1929 Casino Wheels & Crash Mechanisms Spinning Again?
courtesy by: Swiss Investors Protection Association
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U.S. Gross National Debt
globally floating IOUs tied to US housing: $7.5 trillion
hedge-fund asset growth 2001-06: $0.539 to 1.43 trillion
IRS-protected & FATF-targeted black funds: $1 to 2.4 trillion
M&A totalling in 2006: $3.8 trillion ¦ billion dollar boni gurus
16.Nov 11 320
Milliarden Papiermark für ein Ei, NZZ,
7 Jan 09 Mad Men, WSJ, Holman W. Jenkins, Jr.
5 Jan 08 Fighting Off the Great Depression II, NYT, Paul Krugman
4 Jan 09 The End of the Financial World as We Know It, NYT, Michael Lewis et al.
4 Jan 09 How to Repair a Broken Financial World, NYT, Michael Lewis et al.
4 Jan 09 Plea for a New World Economic Order, Shalom P. Hamou
3 Jan 09 The U.S., a Disintegrating Ponzi Scheme?Critics Come Unglued, WP, Joel Garreau
31 Dec 08 Madoff Hits Feeder Funds, Auditors, bloomberg.com, Jane Bryant Quinn
30.Dez 08 Madoff: Der Milliardendieb war auch Kassenwart, Die Weltwoche, Roger Köppel
30 Dec 08 UBP Scrambles to Explain Madoff Ties, WSJ, Cassell Bryan-Low et al.
29 Dec 08 Igor Panarin: The pyramid scheme America will disintegrate in 2010, WSJ, Andrew Osborn
27 Dec 08 Fellow-Americans, co-racketeers & co-profiteers: Stop Being Stupid, NYT, Bob Herbert
27 Dec 08 Ponzi Schemes: The Haul Gets Bigger, but the Fraud Never Changes, NYT, Eduardo Porter
24 Dec 08 Madoff dealings tarnish a private Swiss bank, IHT, Nelson D. Schwartz
17 Nov 08 On the pillory: Deregulator & UBS lobbyist Phil Gramm Looks Back, Unswayed, NYT, Eric Lipton et al.
15 Nov 08 Did steam-rolled Swiss lawmakers unleash the financial tsunami?, WSJ, Iconoclast
15 Nov 08 Growing Sense Of Outrage Over Executive Pay, WP, Heather Landy, pay ratio graphics
15 nov 08 X.Oberson:Les banques du monde entier sont devenues des agents du fisc américain, LT, Myret Zaki
14 Nov 08 Stable, Real-Value Money, e.g. Gold, Is the Key to Recovery, WSJ, Judy Shelton, comments
13 Nov 08 It's Time to Rethink Our Retirement Plans, WSJ, Roger W. Ferguson Jr., comment
13 Nov 08 UBS' QI ties with IRS are bad for Top Banker & Banking Secrecy, WSJ, Evan Perez et al.
12 Nov 08 Replacing the cancerous fiat (un-backed) currency system, The Big Picture, Lee Quaintance et al.
10 Nov 08 Where are the enlightened modern Pharaos of salvation?, The New Yorker, John Lanchester
5 Nov 08 Salve Obama!, Washington Post, Iconoclast
5 Nov 08 In Collusion with One-Eyed Financial Engineers, Model Carpenters & Apprentice-Sorcerers, NYT, Steve Lohr
5 Nov 08 CDS Data Show Scope of Wagers on Nations, WSJ, SERENA NG et al.
4 Nov 08 Five Myths About the Great Depression, WSJ, ANDREW B. WILSON
4 Nov 08 Seven principles to guide reform, here and abroad, WSJ, Stephen Schwarzman
4 Nov 08 Private Equity Draws the Cold Shoulder, WSJ, PETER LATTMAN et al.
4 Nov 08 Convertible Bonds Cause Hedge Funds Serious Pain, WSJ, GREGORY ZUCKERMAN
4 Nov 08 Long live activism, FT
4 Nov 08 Darwinian rules threaten hedge funds, FT, Kate Burgess
3 Nov 08 When Hedge Funds Grease Instead of Slow the Slide, The New Yorker, James Surowiecki
3 Nov 08 G-20 Washington meeting: Beware of monopolists for good ideas!, WP, Iconoclast, comment
2 Nov 08 Hedge fund problems reach far wider, FT, Lawrence Cohen
2.Nov 08 Sternstunde: "Der Schwarze Herbst", SF1, Hansjörg Siegenthaler im Gespräch mit Roger de Weck
2 Nov 08 Discord on Economies In a World Of Trouble, WP, Steven Mufson et al.,comment
31 Oct 08 DTCC opens up registry servicing global credit default swaps market valued at US$40 trillion
31 Oct 08 Behind AIG's Fall: One-Eyed Model Carpenters, WSJ, Carrick Mollenkamp et al.
31 Oct 08 Hank Paulson's $125 Billion Mistake, WP, Steven Pearlstein
31 Oct 08 Greenspan Slept as Off-Books Debt Escaped Scrutiny, bloomberg.com, Alan Katz et al.
31 Oct 08 Banks Owe Billions to Executives, WSJ, ELLEN E. SCHULTZ
31 Oct 08 A $50 Billion Bailout in Russia Favors the Rich and Connected, NYT, ANDREW E. KRAMER
30 Oct 08 Credit `Tsunami' Swamps Trade as Banks Curtail Loans, bloomberg.com, Michael Janofsky et al.
30 Oct 08 U.S. Treasury Program Shuns Banks That Need Cash Most, Bloomberg, David Mildenberg et al.
30 Oct 08 World According to TARP No Laughing Matter for U.S., bloomberg.com, Abigail Moses et al.
30 Oct 08 Mizuho $7 Billion Loss Turned on Toxic Aardvark Made in America, bloomberg.com, Finbarr Flynn
30 Oct 08 UK Bank insider David Blanchflower urges deep rate cut, news.bbc.co.uk
30 Oct 08 Securities-Lending Sector Feels Credit-Crisis Squeeze, WSJ, By CRAIG KARMIN et al.
30 Oct 08 Layoffs Sweep From Wall St. Across New York Area, NYT, PATRICK McGEEHAN
30 Oct 08 NY AG Cuomo: Disproportional pay may violate NY law - banks investigated, NYT, Ben White et al.
30 Oct 08 A Question for A.I.G.: Where Did the Cash Go?, NYT, MARY WILLIAMS WALSH
29 Oct 08 Loans? Did We Say We’d Do Loans?, NYT, editorial
29 Oct 08 Reserve Fund’s Investors Still Await Their Cash, NYT, DIANA B. HENRIQUES
28 Oct 08 Chicken coming back to roost in Mr. Ponzi's Wall Street henhouse, bloomberg.com, Mark Pittman
27.Okt 08 Wir brauchen ein Bretton Woods III, manager-magazin.de, Henrik Müller, Kommentar
27 Oct 08 G-20 meeting: Wall Street's Trojan Horse, Global Research, Michel Chossudovsky
27.Okt 08 Protest gegen Finanzmärkte: Attac-Aktivisten stürmen Frankfurter Börse, Spiegel online, cvk/dpa/Reuters/ddp
27 Oct 08 Morgan Stanley Propped Up Money-Market Funds With $23 Billion, bloomberg.com, Miles Weiss
25 Oct 08 The not-so-invisible hand: How the Plunge Protection Team killed the free market, webofdebt.com, Ellen Brown
24 Oct 08 Ruble's Fall Puts Russia on Defense Amid Crisis, wsj.com, ALAN CULLISON et al.
24.Okt 08 Völlig orientierungslos, welt.de, Jörg Eigendorf, Kommentar
24.Okt 08 Was muss sich am globalen Finanzsystem ändern?, Spiegel online forum, onemanshow
23.Okt 08 FundamentalistInnen am Werk, WOZ, Andreas Missbach, Standpunkt
23.Okt 08 Drohende Pleiten: Schwellenländer schlittern tief in die Krise, welt.de, Frank Stocker
23.Okt 08 Fortsetzung der Plünderung: Der Transkapitalismus, WOZ, Oliver Fahrni
23 Oct 08 NYU's Roubini: 'Worst is Ahead'Some Predict Hedge Fund Failures, Panic, Bloomberg, Tom Cahill et al.
23 Oct 08 The rogue trader is back: A rogue system with lax limits on risk-taking, ft.com, John Gapper
23 Oct 08 Is America self-destructing & bringing down the rest of the world?, Global Research, Tanya Cariina Hsu
23 Oct 08 Hedge Funds’ Steep Fall Sends Investors Fleeing, NYT, LOUISE STORY
23 Oct 08 Bubble & Crash: Engineered by Government, FED & Wall Street?, Global Research, Richard C. Cook
22 Oct 08 A Matter of Life and Debt, NYT, MARGARET ATWOOD
22.Okt 08 Jetzt droht ein weltweites Währungsbeben, welt.de, Daniel Eckert
22.Okt 08 Die soziale Marktwirtschaft ist lebendig!, welt.de, Wolfgang Schüssel
21 Oct 08 The Dangers of a Diminished America, WSJ, AARON FRIEDBERG et al.
21 Oct 08 Get Ready for the New New Deal, WSJ, PAUL H. RUBIN
21 Oct 08 The Iceland Syndrome, WP, Anne Applebaum
21.Okt 08 Ein nüchterner Blick auf die Geschehnisse der vergangenen Wochen, IFW
21 Oct 08 Die Zeit für fette Boni ist vorbei, Spiegel online, Michael Kröger
21 Oct 08 USA: 1607-2008: Aufstieg und Krise einer Weltmacht, Spiegel Spezialausgabe
21 Okt 08 Bild-Illustration: Wie es zur Finanzkrise 2008 kam, Spiegel online
21.Okt 08 Die Zocker von der Wall Street, Spiegel online, Christiane Oppermann
20 Oct 08 Is Capitalism Dead? The market that failed was not exactly free, WP, editorial
20 Oct 08 The price of mathematical, often outsourced & self-serving risk analysis, New Yorker, James Surowiecki
20 Oct 08 Bretton Woods, The Sequel?, WP, Sebastian Mallaby
19 Oct 08 The Bubble Keeps On Deflating, NYT, editorial
18 Oct 08 Anna Schwartz: Bernanke Is Fighting the Last War , WSJ, Brian M. Carney, Weekend Interview
13.Okt 08 Die Wiedergeburt des Eigentums, Wegelin Anlage-Kommentar 259, Konrad Hummler
13 Oct 08 Back to ownership, Wegelin Investment Commentary 259, Konrad Hummler
13 oct 08 Renaissance de la propriété, Wegelin Commentaire d’investissement 259, Konrad Hummler
13 ott 08 La rinascita della proprietà, Wegelin Bollettino finanziario 259, Konrad Hummler
12 Oct 08 Liaquat Ahamed's Lessons of the Great Depression, The New Yorker, Steve Coll
Sep 2008 L'argent dette (Money as Debt FR), Paul Grignon, video
16 Jan 08 Could subprime crisis trigger credit default swaps CDS tsunami?, Chronique Agora, Dan Denning
11 Jan 08 Monetary Policy Flexibility, Risk Management, and Financial Disruptions, Frederic S. Mishkin
10 Jan 08 Exchequer Club speech by Fed-Chairman Ben S. Bernanke
9 Jan 08 Bankers' pay, often based on fake alpha, is deeply flawed, FT, Raghuram Rajan
4 Jan 08 The Next Credit Crisis Will Originate in China, Seeking Alpha, J. Christoph Amberger
2007 "Der Finanzsektor als Feld des Kampfes um die Aneignug von Gewinnen", in: Märkte als soziale Strukturen, Olivier Godechot
31 Dec 07 Wall Street is about smart guys lurking for chances to make money from dumb ones, NYT, Dash
29 déc 07 Quand le rêve américain tourne au cauchemar planétaire, LeTemps, Marie-Laure Chappatte et al.
26 Dec 07 Mortgage Meltdown, NYT, Michael S.Barr, et al., Peter Schiff & Louis Hyman, Op-Eds
24 Dec 07 Analysis: Gov't Tries to Contain Crisis, WP - AP, Martin Crutsinger
24 Dec 07 Dollar's Fall Is Felt Around The Globe, WP, Anthony Faiola
24 Dec 07 Swiss bank regulator to probe UBS: report, WP - Reuters, Jonathan Lynn
23 Dec 07 This Is the Sound of a Bubble Bursting, NYT, Peter S. Goodman
22 Dec 07 A Major Subprime Victim: the American Dream, NYT, Bob Herbert, Op-Ed Columnist
21 Dec 07 Wall Street to get fatter bonuses while many stakeholders suffered huge losses, CNN, AP
21 Dec 07 Blindly Into the Bubble, NYT, Paul Krugman, Op-Ed Columnist
20 Dec 07 End of easy cash: banks must take losses, FT, Charles Wyplosz, comment
19 Dec 07 The looming banking crisis behind the credit crunch - a systemic fault line?, Economist, leader
18 Dec 07 Fed Shrugged as Subprime Crisis Spread, NYT, Edmund L. Andrews
16 Dec 07 Are We in a Recession?, NYT, Roach, Chauvet, Tyson, Furman, Grant, Feldstein, Op-Eds
12 Dec 07 Why the credit squeeze is a turning point for the world, FT, Martin Wolf
5 Dec 07 Lessons of the credit crisis are not just for regulators, FT, David Pitt-Watson
2.Dez 07 Hans-Jörg Rudloff: «Ein unglaubliches Desaster», SonntagsZeitung, Victor Weber
28 Nov 07 Why banking remains an accident waiting to happen, Financial Times, Martin Wolf
28 Nov 07 Bankers are in the confidence, not in the storage or even moving business, FT, Peter T. Larsen
24 Nov 07 At the gates of hell: Now the misery is spreading, Economist
26 Sep 07 U.S. Aims to Limit Funds' Risk, Washington Post, Carrie Johnson, comment
30 Aug 07 Is BIS' "Basel II" regulation partly responsible for the market mess?, WSJ, David Wessel
30 Aug 07 Hedge Funds Do About 30% Of Bond Trading, WSJ, CRAIG KARMIN
27 août 07 Malheur des uns = bonneur des autres, p.ex. Rothschild et Dominicé, Le Temps, Myret Zaki
27 Aug 07 Larry Summers: US could be heading for recession, Telegraph, Ambrose Evans-Pritchard
27 Aug 07 Pension Managers Rethink Their Love of Hedge Funds, WSJ, Craig Karmin
26 Aug 07 Pension funds demand money back, Sunday Telegraph, Helen Power
26 Aug 07 Failure-protected capitalism is socialism for the rich, NYT, James Grant
25 Aug 07 Carlyle Founder on Cheap Debt, Credit Crunch & New Buyout Landscape, WSJ, Henny Sender
23 Aug 07 If you liked liquidity crunch, you'll love insolvency bust, Telegraph, Ambrose Evans-Pritchard
21 août 07 Crise du Subprime: Hyman Minsky avait raison, La Tribune, Pascal Boulard
21 Aug 07 A Fear of Foreign Investments, NYT, STEVEN R. WEISMAN
21 Aug 07 For Wall Street's Math Brains, Miscalculations, Washington Post, Frank Ahrens
20 Aug 07 Herding Scapegoats: Who's to blame for current lending mess? Barrons, T.G.Donlan, Editorial
20 Aug 07 Easy Credit, Bubbles and Betrayals, NYT/IHT, Roger Cohen, edpage comment
20 Aug 07 Market turmoil and threats to the broader economy, NYT, Editorial
19 Aug 07 Watershed: excesses in lending and derivatives threaten system, NYT, Editorial
18 Aug 07 Hyman Minsky Long Argued Markets Were Crisis Prone, WSJ, Justin Lahart
16 Aug 07 Hold tight: a bumpy credit ride is onlyjust beginning, FT, Avinash Persaud
15 Aug 07 In a world of overconfidence, far makes a welcome return, FT, Martin Wolf
14 Aug 07 No longer dancing: How the music stopped for buy-out buccaneers, FT, James Politi et al.
14 Aug 07 Surviving a credit market meltdown, FT, Martin Arnold
13 Aug 07 Banking bail-out sows seeds of future crises, FT, Paul de Grauwe
13 Aug 07 21st Century Bank Run Version: Why the Blowup May Get Worse, Barrons, Randall W. Forsyth
13 Aug 07 Appropriately, the Bill Lands on Wall Street's Desk, Barrons, Andrew Bary
12 Aug 07 Tight Credit Could Stall Buyout Boom, Washington Post, David Cho and Thomas Heath
11 Aug 07 Bubble and Bust, Washington Post, editorial
11 Aug 07 Central Banks Intervene to Calm Volatile Markets, NYT, VIKAS BAJAJ
11 Aug 07 Subprime Turmoil Catches Funds Off Guard, WSJ, ELEANOR LAISE
11.Aug 07 Zusammenbruch des US-Immobilienmarktes, Deutschlandfunk, Presseschau
11 Aug 07 US$ 1 trillion/y black funds sinking "white economy"?, Iconoclast
11 Aug 07 Payback time: A case from the Californian Front, FT, J.E. Morgan, Letter to the Editor
10 Aug 07 Markets abhor the vacuum left by derivatives, FT, Frank Partnoy
10 Aug 07 New Order Ushers in A World of Instability, Washington Post, Steven Pearlstein
10 Aug 07 Very Scary Things, NYT, Paul Krugman
10 Aug 07 A New Kind of Bank Run Tests Old Safeguards, NYT, FLOYD NORRIS, News Analysis
9 Aug 07 Subprime bites, US investigators look for culprits, FT, Brook Masters et al.,ANALYSIS
9.Aug 07 Die Mutter aller Krisen: Der tickende Zusammenbruch, WOZ, Till Hein
4 Aug 07 Report Says S.E.C. Erred on Pequot, NYT, Gretchen Morgenson et al.
Aug 07 The Firing of an SEC Attorney and the Pequot Investigation, US Senate Report
30.Jul 07 Wufflis Abgang: UBS in den USA über den Titsch gezogen, SonntagsZeitung, Arthur Rutishauser
30 Jul 07 Trustees or vulgar fee-hunters? Bankers must relearn their craft, Financial Times, John Gapper
29 juil 07 Union mondiale se dresse contre des éléphants financiers en argile, Le Temps, interview
2006 "La finance, avant-garde du prolétariat? Les salariés de la finance et la structure de classe", Carnet, Olivier Godechot
28 Jun 06 1929 crash mechanism spinning again?, US Senate Testimony, Gary J. Aguirre
2004 "L'appropriation du profit. Politiques des bonus dans l'industrie financière", thèse, CNAM, Olivier Godechot
25.Nov 73 Fünfzig Jahre nach der größten Inflation der Weltgeschichte, NZZ, Walter Günthardt
1950 Le super-mécanisme concentrationnaire, in Demain, C'est l'An 2000!, éd. Jacques Petit, Jean-Gaston Bardet
extrait de Demain, C'est l'An 2000!, éd. Jacques Petit, Angers, 1950
par Jean-Gaston BARDET (1907-1989) architecte et urbaniste, professeur international,
il fut en poste dans de nombreux endroits du monde, Europe, Afrique, Moyen-Orient,
les Amériques, en particulier l'Amérique Latine, dont le Méxique, où il travailla à six reprises.
Une grande partie de ce livre fut écrite quand il était en poste en Argentine.
Mais parmis tous les mécanismes concentrationnaires, il en est un plus subtil et plus puissant, dont l'ignorance était quasi totale il y a trente ans (ndlr, écrit en 1950, donc en 1920). Aussi suis-je bien obligé de l'exposer en détail. C'est le mécanisme bancaire qui multiplie les méfaits de l'usure et du crédit. En effet, d'un côté, par l'addition des intérêts il double, puis quadruple toute dette en quinze puis trente ans, d'un autre côté, par le subterfuge du crédit et de la monnaie scripturale, il vampirise toutes les richesses mobilières et surtout immobilières d'une nation, puis du monde.
