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Commentary>Moral hazard in high finance, a test for 'no drama' ObamaWilberne Persaud - Financial Gleaner Columnist |
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A year ago this column referred to high finance as appearing to some like the 'three-card man' at the fair, to others like a cacophony of voices in a Pocomania trance experiencing the spirit, to yet others, simply the means by which the 'big man' legally extorts his pound of flesh.
That column talked about why it made sense to describe Jamaica's indigenous financial sector crash of mid-1996 as a 'meltdown'.
Today, calling Wall Street's crash a meltdown seems too mild, almost serene.
Reader questions and comments tell me high finance still befuddles many.
One says if the "Fed really meant to help ordinary people they would give money to Detroit and home owners. All they do is give money to their buddies. They did not even ask the public for permission to do anything. They just up and created US$800 billion out of the air. No point hanging the CEO, the system is screwed."
MSNBC's Rachel Maddow questions Wall Street bailout versus Detroit's snub.
Workers needing health care and safety standards, she says, are blamed by the extreme right for the country's economic woes.
Stupid
Mind you, how stupid can one get? Detroit's CEOs turn up on three separate private jets to present cap in hand before Congress?
Merely to save face Congress must turn them away. Understandably, Maddow needs to be 'talked down'.
She insists Detroit makes stuff, real stuff from steel, etc. What does Wall Street do? We can answer: it makes stuff yes, virtual stuff which, without regulation, can morph into global toxicity.
President of the steel workers has the stark but funniest quote: "Those workers who take a shower before they go to work, they get bailed out. The people who must take a shower after work, they get thrown out!"
In bad times it is great to be able to still have a laugh.
Finally, the rescue plan is emerging. It will have reiterations in another week or two, perhaps three. The whole playing field has not been inspected. G20 cannot have its authoritative say before President-elect Barack Obama is formally in charge. Does he still want the job?
Watching him on TV rolling out his overachiever team for the Cabinet-in-waiting, he actually seems enthused by this chaotic and turbulent future. He is highly focused, self-confident, deliberative, apparently with a morally guided compass capable of complex nuance.
Indeed, such times present tremendous potential, especially if you are a President-elect with so much political capital to deploy. He seems to be relishing the opportunity.
The moral hazard is that 'too big to fail' rewards cavalier risk-taking in support of the financial system as a whole. How can so many trillions be created out of thin air, as my reader exclaims?
The United States Federal Reserve has this year created US$1.7 trillion in loans, US$3 trillion in investments and US$3.1 trillion in guarantees. That is US$7.8 trillion in money creation - about half of US gross domestic product.
That this had to be done is beyond debate. But why should the Fed accept, on behalf of 'we the people', less of a return than Warren Buffet? That it had to be done in the way it is structured is indeed debatable, but that debate has to consider its many implications. Yes, preferred shares would certainly cause shareholders to take a haircut, would certainly cause the taxpayer to receive benefits as things turn around. But at the same time it would damage Wall Street and the US capital markets' ability to raise capital from the usual sources. That is the unthinkable element in the mix.
Would the Saudis and others be willing, if they suffered such tremendous losses, to come back to market with sovereign and other funds? I think not. Mind you, they would have a difficulty placing their wealth holdings, but who knows; some other kinds of instruments might have evolved. Confidence is an ephemeral thing.
Citigroup's capital injection is US$20 billion plus a guarantee of US$309 billion against loan losses.
As its CEO says, the bank is really buying insurance. The only entity that could provide such insurance is the United States Government.
On Top of Things
He is on top of things, so no sense looking backwards. That is true for the moment but that backward look is inevitable and necessary. The architecture of world financial markets, and banking and investment entities of the post repealed Glass-Steagall Act of November 1999 will have to be fundamentally different.
Giving the box of candy to your child is unwise, especially if there is a history of diabetes in the family. World financial history tells us this but ideology too often trumps common sense.
The US debt will have to be financed if the world economy must avoid several years of deep recession. G20 has agreed this and China will participate to its fullest. But as British Foreign Secretary David Milliband showed us earlier this month, the price could well be to abandon Tibet.
Position Change
Milliband has been soundly trashed in some of the British press and on the Internet for the position change. "We have made it clear to the Chinese Government, and publicly, that we do not support Tibetan Independence," he said.
Previously, as of 1913, Britain recognised boundaries between Tibet and British-ruled India along with China's 'suzerainty' over the Tibetan region - suzerainty is not sovereignty - allowing some form of Tibetan self-government.
So financial system change after all is both influenced by and influences politics, international diplomacy and more.
President-elect Obama will have his hands full. His cabinet picks suggest a practically oriented government will emerge with capacity to rebuild America's economy and world standing which, even with one super power, cannot be managed by decree.
As he said on campaign, international standing of the US derives neither from wealth nor military strength, but values and promise. The road is difficult if perhaps not nightmarish.
wilbe65@yahoo.com