SOROSIAN Liquidity - We Had Better Pray For Rain

 

 

The main legislative intent of the U.S. Congress in passing the $700 billion “bailout” bill on October 3, 2008 was to have the Secretary Treasurer set up of a troubled asset relief program to purchase and quarantine so-called toxic assets of private companies in a government-created asset management company, somewhat similar to the Resolution Trust Corporation that had been partially successful in disposing of troubled real estate assets taken over from liquidated savings-and-loan companies in the 80s:

“The Secretary is authorized to establish the Troubled Asset Relief Program (or ‘‘TARP’’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.”

The general purpose of the Act was so broadly written that it did not preclude any other course of action; the Secretary of the Treasury was practically given a blank check to do with whatever he deemed necessary:

“The purposes of this Act are to immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States….”

Congress had balked at passing the first version of the bill because it gave Henry Paulson a blank check somewhat similar to the one given to the President for the pre-emptive destruction of Iraq’s sovereign government, therefore it is indeed astounding that a Democratic Congress finally gave the Republican President’s treasury secretary so much discretion in the lengthy emergency bill abruptly passed, which included a tax exemption for children’s wooden arrows. Mr. Paulson’s use of the blank check has given foolhardy Congress cause to think that the august body had gotten it right in the first place, when the first bill was defeated.

Only ten days after TARP was approved, Treasury Secretary Henry Paulson changed course: he put the original TARP plan, to take toxic assets off the banks’ hands, on the bank burner in favor of the very “capital injection” plan that he had formerly opposed. Columnist Paul Krugman of the New York Times, best known for his ideological ranting against everything the Bush Administration did, quotes Mr. Paulson as saying that capital injection “is what you do when you have failure.” Mr. Paulson told Congress that “the right way to do this is not going around and using guarantees or injecting capital,” and referred to Japan’s limited success with such an approach in the 90s. But Mr. Paulson did an abrupt about face – detractors allege that his hand was forced by the adoption of capital injection overseas. And according to a February 6, 2009 New York Times article, he stands charged by TARP watchdogs of deception in the expenditure of nearly $300 billion to bolster not only banks but automakers as well in exchange for preferred shares and warrants issued by those firms: Congressman Daniel K. Akaka of Hawaii said the program had “proceeded in a chaotic, unorganized and ad hoc manner.” Watchdog Neil M. Borofsky’s office is now focusing on “criminal investigations.” Watchdog Elizabeth Warren claims there is a “shortfall of about $78 billion: Treasury put about $254 billion into financial institutions in 2008, but got only $176 billion in value.”

Again, the Troubled Asset Relief Program Act gave Mr. Paulson virtually dictatorial authority, not only to purchase troubled residential and commercial mortgage-backed securities, but any other “instrument” related to same, such as equity shares, and warrants to buy equity shares, in the institutions holding the toxic assets; or, for that matter, anything at all that he deemed necessary to promote financial stability, as per this clause of the Act that Congress and the President hastily signed off on:

“The term ‘’troubled assets’ means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.” (underlining added)

Mr. Paulson commitment of $250 billion to the direct capital “injection” course was a tactic that had been previously recommended to the world’s power elite by multi-billionaire George Soros – journalists must always mention the foremost financial alchemist’s billions because, much to his own chagrin, the good fortune of a man makes him credible wherever money is regarded as the greatest good no matter how it has been gotten or how badly it is put to use. Mr. Soros picked up some arbitraging techniques in his youth in London, moved to America and made billions operating a hedge fund. A former refugee from fascism and communism, the brilliant quantum-leaper is now a prominent fallibilist philosopher, liberal political philanthropist, and influential stealth statesman. Mr. Soros did his best to help defeat President Bush’s second presidential campaign because he perceived that the Bush Administration posed a clear and danger to freedom and social justice. He is said to have considerable influence on Barrack Obama, and has been accused by conspiracy theorists of buying the entire Democratic Party, lock, stock, and barrel. His right-winged critics call him a “leftist” or “socialist”, their dirty word for communist; and fascist Jews, under the sway of ‘groundless’ or self-hatred, call him a Jewish Jew-hater.

