Three Wise Men

Three Wise Men

Ben Bernanke, Timothy Geithner and Henry Paulson all voiced varying degrees of concern about America’s ability to combat another financial meltdown 10 years after they played prominent roles battling the last one.

While agreeing that the banking system is a lot stronger than it was back then, they saw some weak spots in the country’s crisis-fighting arsenal that didn’t exist a decade ago. The trio also decried the nation’s ballooning budget deficits in a joint briefing with reporters.

-       Bernanke, Geithner, Paulson Voice Some Concern About Next Crisis, Bloomberg

By J.M. Hamilton  (7-22-2018)

Amidst the denial, fury, and hubris surrounding many of the elites at the center of the 2008 Financial Crisis, and the subsequent bailout (a bailout that arguably continues to this very day, especially via accommodative monetary policy), were solemn assurances that: this must not happen again; banks & financials institutions should no longer be bailed out by the taxpayer; and Dodd-Frank and subsequent rule making – written in large part, behind closed doors - would prevent the next crisis (or certainly mitigate the possibility of a reoccurrence). 

We were also told the Fed’s multi-trillion dollar – money printing -  largesse to The Street (banks, hedge funds, private equity, multinationals, etc. etc.) was an opportunity for everyone to deleverage, which did not transpire.

Now, the three wise men – on point during the Fall of 2008 –are back again, to warn us that the country is ill equipped to handle the next financial crisis.

To which JMH responds, what do Messrs. Bernanke, Geithner, and Paulson know that we don’t?  The fallout from the 2008 financial Armageddon continues, like the bailout itself, to this very day.  Among repercussions from the Fall of 2008:

Businesses - and the country itself - are leveraged to the hilt, as is much of the globe.

The Banks have only grown more consolidated, powerful, and too big to fail.

The M&A activity leading up to the financial crisis has only picked up, so that the US economy, indeed the world economy, is now – in many major sectors – dominated not by competition, but rent-seeking cartels and monopolies.

Debt securitization & asset backed securities are the rage again, as investors and a surfeit of global liquidity travel the world in search of yield.  (Yields that have been suppressed by central banks.)

Due to global central bank intervention, junk debt is grossly underpriced, and often covenant free.

The sword of Damocles, the 1.2 quadrillion (notional value) swaps and derivatives market (moral hazard defined), guarantees that the taxpayer will be on the hook yet again.  And that if something does go wrong - debt, derivatives, and swaps will likely be the epicenter of the next crisis.  Here, keep your eye on emerging markets, in particular.

And the fallout for the public, as a result of the Wall St. bailout: wage and wealth inequality have only grown worse.  Despite being very late into the current “recovery,” wages – thanks in large part to collusion, non-compete agreements, and cartel dominated biz sectors – remain stagnant.  As a result, the public has turned against establishment political parties, throughout the West, who are in supranational banks' pockets.

JMH has written extensively about The Federal Reserve, and its awesome and unaccountable power, as the fourth branch of government.  Despite its dual mandate, the Fed is accountable to no one but Wall Street, which is the primary conduit for executing monetary policy.  The Fed board and chairperson are not popularly elected.  Presidents have been known to jawbone the Fed, often w/ no or at best, mixed success.

(To see what JMH has written about the Fed in the past, read: here, here, here, here, and here.)

Three Wise Men

A sad state of affairs indeed, brought to you by establishment Treasury Secretaries: Paulson (GOP) & Geithner (Dem)…  and the former Fed Chairman, Bernanke.

More importantly, when the next financial crisis hits – and my guess is the root cause will be debt, asset backed securities, or swaps – what should be the country’s response?  Will the US – and our legislative body - respond to yet another financial crisis, like a frightened band of sheep (a la circa 2008); or will the country finally take proactive measures, this time, to insure that our banks and financial sector are, finally, placed on a very short leash? 

And what might those steps look like.

For starters, all financial institutions at the center of the next financial crisis – including the Fed – should give up its C-Suite management teams, immediately, w/out bonus or pay.  These management teams should be investigated to the fullest extent of the law for criminal, fiduciary, RICO, and malfeasance activities and failings, and if appropriate, prosecuted (or sued) to the fullest extent of the law.  Don’t cry too much for Wall St. bank execs.  The law is rigged against prosecuting white-collar crime, especially for the exceptionally wealthy.

These failed institutions should be nationalized, run as not-for-profits (so as to remain out of the hands of corrupt public officials), and broken up, so that they are no longer TBTF.  Any profits accruing from these nationalized institutions would be allocated to the US taxpayer – not just for the inevitable recapitalization, but for the resulting collateral damage throughout the US economy.  Here, be thinking decades of public sector ownership (under not-for-profit governance/stewardship), particularly in regards commercial banking.

Bond & stockholders of the failed institutions should take the hit, and their bonds and shares eliminated and rendered valueless (in perpetuity): Capitalism 101. No coming back later (like Mr. Greenberg or Freddie/Fannie shareholders), and demanding future earning, or ownership, from institutions recapitalized by the public.

Glass-Steagall should be put in place, Dodd/Frank should be, largely, abandoned, and investment-banking houses shorn clean from commercial lending institutions, so that there is NO FEDERAL BACKSTOP FOR SPECULATION.

The derivatives and swaps market must be cut down to size, so that only parties, and counterparties, who have a direct holding in the commodity or bond – covered by the derivative or swap contract – are allowed to purchase the insurance product.  Swaps and derivatives issued purely for speculation: done, finito, as in – hence forth – never more. 

Rehypothecation, offshore LLCs and subsidiaries - utilized to skirt future financial reform, rules & regs - should no longer be allowed.  And on that note, outlaw countries – where speculation is rampant and laws, rules & regs found lax or wanting (e.g. The City in London) – US institutions should no longer be allowed to operate w/in; and likewise, foreign based financial institutions, who do not hold up to US standards, globally, should not have access to US markets.

And here’s the kicker, any future bailout/recapitalization should be laden w/ covenants, so that those first to be bailed out are the 99% (that is, those most scrod over by the last financial crisis).  Fiscal & monetary largesse from the federal government, and the Federal Reserve, would be directly allocated to the American taxpayer.  Placing money in the hands of the people, in lieu of the financial elite, would increase aggregate demand, and in turn, spur a weakened economy, hit by another financial crisis.

Given the state of the nation's fiscal & monetary affairs, how on earth could the US afford such as bailout?  Quite easy, the Fed should absorb the national debt, and slowly and methodically begin to forgive/write down said national debt, starting w/ the trillions, in public debt, presently held on the Fed’s balance sheet.

To deal w/ the inevitable economic fallout from the next financial crisis, all student debt should be forgiven, and a UBI (universal basic income) should be installed, immediately.

Paint me crazy, but perhaps I’m one of those few souls in the world that believes we should learn from our past mistakes.  Bernanke (who immediately went on the Wall St. speaking circuit, post-Fed career), Geithner (now head of a private equity firm, the incarnation of all things evil), and Paulson (formerly with Goldman Sachs) showed us exactly where their allegiances were, in their handling of the 2008 financial crisis.  

And, contrary to popular fiction, they sure weren’t looking out for the American public. 

Their actions in the Fall of 2008 are being felt to this very day, w/ both foreseen and unforeseen consequences… most of them bad.  Excepting, of course, the financial elite and Wall St. banks have made out like bandits.

Thankfully, these three wise men have shown us exactly how future financial crises should not be handled.

Copyright JM Hamilton Publishing 2018