Shock Doctrine: watch out for Tina

There is no alternative.

We have no choice but to…………fill in the blank.

There is always a choice. It’s amazing that the USA, Land of the Free, seems to find itself in situations where there is no choice. We must invade, bomb, bankrupt etc. Engineer a huge crisis and then say we have no choice but to send in troops or take all your money.

Watching the negotiations over the “Mother of All Bailouts” is like watching children squabble over a bag of sweets.

But it’s dawning on many that the taxpayer should not be handing over any cash. Sure the government can stand by with liquidity infusions but any investors in banks can write off their cash immediately and that includes bond holders.

If anything this shows that there are always risks in investing even in AAA US Securities. This is a great opportunity for a huge clearout and cleansing of the financial system: making banks carry higher capital ratios would be a good start as it will automatically deleverage the system; making sure the tax system encourages productive applications of capital, away from speculative strcutures.

It doesn’t necessarily mean more regulation. Ultimately investors will have to learn more about the companies and products they invest in: what is a securitised loan, what is subordinated debt, what is a perpetual bond etc.

The rating companies are all part of the game but again new approaches will will be found to get around the conflicts of interest currently present.

Section 8 of the proposed legislation says it all:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

Writing out a big cheque with no strings attached is a recipe for more of the same.

Let’s hope the senators are not fooled by Tina. There’s always another way.

US on the abyss

A whole week drifts by and as yet no signed bailout deal is on the table.

Let’s be clear about this: it isn’t going to work. Nothing less than a full recapitalisation of affected banks and financial insitutions will suffice. Repackaging bad debts has been tried already.

What should happen is a debt for equity approach. As it stands now equity holders have (and should be) absolutely wiped out. They have done their dough.

But the real sticking point is all those bondholders. Bonds rank ahead of equity in a liquidation but to avoid that bond holders would swap debt for equity: yes its a disaster scenario but it allows balance sheets to be reformatted (esssentially this is a reformatting of numbers on a spreadsheet).

Given the leverage in debt markets the value of the equity will be piddly but there is not a lot of choice.

There is no one taxpayers should be bailing out failed institutions.

The only solution for taxpayer involvement is complete nationalisation of failing institutions without any fancy deals.

The half way both up approach will not make anyone happy and merely patch up a badly flawed system.

Tipping Points

Why do models never predict catacylsmic events? you know the ones where everything gets blown up….20 years of making safe returns followed by a complete loss of capital.

After LTCM blew up and was repackaged it seemed like no drama was too big to handle. Just reinflate, repackage, securitise and call in the delivery men. But a look at nature shows us this isn’t always possible.

We have reached tipping points before. Easter Island was a good example of how populations and resources co-exist in relationship which should be predictable but actually isn’t. When do you realise that you have cut down too many trees?

We fished cod merrily out of the Grand Banks, a steady and stable provider of cod still one day they disappeared never to return.

Now we have Peak Oil or do we? When will oil production drop off the cliff and what will that mean. Will we continue to fool ourselves into believing that there is actually an endless supply. Can we predict the outcome? I doubt it. Like the Easter Islanders we will merrily be chugging away until one day it dawns on us that its over.

We will fight it of course. However, nature is alot harder to work with than numbers on a spreadsheet. Boy we can make those up forever even if we can’t magic up fish, trees or oil.

Here’s a nice piece from Taleb, of the Black Swan, talking about our inability to forecast meltdowns. The question we have to ask ourselves is simple. Deep down do we really believe we can continue on in the same over consumptive, debt leveraged manner?

We have a great opportunity to sweep away the excesses of the last 20 years.

But try telling that to the masters of the universe. To them it’s just another hiccup in an new paradigm of economic stability.

Somehow I think they will be proved wrong again.

Government Sachs

As if there could be any doubt about who is running US financial policy it has been announced that Goldman Sachs and Morgan Stanley will be allowed to become “bank holding companies” which will allow them access to the Fed’s discount window thus giving them an easier source of funding.