Members of the middle class could care less whether their savior is on their right or left side, or in heaven or on Earth, now that their Golden Ass is in a sling and nobody seems to know their right foot from the left. It is almost as difficult to define whether one is a true conservative or a liberal today as to know for certain whether a Judeo-Christian is really Jewish or Christian, or, for matter, if iconoclastic Muslims who reject idolatry and Jesus as God incarnate are better Jews than Jews – even conservatives would like to be liberated from something or the other. And the degree of orientalism of the occident is subject to much dispute, as is the definite difference between mind and body or firmament and fundament (whereupon man makes an ass of himself). A person cannot be just another human being or man in common: he must naturally make distinctions and beg to differ to be somebody different than others and what he really is; and he, thinking that such disagreement makes him whole, takes too much pride in his schisms. Of course the opposing arguments keeps the milling wheel rolling, but whether it spins in place or progresses, as it crushes skulls in turns, is another subject of debate. However that might be, the fact that even market fundamentalists – they draw an imaginary line between economics and politics, between their very own legs – are running scared to mama and recommending massive government dispensations, reveals that they have, like the rest of the two-faced race, two sides to their nature, a natural ambiguity that apocalypses make most obvious. There is nothing better than a crisis for the revelation of our underlying, critical crisis, our hypo-crisy in behaving as if we and our securities were better than we and our derivatives really are – wherefore we look to absolute power for the elusive unity in which we hope we shall be saved from the unwanted consequences of our relative dissensions.

Mr. Soros described his capital injection concept in an editorial published by The Financial Times on October 1, 2008: He said the original TARP plan idea was “fraught with difficulties. The toxic securities in question are not homogenous and in any auction process the sellers are liable to dump the dregs on to the government fund. Moreover, the scheme addresses only one half of the underlying problem – the lack of credit availability. It does very little to enable house owners to meet their mortgage obligations.” Direct capital injection is the way to go: “If TARP invested in preference shares with warrants attached, private investors, including me, would jump at the opportunity.” And that is what Mr. Paulson eventually did.

Whether or not Mr. Soros bought shares in the banks that received the Paulsonian injections is unknown to this writer, but more recently, seven groups of investors, including Mr. Soros and billionaires Michael Dell and J. Christopher Flowers, purchased the failed bank IndyMac for $13.9 billion dollars. As part of the deal, the investors agreed to put up $1.3 billion in new capital and to absorb 20% of the bank’s loan losses – the FDIC will absorb the rest, and expects the federal insurance fund to lose from $8.5 to $9.4 billion. Incidentally, smaller investors may want to start a brand new bank free of such burdens; they would not inherit an established operation with a large customer base but they might be more profitable, operating in communities where they know their customers well.

Notably, the investment hedge funds that bought IndyMac include several former partners at Goldman Sachs, one of the investment banking firms that was instrumental in causing the financial crisis. People love money hence influential members of opposing parties may wind up bedfellows in our circulating society. Secretary Treasurer Henry Paulson – whom Mr. Soros makes out to be a complete fool as far as his bailout policies go – made his huge fortune at Goldman Sachs, and like a good corporatist leader went through the revolving private/public door to save the investment firm while failing its major competitor. “Commissar” Paulson brought so many Goldman Sachs through the revolving door that the bailout program is said to be run by “Government Sachs.” Since almost everyone was on the deregulation and money grubbing gravy train, Democrats as well as Republicans can be blamed for its derailment. Jim Rogers, who was Mr. Soros’ partner at Quantum, notes that Obama appointees Timothy Geithner and Larry Summers were wrong for 15 years, and that Mr. Geithner was instrumental in botching the handling of the current crisis. Rumor now has it that Mr. Summers might take over the chair of the Federal Reserve Board of Governors from Depression-era buff Ben Bernanke.

Mr. Soros explained to the Financial Times that funds injected at the equity level are twelve times more powerful than funds used to buy assets off the balance sheet, hence the $700 billion would result in $8.4 trillion in credit fuel. Such is the alchemy of bank finance that he claimed that less than $500 billion of public funds would be sufficient to recapitalize the banking system.