L'usure a toujours été interdite par le Droit canon romain, puis par le Coran. Le catéchisme du concile de Trente est formel: "Tout ce qu'on prend au delà de ce qu'on a donné est usure... c'est pourquoi le prophète Ezéchiel (18-17) dit que Celui-là sera juste qui n'aura rien pris au-delà de ce qu'il aura prêté . Et Notre Seigneur nous ordonne, dans Saint-Luc (6-35), de prêter sans en rien espérer. Ce péché a toujours été considéré, même par les païens, comme un crime très grave et très odieux" et le concile ajoute, "c'est ce qui fait dire à Ciceron que prêter à usure ou tuer un homme c'est la même chose. Et en effet, ceux qui prêtent à usure vendent deux fois une même chose, ou ils vendent ce qui n'est point".
Il faudrait bien peu connaître l'histoire des civilisations pour s'imaginer qu'il ne s'agit là que d'un pincipe de morale et non pas d'un principe fondamental de bonne organisation de la société civile... car il n'y a qu'une seule clé pour les Deux Royaumes (celui de la Terre et celui du Ciel).
La civilisation égyptienne a duré quelques cinq mille ans; elle ignorait la monnaie. Les diverses civilisations mésopotamiennes se sont effondrées les unes après les autres, au bout de quelques siècles, s'entre-déchirant, s'entre-détruisant. Elles connaissaient non seulement le trafic des lingots, mais l'usure, c'est-à-dire le "croît de l'argent" comme l'appelle le code d'Hammourabi. L'intérêt pouvait légalement atteindre 25% et montait jusqu'à 100 et 140%...
L'Encyclopaedia Britanica (article Money, édition de 1929) souligne que l'écroulement de la Grèce au VIème siècle comme l'effonfrement de l'Empire romain sont également dus à l'usure. Ainsi que l'a montré G. Ferrero dans: la Grandeur et le déclin de Rome, Jules César fut brisé pour s'être montré incapable de résoudre "la gigantesque accumulation d'intérêts inaliénables qui avaient concentré toute la richesse en quelques mains, réduisant les petits propriétaires en esclavage".
Vous commencez à soupçonner pourquoi Cicéron est plus dur dans ses jugements que les Pères de l'Église!
Précisons que le mot usure ne s'applique pas au taux pratiqué mais au caractère du prêt (Il n'en est pas de même du mot : usurier. Cependant les auteurs anglais qualifient d'usure le prêt à la production de l'argent qui n'existe pas, de l'argent négatif). Le prêt de consommation est seul qualifié d'usure dans les textes canoniques, le prêt à la production n'est pas un prêt, mais un apport de capital à une entreprise dont l'activité fournit des bénéfices. Ce prêt à la production n'est-il pas licite? Oui, dans certaines limites du taux de l'intérêt, mais non quand celui-ci atteint 50% à 60%, tel est cependant le taux réel des avances bancaires modernes.
Pour le comprendre, il faut étudier la constitution et le développement de la Banque d'Angleterre, type du système bancaire moderne, né en pays protestant où l'usure avait été autorisée par Elisabeth.
En 1694, Guillaume d'Orange, devenu Guillaume III d'Angleterre, n'avait plus d'argent pour payer son armée. Ce Hollandais, dont le succès avait été financé par les banquiers protestants de son pays, va — juste retour des choses — être pris dans l'engrenage des usuriers anglo-hollandais. Un syndicat d'usuriers, dirigé par William Paterson, lui proposa la combinaison suivante: a) Le syndicat privé avancera au gouvernement un prêt en or de 1 200 000 livres, au taux de 6%, le capital et l'intérêt étant garantis par l'État et payés en or; b) en récompense, le syndicat privé a le droit de s'appeler Banque d'Angleterre; c) comme le syndicat se démunissait ainsi de tout son capital pour financer le prêt, il avait en échange (?) le droit d'émettre et de négocier des billets à ordre jusqu'à la concurrence des 1 200 000 livres prêtées en or, à l'Etat.
Jusque-là, seul l'Etat avait le droit régalien de battre monnaie, c'est lui qui aurait pû et dû émettre ces billets gagés sur l'or qu'il avait emprunté. Le syndicat, abusant de son titre de Banque d'Angleterre, fit imprimer des billets reconnus valables à Londres, puis dans tout le pays, sous caution morale du roi et matérielle du prêt en or. C'était génial, le public avait confiance en des papiers que la Banque — n'ayant plus de capital — était incapable de rembourser. Ainsi est né le crédit moderne en argent-papier, véritable contrefaçon du Crédo.
Par cet abus de confiance envers le peuple anglais, doublé de haute trahison envers le roi, dit Thomas Robertson (1), le clan des usuriers doubla d'un trait de plume sa fortune. Elle fit même plus que doubler, puisqu'il touchait non seulement l'intérêt sur son prêt en or, mais l'intérêt sur les billets en papier qu'il se mit à prêter — le 6% sur le capital initial devenant du 12%, en huit ans il doublait à nouveau (2).
Ainsi la Banque avait créé une double dette, l'une du gouvernement — lequel, après tout, empochait l'or — l'autre du peuple anglais. L'endettement simultané du gouvernement et du peuple ne fera que croître sans cesse, le gouvernement faisant évidemment tout retomber sur le peuple par le système des impôts. Telle est l'origine de la Dette nationale anglaise, nulle avant Guillaume III et qui ateignait, en 1948, 24 milliards de livres. Le mécanisme comporte trois stades: usure, dette, impôts, dont 60% servent à payer les intérêts de la dette.
Guillaume III continua à emprunter à la Banque jusqu'à concurrence de 16 millions de livres-or. Et celle-ci émit la même somme en billets. Bien plus, comme les billets avaient cours au même titre que l'or, même à l'étranger, la Banque avança désormais au gouvernement du papier... cautionné par lui, et non plus en or. Le tour était joué. Il est évident qu'à ce moment-là le gouvernement aurait pu reprendre son droit régalien et décider d'imprimer lui-même, les billets; il n'aurait ainsi jaimais eu d'intérêts à verser ni de dette nationale en boule de neige.
Au début, la banque n'émit des billets que jusqu'à concurrence de l'or prêté, et conserva une réserve-or dstinée à couvrir les demandes de remboursement. Petit à petit, elle s'aperçut que les gens préféraient manier des billets plus légers que l'or, et qu'on pouvait émettre des billets en se contentant de garder une réserve de 10%.
Mises en goût par une opération aussi fructueuse, les banques se multiplièrent comme des champignons. Entre 1694 et 1830, on trouve dans les îles Britaniques 684 banques privées, émettant chacune ses propres billets.
En dehors de toute considération morale le prêt à la production suffit à déséquilibrer toute économie qui n'est pas purement agricole ou pastorale, c'est à dire la seule économie où le "croît biologique", don de Dieu, éternellement renouvelé, peur dépasser le "croît de l'argent" lorsque le taux est faible. L'industrie, elle, ne fait que transformer, et par l'extraction, épuiser.
Tout d'abord, c'est l'inflation. Il y a dix fois plus de signes monétaire légaux en 1836 qu'en 1694. Or cette monnaie-papier n'est pas seulement prêtée mais dépensée directement par les banques, qui jouent ainsi le rôle de commerçants. Elles peuvent ainsi faire marcher leur commerce, avec seulement 10% du capital réel, tandis que les industriels qui veulent lancer une usine ou constituer un stock empruntent aux banques, au taux de 6%, des billets qui ne représentent quasi rien et hypothèquent leurs moyens réels de production pour du vent. Cela explique le peu de faillites des banques et la vampirisation des industries et du commerce par les "banques d'affaires".
Toutefois, en 1836, le gouvernement britanique eut conscience du danger. Après une enquête secrète, le chancelier Robert Peel prit l'initiative du Bank Charter Act de 1844. Cette lois retira aux quelques 600 banques privées le droit d'émettre des billets en ne reconnaissant qu'à la -seule- Banque d'Angleterre, obligée cette fois d'avoir une couverture-or de 100% — ce qui dura jusqu'en 1914...— Aujourd'hui, la couverture n'est plus que symbolique.
Pauvre gouvernement! Les 600 banquiers se réunirent en un nouveau syndicat, le Joint Stock Banks- et -remplacèrent l'émission des billets interdits par l'émission de chèques facilitant l'avance bancaire, c'est à dire l'ouverture de crédit en compte courant. Ce n'était qu'une émission camouflée de billets, et d'autant plus avantageuse qu'elle allait servir principalement à enfler la production des gros emprunteurs et non à faciliter la consommation des petits, comme la monnaie légale.
C'était un nouveau coup de génie. Cette fois, ce n'est plus le roi qui cautionnera l'émission, ce sont les déposants, par suite d'une confusion habilement entretenue.
Le secret de la toute-puissance bancaire dans le monde entier, précise Robertson, réside dans le fait suivant: "Lorsqu'un individu dépose aujourd'hui 1 000 £ en espèces à la banque, celle-ci ne prête pas ces 1 000 £ à un autre client, mais les garde en réserve, et prête en avance bancaire, ou par chèque 9 000 £, c'est à dire neuf fois le montant du dépôt qu'elle a reçu". C'est le premier client qui constitue la réserve de 10%... alors que le bon public croit que toute Banque n'est qu'un intermédiaire qui avance l'argent mis chez elle en dépôt, soit 1 000 £ pour 1 000 £. C'est d'ailleurs ce qui est déclaré dans tous les traités orthodoxes, et qui était officiellement inscrit dans l' Encyclopaedia Britanica jusqu'en 1910; mais dans l'édition de 1929, vous lisez que "les banques prêtent en créant du crédit, elles créent leurs moyens de paiement ex nihilo" précise M. R. Hawtrey, secrétaire adjoint au Trésor.
En général, l'emprunteur a déposé des garanties. S'il ne peut rembourser son emprunt, la banque saisit les garanties et fait là un bénéfice absolu, pendant que l'emprunteur, lui, fait failite. S'il rembourse, la banque touche 6% sur 9000 £, soit 54% sur les 1 000 £ qui lui avait été déposées jadis, joli bénéfice pour avoir fait un simple jeu d'écriture. L'opération est annulée, la somme inscrite est rentrée dans la colonne Avoir, elle annule le montant porté en sortie dans la colonne Doit. Les 9 000 £ se dissolvent dans le vent, d'où elles étaient venues!...
De là le pouvoir quasi magique des banques. Non seulement elles créent et détruisent de la monnaie, mais des affaires. Elles provoquent des booms, des crises artificielles, des périodes de suractivité ou de chômage, suivant que — comme une coquette — elles accordent ou non leurs faveurs, c'est-à-dire des crédits de compte courants. Elles sont maîtresses du "cycle du commerce". Leur pouvoir est invincible, quel que soit le parti qui triomphe temporairrement. Elles concentrent progressivement tout entre leurs mains, sur la ruine des nations.
Lorsqu'en 1919, Vincent C. Vickers — gouverneur de la Banque d'Angleterre depuis 1910 — s'apercevra de cette destruction irrémédiable, il démissionnera et commencera à dénoncer cet engrenage implacable (3). Il en résultera l'Official Governmental Report on Finance and Industry, dit MacMillan Report (4), au Parlement anglais de 1931, puis le Canadian Government Report of the Committee on Banking and Commerce, de 1939 (5), qui confirmèrent tous ces faits et révélèrent que le mot: dépôt bancaire est une escroquerie verbale, il fait croire à un actif alors qu'il représente au contraire un passif, une dette des emprunteurs. Il faut lui substituer l'expression "crédit financier" ou mieux "argent négatif".
Avec ce système une banque peut tout acheter, tout faire passer entre ses mains, puisqu'elle peut doubler en deux ans non seulement son capital réel mais l'argent qu'on lui dépose. Elle réalise l'idéal concentrationnaire, n'ayant besoin ni de déplacer des hommes, ni de rassembler des machines, quelques traits de plume suffisent. C'est la reine des machines-en-papier! (ndlr, les ordinateurs)
Pas de concentration sans destruction
Le mécanisme moderne du Crédit, portant sur la production va conduire au même effondrement que la simple usure de l'antiquité, portant sur la consommation , car il ne possède plus d'autorégulation venant des signes monétaires légaux, de l'argent accumulé ou thésaurisé, de l'éparge.
Lorsque des consommateurs investissent leur épargne, tout d'abord, le taux d'intérêt réel reste limité, inférieur à 10% mais surtout, l'industrie qui emprunte ne peut se développer qu'en fonction de cette épargne, de ce surplus qui n'a pas été dépensé pour la consommation. À moins de fabriquer des objets superflus, cette industrie risque peu de surproduire, c'est-à-dire de produire au-delà des possibilités d'achat des consommateurs. Tandis que dans le cas du financement par les banques, qui émettent une monnaie scripturale anticipée , basée sur l'hypothèse de la vente des objets produits, les exploitations de la production s'enflent à une vitesse dépassant les pouvoirs d'achat réels qui sont désormais négligés et ignorés.
Il s'en suit une hystérie de la production qui offre l'alternative: chômage ou guerre pour la destruction des biens qui encombrent le marché.
Il y a donc deux financements possibles de caractères totalement opposés: l'un provenant de l'épargne, de l'argent en supplément et l'autre projeté par anticipation . Dans le premier cas, l'autorégulation doit venir de l'offre des capitaux existants, dans le second, de la demande en besoins primaires les plus certains.
Ainsi le financement bancaire — mis en lumière — est tout indiqué pour la construction et l'équipement immobilier profitant à l'ensemble du pays. Là où il n'y a point à craindre de surproduction, c'est vraiment la demande qui fixe l'émission. Ce sont les besoins en logements, en routes, en ponts, en hopitaux, en écoles, en forêts, qui cette fois, deviennent les régulateurs de la monnaie scripturale anticipée, si dangereuse dans ses anticipations. Mais dans ce cas, seuls des offices régionaux — et non une banque de crédit centralisée (6) — permettraient d'avoir la confiance du public de la région et le contrôle effectif des besoins proches. Comme là, il s'agit de prêt de consommation et non plus de production, il ne peut plus être question d'intérêt. La Région ne peut être usurière. Le mécanisme bancaire, en tant que mécanisme , est utilisé sans compromission avec l'usure, il possède son autorégulation organique: la connaissance de la communauté dans ses besoins propres. C'est le seul cas où posant le Bien au départ, nous le récoltons à l'arrivée.
Lorsque s'ajoutent les méfaits de prêt à intérêt de taux scandaleux, de la monnaie scripturale non freinée par les besoins et de l'hystérie de la production, on dévale à roue libre vers la destruction obligatoire.
La ruine vient, d'une part de la Dette nationale et de ses intérêts reportés sur le peuple par l'impôt qui n'est plus "juste", ne répondant pas à un service rendu. Aussi se pose la question: faut-il rendre à César ce qui est à Mammon?
La ruine est augmentée par l'inflation qui déprécie les biens du travail et qui est telle qu'en juillet 1945, les banques réunies des îles Britaniques possédaient en caisse 600 millions de £ et avaient accepté environ 5 400 millions de £, soit neuf fois plus, en reconnaissances de dettes, prêts, avances, investissements. Ces 5 400 millions n'ayant aucune existence réelle ont été créés par les banques, à partir de rien, depuis 1844, au taux de 1 million par semaine (7).
Le système est très exactement satanique. L'homme ne peut rien créer ex-nihilo. L'argent-négatif ou dette peut, et doit, être détruit par un jeu d'écritures sur le grand Livre: la colonne Avoir équilibrant la colonne Doit. Mais subsiste l'intérêt à payer, qui ne le peut être que grâce à une nouvelle création ex-nihilo d'argent-négatif et ainsi de suite... Il se produit une boule de neige de dettes, une marée d'argent-négatif, de néant, qui augmente sans cesse et entraîne à la destruction obligatoire des biens réels.
Le chaos économique qui conduit chaque pays à l'alternative: révolution ou guerre, provient d'une méconnaissance de vérités élémentaires, tant des marxistes d'ailleurs, que des économistes libéraux. Marx, en effet, n'a nullement soupçonné le mécanisme de l'argent-négatif, et a reporté ses attaques contre le profit et la propriété. Ces derniers ayant toujours été defendus — dans de justes limites — par l'Église, mère des Pauvres, la sagesse commandait de chercher une autre explication.
La voici. Pour qu'il n'y ait pas coexistence de surproduction et de sous-consommation, il faut que le revenu national puisse acheter la production nationale donc lui soit égal (8) — la soupape des exportations étant de plus en plus réduite dans un monde qui s'unifie (9).
Or tout prix comporte deux parts: l'une de travail, l'autre de capital, l'une a) de salaires personnels (directs ou indirects mais versés à des personnes pour leur consommation), l'autre b) de rémunération des capitaux engagés, qui sont des capitaux d'argent-négatif en majeure partie — la monnaie légale servant à peine à 5% des échanges (avoua lors de l'enquête précitée M. C. Towers, gouverneur de la Banque du Canada). Tel est le phénomène a + b découvert expérimentalement par le major Douglas en 1920 et au sujet duquel M. de Valera déclarait en 1942: "Malgré mes demandes réitérées, aucun économiste n'a pu me démontrer la fausseté de ce théorème".
Si donc les producteurs touchent un total a, ils ne peuvent, en aucune façon, acheter un total a + b ; le revenu national reste toujours inférieur à la production nationale. Il y aura toujours des surplus et les consommateurs seront toujours en état de sous-consommation. Telle l'origine du phénomène surabondance-misère qu'aucun dirigisme ne peut réduire.
Faut-il souligner que plus la structure productrice est concentrée, plus les investissements dans d'énormes machines sont gigantesques, plus b croît aux dépens de a dans l'équation, moins les salarié peuvent acheter leur production, plus la misère augmente, ce qui se vérifie depuis un siècle, quelle que soit l'augmentation continue des salaires (10).
Le remède financier — dont nous avons déjà montré dans nos autres chapitres la valeur économique — consiste d'une part dans le micro-machinisme et la décentralisation diminuant b. Et d'autre part, dans le retour à l'Etat de son droit régalien de bettre monnaie, enfin dans l'utilisation de crédit public retrouvé, sans intérêt , pour la construction des services publics nationaux, régionaux (routes et hôpitaux, écoles et forêts) où la part de salaires personnels est maxima et qui sont en dehors du circuit Production, dans lequel doit jouer seulement la monnaie légale (11).
Faut-il faire remarquer que, quelle que soit la Distribution: structure du commerce et répartition des biens parmi les citoyens, cela ne joue qu'à l'intérieur de a . Il peut y avoir des injustices, des bénéfices scandaleux ou un gaspilage dû à une cascade d'intermédiaires, mais les Salaires totaux, plus ou moins bien répartis, doivent d'abord permettre d'acheter la Production totale.
Le système bancaire actuel, autrement dit l'usure-à-l'argent-négatif ne peut rien créer de positif, il est très axactement inverti. Il prospère en temps de guerre, s'épanouit, apporte la prospérité matérielle aux ouvriers requis en usine, aux fournisseurs de l'État et aux fabriquants de munitions, pendant que la fleur de la nation est tuée ou mutilée. Il languit en temps de paix, se contracte, apporte le rétrécissement du pouvoir d'achat, les faillites, banqueroutes, le chômage et toutes les misères à la clé. Pourquoi ce paradoxe?
Il y a toujours assez de pouvoir d'achat pour les buts de guerre PARCE QUE les biens créés sont détruits. Ainsi la sous-consommation peut être ordonnée au nom du patriotisme, tandis que la surproduction est liquidée.
