doubting they at least wondered aloud why we need allow him and his unknown successors and assorted minions to do whatever they deem necessary for a period of two years, at the pleasure of the secretary’s office, to return the US financial system to its rightful place as the world’s most deep and transparent, even as the veneer of trust flakes off to reveal shallowness and opacity. As Marshall McLuhan once said, "Mud sometimes gives the illusion of depth."
One US representative reared up on his hind legs to suggest that perhaps, just maybe, the Minister might recuse himself from these proceedings as his former employer is counted among the now very limited two item menu of investment banks remaining of a 150 year tradition of capitalism in America, Goldman Sacks and JP Morgan, all other competitors now summarily wiped out. Also, and, well, gee (and – gosh) while we're on the subject, they aren't even investment banks anymore. The Fed on Monday made the two winners of the US Investment Bank Survivor Show – presto! – into bank holding companies so that they may swallow what is left of the assets of 1,000 or so bank failures, as estimated by reliable sources, waiting in the wings.
Is that, you know, like, constitutional?
Last time this happened, after the Savings & Loan fiasco, the government created the Resolution Trust Corporation so that any value that might possibly be recovered in the assets of those Frankenstein creations of deregulation and corruption stood a chance of recapture by tax payers, to minimize the damage. Fair value for those assets was assured by their sale on the open market. Not this time. We may never know what Goldman and JP Morgan will in the future pay for the assets that they are now politically lined up to receive at a discount. Of course, the truth is that most of the securitized debt is completely worthless – so should we complain that any value they might have will be snagged by private banks behind closed doors?
Too late now. Instead of decision making authority Congress will demand transparency, dutiful reporting of decisions after the fact.
Transparency. There’s a word I’d like to see banished from the finance lexicon. Let’s replace it with a venerable yet less popular word: honesty.
Enron was transparent. It provided all of the data it was asked for in unfathomable volumes and right on time. US accounting firms with once honored names swore by them.
But they were all lying.
Can Secretary Paulson be trusted? Maybe so or maybe not. But if Congress passes this measure to give him even a fraction of the power he is asking for, they may as well cancel the upcoming presidential election in the same vote.
It won’t matter anyway.
iTulip Select subscribers can read our extensive analysis published today on the possibility and implications of capital and currency price controls in:
US exchange rate and capital controls or bust?
September 23, 2008, iTulip
When inflows become outflows: Avoiding the Sudden Stop at the end of the multi-decade long American capital flow bonanza.
Moreover, it may well be asked whether we can take it for granted that a return to freedom of exchanges is really a question of time. Even if the reply were in the affirmative, it is safe to assume that after a period of freedom the regime of control will be restored as a result of the next economic crisis.
—Paul Einzig, Exchange Control, MacMillan and Company, 1934
Exchange rate and capital controls are viewed by our modern economics orthodoxy as the retrograde policy of desperate third world countries that can’t hack free markets. However, history teaches us to not discount the possibility that major economies even in our current times may use them as a last resort. Each day the front page of the newspaper is plastered with reports of one last resort measure after another. It’s time to give the possibility of exchange rate and currency controls serious consideration. More ($ Subscription) …
iTulip Select: The Investment Thesis for the Next Cycle™September 23, 2008, iTulip
When inflows become outflows: Avoiding the Sudden Stop at the end of the multi-decade long American capital flow bonanza.
Moreover, it may well be asked whether we can take it for granted that a return to freedom of exchanges is really a question of time. Even if the reply were in the affirmative, it is safe to assume that after a period of freedom the regime of control will be restored as a result of the next economic crisis.
—Paul Einzig, Exchange Control, MacMillan and Company, 1934
Exchange rate and capital controls are viewed by our modern economics orthodoxy as the retrograde policy of desperate third world countries that can’t hack free markets. However, history teaches us to not discount the possibility that major economies even in our current times may use them as a last resort. Each day the front page of the newspaper is plastered with reports of one last resort measure after another. It’s time to give the possibility of exchange rate and currency controls serious consideration. More ($ Subscription) …
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