According to a September 26, 2008 Reuters report filed by Anne Penketh, British Prime Gordon Brown strongly supported the original TARP plan, to buy up and sequester bad loans, during his visit to the United Nations in September: “Mr. Brown, speaking outside the UN, said that he had been consulting Wall Street financiers and government leaders from all continents in New York in order to ‘back up the action’ President Bush is taking.” His support of that action reportedly brought him into conflict with George Soros at a breakfast the day before.

But it was Mr. Brown who eventually took credit for Mr. Soros’ brilliant capital-injection idea, as witnessed by an October 15, 2008 article in the New York Times entitled: “British Prime Minister’s Stock Rises as His Bank Plan Lifts Stocks Worldwide.” We learn that Mr. Brown, “after devising a bank rescue plan that has now been endorsed by European and American officials…he is being celebrated worldwide and has revived a political career…. And forgetting for the moment his past enthusiasm for the free-wheeling global capitalism championed by Alan Greenspan, the Federal Reserve chairman whom Mr. Brown has called a mentor, he took full credit where he seemed to feel credit was due…. Not to mention the United States, he added, saying that he would soon speak to President Bush, who went on television Tuesday morning to endorse a remarkably similar plan from his Treasury Secretary Henry M. Paulson, Jr.” That led Mr. Krugman to pose the question, “Has Gordon Brown, the British prime minister, saved the world financial system?”

We may rejoice that what is good for the world is good as well for the messiah who recommends it, and that the motherland was thereby able to look down on its wayward progeny across the pond instead of having the British prime minister pose as the American president’s lapdog. Yet the salve of the salvation was to the best of our knowledge concocted by George Soros. Not that Mr. Brown is a devious and vain politician who plagiarized Mr. Soros’ recommendation. Brilliant ideas have mystically appeared in many heads around the world at about the same time, perhaps secretly implanted by Madame Blavatsky’s Great Masters if not by extra-sensory perception. And then there is the usual grapevine. As for giving and taking credits due, sometimes we do hear or read about something and forget its source, then claim it as our own creation: we recall how Helen Keller as a young girl was accused of plagiarizing a fairy tale, and had the prize she had won for her story taken away from her over the vigorous defense raised by Mark Twain and Alexander Graham Bell. In any case, we should give some credit to U.S. Senator Maria Cantwell, for one, who voted against the original bailout plan with its intended TARP, advocating capital injection instead. U.S. Representative Paul Hodes had consulted with Mr. Soros before twice voting against the bill. Mr. Krugman claimed that besides Mr. Soros, he and economists Nouriel Roubini and Brad DeLong had long favored the capital injection plan – Mr. Brown had simply carried the spear.

Maybe it does not matter who was first in this case, but we think so because we want geniuses at the apex of the money pyramid; we need real money magicians and alchemists now instead of charlatans. There is always a lot of magic to money. Economists have written long tracts on such subjects as the difference between money and credit, but they cannot clearly distinguish the difference. The dollar is clearly marked as a “note”, and the other side of a demand deposit liability in the bank is a debt asset – new money is created when banks make loans. Most of us know very little about financial alchemy; how something might come of nothing; how dross might be converted to gold, is a mystery to us, better left in the hands of the high priests of finance initiated into the Arcanum. When the magicians’ sleights-of-hand periodically falter, the public loses confidence in the symbols on the backside of the dollar; the omniscient eternal eye on the financial pyramid scheme, the imperial eagle clutching the fasces of war and peace, and the motto, “In God We Trust One Dollar.” So we barely understand the capital injection solution Mr. Soros offered and Mr. Paulson bought as a medicine for the financial disease.

Instead of mopping up the highly over-rated junk mortgage mess and wringing it into a slop bucket for rehabilitation and eventual sale, it was thought best for the government to use $250 billion to buy shares in the troubled institutions. If liquidity and capital were the problem, why waste time fooling around with a risky asset management company when the government could kill two birds with one stone by buying shares in the banks, thus debiting cash on the balance sheet to raise the value of assets, and crediting capital to raise the value of that net account as well. The toxic assets would remain on the balance sheet at their marked-to-market value in accordance with FASB Rule 157, a rule that editorialist Steve Forbes called “asinine” because, if the whole truth were told, every bank would be insolvent. If those assets were not as toxic in the future as presently perceived, the banks would get the appreciation in their value.