Il ne s'agit point de mettre au pilori les banquiers actuellement inconscients, mais de considérer les faits. Les faits sont les suivants, ils crèvent les yeux: l'usure-à-l'argent négatif conduit à fournir toujours assez d'argent pour la guerre, la mort et la destruction et jamais assez pour la paix, la vie et la construction. Plus la guerre est terrible, dévastatrice, plus de pouvoirs d'achat sont créés, plus le flot d'argent-négatif s'enfle ainsi que les bénéfices des usuriers. Mais ce gonflement ne peut avoir lieu avec des biens qui encombreraient le marché, puisque les salaires sont toujours insuffisants pour les acheter, et ne peut avoir lieu que dans un seul cas, celui de la destruction délibérée des stocks. Le système ne fonctioone avec efficiency que si l'on détruit des biens réels (12). Il conduit implacablement à la guerre.
In -Human Ecology-, (Maclellan ed. 240 Hope Street, Glasgow), admirablement
documenté mais dont nous n'acceptons pas le remède.
(2) Savoir doubler l'intérêt fait partie de la science bancaire... Ainsi en est-il de la vente à crédit -mensuel- à 8%, qui est en réalité à 16%, et qu'on tente de généraliser en Europe (en 1950)
(3) Economic Tribulations (Badley Heat, 1941).
(4) Publié par H. M. Stationary Office (Londres, 1931)
(5) Publié par Hing's Printer (Ottawa, 1939)
(6) Dont les méfaits sont dénoncés par Robertson, -op. cit-, et le thomiste irlandais R. P. Denis Fahey in -Money manipulation and Social Order-, (Brown and Nolan. Dublin).
(7) Tel est le montant de l'impôt secret perçu sur toute la communauté de l'espace financier britanique, qui le paie non avec du vent mais avec son travail et ses propres biens réels. Et ce chiffre de 5 400 millions ne comporte pas toutes les acquisitions et investissements dans les affaires nationales ou internationales qui se montent au moins à 5 000 autres millions.
(8) Molotov, longtemps ministre des affaires étrangères de l'URSS, avoua que la seule chose qu'il craignait était que cette égalité soit réalisée en Occident...
(9) La recherche des grands espaces financiers, les accords financiers entre plusieurs nations n'ont, au fond (et peut-être inconsciemment), pour but que de trouver... chez les autres, de l'argent que l'on ne peut trouver chez soi; mais le théorème reste inéxorablement valable pour l'espace considéré!
(10) Le personnel de certaines usines s'appauvrit au fur et à mesure que s'accroît leur modernisation. Il pouvait acheter, en 1947, environ la moitié de la production, et deux ans après seulement le quart, car la modernisation entraîne un accroissement des charges du capital et une diminution des pouvoirs d'achat. Cf. l'article de Georges Levard, in "revue d'Action Populaire" de décembre 1950.
(11) L'abîme qui sans cesse augmente entre le "progrès" matériel et le progrès moral, vient de ce que la production matérielle n'est plus organique. Elle n'est plus financée par le croît naturel, par les propres réserves des industries, mais par anticipation, par dettes d'argent-négatif. Elle s'enfle à une vitesse qui dépasse toute maturation possible des individus. Cela est fondamental pour comprendre l'hystérie de la production.
(12) Aussi les faillites des industries sont-elles acceptées avec complaisance par les banques, c'est une des soupapes de sûreté qui empêchent la chaudière d'éclater. Par contre, les bons "Serra" émis sans intérêt au Kenya, vers 1921, ou les "billets coopératifs" sans intérêt, J.A.K., au Danemark en 1931, furent stoppés par les banques nationales, car les professeurs d'économie démontrèrent (!!) "que c'était un gros -désavantage- pour tout le monde (!) d'emprunter sans intérêt". Qu'en pensent les constructeurs de petites maisons familiales... qui paient deux fois leur maison?
Hedge Funds and Independent Analysts:
How Independent Are Their Relationships?
TESTIMONY OF GARY J. AGUIRRE, ESQ.
BEFORE THE U.S. SENATE COMMITTEE ON THE JUDICIARY
June 28, 2006
United States Senate
Committee on the Judiciary
224 Dirksen Senate Office Building
Washington, D.C. 20510
Mr. Chairman, Senator Leahy, Committee Members:
The subject of your Committee’s hearing today (Hedge Funds and Independent Analysts: How Independent Are Their Relationships?) is the most recent variant of a stubborn question that keeps popping at Senate committee hearings: is federal law enforcement adequately protecting the nation’s capital markets and their participants from the risk of manipulation and fraud by the nation’s 11,500 hedge funds? The answer is no.
And the answer is no whatever facts you consider. It is no when the Securities and Exchange Commission ("SEC") fails to recognize any hedge fund fraud or manipulation against other market participants for a quarter century: from 1979 until 2004. It is no when the SEC fails to protect mutual fund investors when billions of dollars are siphoned from their accounts by hedge funds. It is no when you compare what the SEC is doing and saying about hedge funds with what its counterparts in Europe are doing and saying. It is no when the Department of Justice ("DOJ") merely shadows the SEC’s meager scrutiny of hedge funds. It is a deafening no when senior SEC officials throw a roadblock in the insider trading investigation of one of the nation’s largest hedge funds because the suspected tipper has powerful political connections, as they did with the investigation assigned to me.
From September 2004 through September 2005, I had primary responsibility for conducting an investigation by the Securities and Exchange Commission ("SEC") of suspected insider trading and market manipulation by one of the nation’s largest hedge funds, Pequot Capital Management ("PCM"). I worked long hours on the investigation with other equally committed staff. Among them was a thirty-year SEC veteran, then SEC’s most experienced and respected investigator of insider trading. His duties included teaching incoming Enforcement attorneys and foreign regulators how to conduct an insider trading investigation. At his retirement party, he told Enforcement Director, Linda Thomsen, in my presence that the PCM investigation was the most important one he had worked on in his thirty-year career with the SEC. Another seventeen-year veteran, who worked side by side with me, told me the same. His expertise was market manipulation and insider trading.
I believe the nation’s capital markets face a growing risk from unregulated pools of money--now called hedge funds--just as they did in the 1920s from unregulated pools of money--then called syndicates, trusts or pools. Those unregulated pools were instrumental in delivering the 1929 Crash. They were, among other things, skilled at using various devices to manipulate stock prices to trick the public. There is growing evidence that today’s unregulated pools--hedge funds--have advanced and refined the practice of manipulating and cheating other market participants.
One final introductory point: you may be curious why someone comes to the SEC after twenty-eight years as a trial attorney in private practice. I left the full-time practice of law in 1995. I had achieved my professional and economic goals and had no intention of returning to the full-time practice. Five years later, I looked back on that career that had missing chapter. Very little of it had been devoted to public service. I decided it was not too late to write that chapter and returned to law school to retool for that purpose. While at Georgetown, I decided my skills might be useful at the SEC.
The "Good Old Times" Are Back Again
Fixing the SEC so it can protect investors and capital markets from hedge fund abuse will not be an easy task. Powerful interests want the SEC to stay just the way it is or, better yet, to become even weaker. Those interests are not just the hedge funds. They include the financial industries that are receiving tens of billions of dollars in revenues for helping hedge funds cheat other market participants or close their eyes to the carnage. At the top of that list are the big investment banks, e.g., Goldman Sachs, Morgan Stanley, Merrill Lynch and Bear Stearns. Those interests know how to reward friends and punish perceived enemies. Their tentacles reach far. They stopped the hedge fund investigation I was assigned to conduct. They cost me my job.
Wall Street’s misuse of influence is nothing new. Ferdinand Pecora sensed this misuse of influence when he conducted the investigation in 1933 and 1934 on behalf of the Senate Banking Committee that led to the adoption of the securities acts and the creation of the SEC. His detailed cross-examination of powerful bankers, brokers, and industrialists revealed the ills the securities acts were designed to cure.
Five years later, he warned in Wall Street under Oath:
Under the surface of the governmental regulation of the securities market, the same forces that produced the riotous speculative excesses of the "wild bull market" of 1929 still give evidences of their existence and influence. Though repressed for the present, it cannot be doubted that, given a suitable opportunity, they would spring back into pernicious activity (emphasis added).I suggest the "good old times" are now back again and the device Congress designed to protect the public investor--the SEC--needs fixing.
Frequently we are told that this regulation has been throttling the country's prosperity. Bitterly hostile was Wall Street to the enactment of the regulatory legislation. It now looks forward to the day when it shall, as it hopes, reassume the reigns of its former power. . . .
The public, however, is sometimes forgetful. As its memory of the unhappy market collapse of 1929 becomes blurred, it may lend at least one ear to the persuasive voices of The Street subtly pleading for a return to the "good old times."
The first step in getting a handle on the risks posed by hedge funds is to separate and tag them. I believe there are three risks: (1) hedge fund conduct that cheats their own investors; (2) hedge fund conduct that randomly cheats everybody else, and (3) the systemic risks such as those that surfaced when Long Term Capital Management ("LTCM") collapsed. I will not address the LTCM class of risks because it is beyond my expertise and its solution appears to involve multiple federal agencies.
Hedge Fund Fraud Has Two Distinct Classes of Victims
There are two different species of hedge fund fraud. They are easily distinguished because each has a different victim. One species victimizes the hedge fund’s own investors--wealthy individuals and institutions. The other species randomly victimizes everybody else.
Hedge Fund Fraud against Hedge Fund Investors
This species of fraud poses little risk of a severe crisis to the capital markets for multiple reasons. First, the incidence of fraud by hedge funds against their own investors is not disproportionately high. Further, when hedge funds do cheat their own investors, the character of fraud is not unique [viz TV's Big Brother Ponzi scam]. Put differently, a Ponzi scheme is a Ponzi scheme whether the investment vehicle is a corporation, an investment trust, or a hedge fund. That means the SEC has the experience to tackle this species of fraud. They have been doing it for decades. Indeed, through September 2003, all 38 enforcement actions the SEC brought against hedge funds over the prior four years were exclusively for this class of fraud - hedge funds victimizing their own investors.
Further, hedge fund investors, as a class, are not the easiest targets. They are wealthy individuals and institutions. They are more likely to become suspicious when the quarterly reports are a bit off. If they don’t get the right answers, they are prone to call their attorneys, who file lawsuits and call the SEC. Once again, the SEC knows how to investigate this kind of fraud.
Of course, wealthy individuals and institutions have entrusted $1.2 trillion to hedge funds. That is a big chunk of money, but it is only a tiny fraction of the total assets that individuals and institutions have invested in the capital markets. For example, mutual funds collectively manage $9.2 trillion. The bond and equity markets are more than $40 trillion. Globally, $90 trillion of financial assets are under management. Thus, by any measure, hedge funds have significant assets, but by no means dominate the capital markets. No amount of fraud by hedge funds against their own investors could cripple the capital markets. It is too little money.
From these facts, the hedge
fund industry and others contend that hedge funds need no special attention.
Why shackle an industry that does so much good for our capital markets,
e.g., liquidity or risk transfer? Though the comments are valid when applied
to the first species of hedge fund fraud, they are off the mark when applied
to the second species discussed next.
Hedge Fund Fraud against Other Market Participants
This species of fraud has an easier target and a far greater potential to disrupt the capital markets. Its victims have no connection with the hedge fund. They are random victims. Much like the victims of a sniper, they never knew what hit them. For example, the millions of mutual fund investors had no clue that billions of dollars were being siphoned from their investment accounts each year by hundreds of hedge funds, as it happened in the recent mutual fund scandal. Likewise, the value investor has no clue that an attractively priced small cap is on its way to bankruptcy via the naked shorting of an $8 billion hedge fund. Similarly, the most sophisticated institutional investor will not second guess the expensive computer model when it begins blinking sell on XYZ stock because it has become overpriced. How could that investor know several hedge funds are buying up XYZ stock because they have been tipped by an investment bank executive that Google will make a tender offer for XYZ at a 50% premium to its current stock price?
The use of invisible fraud and manipulation is nothing new. It was just as invisible in the 1920s when banks and brokers employed the same devices to cheat the public. Pecora described why the public could not detect this type of fraud in the 1920s in words that ring true today:
The Public was always in the dark. It could not tell whether sales were due merely to the "free play of supply and demand," or whether they were the product of manipulated activities…It all looks alike on the ticker. Nor did the public have access to the inside information on which the officers, the directors and the dominant shareholders act (emphasis added).In the Darwinian hedge fund world, cheating other market participants has its benefits. It increases the profits to the hedge fund’s wealthy individual and institutional investors. Those happy folk tell their friends. New money increases assets under management. The hedge fund takes 2% of those new assets plus 20% of any profits those assets generate. If a manager can maintain that track record, he may join a very exclusive club. The top twenty-five hedge fund managers individually made between $130 million and $1.5 billion last year. The key to getting an investor to plunk down $500,000 to $50 million subject to the 2% and 20% hedge fund take: "As long as the performance is up there, in the end the investors do not care about the high fees."
It also works the other way. A hedge fund manager may find his investors heading for the door. The profits at rival funds are a couple points higher. Rumors circulate that the competition found a way to siphon funds from mutual fund accounts. To survive, a hedge fund must learn to siphon. One after another, hedge funds learn the trick. Fortune Magazine offers this colorful and insightful account how market timing and late trading spread like a virus from one hedge fund to another until it infected more than 400:
Eddie Stern’s saga is the untold tale of the market-timing scandal: where the practices were conceived, how they took hold, and how they metastasized from a benign cat-and-mouse game to a sophisticated gambit in which hedge funds slung around billions, compromising an entire industry. "It was like a little brotherhood of people who embraced this niche in life," says Brown, "a whole grotesque industry growing up based on screwing small investors. It's about as bad as it gets."This species of fraud--victimizing other market participants--also operates under the SEC’s radar. In fact, it went undetected by the SEC until September 2003, and, even then, it was not the SEC that discovered it. Rather, a state attorney general announced the first case and settlement involving a hedge fund that had used the market timing and later trading devices- to siphon funds from the accounts of unsuspecting mutual fund investors. After two critical Government Accountability Office ("GAO") reports and an equally critical Congress, the SEC went after hedge funds and their helpers with a vengeance. Beyond this, as discussed below, the SEC--"the cop on the street"--does not spend much time walking this beat.
Hedge funds’ Dominance of the Capital Markets Creates the Power to Abuse Them
The potential harm that hedge
funds can inflict on other market participants has no real limits. Hedge
fund trading now dominates the nation’s capital markets. The $1.2 trillion
under hedge fund management are on steroids. They recycle at high velocity
through the markets. With that $1.2 trillion, hedge funds execute up to
fifty percent of the daily trading on the $21 trillion New York Stock Exchange.
They also do seventy percent of the trading in the US distressed debt market,
US exchange-traded fund market and the convertible bond market. The same
picture is emerging in the derivative markets. Patrick Parkinson of the
Federal Reserve recently testified at a Senate hearing:
"The active trading by hedge funds has contributed significantly to the extraordinary growth in past years in the market for derivatives (emphasis added)." So far, hedge funds have dominated these markets with only $1.2 trillion under management. But that is changing too. The SEC projects the hedge fund asset base will increase from $1.2 trillion to $6 trillion by 2015.
Hedge fund trading generates huge commissions and fees to investment banks and brokers. That revenue flow gives hedge funds influence with both brokers and investment banks. The Economist examined this growing influence in an article last year:
At a time when mutual and pension funds have become ever more reluctant to pay the traditional five cents a share for trades, hedge funds pay up to four times that amount if in the process they can receive good ideas or particularly effective execution….The revenue from hedge funds to investment banks was $25 billion for 2004. Since hedge fund assets under management continue to grow exponentially, hedge fund revenue to investment banks will do the same. Consequently, hedge fund influence with those banks will continue to grow as well.
And trading is just the beginning for banks. Hedge funds want hot issues, structured derivatives, margin, stock-lending for short sales and the equivalent for fixed-income, clearing and settlement, customer support and marketing. The money coming from all these transactions and fees is enormous….Although there is some overlap in the numbers, investment banks collected $15 billion either directly from hedge funds or because of them, producing $6 billion in profits. For individual firms, hedge funds were critical to last year's performance. They produced one-quarter of Goldman Sachs's profits, estimates Guy Moszkowski of Merrill Lynch, and only a slightly smaller slug of Morgan Stanley's returns.
The United Kingdom’s Financial Services Authority ("FSA") expressed concern in June 2005 that hedge funds were getting more from investment banks than their contracts specified. According to the FSA, "insider trading is now institutionalized" because of the flow of tips from investment banks to hedge funds. The FSA "had uncovered signs of insider dealing at almost a third of British M&A deals, with possible culprits including traders at hedge funds and investment banks." That same month, the FSA also observed that hedge funds were "testing the boundaries of acceptable practice with respect to insider trading and market manipulation."
The illegal flow of insider information from investment banks to hedge funds was the primary focus of the hedge fund investigation I headed. Senior SEC officials halted the investigation, as I was told, because the suspected tipper had powerful political connections. Indeed, he does at the highest level. When I raised the propriety of that decision with the most senior Enforcement officials, they fired me. When I apprised Chairman Cox of these events, he did not lift a finger.
How Influence Peddlers Stopped a Critical Hedge Fund Investigation in Its Tracks
The investigation was two-pronged. The insider trading prong involved the securities of twenty public companies. On eighteen occasions, a Self Regulated Organization ("SRO") had referred the suspected insider trading matter to the SEC after conducting its own investigation. In each case, the hedge fund traded shortly before a public announcement sharply increased the value of its new holding. In all but two cases, the hedge fund made at least $1 million. Some referrals involved much larger profits. In two cases, evidence suggested the tip may have come from court personnel. In five cases, the hedge fund made highly profitable trades shortly before public announcements of acquisitions. In two of these cases, evidence indicated the tip had come from an investment bank.
The second prong of the investigation--market manipulation--involved two classes of suspected violations: wash sales and naked shorts. Some of my colleagues believed this prong held a greater potential to severely injure the capital markets. Evidence indicated that hedge funds used wash sales to spike stock prices just as unregulated pools used wash sales to spike stock prices in the 1920s. The investigation of both wash sales and naked shorts led to the hedge fund’s prime broker, a large investment bank.
By May 2005, one of the insider trading matters dwarfed all others: the hedge fund’s trading in two companies just before the announcement of a cash tender offer by one for the other at a 50% premium over the last trading price. The hedge fund profited by $18 million in 30 days. The evidence suggested that the hedge fund’s CEO acted on an unlawful tip in directing the hedge fund’s trades. But the question remained: who tipped him? In May 2005, Branch Chief Robert Hanson, directed me to spend all my time on the one matter and focus on finding the tipper. Accordingly, beginning in May 2005, I searched through millions of emails and other records for clues indicating who tipped the hedge fund CEO and, in June 2005, questioned the hedge fund’s CEO--the suspected tippee--on this issue.
By mid-June, growing evidence pointed to one person: the former CEO of a large investment bank. The suspected tipper likely knew about the tender offer, spoke with the hedge fund’s CEO just before he began to trade, profited by the trades, and had other personal and financial motives for tipping the hedge fund’s CEO. The two suspects trusted each other, did financial favors for each other, and exchanged stock tips. The evidence yielded no other viable candidates.
My supervisors enthusiastically endorsed this factual theory of the evidence. On June 14, I briefed Branch Chief Hanson and Assistant Director Kreitman for one hour on the insider trading investigation, including the evidence that pointed to the suspect as the likely tipper. After which, they authorized me to present this same factual theory and evidence to the FBI and the US Attorney’s office in New York, as the first step toward a possible criminal proceeding against both suspects. Accordingly, at a meeting the next day, I presented the information to an Assistant US Attorney and two FBI agents.