Shame Lehmans didn’t get this little gift. Then again they didn’t have anyone in the Cabinet to look after them.

It’s no surprise that a recent poll showed American’s most concerned about rebuilding their reputation overseas as their most pressing issue (83%). The country has well and truly gone down the tubes and under a Republican watch. Some mentioned National Socialism was alive and well in the USA.

Stablising financial markets is one thing but underwriting the losses of the banking system is another. This just confirms everything Thomas Jefferson ever said about the bankers and also confirms that the US is no longer the world’s leading financial center.

Fed throws huge Hail Mary……..

Another day, another bail out but this time they have thrown the play book out the window.

It feels like a 4th down with 80m to go and 10 seconds on the clock.

Game over.

Wrap up the toxic stuff (we’ve heard that before) and hopefully it will all go away. Strange that Goldmans have been spared the ignominy of going under as Paulson comes in to the rescue. Anyone wondering about the Goldmans cabal at the centre of a government that always yells out “we had no choice” will be muttering feverishly about the intervention on Friday.

Forget about whether the US should lose its AAA rating or the $ be heaved off the cliff, what concerns me is the idea that ex-market players are running the public finances. Why not let all the banks fail? If that’s the outcome of the “free market” then let it happen. As long as depositors money is safe the rest is a simple case of caveat emptor.

The taxpayer is picking up the bill so why not pay as little as possible.

And what then you ask? Well the banking system will be nationalised to a point, focused in the issuance of money as opposed to making loans. The point is that there are elements of our financial system that we could well do without.

They said the Titanic was unsinkable.

Goodbye Gordon Gekko

Who could forget the electrifying performance of Michael Douglas in “Wall Street” a film that still smolders in the consciousness as reflecting the canvas that is the financial market.

Though the products have changed the mantra hasn’t: Greed is Good.

Greed as an incentive to productivity? I don’t think so. Look at the innovation coming out of the technology world and compare it with the innovation coming out of the financial world. Technology is founded on the idea of making life easier, efficient and fun. Innovation in finance is a way of slicing and dicing the same piece of paper.

But what’s the paper made of? Not much really as we are finding out.

The investment banks that rolled out of the 80s and dominated the global financial landscape are falling like dominoes. Falling on the back of injudicious management of risk, capital and balance sheets.

But that’s not where the rot really starts. Greed is just another human emotion, another desire. Living in a world with few boundaries it should come as no shock that we have tipped over into the abyss.

The money seems to have been flowing like the pump was turned on full steam, an inexhaustable supply of cash to be invested in anything that moved or, in the case of property, did nothing.

Now the party is well and truly over. After numerous attempts to keep it going by the self proclaimed master, Alan Greenspan, no one can take anymore. Its like turning up to a mad all day party at 4am with another case of wine or keg of beer. It has no value. Everyone is asleep, passed out.

It will take a while to play out. Some more institutions will go under probably in the form of a shotgun merger, a hastily arranged monetary marriage with glum faces standing behind the bride and groom attempting to be happy.

Just last night the FSA in the UK talked about how “well capitalised” HBOS was. At the same time they were forced into a “merger” with Lloyds. Oliver Stone couldn’t make this up if he was on acid.

But looking ahead can we find anything in the rubble to work with? Well maybe.

It’s time for a reform of the banking system, root and branch.

Banks can go back to being deposit takers and loan makers (though I think P2P lending will eventually take this over).

A Parliamentary institution can take over the task of supply money to the economic system via a Universal Basic Income and Direct expenditure. This would be managed with excrutiating process and targets.

Not like our current Central Bankers who have given up on targetting inflation: one because they can’t get it to work and two because they are more worried about the impact on financial markets.

It doesn’t work. The current system promotes inflation, falling real wages and the treatment of money as a financial asset.

So when we see the reaction to Parliamentary control of the money supply we can simply point out the failures of the private system for all to see.