Saturday, April 12, 2008
" The power to
determine the quantity of money... is too important, too pervasive, to be
exercised by a few people, however public-spirited, if there is any feasible
alternative. There is no need for such arbitrary power... Any system which
gives so much power and so much discretion to a few men, [so] that mistakes - excusable or not - can have
such far reaching effects, is a bad system. It is a bad system to believers in
freedom just because it gives a few men such power without any effective check
by the body politic - this is the key political argument against an independent
central bank."
Milton Friedman (1912-2006)
"The system of banking [is] a blot left in all our Constitutions, which,
if not covered, will end in their destruction... The issuing power should be taken from the banks and restored to
the people to whom it properly belongs."
Thomas Jefferson, (1743-1826), 3rd U.S. President
"If the American people ever allow
private banks to control the issue of their money, first by inflation and then
by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of
their property until their children will wake up homeless on the continent
their fathers conquered."
Thomas Jefferson, (1743-1826), 3rd U.S. President
In 1989, the U.S.
government created the Resolution Trust Corp.,
in effect nationalizing many savings and loans banks that were in financial
difficulties. Similarly, on February 16, 2008, the British government
nationalized the Northern Rock bank and rescued this bank with about £55 billion ($107
billion) in public loans and guarantees.
During the weekend of March 14-16, 2008, the Federal Reserve,
a semi-public and semi-private American central bank organization, accepted to
create a Delaware-based corporation
in partnership with a (regulated) private bank, the JP Morgan Chase bank, in
order to buy and manage $30 billion of distressed mortgage-backed securities
acquired from a New York-based global but unregulated investment bank, Bear Stearns,
about to go bankrupt. JP Morgan Chase put $1 billion in the new corporation,
while the Fed invested $29 billion, an amount that was quickly transferred to
JP Morgan Chase, the new owner of Bear Stearns.
In so doing, the Fed has de facto nationalized a portion of the portfolio of Bear Stearns, and become an
"investor of last resort" rather than a "lender of last
resort", besides facilitating the take-over of this investment bank by JP
Morgan Chase. A private company, BlackRock Financial Management,
was also hired to administer the new Delaware-based corporation and will
attempt to liquidate the acquired securities gradually over time. The Fed could
then recuperate part or all of its non-recourse "loan" to JP Morgan
Chase, and would retain any excess amount on its unusual "investment", in the event
there is a profit.
There you have it. For the first time since its
creation in 1913, the Fed has turned itself into a government of the banks,
and has invested risky public capital in a business that was in need to be
saved quickly from bankruptcy and liquidation. Thus, the Fed has not only
decided that it is its duty to solve "liquidity crises",
but also "solvency crises" in
the regulated and non-regulated banking sector. In other countries, such public
investments to resolve a solvency crisis are decided and handled by the
Treasury and the Government, and are later voted into law. Even in the U.S.,
that is the way the Resolution Trust Corp. was created by the Reagan administration
in the late 1990's. In fact, the current banking crisis is very reminiscent of
the U.S. Savings and Loan crisis
of the 1980's and 1990's, although this time the
banking crisis is much more severe and much more widespread.
I personally do not question the need for avoiding a
panic liquidation of the subprime and other exotic assets of Bear Stearns, in
order to avoid a contagious domino effect of bank failures and a worldwide
credit crunch, which could have duplicated the failure of the Creditanstalt bank
in September 1931, an event that precipitated the 1930's depression. After all,
the Fed was established in 1913 to avoid banking panics. What can be questioned
is the way this has been done, the end result being in effect to subsidize the
U.S. banking sector by privatizing most of the profits derived from the rescue
operation in the hands of a private bank, and nationalizing the most likely
losses in the hands of the Fed and its backer, the U.S. government. The U.S.
Treasury should have played a much larger role in this bailout, so as to
protect the public interest.
Make no mistake about it. This transaction may turn
out to be enormously profitable to JP Morgan Chase, if the actions of the Fed
were to stabilize the market for mortgage-backed financial assets in the coming
months, while the Fed guarantees that the new owner of Bear Stearns would not
suffer any loss on a vulnerable portion of its acquired portfolio.
A more transparent and a more democratic approach
would have called for the Treasury to establish the equivalent of the old
Resolution Trust Corp. to acquire insolvent
Bear Stearns and gradually liquidate its mortgage-backed and other risky
financial assets over time. The salvaged investment bank could have later on be
sold to an existing bank at a fair market value, or reinstated as an
independent viable financial entity. The public good could have been protected
by avoiding a financial panic, while simultaneously precluding a massive
liquidation of jobs at Bear Stearns, and a possible private enrichment of a
private entity under the umbrella of an unusually risky public investment by
the Fed.
I have been an adviser to central banks over my
career, and that is what I would have recommended.
_____________________________________________
Rodrigue Tremblay is professor emeritus of economics at the University
of Montreal and can be reached at rodrigue.tremblay@yahoo.com
He is the author of the book 'The
New American Empire'
Visit his blog site at: www.thenewamericanempire.com/blog.
Author's Website: www.thenewamericanempire.com/
Check Dr. Tremblay's coming book "The Code for Global Ethics" at: www.TheCodeForGlobalEthics.com/
Posted, Saturday, April 12, 2008, at 5:30 am
Email to a friend:
http://www.TheNewAmericanEmpire.com/tremblay=1085
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