A few days after the meeting, I informed Branch Chief Hanson that I intended to issue subpoenas for the suspected tipper’s examination and key documents. He first reacted positively to the suggestion. But a few days later, to my surprise, Hanson abruptly reversed course. Hanson blocked the issuance of subpoenas for the suspected tipper’s testimony and records, stating that it would be difficult to obtain the authority to issue the subpoenas because the suspected tipper had powerful political connections.
Immediately after Hanson’s comment, external interference with the investigation became evident. A high-powered attorney, Mary Jo White, bypassed the normal protocol of discussing the investigation with the assigned staff attorney. Instead, she went directly to Enforcement Director Linda Thomsen, despite the fact Director Thomsen had no prior involvement in the case. For the first time, senior staff left me out of meetings when they discussed the case. Associate Director Paul Berger--who had very limited knowledge of the facts--emphatically stated in my presence that no case would be filed against the suspected tipper, but gave no reason or clue for his decision. Emails between the suspected tipper and tippee that I had subpoenaed from investment banks were delivered by Mary Jo White to Director Thomsen. That had never happened before in the other 100 subpoenas I had issued. My supervisors, who had strongly supported the case only two weeks before, became angry and defensive when I tried to discuss the issuance of the subpoenas.
Most confounding, I could not understand how senior SEC officials would authorize me to meet with the FBI and the US Attorney to initiate a criminal investigation and then, two weeks later, block the issuance of civil subpoenas for the suspected tipper’s testimony and key documents. The only significant occurrence between those two events was the decision of the US Attorney and the FBI to begin looking into the matter.
From late June until September
2, 2005, I informed every link in the chain of command from my branch chief
to the SEC Chairman in over thirty written communications of the special
and favored treatment my supervisors were giving to the suspected tipper.
By way of example, I enclose a redacted copy of the letter I faxed to Chairman
Cox on September 2, 2005. It never got a response. Neither Chairman Cox,
nor Director Thomsen, nor Associate Director Berger ever questioned why
the investigation was stopped.
If you wish to know more details how the SEC stopped the investigations, including supporting evidence, the identity of the suspected tipper and tippee, and the tipper’s political connections, you may find this information in the 42-page sworn statement and 46 supporting exhibits I provided Kathy Casey, Esq., Staff Director and Counsel for the Senate Banking Committee, in mid-March 2006.
On August 4, 2005, I sent the following email to Director Thomsen:
Do you have an open door policy?The following day, my branch chief told me that senior staff would reconsider my recommendation to take the suspected tipper’s testimony after he and I returned from vacation in September. I went on vacation two weeks later. On September 1, while on vacation, senior staff fired me.
If so, do you recall Hilton Foster’s comment to you about the most important case he handled in his 30 years with the Commission? [As discussed earlier, Mr. Foster routinely taught incoming enforcement staff and foreign regulators how to conduct an insider trading investigation. He worked with me on the investigation from October 2004 until he retired on June 30, 2005.] He wanted me to talk to you about it. It was nearly killed 5 months ago and is now moving in circles.
It could change the financial markets - make them a little more hospital [hospitable] for investors, small or big, who do their home work rather than buy information with favors.
My SEC performance evaluations
Until I questioned the suspected tipper’s special treatment, my supervisors found my work met or exceeded all applicable SEC standards. They certified my performance met all applicable Enforcement standards for a staff attorney in June 2005. In mid-June 2005, Assistant Director Kreitman gave me his highest unofficial award for excellent work on the investigation. Later June, Branch Chief Hanson prepared his assessment of my 2004-2005 performance for a possible merit step increase. Just before the controversy over investigating the suspected tipper arose, Hanson praised my work on the hedge fund investigation, stating:
Gary has an unmatched dedication to this case (often working well beyond normal work hours) and his efforts have uncovered evidence of potential insider trading and possible manipulative trading by the fund and its principals. He has been able to overcome a number of obstacles opposing counsel put in his path on the investigation. Gary worked closely with the Office of Compliance Inspections and Examinations to develop the case and worked with several self-regulatory organizations to develop a number of potential leads. He has gone the extra mile, and then some.Consequently, on August 21, 2005, the SEC approved my two-step merit increase based on my handling of the hedge fund investigation. The SEC terminated my employment eleven days later on one day’s notice. According to the SEC union president, the SEC’s decision in my case to award a merit pay increase and then terminate my employment is unprecedented.
SEC’s Dismal Record Protecting Market Participants from Hedge Fund Fraud
How the SEC Learned Hedge Funds Cheat Others; the Mutual Fund Scandal
For twenty-five years, from 1979 to 2004, hedge fund fraud and manipulation operated under the SEC’s radar. The SEC brought no cases against hedge funds for manipulation, insider trading, or fraud directed against other market participants. During this period, the SEC recognized only one species of hedge fund fraud: that committed by a hedge fund against its own investors. The SEC first publicly recognized that there were two classes of hedge fund fraud in July 2004. Its proposed rule requiring hedge funds to register noted: "Since the staff report [of September 2003], a new species of hedge fund fraud has been uncovered (emphasis added)."
So, how did senior SEC officials figure out after twenty-five years that hedge funds were also cheating other market participants? Well, as a matter of fact, they did not. A state attorney general announced the settlement of the first case involving a pattern of hedge fund fraud on other market participants. It was the first hedge fund caught for pilfering mutual fund accounts, the investment vehicle of choice for tens of millions--the classic small investor. As for the SEC - "the cop on the street" - it caught nothing.
The total cost to mutual fund investors was staggering. According to Time Magazine, "Academics estimate that late trading costs investors $400 million a year and market timing $4 billion to $5 billion." According to The Wall Street Journal, "[H]edge funds …reaped the lion’s share of gains from the [unlawful] trading." In March 2005, the SEC was investigating 400 hedge funds for their participation in the scam.
The SEC Also Failed to Catch the Helpers--Yet Another Industry it Regulated.
Hedge funds could not have skimmed mutual fund accounts without help. That is just what they got from the brokers the SEC also regulates. "Thirty percent of the brokerage firms the SEC surveyed helped clients mask market-timing trades, either by breaking up big orders or creating special accounts to hide identities." On top of that, "70 percent of the brokers said they were aware that some of their customers were timing the market." They just looked the other way. The SEC survey showed that twenty-five percent of brokerage companies allowed late trading. Late trading occurs where a hedge fund puts in a trade after the funds’ 4 p.m. cutoff, but gets the pre-4 p.m. price. Some have likened it to betting on a horse race after it has been run. Some of those brokers who helped hedge funds pilfer mutual fund accounts were the brokerage arms of large investment banks like Bear, Stearns, & Company, Merrill Lynch & Company, and CIBC.
To sum up, the SEC was oblivious that hedge funds cheated other market participants for twenty-five years. The SEC somehow overlooked a hedge fund scam that cost mutual fund investors billions of dollars per year. The scam was executed for years with the participation of two industries the SEC also regulates: mutual funds and brokers. It would not listen to a whistleblower who was armed with the facts. Eventually, like the public, the SEC learned about the scandal when a state attorney general announced a $30 million settlement. How has the SEC done since then to detect hedge fund fraud that victimizes other market participants?
The PIPE Cases
Over the past year, the SEC has brought three cases for a new type of hedge fund fraud that victimizes other market participants. All three involved a very specific form of insider trading. The facts follow the same pattern. A public company decides to raise money by making a private placement of its stock with the intent to register the stock a few months later. This is commonly known as a private investment in public equity or PIPE. A hedge fund agrees to purchase stock through the placement. The hedge fund also knows that the public announcement of the PIPE will depress the market price of the stock. Knowing that, the hedge fund shorts the company’s stock and covers it with the private placement for a quick and sure profit. In executing the short, the hedge fund acted on material nonpublic information and violated the securities laws.
Once again, the PIPE cases demonstrate the same old SEC enforcement patterns. The cop on the street--the SEC--did not detect this pattern of insider trading. Rather, it was detected by a $100 billion mutual fund and the evidence was then handed over to SEC officials.
In handling the PIPE cases, the SEC again wore blinders. The SEC has twenty-seven PIPE cases; it has filed three; it is investigating twenty-four others. Again, the PIPE cases demonstrate a pattern of insider trading by hedge funds. This pattern raises the obvious question: If hedge funds are willing to trade on nonpublic material information in one situation, might they not be doing the same in others? For example, are they getting tips from investment banks of pending acquisitions before they are publicly announced? Do hedge funds have techniques for obtaining tips, e.g., next quarter’s earnings from public companies before they are publicly announced?
The SEC should be able to check for this. It receives a constant flow of suspected insider trading referrals from SROs. The NASD, NYSE, and AMEX all have market surveillance units that track the market daily for suspicious trades, including insider trading. When their computers detect suspicious trading, the SRO’s staff does its own review and, if the trading appears suspicious, refers the matter to the SEC. Many of those referrals involve hedge funds suspected of insider trading.
But that system breaks down when it comes to referrals involving insider trading by hedge fund. Those referrals are rarely, if ever, investigated, unless they happen to meet the PIPEs cookie cutter mold. The investigation I conducted was an anomaly. The right person at intake found the right senior SEC official. That matter was assigned to me. I then found thirteen other insider trading referrals on the same hedge fund that had been gathering dust. None had been investigated other than a cursory review. No one had looked at the referrals collectively for any patterns.
The institutionalized form of insider trading by hedge funds insidiously erodes the integrity of the stock markets. The concept is best illustrated with an analogy. Imagine a sports arena with thousand small boxes organized in rows on the arena floor. Each box contains an egg: some are Faberge, others gold, others silver and on and on gradually to the rotten eggs. Egg buyers - some sophisticated; some not - carefully inspect the exterior of the boxes for clues to their contents. None may peak inside. The inspection ends at 5 p.m. All egg buyers exit the arena, notes in hand, ready for tomorrow’s auction. In the early hours, a security guard allows a team of egg buyers to enter the arena, open the boxes and survey their contents. The public auction of the boxes begins at 10 a.m. sharp. With their survey notes, the early morning team pays richly for the boxes containing the Faberge, gold and silver eggs and craftily avoids those with lesser value. The sophisticated egg buyers are puzzled why their boxes never contain the prized eggs.
My point is this: those that use insider trading cheat all investors--the most sophisticated institutional investor and the small investor alike. They cherry pick the market and, in so doing, undermine the integrity of the capital markets. They rig the game. One senior executive of a $97 billion mutual fund put it this way: "For the last five years, the hedge funds have gotten a free pass,...it’s damn well time that they're held accountable to the capital market rules, which were created to protect companies and investors to know that the game isn’t rigged." For the sophisticated investor, there are two options: continue to be victimized or join the early morning team.
The Most Recent Statement of the SEC on Policing Hedge Fund Abuse
The most recent testimony from the SEC on its efforts to police hedge fund abuse was given on May 16, 2006, before the Senate Subcommittee on Securities and Investment. Given the growing concern on this subject, this was a golden opportunity for a senior SEC official, perhaps from its Enforcement Division, to tell what new steps the SEC has implemented to protect market participants from hedge fund abuse. Instead, the SEC sent its Director of Investor Education, Susan Wyderko, as if to say that hedge fund abuse is merely a matter of educating investors. She was of course unable to give meaningful testimony or respond to the obvious questions.
Ms. Wyderko’s written testimony offered a ray of hope. It cited three "recent significant cases" to demonstrate the SEC "has taken appropriate remedial legal action" against hedge funds for "market abuse." Unfortunately, those cases merely confirm the analysis above that the SEC has no new thought for dealing with hedge funds. The first cited case is a classic market timing-late trading case. The second was a classic PIPE case.
That leaves the SEC’s handling of the third case, which would be funny, if the SEC were not offering it as an example how it is protecting market participants from hedge fund abuse. In that case, the media began detailing the transparent scheme of Scott Sacane and his hedge fund to manipulate two small biotech stocks in July 2003. The media continued to do so for more than two years until the SEC finally filed its enforcement action in October 2005. The SEC complaint borrowed allegations made by The Wall Street Journal two years earlier, but left out the humor. On July 30, 2003, the Wall Street Journal published this account of Mr. Sacane’s trading:
Thursday, Mr. Sacane disclosed that his health-care fund… "inadvertently" had bought a majority stake in a small medical-products company called Aksys. Monday, Durus filed that it owned 77% of Aksys, whose stock has been plummeting for days on the news. Mr. Sacane insisted that the investment is passive.So what exactly did the SEC uncover over the next two years? Its complaint alleges: "The statement [Sacane’s purchase was inadvertent] was false because the Sacane Defendants knew about their Aksys stock purchases all along, and those purchases were not inadvertent." How could it take the SEC two years to deduce the same point any reader of The Wall Street Journal article immediately understood? If this case were a movie, it would be titled The Keystone Kops meet the Gang that Couldn’t Shoot Straight.
But Mr. Sacane, who declined to comment, didn't stop his "inadvertent" buying there. He also "inadvertently" bought a 33% stake of Esperion Therapeutics.
No new legislation or regulation can protect market participants from hedge fund abuse unless the SEC does its job. By any measure, it has not. The SEC failed to detect that hundreds of hedge funds were siphoning billions of dollars from mutual fund investors. It also failed to detect a second pattern of hedge fund abuse--the PIPE insider trading. Its conduct and words give no reason to believe it will detect other hedge fund abuses of market participants.
And then there is the obvious. One SEC investigation picked up the trail of several patterns of hedge fund market abuse. One prong included suspected insider trading in twenty public companies. The other found evidence of numerous wash sales and naked shorts. Both prongs led to the hedge fund’s connection with its prime broker. If the prime broker was involved in any of the violations, as appeared to be the case, the investigation would have had implications for the whole hedge fund industry. In sum, it was the only SEC investigation to put a high beam on the shadowy juncture where hedge funds and investment banks do their lucrative business.
Just after the SEC authorized the investigation to be presented to federal prosecutors and the FBI for possible criminal prosecution, senior SEC Enforcement officials blocked the issuance of civil subpoenas for the suspected tipper’s testimony and key documents. No insider trading case can be filed without proof of the source of the tip. Thus, stopping the investigation of the likely tipper stops the investigation. In so doing, the SEC has given hedge funds and investment banks notice that it will not police their joint activities. The SEC could do no greater disservice to other market participants and especially the small investor. This is not mere incompetence.
It is not surprising that the U.S. Office of Management and Budget (OMB) gave SEC Enforcement its lowest performance assessment: "Results Not Demonstrated." According to the OMB, "that rating indicates that [Enforcement] has not been able to develop acceptable performance goals or collect data to determine whether it is performing." In short, whether or not Enforcement performs is an unknown. And it is an unknown because it has no goals or data. That criticism is aimed at the top. No matter how committed and competent the SEC staff works the trenches, and that was my experience, they cannot achieve the SEC’s mission without leadership equally committed to that mission.
Is there more hedge fund abuse on the horizon? Logic says yes. In the mutual fund scandal, hedge funds broke legal and moral boundaries to make billions in profits at the expense of small investors. In doing so, hedge funds compromised two financial industries - mutual funds and brokers. It seems implausible that hedge funds would suddenly recognize those boundaries if other opportunities arose to make a fast dollar without getting caught. The PIPE cases are just one more example that hedge funds break the law in packs.
Bill Lands on Wall Street's Desk
By Andrew Bary - Part I
THE SOURCE OF MUCH OF THE RECENT TURMOIL in the stock market lies on Wall Street, and appropriately, the Street is paying the price.
It was the Street that helped enable the excesses in the subprime-mortgage business by packaging the loans into complex securities that were sold around the world to buyers who often knew little of the risks. It was the Street that extended copious credit for leveraged buyouts on overly generous terms. And it was highly paid Street rocket scientists working at places like Goldman Sachs who devised dubious quantitative equity-investment strategies that have backfired recently, roiling the stock market.
Stocks again grabbed the headlines last week as major indexes rose sharply from Monday through Wednesday, only to collapse Thursday in a session in which the Dow industrials fell 387 points. Stocks finished mixed on Friday after an ugly opening. The overall moves for the week were modest. The Dow industrials rose 57.6 points to 13,239.5, a 0.44% gain; the Standard & Poor's 500 index rose 1.45%, to 1453.64; and the Nasdaq increased 1.34%, to 2544.89. So far this year, the Dow is up 6.23%; the S&P 500, 2.49%; and Nasdaq, 5.37%.
Bank and brokerage stocks have been weak lately as investors rightly worry about the fallout from the mortgage and leveraged-buyout markets and whether the Street's profit cycle has peaked.
Takeover stocks continued to come under pressure last week, including a free-fall on Friday's opening that had some risk arbitrageurs making a comparison to 1987. Annualized returns in many takeover stocks like Clear Channel Communications (ticker: CCU) and First Data (FDC) are topping 30%, reflecting fears that pending LBOs won't get done or that private-equity firms will move to negotiate lower prices, as is being done by the group buying Home Depot's (HD) building-supply business.
It was a week of feasting for bears -- fed partly by the stumbling of
THE HEDGE-FUND INDUSTRY has suffered a black eye for the troubles among quantitative-equity, or "black-box" funds. Like most in the hedge-fund business, these funds sought to produce "alpha," which boils down to high returns with little risk. That's a tough game to play since only a few managers can truly add value, but the hedge-fund business pursues alpha anyway. Otherwise, why should investors pay high fees when they can buy a low-cost S&P 500 index fund that historically has produced ample annual returns?
The black-box funds sought to take the volatile human element out of investing by empowering computers to drive stock selections as well as buy and sell decisions. The managers generally have been loath to tell investors how the funds work, for fear of copycats.
These strategies, touted as "market-neutral," are designed to do well regardless of market direction. The largest and most famous of these funds is the $29 billion Renaissance Institutional Equities, run by the reclusive billionaire Jim Simons, that has generated consistently high returns and huge fees for Simons. Other black-box funds are operated by AQR Capital Management and Goldman Sachs, whose flagship is the $9 billion Global Alpha fund.
It turns out that many of these highly sophisticated, supposedly distinctive, computer-driven trading strategies actually were remarkably similar. The result is that the funds tended to crowd into similar stocks and to sell short similar issues.
The Bottom Line
With credit woes taking their toll on equities, the best bets are cash-rich companies, like Berkshire Hathaway and Loews, guided by smart investors.It may be an oversimplification, but the black-box funds appear to be value investors, buying stocks with low price/earnings ratios, low price/revenue ratios or low price/book value ratios while selling stocks with high-P/E, high-price/revenue and high-price/book ratios. Lately, the funds have suffered, with Renaissance down 8.7% in August and 7.4% so far this year, while the Goldman Alpha fund is off 26% in 2007, according to sources cited on Bloomberg.
THE LOSSES HAVE PILED UP lately because value investment strategies have fared poorly relative to growth strategies, and the funds have had to liquidate massive multibillion-dollar positions in volatile and sometimes illiquid markets. The funds often have suffered a double whammy as long positions have fallen and shorts have risen. Indeed, the talk on the Street Thursday was that the only stocks that rose in the market rout were those that had been shorted by the quant funds.
In a report Friday analyzing the plight of the quantitative funds, Citigroup Global Markets analyst Keith Miller noted that a strategy of buying the 100 stocks in the Russell 1000 index with the lowest price/sales ratio and selling those with the highest price/sales ratio would have generated a return of negative 5.6% in the first week of August. That may not sound like much, but these funds often use leverage of 5 to 1 or more.
"We have been caught in what appears to be a large wave of de-leveraging on the part of quantitative long/short hedge funds," Renaissance's Simons wrote to investors Thursday, according to Bloomberg.
ONE HEDGE-FUND MANAGER told Barron's that quant funds are in a bind. The valuation part of their models is telling them to stay invested because attractive situations are plentiful on the long and short side, especially among undervalued stocks. The risk side of the models, however, is telling them to liquidate positions because volatility is high. Lenders to these funds also are applying pressure to collapse the funds.
