Over the last week, the cries,indeed the demands, for further intervention in the present credit crisis have grown shriller and shriller.
At the annual Ambrosetti Forum at Villa d’Este on the shores of Lake Como, a conference of leading global regulators and policy makers, a group of private-sector financiers urged the Fed and the European Central Bank to do much more to reassure investors and thus stabilise the markets.
Jim O’Neill, chief economist at Goldman Sachs, said the credit squeeze confirmed his view that the US economy would grow at below 2 per cent, probably for the next six quarters. “The big issue is whether the Fed can keep it from tumbling over into being a lot weaker.” He suggested the Fed must prevent the US housing market sinking into a depression resembling the Japanese property crisis of the 1980s.
Ken Rogoff, former chief economist at the IMF, said the world was experiencing its “first new-age financial crisis” that was following an unpredictable path and posing new problems for the world’s monetary authorities.
“We are in a window of vulnerability,” he said. “We have reached the point where there is going to be fairly aggressive interest rate moves and if that proves not to be enough then we may see some dramatic regulatory intervention,” he said.
Mr Rogoff even suggested that a further twist in the financial crisis could help clarify issues. “Having a medium-sized bank go under would almost be a blessing at this point because it would give them [central banks] confidence to do something more dramatic.”
My answer to Mr. O’Neil, Mr. Rogoff, and the countless others calling for immediate and dramatic action, i.e., massive rate cuts, is this plea to the Fed, Bank of England, ECB and others – Do Nothing
That’s right – do nothing - let the chips fall where they may, they made their bed(s) let them lie in them, throw the cat among the pigeons, let slip the dogs of war, or use any other cliché you like – it is time that the perpetrators of this disaster be held to account.
We are told that something must be done to forestall a greater economic crisis. This a chant of those who do not want to be held responsible for the wrecks they have made of tens of thousands, if not hundred of thousands, of people's lives.
We have heard this “line” countless times - in the Thrift Savings debacle in the ‘80’s, the Asian crisis, the Russian crisis, the dot.com crisis. Each and every time the central banks and the regulators have spared the “perps” and penalised their nations and their citizens. Bastante! Ça suffit! Das ist Alles! Enough is enough!
Forget about letting a “medium size bank” fail – let Countrywide fail; let Bear Sterns go under. Stop intervening and start letting the “free market forces”, the ones that all these shining examples of unrestrained capitalism are so in favour of when they are crushing their opponents, take control. It will not be the first time – the Fed “allowed” Drexel Burnham Lambert to be liquidated in an orderly fashion as the Bank of England “rolled up” Barings Bank. These loses are sustainable and can be done in good order. This “doing” makes a point that no rescue can – no one is above the law, no one is sacrosanct, no one who plays these sorts of games will be supported at taxpayers' cost. If you take the risk risk you take the responsibility. Period. End of sentence.
You are probably thinking that I have lost my mind – I have not; I have finally found it.
What I, and others, have been trying to do over the last 35+ years is not simply survive the repeated cycles of boom and bust in the financial markets. We have sought actively for a remedy that would end this repeated blood letting. We have used the knowledge and experience we have gained to build the tools and structures that would break the cycle and bring in an era of stable growth in risk asset value and earnings. We have made it our goal to implement this vision of balanced yet quality growth of risk assets; i.e., garnering earnings commensurate with our risks.
The problem is our Lords & Masters, with some notable exceptions, have used our vision, our experience and the very tools we built to control volatility to create more. They are so hell-bent for leather to build bigger and “better” businesses with more profits and bigger bonuses that they have misused the gifts we have given them. They have replaced good risk practices and common sense with the one value that they truly believe in – Greed.
Yes, Gordon Gekko is alive and well. He is not the anti-hero or the antithesis of what they believe and practice; rather he is their patron saint, their guru, their hero, their demi-god. Listen to the words and tell me that this is not the motivation for this new killing field:
Greed -- for lack of a better word -- is good. Greed is right. Greed works.
Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.
Greed, in all of its forms -- greed for life, for money, for love, knowledge -- has marked the upward surge of mankind.
And greed -- you mark my words -- will … save … that other malfunctioning corporation called the USA.
I am not going to preach but I do wish to point out that the meaning of the word greed, as taken from the OED*, is not merely the desire to take things for oneself but it also involves the denial of the same things to others . Of course, the counterpoint to avarice, which is charity, is the selfless giving to others. I am no idealist to believe that the “markets” are or ever will be run on charity – profit is a real and basic motivator of building and sustaining markets and economies. However, a concern for others need not be banished, as it is all too often has, from the equation. Even if it is only for the selfish motivation to endure and keeping growing one’s business, concern for the “little guy” is essential.
Whilst I am no idealist, I am a pragmatist; I am convinced, more so than ever, that modern risk and reward management is essential to the viability of all institutions. It not only helps them weather the storms of volatility that exist in risk markets, but it actually contributes to their stability, their asset quality and their earnings. We need to take a step back, examine the mistakes that were made and the damage that has been done and set our feet once again on the right path. This will not be easy or painless but it is essential.
I have gone on record here in support of the efforts of the Bush Administration to help out sub-prime borrowers to stay in their homes and their effort, along with the BofE, ECB, BOJ and others, to feed additional liquidity in the market, and finally their call for an investigation by the Financial Stability Forum (FSF)** as to the causes of this present situation. However, I draw the line at the Fed, BofE, ECB, etc., cutting interest rates to create some short-term boom to clear away the blood. Like Marc Antony, I believe that Caesar’s corpse needs to be seen by all if reality is to have a permanent effect on our psyches. This mindless madness must be stopped, and stopped now.
None other than Mervyn King, the governor of The Bank of England, argued the same case in a letter today to Parliament. Mr King stated that the BofE was facing “a balancing act” between its duty to ensure the proper functioning of the the financial system - thereby limiting the effect on the wider economy - and its fear that providing wider liquidity support would “undermine the efficient pricing of risk.”Mr King warned, “Interbank interest rates rising far above normal levels could put a brake on the economy if they persisted but this was no time to compensate banks that had accepted too many risks too cheaply. If a central bank provided implicit insurance to lenders the next period of turmoil will be on an even bigger scale.”
“The provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises.”
Mr. King agreed that the question of pumping additional liquidity in the system “is the most difficult issue facing central banks at present”, but he also made it abundantly clear that this was the wrong course of action to take as this would believed this would destabilise the markets in the long-term as it would threaten “the efficient pricing of risk by providing ex-post insurance for risky behaviour. That encourages excessive risk-taking and sows the seeds of a future financial crisis.”
Bravo, Bravo, Bravissimo, Mr. King! Hold to your convictions and let them echo from London to Washington & New York, to Frankfurt, Paris & Brussels, to Tokyo & Beijing, and across the globe. Else-wise, the epitaph of this generation may well read the same as that of Louis XV, le Bien-Aimé, “Après moi, le déluge”
Cassandra
* Greed is the selfish desire for or pursuit of money, wealth, food, or other possessions, especially when this denies the same goods to others. Oxford English Dictionary
** The Financial Stability Forum (FSF) located at the Bank for International Settlement (BIS) is a body of finance ministries, central banks and regulatory bodies from leading financial centres created after the Asian financial crisis. It was convened in April 1999 to promote international financial stability through information exchange and international co-operation in financial supervision and surveillance. The Forum brings together on a regular basis national authorities responsible for financial stability in significant international financial centres, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSF seeks to co-ordinate the efforts of these various bodies in order to promote international financial stability, improve the functioning of markets, and reduce systemic risk.
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