Some funds, including the Goldman Sachs Alpha, may not survive because of losses and likely investor pressure for redemptions. Hedge-fund investors as a rule want to be the first out of a sinking fund. So-called funds-of-funds, which place money for investors in various hedge funds, have no patience with losing funds.
The irony is that some of these funds won't survive at a time of maximum opportunity for them. Investors may find that any "alpha," or excess returns, that the funds generated in recent years, was lost in the past month. The quant-fund rout is just another example of the perils faced by investors in leveraged hedge funds with opaque strategies. Investors ought to be wary of any fund that needs to use leverage to enhance returns.
Keith Trauner, the co-manager of the Fairholme mutual fund (FAIRX), says that if investors can't understand a manager's strategy, "Walk away."
The recent market dislocations could provide opportunities to cash-rich companies like Berkshire Hathaway (BRK.A) and Loews (LTR) that have well-deserved reputations for both investment smarts and the ability to take advantage of depressed markets. Berkshire and Loews have shown a willingness to invest in any appealing asset class, including stocks, bonds, commodities and entire companies.
BERKSHIRE SHARES HAVE HELD UP well recently, rising 1.55% to $111,600 last week, reflecting investor expectations that Chief Executive Warren Buffett will find attractive investments using Berkshire's huge cash hoard, which totaled $40 billion at the end of the second quarter. It's tough, however, for Buffett to move the needle with any single investment, given Berkshire's $170 billion market value.
Loews, the conglomerate controlled by the Tisch family, has seen its stock drop to 44 from a June high of 53. Loews' allure is that investors can buy the stock for a 23% discount to its estimated net asset value of $57 a share and get the services of CEO Jim Tisch and the rest of his management team, which has done a great job of creating value for shareholders in recent years. After a $4 billion oil-and-gas investment last month, Loews has about $2.6 billion of net cash, or $5 a share.
Berkshire and Loews are good alternative to hedge-fund investments. Berkshire trades for a modest 1.5 times book value and less than 20 times earnings. Investors pay no incentive fee to get Buffett and the Tisch family to work on their behalf.
There aren't many companies like Berkshire and Loews that are rich in cash and willing to make opportunistic investments. Others include Leucadia National (LUK), Alleghany (Y) and American Real Estate Partners (ACP), which is controlled and run by Carl Icahn. Companies that build cash often find themselves targets of activist investors seeking to prod managements to buy back stock, pay large dividends or go private.
"Unless you're a company controlled by an individual or a family, it's difficult to behave in a conservative financial fashion now," says Trauner. His fund is attracted to companies with ample liquidity, including Berkshire, Leucadia National and Echostar Communications (DISH). Echostar's chief executive and controlling shareholder, Charlie Ergen, has resisted pressure from investors for a big debt-financed stock buyback, arguing that a strong balance sheet is a major attribute. The Roberts family, which controls Comcast (CMCSA), also has turned aside similar shareholder entreaties for big buybacks.
Fairholme is better poised to capitalize on market dislocations than
most other mutual funds because it carries a 20%-plus cash position. For
mutual funds, it's tough to hold cash because it acts as a drag on returns
in a rising market. Over time, having cash at the right moment generally
leads to profitable investments.
THE 21ST CENTURY VERSION OF A BANK RUN
Why the Blowup May Get Worse
By Randall W. Forsyth
The 21st century version of a bank run encircled the globe, but by week's end it seemed to be contained by central bankers using tried-and-true 20th century methods.
But the real question is how, and whether, the damage from the subprime mortgage meltdown can be contained. The good news is that the positives of a strong global economy should mute the repercussions from this financial debacle. The bad news is that mortgage crisis still is in its early innings.
Central banks around the globe injected $290 billion of liquidity Thursday and Friday after money markets in Europe and the U.S. suddenly tightened. It followed BNP Paribas' halt in withdrawals from two of its funds with big chunks of U.S. subprime paper, the firm citing the inability to value its assets during the market's collapse.
Thursday's efforts, totaling $154 billion with $130 billion coming from the European Central Bank, did little to relieve the distress. But Friday, the Federal Reserve was able to restore a semblance of normalcy, if only by taking extraordinary actions. First, like the mythical Chicago voter, it entered the market early and often. It arranged three rounds of repurchase agreements, which is unusual, for a total of $38 billion, up from $24 billion on Thursday, and the most since the days following Sept. 11, 2001. The Fed also accepted mortgage-backed securities as collateral in the first round to bolster that beleaguered sector instead of the more usual Treasuries.
And just to make sure nobody missed the message of these open-market operations, the Fed issued a press release saying it would provide liquidity to keep the financial markets functioning and to keep the federal-funds rate close to its target of 5 1/4% after the cost of overnight money had climbed as high as 6%. The Fed added that the discount window was open to banks and other depository institutions experiencing "unusual funding needs."
Bernanke & Co.'s words and actions had the desired effect Friday, and nowhere was their impact more evident than in the action of Countrywide Financial (ticker:CFC). Shares of the big mortgage lender were slammed with a 13% loss at the open after it said in an SEC filing that it and other lenders faced "unprecedented disruptions" in the credit markets that resulted in Countrywide having to hold $1 billion in mortgages on its books that it had planned to sell into the secondary markets. By Friday's close, Countrywide was off less than 3%, a huge recovery that extended to the overall stock market.
Not since 1966 -- when the term "credit crunch" was coined after the Fed pushed market interest rates above the legal limits banks and thrifts then could pay on deposits and thus stopped lending in its tracks -- has the nation's mortgage apparatus been so close to breaking down.
The current crisis arguably has the potential for more economic disruption than the celebrated 1998 Long Term Capital Management meltdown. Then, as Northern Trust economist Asha Bangalore points out, the economy cruising along -- in contrast to the past four quarters, which have seen below-potential growth on average.
Moreover, mortgage borrowers perversely benefited from the LTCM fiasco. Not only did the Greenspan Fed lower rates, sparking a huge bond rally, but, also, the government-sponsored enterprises Fannie Mae (FNM) and Freddie Mac (FRE) went on virtual buying sprees. As a result, the biggest part of the credit mar- ket -- mortgages -- remained flush. Now, Fannie is looking to expand its portfolio beyond the $727 billion limit imposed on it after its accounting and governance scandals -- a move viewed skeptically by the White House but supported by some congressional Democrats.
Indeed, the full impact of the mortgage crisis still lies ahead. From the beginning of 2007 through mid 2008, interest rates on over $1 trillion of adjustable-rate mortgages are slated to be reset, many from low "teaser" rates.
The subprime mess also recalls another crisis -- the virtual collapse of the commercial-paper market in the wake of the Penn Central bankruptcy of 1970. Back then, the paper market consisted of relatively simple short-term corporate IOUs. Now, so-called asset-backed commercial paper is backed by all manner of things, from credit cards and auto loans to collateralized debt obligations, and comprises over half the CP outstanding. Moreover, notes MacroMavens' Stephanie Pomboy, money-market funds own 27% of CP outstanding.
While the Fed managed to soothe the financial markets' nerves by week's end, the potential for future upheavals remains. As a result, the futures market is looking for the central bank to ride to the rescue with rate cuts. Fed-funds contracts are fully discounting a quarter-point cut, to 5%, at the Sept. 18 Federal Open Market Committee meeting, and a further reduction to 4 3/4% in December.
As the chart here shows, financial crises have tended to coincide with peaks in the fed-funds rate and subsequent Fed easing. The subsequent rate relief would be hailed by the markets as the start of a new bull run.(see accompanying illustratione -- Barron's August 13, 2007)
There is a new wrinkle -- the precarious state of the dollar. No longer is the greenback viewed as a safe haven in the world, contends Barclay Capital's currency team.
Indeed, as MacroMavens' Pomboy has posited, a Fed rate cut that sends the dollar tumbling could have a perverse effect. The influx of foreign capital has kept U.S. interest rates low and provided a flood of credit for everything from leveraged buyouts to, of course, subprime mortgages. If there's an exodus of foreign capital fleeing a declining dollar, credit could tighten even as the Fed eases. Be careful of what you wish for.
The search for scapegoats in the current
Giving Credit Where Due
By Thomas G. Donlan
WHOM SHALL WE BLAME FOR the so-called credit crunch? Casting about for scapegoats has never been easier, because the herd includes dozens of famous people, thousands of obscure but important financiers and millions of impecunious borrowers. Not in any special order, we blame:
Alan Greenspan and George Bush. The "maestro" of the Federal Reserve pounded the monetary gas to get the country out of recession in 2001, the "compassionate conservative" president pounded tax cuts and allowed the Republican Congress to boost spending as if they were Democrats. Either stimulus might have been enough; together they were too much.
Bill Clinton and his housing promoters at the Department of Housing and Urban Affairs, Henry Cisneros and Andrew Cuomo. It takes a long time to get a housing boom started, just as it will take a long time to cut back the inventory of new condos and houses that is pushing the market down.
William R. Fair and Earl J. Isaac, who started the eponymous credit analysis company. Fair Isaac analytics are used in three out of four U.S. mortgage originations, and the company sells 10 billion credit scores a year. Though the company has reduced the effect of prejudice and allowed lending to move more quickly, it has turned credit from a character judgment into a commodity. Commoditized loans, in turn, are turned into commodity packages of loans.
From AAA to DDD
The rating agencies, Standard & Poor's and Moody's, swallowed tonics compounded with financial alchemy that lead them to believe that over-collateralization could trump high leverage and poor quality in a package of loans. Or, if it was not an alchemical elixir, perhaps it was money. Issuers pay the rating agencies to bless their bits of paper.
Supposedly professional investors who rushed to put their funds' funds into Triple-A rated things they did not understand, ignoring the market's warning signal that risk premiums were nearly non-existent. Sometimes you get paid for buying junk, and sometimes you don't.
There's also room to blame predatory lenders and their phony appraisers and brokers. Their chief concern was that fees were paid up front. The worst of these made their living inducing old folks with free-and-clear homes to become speculators in real estate and credit. But the greatest blame attaches to people who borrowed imprudently, and who should have known better.
They are still around waiting to be fleeced again, to judge from the lower dregs of commerce.
Little Green Loans
An advertisement from "Lowermybills.com, an Experian Company" slipped through our office spam filter the other day. Headlined "Mortgage Rates Fall Again," it purported to offer a "$430,000 mortgage for under $1,299 a month," which seems to be a rate of 3.5% or less, depending on the amortization of principal, if any. It urged the would-be borrower, "Select your credit: Excellent, Good, Fair, Needs Improvement, Poor." We stopped following the lead when it asked for personal information. Experian, which likes to describe itself as "a global information solutions company," is not to be trifled with, since it runs one of the major credit-reporting bureaus.
People get this kind of junk mail all the time, but the odd thing was the corporate spokescreature: Instead of a gecko or a frog, the ad featured an animation of a little green alien, dancing what appeared to be the Macarena.
What were they trying to say, that Experian has investors on Mars who haven't heard about the problems with subprime mortgages?
In the snail-mail at our house the other day there appeared a come-on from an outfit called Crown Mortgage Corp., which may beat the little green alien. "Start saving now with our 1.750% loan program," it said. "It's almost impossible not to qualify! And it's fast and easy." No worries: "Borrow up to 100% of the value of your home and take cash out for any purpose. Use the cash for anything you want. Pay off high-interest debt or tax liens, take a vacation or finance your child's education. It's up to you."
Compared to companies like these, Countrywide Financial is as sound as the U.S. Treasury. Which may be true anyway.
The Last Trump
Henry Kaufman, who used to be known as "Dr. Doom" back a few financial crises ago, weighed in last week with the all-too-accurate assessment that financiers redefined liquidity over the past couple of decades. Liquidity used to mean cash, or assets that certainly could be converted to cash with the stroke of a pen.
"Firms and households today often blur the distinction between liquidity and credit availability," Kaufman said. "When thinking about liquid assets, present and future, it is now commonplace to think in terms of access to liabilities."
Personal liquidity recently has been defined as what you can borrow with the stroke of a pen. An individual adds up all the limits on the credit cards in his wallet, permissible overdrafts on his checking account, margin-loan limits on his brokerage account and home-equity loan checks in his desk. Maxing them out, he may command two years' salary, or more if he had worked at it when lenders were bullish.
Corporate liquidity is not much different. Companies maintain credit lines that would have constituted the mark of Cain many years ago, confident that they can borrow their way through any crisis.
When a person or a corporate treasurer writes a check on air to achieve liquidity, he should think of Owen Glendower, the Welsh magician who tries to impress Henry Hotspur in an early scene of Shakespeare's Henry IV, Part I. Glendower brags that he can "call spirits from the vast deep!" Hotspur gives him no credit: "Why, so can I; or so can any man. But will they come?"
What is shaking the markets is a refusal of the spirit of easy money to come from the vast deep. We are undergoing an agonizing reappraisal of the power and security of credit.
of the Great Depression
by Steve Coll
Liaquat Ahamed earned degrees in economics from Cambridge University and Harvard; he worked for a time at the World Bank and then, for twenty-five years, in the investment-management business. He is the author of a forthcoming book about how the mistakes of central bankers caused the Great Depression. The book is titled “Lords of Finance: The Bankers Who Broke the World,” and it will be published by Penguin Press in January. (Disclosure: Penguin is also my publisher.) When I first got to know Liaquat, about a year ago, I thought his book project sounded interesting, if specialized; now I try his patience with relentless questions about the current mess. Given the unfortunate timeliness of his topic, he’d better get used to it. I caught up with him this weekend; he was in London, and generously agreed to answer some more questions by e-mail (editor's emphasis):
Reserve Chairman Ben Bernanke is often described as a student of policy failures during the Great Depression. What “lessons of history” are animating his decision-making now?
Contrary to popular opinion, the Great Depression was not caused by the stock market crash of 1929. Rather the consensus among economists is what made the Depression great in the U.S. were the mistakes made by the Fed—especially by its decision, in 1931 and 1932, to allow so many banks to fail. The Fed in 1931 stuck to the principle that it should only lend to institutions facing a temporary shortage of liquidity and that propping up insolvent banks would be throwing good money after bad.
There were two problems with this. First, the neat distinction between liquidity and solvency had become meaningless. Many banks experiencing temporary shortages of cash were forced to liquidate assets in a falling market at fire-sale prices, and were thus driven into insolvency. Second, allowing even insolvent institutions to go under has a very damaging effect on public confidence in the financial system. Depositors have no way of knowing which banks are solvent and which are not and so pull their money out of all banks, good and bad, indiscriminately.
It is this downward spiral that Bernanke is trying to avoid.
It seems as if the Fed and Treasury have opened up a fire hose of liquidity to try to melt the frozen credit markets. Especially in the last week or two, the Fed in particular seems willing to try just about anything that might work. And yet the credit markets still seem to be iced over by fear and mistrust. Why?
No one quite understands why. The Treasury has been given a war chest of $700 billion and the Fed, with somewhat less fanfare, has doubled the size of its balance sheet from $800 billion to $1.6 trillion. This combination amounts to an extra ten per cent of G.D.P. So far the package has had little impact. There are three possibilities:
One is that it is just a matter of time; the measures will eventually work. We are in the eye of the storm, as it were, and the panic will burn itself out over the next few weeks.
Another is that over the last twenty years or so, the whole financial system—both banks and the so-called “shadow banking system” of investment banks, money-market funds, and various types of special-purpose investment vehicles—has become too large relative to the size of the central banks’ balance sheets. The Fed can only curb a bank panic by a show of overwhelming force—the financial equivalent of the Powell Doctrine—and that is much more difficult to achieve now that the financial system is so much larger. The implication is that officials just have to turn up the dials and do what they have been doing, only in larger size.
The final possibility is that the authorities have misdiagnosed the problem and are focused on the wrong thing. They are still treating this as a massive liquidity crisis. If in fact the losses have been so great that the banking system is essentially insolvent, the only way to “unfreeze” the system will be to inject massive amounts of equity capital into the banking system—in effect nationalize it or partially nationalize it, the way the British have done. That might have to be accompanied by some sort of blanket government guarantee of all interbank deposits.
Don’t ask me which of these is the case. I wish I knew.
Will we move from a financial crisis into a full-blown economic crisis over the next few months, involving not only banks but major industrial corporations such as the American automakers? What do the lessons of the Great Depression suggest about what the government can and should do to mitigate the effects of such bankruptcies on employment and economic recovery?
There is little doubt that, unless we solve the financial crisis and arrest the collapse in credit, we will have significant contraction in the major economies—more than five per cent of G.D.P. over a two-year period. If we solve the crisis, we will still get a recession in the major economies, but it will be less dramatic.
Unemployment in the Great Depression in the U.S hit twenty-five per cent. Even under worst-case scenarios, unemployment in the U.S. is unlikely to go above ten per cent (it is currently six per cent). Government is a much larger factor in the economy now compared to the nineteen-thirties and will adopt mitigating factors such as the last year’s stimulus package. And there are automatic stabilizers in place—unemployment insurance, a more responsive tax system—that will mute the impact of the downturn.
The coordinated interest-rate cuts this week seemed to demonstrate that there is a global consensus among central bankers about the nature of the crisis and about the need to take swift action to restart lending, prop up banks, and bolster investor and public confidence—even China acted essentially in concert with the West. How does this broad policy consensus among the world’s governments compare to the Depression period? And do you think it will make a difference to our prospects for avoiding a long, deep recession?
In the Great Depression, the world was on the gold standard. The Fed had massive amounts of gold reserves but was unwilling to act for the reasons I outlined above. The central banks of the next two largest powers, Britain and Germany, were unable to act because they did not have enough gold reserves, and in Germany’s case because of the overhang of reparations after the First World War. The fourth major economic power, France, had massive gold reserves but refused to adopt stimulative policies out of a combination of parochialism, selfishness, and economic illiteracy.
This time, none of the major economic powers are constrained in the same way. Everyone can expand monetary policy together. And the officials in charge of steering the world economy understand how it operates a little better.
While everyone shares a common interest in preventing a meltdown, we could still have arguments about who was to blame and how the costs of a recovery package are to be apportioned. The globalization of the financial system creates its own problems as well, since who is responsible for what is not always clear. Witness the current spat between Britain and Iceland over who is liable for the losses imposed by Icelandic banks operating in Britain. The British say it is the Icelandic authorities. Unfortunately, the balance sheet of Icelandic banks account for eight per cent of the G.D.P. of Iceland, and the Icelandic government just cannot afford to take on that liability.
Do you have any guess about how much unrealized liability might still be out there in the shadow banking system, such as credit-default swap contracts that may be yet triggered by insolvencies, but whose issuers don’t have the capital to make good? If there are major liabilities out there, do you have a sense of how they are distributed geographically among the United States, Europe, and the emerging economies?
I suspect that given what has happened to the world—especially after Lehman and A.I.G.—anyone who is owed money in the derivatives market has calculated how much they are owed and by whom and collected on that. The losses have therefore been largely crystallized. That is not to say that we won’t have some high-profile bankruptcies still to come.
Schwartz: Bernanke Is Fighting the Last War
'Everything works much better when wrong decisions are punished and good decisions make you rich.'
By BRIAN M. CARNEY
On Aug. 9, 2007, central banks around the world first intervened to stanch what has become a massive credit crunch.
Since then, the Federal Reserve and the Treasury have taken a series of increasingly drastic emergency actions to get lending flowing again. The central bank has lent out hundreds of billions of dollars, accepted collateral that in the past it would never have touched, and opened direct lending to institutions that have never had that privilege. The Treasury has deployed billions more. And yet, "Nothing," Anna Schwartz says, "seems to have quieted the fears of either the investors in the securities markets or the lenders and would-be borrowers in the credit market."
The credit markets remain frozen, the stock market continues to get hammered, and deep recession now seems a certainty -- if not a reality already.
Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. Schwartz, 92 years old, is one of the exceptions. She's not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.
Since 1941, Ms. Schwartz has reported for work at the National Bureau of Economic Research in New York, where we met Thursday morning for an interview. She is currently using a wheelchair after a recent fall and laments her "many infirmities," but those are all physical; her mind is as sharp as ever. She speaks with passion and just a hint of resignation about the current financial situation. And looking at how the authorities have handled it so far, she doesn't like what she sees.
Federal Reserve Chairman Ben Bernanke has called the 888-page "Monetary History" "the leading and most persuasive explanation of the worst economic disaster in American history." Ms. Schwartz thinks that our central bankers and our Treasury Department are getting it wrong again.
To understand why, one first has to understand the nature of the current "credit market disturbance," as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads -- the difference between what it costs the government to borrow and what private-sector borrowers must pay -- are at historic highs.
This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
In the 1930s, as Ms. Schwartz and Mr. Friedman argued in "A Monetary History," the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they'd lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: "If the borrowers hadn't withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress," deepening the crisis and causing still more failures.
But "that's not what's going on in the market now," Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."
"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson's original proposal to buy these assets from the banks was "a step in the right direction."
The problem with that idea was, and is, how to price "toxic" assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.
Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."
Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."
Instead, we've been hearing for most of the past year about "systemic risk" -- the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.
Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them, just as it didn't save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on."
It takes real guts to let a large, powerful institution go down. But the alternative -- the current credit freeze -- is worse, Ms. Schwartz argues.
"I think if you have some principles and know what you're doing, the market responds. They see that you have some structure to your actions, that it isn't just ad hoc -- you'll do this today but you'll do something different tomorrow. And the market respects people in supervisory positions who seem to be on top of what's going on. So I think if you're tough about firms that have invested unwisely, the market won't blame you. They'll say, 'Well, yeah, it's your fault. You did this. Nobody else told you to do it. Why should we be saving you at this point if you're stuck with assets you can't sell and liabilities you can't pay off?'" But when the authorities finally got around to letting Lehman Brothers fail, it had saved so many others already that the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant.
How did we get into this mess in the first place? As in the 1920s, the current "disturbance" started with a "mania." But manias always have a cause. "If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.
"The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it's so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses."
The house-price boom began with the very low interest rates in the early years of this decade under former Fed Chairman Alan Greenspan.
"Now, Alan Greenspan has issued an epilogue to his memoir, 'Time of Turbulence,' and it's about what's going on in the credit market," Ms. Schwartz says. "And he says, 'Well, it's true that monetary policy was expansive. But there was nothing that a central bank could do in those circumstances. The market would have been very much displeased, if the Fed had tightened and crushed the boom. They would have felt that it wasn't just the boom in the assets that was being terminated.'" In other words, Mr. Greenspan "absolves himself. There was no way you could really terminate the boom because you'd be doing collateral damage to areas of the economy that you don't really want to damage."
Ms Schwartz adds, gently, "I don't think that that's an adequate kind of response to those who argue that absent accommodative monetary policy, you would not have had this asset-price boom." Policies based on such thinking only lead to a more damaging bust when the mania ends, as they all do. "In general, it's easier for a central bank to be accommodative, to be loose, to be promoting conditions that make everybody feel that things are going well."
Fed Chairman Ben Bernanke, of all people, should understand this, Ms. Schwartz says. In 2002, Mr. Bernanke, then a Federal Reserve Board governor, said in a speech in honor of Mr. Friedman's 90th birthday, "I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
"This was [his] claim to be worthy of running the Fed," she says. He was "familiar with history. He knew what had been done." But perhaps this is actually Mr. Bernanke's biggest problem. Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."
Mr. Carney is a member of The Wall Street Journal's editorial board.
The market that failed was not exactly free.
IS THIS the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush's ideology. But this is wrong in two ways. The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.
It's true that the Bush administration has stood for light regulation of capital markets. But it did not invent this approach. By the middle of the last decade, experts across the spectrum believed that U.S. financial institutions faced outmoded restraints on their ability to innovate. Thus, the Clinton administration, supported by then-Federal Reserve Chairman Alan Greenspan, refused to tighten regulations on financial derivatives, memorably dubbed "financial weapons of mass destruction" by Warren Buffett. The 1999 repeal of the Glass-Steagall Act, a Depression-era law separating commercial banking and investment banking, passed with overwhelming bipartisan support in Congress and was signed into law by President Bill Clinton.
We'll never know how this newly liberated financial sector might have performed on a playing field designed by Adam Smith. That's because government interventions of all kinds, from the defense budget to farm supports, shaped the business environment. No subsidy would prove more fateful than the massive federal commitment to residential real estate -- from the mortgage interest tax deduction to Fannie Mae and Freddie Mac to the Federal Reserve's low interest rates under Mr. Greenspan. Unregulated derivatives known as credit-default swaps did accentuate the boom in mortgage-based investments, by allowing investors to transfer risk rather than setting aside cash reserves. But government helped make mortgages a purportedly sure thing in the first place. Home prices seemed to stand on a solid floor built by Washington.
Government support for housing was well-intentioned: Homeownership is a worthy goal. But when government favors a particular economic activity, however validly, it must seek countervailing control to ensure the sustainable use of public resources. This is why banks must meet capital requirements in return for federal deposit insurance. Congress did not apply this sound principle to Fannie Mae and Freddie Mac; they were allowed to engage in profitable but increasingly risky activities with an implicit government guarantee. The result was that taxpayers had to assume more than $5 trillion of their obligations. Contrast U.S. experience with that of Canada, where there is no mortgage interest deduction and the law requires insurance on any mortgage over 80 percent of a home's purchase price. Delinquency rates at Canada's seven largest banks are near historic lows.
The new capitalist model that emerges from this crisis must operate according to more consistent principles. The Fed should set interest rates with the long-run value of the dollar in mind. Government must be more selective about manipulating markets; over the long term, business works best when it is subject to market discipline alone. In those cases -- and there will and should be some -- in which government intervenes on behalf of social goals, its support must be counterbalanced with taxpayer protections and regulation. Government-sponsored, upside-only capitalism is the kind that's in crisis today, and we say: Good riddance.
Woods, The Sequel?
By Sebastian Mallaby
The financial crisis is by no means over, but the urge to extract lessons from it already is irresistible. The Europeans have pressed successfully for a new Bretton Woods summit, modeled after the 1944 gathering that inoculated the world against a repeat of the Great Depression. Although the original Bretton Woods took place years after the Depression, Britain and France are bent on staging the new version within weeks. "Europe wants it. Europe demands it. Europe will get it," French President Nicolas Sarkozy said before jetting off to Camp David, where President Bush meekly gave in to him.
The Bretton Woods analogy is contrived, to put it mildly. That summit created the World Bank to reconstruct Europe after the ravages of World War II. Today, bombed-out infrastructure is hardly the issue. Bretton Woods also created the International Monetary Fund, to support a system of fixed exchange rates. But the world has largely abandoned that system, and today's chief exchange-rate challenge is to move even further from Bretton Woods by persuading China to float its currency.
Bretton Woods boosters assert that a global financial system needs global regulatory fixes. This claim deserves scrutiny. The fix that rightly commands widest support is moving the swap contracts between financial institutions onto centralized exchanges, so the collapse of one large player does not threaten others that entered into swaps with it. But this reform can be achieved with a minimum of international coordination. Countries can unilaterally establish swaps exchanges, and financial institutions all over the world can use them.
The second fix on most reformers' lists is to shrink the pyramids of debt in the financial system. When a bank or a hedge fund buys $100 million of assets with $5 million in capital and $95 million in debt, a 5 percent loss is enough to wipe it out, forcing liquidation of the remaining $95 million worth of stocks or bonds in its portfolio. Such fire-sale liquidation has driven part of the recent market turmoil; it forces prices down and damages other debt-laden players, which then join in the selling. Although such debt, or "leverage," is certainly dangerous, a new Bretton Woods summit is not going to tame it.
We know this because we've tried already. It took five years, not a handful of photo-op summits, to negotiate the so-called Basel II standards that govern leverage at banks, and the resulting deal proved ineffectual anyway. Daniel Tarullo, who has just published a Peterson Institute book on Basel, points out that the next attempt to control leverage may need to be broader. After the events of recent months, that is surely right. Given AIG's failure, the next round should probably encompass insurers. Given the vast growth of hedge funds, it should also cover some of them. Creating sensible leverage rules for such disparate institutions will be fiendishly complex, perhaps even impossible.
So what might a new Bretton Woods conference usefully do? Well, it could reform the IMF, which has evolved from its original role into a rescue fund for collapsing currencies. During the emerging market crises of a decade ago, the IMF was central to all the bailouts. Its status has since dwindled. As my Council on Foreign Relations colleague Brad Setser notes, the Chinese have tried to muscle in on the IMF's turf by helping Pakistan. The Russians have tried to help Iceland. The European Union has helped Hungary.
Reestablishing the IMF as the agreed provider of bailouts would be a worthwhile project. The IMF puts economic conditions on its loans while governments place political ones; we don't want to revive the cronyism of the Cold War, when countries from Cuba to Zaire could pursue absurd policies and know they would be bailed out because they were strategically useful.
The irony is that Britain and France will be the first to resist a serious effort to revive the IMF. British Prime Minister Gordon Brown talks vacuously about giving the organization the role of creating an early-warning system for crises, even though this is what thousands of economic forecasters already try to provide. What Brown does not stress is that serious IMF reform needs to begin with the modernization of its board. Rising powers such as China and India deserve more say. Declining powers need to give up some influence -- and that includes France and Britain.
Of course there is a role for global cooperation. The coordinated interest rate cuts and bank rescues of recent days have been constructive. But it's worth remembering that after the last global crisis, in 1997-98, there was lots of grand talk about a new international financial architecture. In the end, the only important reforms were national ones. Governments ran budget surpluses and built up foreign reserves to protect themselves from the next shock. That shock has arrived, and we are about to find out if those changes were enough. One thing is certain: They were not the result of any international conference.
Sehr geehrter Herr Keller,
Es ist wieder Zeit für
unsere monatliche Kurz-Information. Wir hoffen, Ihnen gelingt es, die Krise
der Gegenwart für einige richtungsweisende Entscheidungen zugunsten
eines besseren Lebens zu nützen. Das Institut für Wertewirtschaft
möchte weiterhin versuchen, jenen ein wenig bei Erkenntnis und Orientierung
zu helfen, die nicht bloß an kurzfristigem, panischem Reagieren interessiert
sind, sondern an langfristigem Agieren, angefangen bei einem tieferen Verständnis
der heutigen Probleme und Dynamiken.
Ein nüchterner Blick auf die Geschehnisse der vergangenen Wochen
Dramatische Kursverluste an den internationalen Börsen, Geschäftsbanken am Rande der Zahlungsunfähigkeit und mit Island und Ungarn zwei Länder vor dem Staatsbankrott; die Finanzkrise hat erneut zugeschlagen und allen Beschwichtungsversuchen zum Trotz ist die Krise damit bei weitem noch nicht ausgestanden. Schadenfreude, ein erfreutes „Wir haben es ja immer schon gewusst ist in einer derartigen Situation nicht angebracht. Gerade weil die Konjunkturzyklustheorie der Wiener Schule der Ökonomie, die maßgeblich von Ludwig von Mises entwickelt und von Guido Hülsmann verfeinert worden ist, gute Gründe anführt, warum die Krise noch gar nicht so richtig begonnen hat und eine profunde Orientierung liefert, wie die beschlossenen Rettungsmaßnahmen die nahe Zukunft beeinflussen werden.
Die im Eilzugstempo beschlossen Bankenrettungspläne mögen zu einer kurzfristigen Erholung führen. Das Unausweichliche, die Aufdeckung der von der Inflationierung der Geldmenge hervorgerufenen Verzerrung in einer Rezession, schieben diese Maßnahmen allerdings bloß auf. Denn den Schaden hat das inflationistische Geldwesen und Geschäftsbankensystem schon angerichtet. Sich diesen Fehler einzugestehen und die Konsequenzen dieses Handelns auszustehen, wäre ein Gebot der Vernunft.
Eine scharfe, wenngleich nicht allzu lange Rezession würde die strukturellen Verzerrungen entzerren. Besonders stark von dieser Entzerrung betroffen wären jene Branchen, die von der Inflationierung überdurchschnittlich stark profitierten. Dazu sind neben den Banken und Versicherung speziell die kapitalintensiven Branchen wie etwa die Baubranche zu zählen. Die Rezession vernichtet allerdings keine Werte. Sie leitet die fehlinvestierten Mittel wieder in jene Produktionsprozesse um, die von den Konsumenten tatsächlich nachgefragt werden. Diese Heilungsphase legt damit das Fundament für eine nachhaltige Wohlstandsmehrung.
Werden hingegen die beschlossenen „Hilfsmaßnahmen in die Realität umgesetzt, steuern wir direkt auf eine hyperinflationäre Entwicklung zu. Es ist schlichtweg unmöglich, strukturelle Verzerrungen mit monetären Mitteln zu bekämpfen. Ebenso unmöglich ist es, den Wohlstand durch inflationistische Konjunkturankurbelungsprogramme nachhaltig zu mehren. Mehr Geld, mehr „Liqudität und höhere Schulden führen nur zu höheren Preisen. Der nachhaltigen Wohlstandsmehrung geht dagegen eine erhöhte Sparneigung voraus und diese verlangt eine Verhaltensänderung der Menschen; die kurzfristige Bedürfnisbefriedigung muß einer langfristig orientierten Zielsetzung weichen.
Wie tief verwurzelt das Unverständnis
über die ökonomischen Gesetzmäßigkeiten unter den
„Experten ist, zeigt beispielhaft der amtierende Vorsitzende der amerikanischen
Zentralbank, Ben Bernanke. In seinem Lehrbuch „Principles of Economics
bezeichnet er die „Große Depression der 1930er Jahre als den „Heiligen
Gral der Makroökonomie. Eine Wiederholung der damaligen Geschehnisse
sei nunmehr ausgeschlossen, weil er, und mit ihm die meisten Geldtheoretiker,
die Lektion aus der „Großen Depression gelernt hätten, versichert
uns Bernanke in seinem Lehrbuch. Aus dem Hut zaubert er kein Kaninchen,
sondern als Allheilmittel von den Zentralbanken
und Regierungen zu koordinierende Inflationierung. Damit verschreibt er als Medikament jenes Mittel, daß den Hauptgrund für die gegenwärtigen Probleme darstellt. In den Augen der Zentralbanker müßten die Zentralbanken nur zur rechten Zeit inflationieren und dann könne die Rezession auf ewig hinausgezögert werden.
Vor dem Hintergrund dieser tiefsitzenden Illusion stehen die Zeichen auf mittlere Sicht auf Sturm. Weil die Notenpresse als Allheilmittel angesehen wird, und steigende Aktienkurse in der Presse und unter den Politikern ein Freudengeschrei auslösen (wer freut sich dagegen über steigende Brotpreise?), scheint eine Hyperinflation derzeit der wahrscheinlichste Weg aus dem Schlamassel der überbordenden Verschuldung. Und nur mehr als dreist kann das Vorgehen der meisten Politiker und Ökonomen bezeichnet werden, die eine Staatsgarantie für die Bankeinlagen zunächst gefordert und mittlerweile gegeben haben. Schließlicht läuft diese „Sicherung darauf hinaus, daß die Bürger ihre unsicheren Sicht- und Sparguthaben mit ihren eigenen (zukünftigen) Steuerzahlungen garantieren. Zudem bezieht sich die Garantie nur auf die nominelle Höhe der Ersparnisse und mithilfe der Notenpresse kann dieses Versprechen zweifellos eingehalten werden. Allerdings wiederum nur um den Preis einer Hyperinflation.
By Anne Applebaum
Imagine this scenario: In a medium-size European country -- call it Country X -- the bank regulators hold an ordinary meeting. These being extraordinary times, the regulators discuss the health of various banks, including the country's largest -- call it Bank Y -- which is owned by an even larger Italian financial group. Last spring, Bank Y, which is perfectly healthy, transferred a large sum to its now somewhat-less-healthy Italian parent; since this is nothing unusual, the regulators drop the subject and move on.
The following day, the matter is reported in a marginal, far-right newspaper in somewhat different terms: "A billion dollars transferred to Italy! Country X's hard-earned money going abroad!" Within hours, as if on cue, everyone starts selling shares in Bank Y, whose stock price plunges. So does the rest of Country X's smallish stock market. So does Country X's currency. Within a few more hours, Country X is calling for an international bailout, the IMF is on the phone and the government is wobbling.
Except for that final sentence -- there was no international bailout or call to the International Monetary Fund, and the government is fine -- that is a brief description of something that happened last week to one of Poland's largest banks. A real meeting, followed by an unsubstantiated rumor in a dodgy newspaper, and a bunch of nervous investors started selling. Shares in the bank collapsed by the largest margin in its history; for one ugly day, they dragged down the rest of the Polish stock market and currency as well.
As I say, the story ended there. But it could have gone further, and, indeed, in several other countries it has. A month ago, in the first round of this crisis, panicky rumors brought down banks. Now, with trillions of nervous dollars sloshing around the international markets, panicky rumors are bringing down countries.
The case of Iceland, which in recent weeks has nationalized its three major banks, shut its stock exchange and halted trading in its currency, is by now well known. Less well known is the speed with which the Icelandic disease is spreading. Consider Hungary, once the destination of choice for investors who wanted an Eastern European head office with a 19th-century facade and a pastry shop next door: The currency is in free fall and so is the stock market, flummoxing those previously well-fed investors. (One of them told a Hungarian financial Web site: "I haven't got a clue as to when and how this would end, I'm just staring into empty space.") Or Ukraine, whose central bank governor declared his banking system "normal and reliable" on Monday of last week. By Tuesday of last week, Ukraine had desperately requested " systemic support" from the IMF.
So far, most of these crises have been explained away: The banks of Iceland had debts larger than Iceland's gross domestic product, Hungary's finances were long mismanaged, and Ukraine, whose president just called for the third election in as many years, is badly governed. But the speed with which some of these defaults are happening, coupled with the paranoia inherent in the political culture of small countries, has led many to suspect political manipulation as well.
To put it another way: If you wanted to destabilize a country, wouldn't this be an excellent time to do it? If Country X's stock market can crash after the publication of a single article in an obscure newspaper, think what might happen if someone conducted a systematic campaign against Country X. And if you can imagine this, so can others.
All governments have enemies, internal and external, or at least are faced with elements that do not wish them well: the political opposition, the country next door, the former imperial power. For someone, there will always be the temptation to bring down the government, destabilize the country and thus create political chaos.
Even when there hasn't been political meddling, someone else will suspect that it has occurred, anyway. Here, then, is a prediction: Political instability will follow economic instability like night follows day. Iceland is not alone. Serbia, the Baltic states, Kazakhstan, Indonesia, South Korea and Argentina are all in financial trouble; so, too, are Russia and Brazil.
And here's a final, unpleasant thought: Pakistan. This is a country with 25 percent inflation and a currency in free fall; a country with a jihadist insurgency on its border with Afghanistan, permanent hostility on its border with India, nuclear weapons and a tradition of street demonstrations in response to suspect newspaper articles. Dozens of people, with all kinds of agendas, have an interest in using financial markets to destabilize Pakistan, and Afghanistan along with it. Eventually, one of them will.
Dangers of a Diminished America
In the 1930s, isolationism and protectionism spurred the rise of fascism.
By AARON FRIEDBERG and GABRIEL SCHOENFELD
With the global financial system in serious trouble, is America's geostrategic dominance likely to diminish? If so, what would that mean?
One immediate implication of the crisis that began on Wall Street and spread across the world is that the primary instruments of U.S. foreign policy will be crimped. The next president will face an entirely new and adverse fiscal position. Estimates of this year's federal budget deficit already show that it has jumped $237 billion from last year, to $407 billion. With families and businesses hurting, there will be calls for various and expensive domestic relief programs.
In the face of this onrushing river of red ink, both Barack Obama and John McCain have been reluctant to lay out what portions of their programmatic wish list they might defer or delete. Only Joe Biden has suggested a possible reduction -- foreign aid. This would be one of the few popular cuts, but in budgetary terms it is a mere grain of sand. Still, Sen. Biden's comment hints at where we may be headed: toward a major reduction in America's world role, and perhaps even a new era of financially-induced isolationism.
Pressures to cut defense spending, and to dodge the cost of waging two wars, already intense before this crisis, are likely to mount. Despite the success of the surge, the war in Iraq remains deeply unpopular. Precipitous withdrawal -- attractive to a sizable swath of the electorate before the financial implosion -- might well become even more popular with annual war bills running in the hundreds of billions.
Protectionist sentiments are sure to grow stronger as jobs disappear in the coming slowdown. Even before our current woes, calls to save jobs by restricting imports had begun to gather support among many Democrats and some Republicans. In a prolonged recession, gale-force winds of protectionism will blow.
Then there are the dolorous consequences of a potential collapse of the world's financial architecture. For decades now, Americans have enjoyed the advantages of being at the center of that system. The worldwide use of the dollar, and the stability of our economy, among other things, made it easier for us to run huge budget deficits, as we counted on foreigners to pick up the tab by buying dollar-denominated assets as a safe haven. Will this be possible in the future?
Meanwhile, traditional foreign-policy challenges are multiplying. The threat from al Qaeda and Islamic terrorist affiliates has not been extinguished. Iran and North Korea are continuing on their bellicose paths, while Pakistan and Afghanistan are progressing smartly down the road to chaos. Russia's new militancy and China's seemingly relentless rise also give cause for concern.
If America now tries to pull back from the world stage, it will leave a dangerous power vacuum. The stabilizing effects of our presence in Asia, our continuing commitment to Europe, and our position as defender of last resort for Middle East energy sources and supply lines could all be placed at risk.
In such a scenario there are shades of the 1930s, when global trade and finance ground nearly to a halt, the peaceful democracies failed to cooperate, and aggressive powers led by the remorseless fanatics who rose up on the crest of economic disaster exploited their divisions. Today we run the risk that rogue states may choose to become ever more reckless with their nuclear toys, just at our moment of maximum vulnerability.
The aftershocks of the financial crisis will almost certainly rock our principal strategic competitors even harder than they will rock us. The dramatic free fall of the Russian stock market has demonstrated the fragility of a state whose economic performance hinges on high oil prices, now driven down by the global slowdown. China is perhaps even more fragile, its economic growth depending heavily on foreign investment and access to foreign markets. Both will now be constricted, inflicting economic pain and perhaps even sparking unrest in a country where political legitimacy rests on progress in the long march to prosperity.
None of this is good news if the authoritarian leaders of these countries seek to divert attention from internal travails with external adventures.
As for our democratic friends, the present crisis comes when many European nations are struggling to deal with decades of anemic growth, sclerotic governance and an impending demographic crisis. Despite its past dynamism, Japan faces similar challenges. India is still in the early stages of its emergence as a world economic and geopolitical power.
What does this all mean? There is no substitute for America on the world stage. The choice we have before us is between the potentially disastrous effects of disengagement and the stiff price tag of continued American leadership.
Are we up for the task? The American economy has historically demonstrated remarkable resilience. Our market-oriented ideology, entrepreneurial culture, flexible institutions and favorable demographic profile should serve us well in whatever trials lie ahead.
The American people, too, have shown reserves of resolve when properly led. But experience after the Cold War era -- poorly articulated and executed policies, divisive domestic debates and rising anti-Americanism in at least some parts of the world -- appear to have left these reserves diminished.
A recent survey by the Chicago Council on World Affairs found that 36% of respondents agreed that the U.S. should "stay out of world affairs," the highest number recorded since this question was first asked in 1947. The economic crisis could be the straw that breaks the camel's back.
In the past, the American political process has managed to yield up remarkable leaders when they were most needed. As voters go to the polls in the shadow of an impending world crisis, they need to ask themselves which candidate -- based upon intellect, courage, past experience and personal testing -- is most likely to rise to an occasion as grave as the one we now face.
Mr. Friedberg is a professor of politics and international relations at Princeton University's Woodrow Wilson School. Mr. Schoenfeld, senior editor of Commentary, is a visiting scholar at the Witherspoon Institute in Princeton, N.J.
Ready for the New New Deal
Obama is much more dangerous to economic freedom than FDR.
By PAUL H. RUBIN
In 1932, Democrat Franklin Delano Roosevelt was elected president as
the nation was heading into a severe recession. The stock market had crashed
in 1929, the world's economy was slowing down, and all economic indicators
in the U.S. showed signs of trouble.
The new president's response was to restructure the economy with the New Deal -- an expansion of the role of government once unimaginable in America. We now know that FDR's policies likely prolonged the Great Depression because the economy never fully recovered in the 1930s, and actually got worse in the latter half of the decade. And we know that FDR got away with it (winning election four times) by blaming his predecessor, Herbert Hoover, for crashing the economy in the first place.
Today, the U.S. is in better shape than in 1932. But it faces similar circumstances. The stock market has been in a tail spin, credit markets have locked up, and a surging Democratic presidential candidate is running on expanding the role of government, laying the blame for the economic turmoil on the current occupant of the White House and his party's economic policies.
Barack Obama is one of the most liberal members of the Senate. His reaction to the financial crisis is to blame deregulation. He even leverages fear of deregulation onto other issues. For example, Sen. John McCain wants to allow consumers to buy health insurance across state lines. Mr. Obama likens this to the financial deregulation that he alleges got us into the current mess.
But a President Obama would also enjoy large Democratic majorities in Congress. His party might even win a 60-seat, filibuster-proof majority in the Senate, giving him more power than any president has had in decades to push a liberal agenda. And given the opportunity, Mr. Obama will likely radically increase government interference in the economy.
Until now, this election has been fought on the margins, over marginal issues. But it is important to understand how much a presidential candidate wants to move the needle on taxes, trade and other issues. Usually there isn't a chance for wholesale change. Now, however, it appears that this election will make more than a marginal difference. It might fundamentally change America.
Unlike FDR, Mr. Obama will not have to create the mechanisms government uses to interfere with the economy before imposing his policies. FDR had to get the Supreme Court to overturn a century's worth of precedents limiting the power of government before he could use the Constitution's commerce clause, among other things, to increase government control of the economy. Mr. Obama will have no such problem.
FDR also had to create agencies to implement regulations. Today, the Securities and Exchange Commission and the National Labor Relations Board (both created in the 1930s) as well as the Environmental Protection Agency and others created later are in place. Increasing their power will be easier than creating them from scratch.
Even before the current crisis, there was a great demand for increased government regulation to limit global warming. That gives the next president a ready-made box in which to place more regulation, and a legion of supports eager for it.
But if the coming wave of new regulation from an Obama administration is harmful to the economy, Mr. Obama will take a page from FDR's playbook. He'll blame Republicans for having caused the market crash in the first place, and so escape blame for the consequences of his policies. It worked for FDR and, so far in this campaign, blaming Republicans and George W. Bush has worked for Mr. Obama.
Democrats draw their political power from trial lawyers, unions, government bureaucrats, environmentalists, and, perhaps, my liberal colleagues in academia. All of these voting blocs seem to favor a larger, more intrusive government. If things proceed as they now appear likely to, we can expect major changes in policies that benefit these groups.
If those of us who favor free markets for the freedom and prosperity they bring are right, the political system may soon put our economy on track for a catastrophe.
Mr. Rubin is a professor of economics and law at Emory University. He held several senior economic positions in the Reagan administration, and is an unpaid adviser to the McCain campaign.
Matter of Life and Debt
By MARGARET ATWOOD
THIS week, credit has begun to loosen, stock markets have been encouraged enough to reclaim lost ground (at least for now) and there is a collective sigh of hope that lenders will begin to trust in the financial system again.
But we’re deluding ourselves if we assume that we can recover from the crisis of 2008 so quickly and easily simply by watching the Dow creep upward. The wounds go deeper than that. To heal them, we must repair the broken moral balance that let this chaos loose.
Debt — who owes what to whom, or to what, and how that debt gets paid — is a subject much larger than money. It has to do with our basic sense of fairness, a sense that is embedded in all of our exchanges with our fellow human beings.
But at some point we stopped seeing debt as a simple personal relationship. The human factor became diminished. Maybe it had something to do with the sheer volume of transactions that computers have enabled. But what we seem to have forgotten is that the debtor is only one twin in a joined-at-the-hip pair, the other twin being the creditor. The whole edifice rests on a few fundamental principles that are inherent in us.
We are social creatures who must interact for mutual benefit, and — the negative version — who harbor grudges when we feel we’ve been treated unfairly. Without a sense of fairness and also a level of trust, without a system of reciprocal altruism and tit-for-tat — one good turn deserves another, and so does one bad turn — no one would ever lend anything, as there would be no expectation of being paid back. And people would lie, cheat and steal with abandon, as there would be no punishments for such behavior.
Children begin saying, “That’s not fair!” long before they start figuring out money; they exchange favors, toys and punches early in life, setting their own exchange rates. Almost every human interaction involves debts incurred — debts that are either paid, in which case balance is restored, or else not, in which case people feel angry. A simple example: You’re in your car, and you let someone else go ahead of you, and the driver doesn’t nod, wave or honk. How do you feel?
Once you start looking at life through these spectacles, debtor-creditor relationships play out in fascinating ways. In many religions, for instance. The version of the Lord’s Prayer I memorized as a child included the line, “Forgive us our debts as we forgive our debtors.” In Aramaic, the language that Jesus himself spoke, the word for “debt” and the word for “sin” are the same. And although many people assume that “debts” in these contexts refer to spiritual debts or trespasses, debts are also considered sins. If you don’t pay back what’s owed, you cause harm to others.
The fairness essential to debt and redemption is reflected in the afterlives of many religions, in which crimes unpunished in this world get their comeuppance in the next. For instance, hell, in Dante’s “Divine Comedy,” is the place where absolutely everything is remembered by those in torment, whereas in heaven you forget your personal self and who still owes you five bucks and instead turn to the contemplation of selfless Being.
Debtor-creditor bonds are also central to the plots of many novels — especially those from the 19th century, when the boom-and-bust cycles of manufacturing and no-holds-barred capitalism were new and frightening phenomena, and ruined many. Such stories tell what happens when you don’t pay, won’t pay or can’t pay, and when official punishments ranged from debtors’ prisons to debt slavery.
In “Uncle Tom’s Cabin,” for example, human beings are sold to pay off the rashly contracted debts. In “Madame Bovary,” a provincial wife takes not only to love and extramarital sex as an escape from boredom, but also — more dangerously — to overspending. She poisons herself when her unpaid creditor threatens to expose her double life. Had Emma Bovary but learned double-entry bookkeeping and drawn up a budget, she could easily have gone on with her hobby of adultery.
For her part, Lily Bart in “The House of Mirth” fails to see that if a man lends you money and charges no interest, he’s going to want payment of some other kind.
As for what will happen to us next, I have no safe answers. If fair regulations are established and credibility is restored, people will stop walking around in a daze, roll up their sleeves and start picking up the pieces. Things unconnected with money will be valued more — friends, family, a walk in the woods. “I” will be spoken less, “we” will return, as people recognize that there is such a thing as the common good.
On the other hand, if fair regulations are not established and rebuilding seems impossible, we could have social unrest on a scale we haven’t seen for years.
Is there any bright side to this? Perhaps we’ll have some breathing room — a chance to re-evaluate our goals and to take stock of our relationship to the living planet from which we derive all our nourishment, and without which debt finally won’t matter.
Margaret Atwood is the author of “The Handmaid’s Tale” and, most recently, “Payback: Debt and the Shadow Side of Wealth.”
End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN
AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.
This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?
Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?
To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.
In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.
In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.
Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.
What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.
The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.
A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.
Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.
OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.
The credit-rating agencies, for instance.
Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.
Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”
The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.
These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.
This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.
By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.
Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)
At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)
The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.
But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.
Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)
The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.
IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.
The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.
At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.
At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth. He phoned Mr. Sokobin and then sent him his paper. “Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”
How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.
And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.
SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.
When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.
Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.
But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.
In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.
It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.
Continued at "How to Repair a Broken Financial World."
Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street. David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article.
to Repair a Broken Financial World
By MICHAEL LEWIS and DAVID EINHORN
(Continued from "The End of the Financial World As We Know It")
Mr. Paulson must have had some reason for doing what he did. No doubt he still believes that without all this frantic activity we’d be far worse off than we are now. All we know for sure, however, is that the Treasury’s heroic deal-making has had little effect on what it claims is the problem at hand: the collapse of confidence in the companies atop our financial system.
Weeks after receiving its first $25 billion taxpayer investment, Citigroup returned to the Treasury to confess that — lo! — the markets still didn’t trust Citigroup to survive. In response, on Nov. 24, the Treasury handed Citigroup another $20 billion from the Troubled Assets Relief Program, and then simply guaranteed $306 billion of Citigroup’s assets. The Treasury didn’t ask for its fair share of the action, or management changes, or for that matter anything much at all beyond a teaspoon of warrants and a sliver of preferred stock. The $306 billion guarantee was an undisguised gift. The Treasury didn’t even bother to explain what the crisis was, just that the action was taken in response to Citigroup’s “declining stock price.”
Three hundred billion dollars is still a lot of money. It’s almost 2 percent of gross domestic product, and about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined. Had Mr. Paulson executed his initial plan, and bought Citigroup’s pile of troubled assets at market prices, there would have been a limit to our exposure, as the money would have counted against the $700 billion Mr. Paulson had been given to dispense. Instead, he in effect granted himself the power to dispense unlimited sums of money without Congressional oversight. Now we don’t even know the nature of the assets that the Treasury is standing behind. Under TARP, these would have been disclosed.
THERE are other things the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail.
Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.
This is more plausible than it may sound. Sweden, of all places, did it successfully in 1992. And remember, the Federal Reserve and the Treasury have already accepted, on behalf of the taxpayer, just about all of the downside risk of owning the bigger financial firms. The Treasury and the Federal Reserve would both no doubt argue that if you don’t prop up these banks you risk an enormous credit contraction — if they aren’t in business who will be left to lend money? But something like the reverse seems more true: propping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess. Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.
Rather than tackle the source of the problem, the people running the bailout desperately want to reinflate the credit bubble, prop up the stock market and head off a recession. Their efforts are clearly failing: 2008 was a historically bad year for the stock market, and we’ll be in recession for some time to come. Our leaders have framed the problem as a “crisis of confidence” but what they actually seem to mean is “please pay no attention to the problems we are failing to address.”
In its latest push to compel confidence, for instance, the authorities are placing enormous pressure on the Financial Accounting Standards Board to suspend “mark-to-market” accounting. Basically, this means that the banks will not have to account for the actual value of the assets on their books but can claim instead that they are worth whatever they paid for them.
This will have the double effect of reducing transparency and increasing self-delusion (gorge yourself for months, but refuse to step on a scale, and maybe no one will realize you gained weight). And it will fool no one. When you shout at people “be confident,” you shouldn’t expect them to be anything but terrified.
If we are going to spend trillions of dollars of taxpayer money, it makes more sense to focus less on the failed institutions at the top of the financial system and more on the individuals at the bottom. Instead of buying dodgy assets and guaranteeing deals that should never have been made in the first place, we should use our money to A) repair the social safety net, now badly rent in ways that cause perfectly rational people to be terrified; and B) transform the bailout of the banks into a rescue of homeowners.
We should begin by breaking the cycle of deteriorating housing values and resulting foreclosures. Many homeowners realize that it doesn’t make sense to make payments on a mortgage that exceeds the value of their house. As many as 20 million families face the decision of whether to make the payments or turn in the keys. Congress seems to have understood this problem, which is why last year it created a program under the Federal Housing Authority to issue homeowners new government loans based on the current appraised value of their homes.
And yet the program, called Hope Now, seems to have become one more excellent example of the unhappy political influence of Wall Street. As it now stands, banks must initiate any new loan; and they are loath to do so because it requires them to recognize an immediate loss. They prefer to “work with borrowers” through loan modifications and payment plans that present fewer accounting and earnings problems but fail to resolve and, thereby, prolong the underlying issues. It appears that the banking lobby also somehow inserted into the law the dubious requirement that troubled homeowners repay all home equity loans before qualifying. The result: very few loans will be issued through this program.
THIS could be fixed. Congress might grant qualifying homeowners the ability to get new government loans based on the current appraised values without requiring their bank’s consent. When a corporation gets into trouble, its lenders often accept a partial payment in return for some share in any future recovery. Similarly, homeowners should be permitted to satisfy current first mortgages with a combination of the proceeds of the new government loan and a share in any future recovery from the future sale or refinancing of their homes. Lenders who issued second mortgages should be forced to release their claims on property. The important point is that homeowners, not lenders, be granted the right to obtain new government loans. To work, the program needs to be universal and should not require homeowners to file for bankruptcy.
There are also a handful of other perfectly obvious changes in the financial system to be made, to prevent some version of what has happened from happening all over again. A short list:
Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices. Stock prices go up and down: let them. An absurd number of the official crises have been negotiated and resolved over weekends so that they may be presented as a fait accompli “before the Asian markets open.” The hasty crisis-to-crisis policy decision-making lacks coherence for the obvious reason that it is more or less driven by a desire to please the stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view propping up stock prices as a critical part of their mission — indeed, the Federal Reserve sometimes seems more concerned than the average Wall Street trader with the market’s day-to-day movements. If the policies are sound, the stock market will eventually learn to take care of itself.
End the official status of the rating agencies. Given their performance it’s hard to believe credit rating agencies are still around. There’s no question that the world is worse off for the existence of companies like Moody’s and Standard & Poor’s. There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided.
Regulate credit-default swaps. There are now tens of trillions of dollars in these contracts between big financial firms. An awful lot of the bad stuff that has happened to our financial system has happened because it was never explained in plain, simple language. Financial innovators were able to create new products and markets without anyone thinking too much about their broader financial consequences — and without regulators knowing very much about them at all. It doesn’t matter how transparent financial markets are if no one can understand what’s inside them. Until very recently, companies haven’t had to provide even cursory disclosure of credit-default swaps in their financial statements.
Credit-default swaps may not be Exhibit No. 1 in the case against financial complexity, but they are useful evidence. Whatever credit defaults are in theory, in practice they have become mainly side bets on whether some company, or some subprime mortgage-backed bond, some municipality, or even the United States government will go bust. In the extreme case, subprime mortgage bonds were created so that smart investors, using credit-default swaps, could bet against them. Call it insurance if you like, but it’s not the insurance most people know. It’s more like buying fire insurance on your neighbor’s house, possibly for many times the value of that house — from a company that probably doesn’t have any real ability to pay you if someone sets fire to the whole neighborhood. The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.
Impose new capital requirements on banks. The new international standard now being adopted by American banks is known in the trade as Basel II. Basel II is premised on the belief that banks do a better job than regulators of measuring their own risks — because the banks have the greater interest in not failing. Back in 2004, the S.E.C. put in place its own version of this standard for investment banks. We know how that turned out. A better idea would be to require banks to hold less capital in bad times and more capital in good times. Now that we have seen how too-big-to-fail financial institutions behave, it is clear that relieving them of stringent requirements is not the way to go.
Another good solution to the too-big-to-fail problem is to break up any institution that becomes too big to fail.
Close the revolving door between the S.E.C. and Wall Street. At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. Its influence over the S.E.C. is further compromised by its ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.
But keep the door open the other way. If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: Harry Markopolos.
The funny thing is, there’s nothing all that radical about most of these changes. A disinterested person would probably wonder why many of them had not been made long ago. A committee of people whose financial interests are somehow bound up with Wall Street is a different matter.
By PAUL KRUGMAN
“If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case.
The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.
So will we “act swiftly and boldly” enough to stop that from happening? We’ll soon find out.
We weren’t supposed to find ourselves in this situation. For many years most economists believed that preventing another Great Depression would be easy. In 2003, Robert Lucas of the University of Chicago, in his presidential address to the American Economic Association, declared that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”
Milton Friedman, in particular, persuaded many economists that the Federal Reserve could have stopped the Depression in its tracks simply by providing banks with more liquidity, which would have prevented a sharp fall in the money supply. Ben Bernanke, the Federal Reserve chairman, famously apologized to Friedman on his institution’s behalf: “You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.”
It turns out, however, that preventing depressions isn’t that easy after all. Under Mr. Bernanke’s leadership, the Fed has been supplying liquidity like an engine crew trying to put out a five-alarm fire, and the money supply has been rising rapidly. Yet credit remains scarce, and the economy is still in free fall.
Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to fight mass unemployment. The failure of monetary policy in the current crisis shows that Keynes had it right the first time. And Keynesian thinking lies behind Mr. Obama’s plans to rescue the economy.
But these plans may turn out to be a hard sell.
News reports say that Democrats hope to pass an economic plan with broad bipartisan support. Good luck with that.
In reality, the political posturing has already started, with Republican leaders setting up roadblocks to stimulus legislation while posing as the champions of careful Congressional deliberation — which is pretty rich considering their party’s behavior over the past eight years.
More broadly, after decades of declaring that government is the problem, not the solution, not to mention reviling both Keynesian economics and the New Deal, most Republicans aren’t going to accept the need for a big-spending, F.D.R.-type solution to the economic crisis.
The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts.
This is a problem with which Keynes was familiar: giving money away, he pointed out, tends to be met with fewer objections than plans for public investment “which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles.” What gets lost in such discussions is the key argument for economic stimulus — namely, that under current conditions, a surge in public spending would employ Americans who would otherwise be unemployed and money that would otherwise be sitting idle, and put both to work producing something useful.
All of this leaves me concerned about the prospects for the Obama plan. I’m sure that Congress will pass a stimulus plan, but I worry that the plan may be delayed and/or downsized. And Mr. Obama is right: We really do need swift, bold action.
Here’s my nightmare scenario: It takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious. As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it’s only enough to slow the descent, not stop it. Meanwhile, deflation is setting in, while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy — well, you can see where this is going.
So this is our moment of truth. Will we in fact do what’s necessary to prevent Great Depression II?
Milliarden Papiermark für ein Ei
Fünfzig Jahre nach der größten Inflation der Weltgeschichte
Von Walter Günthardt
Dr. Hermann Eichhorn mit seiner Sammlung, die rund zweilausend Geldscheine aus der Kriegszeil und der darauffolgcnden Inllatlonsperode enthält.
Vor genau fünfzig Jahren, Im November 1923, erlebte Deutschland den Kulminationspunkt einer Nachkriegsinflation, die in der Geschichte ihresgleichen sucht und dementsprechend tiefe Spuren hinterlassen hat. Astronomische retrospektiv gesehen, unglaubliche Zahlen kennzeichneten damals die Preise der wichtigsten Nahrungsmittel, die täglich, zuletzt sogar stündlich in die Höhe kletterten. Allein im Oktober 1923, als der unheimliche Tanz aul der Inflationsspirale seine schärfste Beschleunigungsphase erreichte, errechnete das Statistische Reichsamt eine Erhöhung des Lebenskostenindexes um nicht weniger als 24 280 Prozent. Ende November kostete ein Kilo Brot 470 Milliarden, ein Sack Kartoffeln 90 Milliarden, ein Kilo Schweinefleisch 5,2 Billionen, ein Liter Milch 360 Milliarden, ein Kilo Butter 5,6 Billionen und ein Ei 320 Milliarden Papiermark. Das Porto für einen Brief, das am 1. Juni 1923 noch 120 Mark betragen hatte, stellte sich im November auf 5 Milliarden Mark.
Die Löhne hinkten zwar was bei diesem progressiven Rhythmus der Geldentwertung verständlich scheint in gewissem Abstand den Preisen nach, machten aber doch, wenn auch nur auf dem Papier, die deutschen Arbeitnehmer sukzessive zu einem Volk von Millionären, Milliardären und sogar Billionären. So verdiente im November 1923 selbst ein Hilfsarbeiter rund 10 Billionen, während ein Facharbeiter mit einem gelernten Beruf zwischen 17 und 20 Billionen bezog und ein hoher Beamter gegen die 100 Billionen Mark mit einer entsprechend dicken und schweren Brieftasche nach Hause tragen mußte. Im Mittelpunkt dieses beispiellosen Geldschwundes, dieses Circulus vitiosus der sich in atem- und pausenloser Hetzjagd gegenseitig verfolgenden Preise und Löhne standen denn auch immer wieder die Banknoten, denn die scheinbar unaufhaltsam galoppierende Inflation verlangte nach immer mehr Papier, nach Geldscheinen mit immer höheren Nominalwerten.
«Es war die Zeit» - erinnert sich Zahnarzt Dr. Hermann Eichhorn (Konstanz), der damals begonnen hatte, die in dieser Beilage wiedergegebenen Banknoten und Zahlungsmittel zu sammeln -, «als die Nullen auf den Geldscheinen laufen lernten.»
Je rascher die Preise davoneilten, um so schneller zirkulierten aber auch die neuen Banknoten, denn jeder wollte die wertlosen Scheine sobald als möglich loswerden. Vom Sommer 1923 an arbeiteten 30 Papierfabriken und 33 Druckereien ununterbrochen in drei Schichten, um das für die Lohnauszahlungen erforderliche Papiergeld zu produzieren. Als in den letzten Stadien der Inflation im Druckereigewerbe noch ein Streik ausbrach, konnte nicht einmal die Notenpresse mit der Geldentwertung Schritt halten: da wurden «alte» Geldscheine aus dein Jahre 1922 hervorgeholt und durch einen amtlichen Stempelaufdruck mit einem neuen Milliardenwert versehen. Da die Reichsbankanstalten in der Provinz in dieser Situation immer wieder zahlungsunfähig wurden, begannen die einzelnen Städte und viele öffentliche Anstalten eigenes Notgeld zu drucken, so daß die Schwemme an Banknoten mit immer höheren Zahlen und stets abnehmendem Wert kein Ende zu nehmen schien.
In diesem wirtschaftlichen Chaos, in dem sich niemand mehr zurechtfand, grassierten spekulative Naturaltauschgeschäfte und Hamsterei; Makler und Schieber kamen rasch zu Geld, während Pensionierte, die von einer fixen Rente leben mußten, vollständig verarmten. Volkmar Muthesius berichtet in seinem 1973 erschienenen Buch «Augenzeuge von drei Inflationen» vom Elend und von der Not der Nullenmilliardäre, von jener ersten großen Inflation, die alle Relationen und Proportionen über den Haufen warf, und erinnert daran, daß es in der Zuspitzungsphase der Jahre 1922/23 sogar Rentiers gab, die sich das Leben nahmen, weil sie den sicheren Hungertod vor Augen zu haben glaubten. Die Verarmung durch die Inflation drückte sich nicht nur in vielen persönlichen Schicksalen aus sondern auch das Geldwesen selbst schrumpfte hinter dem aufgeblähten Papiervorhang de facto zusammen. So schätzt Erwin Hielscher in seinem 1968 veröffentlichten Buch «Das Jahrhundert der Inflationen in Deutschland», daß der Banknotenumlauf im Deutschen Reich am Ende der Inflation im Herbst 1923, auf Gold umgerechnet, nur etwa 100 Millionen Mark betragen habe. Dies hätte, um die Sinnlosigkeit der Situation zu unterstreichen, in Papiermark gemessen, nur dem «Wert» eines Kilos Kartoffeln entsprochen.
«Das Ganze war» wie Muthesius zusammenfassend schreibt ~ «also, bildlich gesprochen, eine gigantische schmutzige Schaumwoge, eine ins Monumentale gehende Seifenblase, freilich ohne den farbigen Reiz einer solchen schillernden Kugel und als tertium comparationis nur die Eigenschaft besitzend, daß sie mit dem Stich der Währungsreform von 1923/2-1 zerplatzte und kaum eine Spur zurückließ, sozusagen nur einen Tropfen, der fürs erste zu neuem Geld aufgeblasen werden mußte, um ein reguläres Wirtschaftsleben wieder in Gang zu setzen.» Mit dieser lapidaren Schlußfolgerung beginnen allerdings erst die Fragen: Was war denn damals wirklich geschehen? Wo sind die Ursachen der größten Inflation der Weltgeschichte zu suchen? Waren es nur die äußeren Umstände einer spezifischen Ausgangslage, oder versagte die Währungsbehörde? Wie ist dieser monetäre Zusammenbruch aus der Sicht der Nationalökonomie zu beurteilen? Bei jeder Auseinandersetzung mit diesen Fragen drängt sich eine kurze Rückblende auf die Wirtschaftsgeschichte und -theorie geradezu auf.
Wann und wo die Inflation -- heute leider ein wohlbekannter und trotzdem kein eindeutiger Begriff erstmals zu einem ernsthaften Problem für Wirtschaft, Gesellschaft und Staat geworden ist, läßt sich aus den Annalen der Weltgeschichte kaum mehr ermitteln. Sicher ist lediglich die Tatsache, daß sie in einer absoluten Naturaltauschwirtschaft, in der nur Ware gegen Ware gehandelt wird, gar nicht vorkommen kann, da es auf dieser Stufe a priori kein Geld gibt, obwohl mit jeder Form von Eigentum (Land, Vieh, Vorräte, Schmuck) bereits Hortungsmöglichkeiten bestehen. Gleichzeitig bezeichnend aus historischer Sicht ist der Umstand, daß in jeder Beschreibung einer Wirtschaftsentwicklung mit inflationären Zügen sei es in der Antike, im Mittelalter, in der Renaissance oder in der Neuzeit gerade alle Sachwerte gegenüber sämtlichen Arten von Münzen, Noten und Guthaben in den Vordergrund treten, und zwar bis zu dem in diesem Jahrhundert registrierten Extremfall, daß ein unvorsichtigerweise stehengelassener Waschkorb voll von Inflationsgeld gestohlen wird, aber ohne Inhalt, ohne die «wertlosen» Geldscheine, die niemand mehr haben will.
Nachdem sich die wenigen geldtheoretischen Essays von der Antike bis zur Scholastik, von Plato und Aristoteles bis zu Thomas von Aquin primär mit der Diskussion über den «gerechten Preis» und die Berechtigung der Zinsexistenz für das Geldausleihen befaßt hatten, mußte Im Spätmittelalter, in einer Zeit, da die Falschmünzerei selbst den Regierenden nicht fremd war, schon aus der täglichen Erfahrung die Frage nach dem Ursprung, dem Wesen und der Funktion des Geldes sowie nach den Ursachen der Geldentwertung neu gestellt werden. Der «nominalistischen» Konzeption, welche die Entstehung des Geldes aus einer Art Uebereinkunft erklärt und seine Geltung ausschließlich auf eine «Staatliche Proklamation» zurückführte, wurde dabei in der zweiten Hälfte des 16. Jahrhunderts die «metallistische» Theorie gegenübergestellt, die aus der Praxis der Verminderung des Edelmetallgehaltes vieler geprägter Münzen folgerte, daß der Wert des Geldes aus dem verwendeten Material selbst stammen müsse.
Anderseits stellte der Franzose Jean Bodin im 16. Jahrhundert erstmals fest, daß die Preissteigerung seit der Entdeckung der Neuen Welt die Wertverschlechterung des Geldes bei weitem übertroffen habe - er vertrat dabei die Ansicht, daß der «vornehmlichste und fast einzige Grund der Teuerung, den bis anhin niemand erwähnt hatte, im Ueberfluß an Gold und Silber» zu finden sei. Mit dieser Feststellung, die, wie Prof. Edgar Salin in seiner «Geschichte der Volkswirtschaftslehre» unterstreicht, die allgemeine Behauptung einer unmittelbaren Abhängigkeit der Höhe der Warenpreise von der Menge des Goldes enthält, ist die monetäre Quantitätstheorie begründet. Daß zudem nicht etwa die Menge des vorhandenen, sondern nur die Menge des umlaufenden Geldes einen preisverändernden Einfluß ausübt, wobei die Beschleunigung beziehungsweise Verringerung der Umlaufgeschwindigkeit die gleiche Wirkung wie die Vergrößerung beziehungsweise Verkleinerung der Geldmenge haben muß, wurde im 17. Jahrhundert vom Engländer John Locke und im 18. Jahrhundert vom Iren Richard Cantillon schrittweise erkannt.
Da die Wirtschaftstheorie in dieser Periode entdeckt hatte, daß die Vermehrung des Geldes eine umsatzfördernde Maßnahme sein kann, wurde der Gedanke lebendig, den Geldbedarf auch ohne Edelmetalle zu decken. Die Praxis der Ausgabe von Papierurkunden durch die italienischen Geldwechsler und die englischen Goldschmiede gaben dazu Anregung genug. So dachte man daran, Papiergeld neben dem Münzgeld zu schaffen, um dadurch den monetären Umlauf zu erhöhen oder Gold und Silber für Außenhandelstransaktionen freizumachen.
Der erste konsequente und deshalb bekannteste Anwendungsfall dieser Theorie hat der Schotte John Law als Finanzministor des Regenten Philipp von Orleans durchgespielt, indem er 1716 in Paris ein damals einmaliges Bankinstitut gründete, mit dem er vor allem das Wechseldiskontgeschäft in großem Stil betrieb und sich dabei anfänglich durch geschickte und vorsichtige Geschäftsgebarung wachsendes Vertrauen erwarb. Handel und Industrie verdankten seinem Kreditsystem zunächst große Blüte, und als Law noch für die Ausbeutung der französischen Handelsmonopole für Louisiana und Indien eine Aktiengesellschaft kreierte, wurde Paris von einem steigenden Spekulationsfieber befallen. Ueber Nacht entstanden enorme nominelle Vermögen, doch als die Gewinne nicht den Erwartungen entsprachen, setzte 1720 eine Vertrauenskrise ein, die Masse emittierter Papierscheine war nichts mehr wert, und der unaufhaltsame Bankrott trieb Law zur Flucht ins Ausland. Obwohl der schottische Bankier weder ein Schwindler noch ein Scharlatan war, sondern halb Abenteurer, halb Visionär ein an sich funktionsfähiges System in die Wirtschaft einzuführen versuchte, als die Zeit dafür noch nicht reif war, hinterließ sein Versuch weit über die ruinierten Noten- und Aktienbesitzer hinaus eine Welle der Unzufriedenheit und ein viel zu lange andauerndes Unverständnis des Kredit- und Bankwesens überhaupt.
Ein untrügliches Zeichen für die nachhaltige Wirkung, die vom mißglückten Lawschen Experiment ausging, ist jedenfalls darin zu sehen, daß es Goethe zur berühmten Papiergeldszene in «Faust II» inspirierte. Rückblickend konnte man also zur Schlußfolgerung gelangen, daß die Kenntnisse von der Quantitätstheorie des Geldes sowie das praktische Beispiel des mephistophelischen Geldzaubers, der sich während der Französischen Revolution mit der Assignatenwirtschaft wiederholt hatte, hätten genügen müssen, um die deutsche Inflation nach dem Ersten Weltkrieg zumindest auf ein erträgliches Maß zu beschranken. Dies um so mehr, als England seit der Peelschen Bankakte von 1844 den Beweis erbracht hatte, daß ein modernes Geld- und Kreditsystem recht gut funktionieren kann, wenn die Banknotenemission knapp gehalten wird, wie es von der Bank von England bis 1914 auf Grund der Bindung an die Goldreserven getan wurde. Statt dessen traf die inflationäre Welle der Nachkriegszeit die deutsche Währungsbehörde offensichtlich völlig unvorbereitet, was schon daraus hervorgeht, daß der Präsident der Deutschen Reichsbank, Rudolf Havenstein, noch 1922 die Absicht äußerte, mit dem Kauf eines Anzuges zuzuwarten", bis die «Teuerung» vorbei sei, und es im gleichen Jahr als seine größte Sorge bezeichnete, daß die «Versorgung mit Bargeld» nicht mehr funktioniere.
Während es mithin die Aufgabe der Zentralbank gewesen wäre, die Banknotenemission in einfacher Anwendung der Quantitätstheorie auch und gerade in Zeiten der Not zu bremsen, fachte die gesteigerte Notenausgabe die Inflation immer stärker an, da zur zunehmenden Menge des zirkulierenden Geldes noch eine ständige Beschleunigung der Umlaufgeschwindigkeit hinzukam.
Daß sich die verheerende Wirkung der Inflation neben den Preisen und Löhnen - auch im Außenwert der Papiermark widerspiegelte, liegt auf der Hand. So stellte sich der Wechselkurs zum Dollar vor 1914 auf 4,20 Mark; Anfang 1922 brauchte es bereits 162 Mark, um einen Dollar zu kaufen, am Jahresende schon mehr als 7000 Märki am l.Juli 1923 stand die Dollarnotiz auf 160 000 Mark, am 1. Oktober auf 242 000 000 Mark und am 20. November auf 4 200 000 000 000 Mark. Die letzte Zahl gibt denn auch die Relation an, die bei der dann eingeleiteten Währungssanierung angewendet wurde: 1 Rentenmark für 1 Billion Papiermark. Es war die Idee Karl Helfferichs, damals Staatssekretär der Finanzen, die zwölf Nullen zu streichen und nach dem Schnitt die Emission der neuen Banknoten knapp zu halten. Da jedoch Helfferich im April 1924 bei einem Eisenbahnunglück ums Leben kam, also kaum ein halbes Jahr nach dem Erfolg der von ihm konzipierten «Stabilisierung» der Mark, fiel bald der Ruhm für diese Tat Dr. Hjalmar Schacht zu, der als Reichswährungskommissar bis August 1924 die Ueberleitung der im November 1923 begonnenen, provisorischen Geldreform in einer Dauerlösung ausführte, die auf einer Goldkernwährung beruhte. Das «Wunder der Rentenmark» wurde jedenfalls in erster Linie deshalb möglich, weil die dem Wirtschaftsablauf angemessene Banknotenmenge in normalem Tempo zu zirkulieren begann, bald das Vertrauen der Bevölkerung gewann und die Inflationszeit wie einen bösen Traum allmählich in Vergessenheit geraten ließ. Daß auf dieses Wunder der «goldenen zwanziger Jahre» die Katastrophen der Weltwirtschaftskrise und des Zweiten Weltkrieges folgen würden, hätte vor fünfzig Jahren kaum jemand geglaubt.
Die Chronologie der Inliation: Nolgcldscheine der Stadt Konstanz, von fünzig Plennig aus der Zeil des Ersten Weltkrieges bis zu einer Billion Mark, emittiert am 8. November 1923.
Selbst in Zeilen der größten Not ließen es sich die Schöpter dieser Banknoten nicht nehmen, phantasie- und anspruchsvolle Themen zur Darstellung zu bringen.
Not macht erlinderisch: Als das Papier iür die Banknoten lehlte, wurde Holz iür Kassenscheine sowie Leichtmetall und Porzellan für Münzen verwendet.
Bevor die Inflation alle Werle zu zerstören begann, gab es Banknoten aus Leder und sogar aus bestickter Seide.