The government carried out the injections over taxpayers’ heads, and many of them were screaming bloody murder at the outset of 2009. The Sorosian plan is apparently not working because the badly burned banks are reportedly hoarding the money instead of loaning it out. The economy is radically reeling, so why throw good money after bad? Maybe the value of the bank assets will further diminish as the situation worsens, further cutting into the banks’ capital, so it might be better to hang on during the storm and wait for the Sun to shine once again. After all, consumers are hoarding their money as well, making the recession worse, although a net increase in savings would be deeply appreciated by financiers because savings is the major source of funds for investment.

On the other hand, we have an often quoted and debated Celent report that the banks were in fact loaning out more money than ever, and that government officials are apparently relying on limited sources of information to the contrary, sources that they refuse to disclose. Experts say that the increases were only temporary, that companies were taking down their credit lines lest they lose them. Other analysts insist that new loans, even for real estate, were at record highs. But local businesses say they cannot get loans and that the lack of available credit is killing them.

In sum, despite all the professional data collection services and analysts in the world, nobody seems to know exactly what is going on. The government has at one point refused to disclose what they are doing with the bailout money, presumably for the reason that, if people know exactly which banks are not getting capital injections, they might make a run on those banks and put the withdrawn funds into the government-backed banks. Furthermore, we hear that the government refuses to disclose information about a mysterious program going on behind the scenes involving over a trillion dollars in advances to troubled institutions. An Associated Press report states that “we may never know whether the government’s $700 billion bailout worked according to a new report from congressional auditors.” The January 30, 2009 GAO report said that too many programs were involved to sort out cause and effects, and that more information was needed about the division and use of the bailout funds in order to ascertain the effectiveness of the recovery plan or the lack thereof. An earlier GAO report had already blasted the lack of transparency or opacity of the bailout program.

That is not to say that Mr. Soros’ capital injection notion was a bad idea – he did not say it was a quick fix, and he still seems to be pushing it. We cannot really say because we don’t know what is going on. The jury is still out, and is asking questions of the public money managers, many of whom came through the revolving door to save the very outfits they worked for. The jury foreman hopes Mr. Obama and his experts who helped create the crisis will deliver on his promise for transparency. But stalwart holdouts, who think nothing worthwhile can be done democratically because factions are bound to bicker ad infinitum over the dirty details, claim that bank operations should be clothed in secrecy; indeed, perhaps it was Federal Reserve Board Chairman Ben Bernanke’s new transparency policy that initially panicked the financial markets, not to mention the interest rate hikes designed to take away the punchbowl his irrationally exuberant predecessor had laid out for Wall Street’s drunken party.

The Federal Reserve Act of 1913, as we know, was a Congressional reaction to the 1907 panic. The House Banking and Currency Committee held hearings in 1912 and determined that America’s financial system was in the hands of a “money trust… an established and well defined identity and community of interest between a few leaders of finance . . .which has resulted in a vast and growing concentration of control of money and credit in the hands of a comparatively few men." What’s new? The nation, including its financial branch, is still owned by the “money trust,” and that trust makes a great deal of money on the opportunities provided by volatility – buy low, sell high. In one of the greatest paradoxes of all times, the financial branch of government designed to flatten out the boom and bust cycles to save the nation from the financial calamity of busts actually contributed to the boom of the 20s and bust of the 30s. According to the market fundamentalist, monetarist-economics tale cited by Mr. Bernanke in his March 2, 2004 remarks at Washington and Lee University, the Fed inflated the money supply in the 20s and then unnecessarily began to hike interest rates. This expansion and contraction of the money supply upset the apple cart. Many of the local banks, instead of taking measures to save themselves, hoarded money the best they could and waited for the new central bank to set policy. Instead of providing liquidity to the system, the central bank hoarded money and allowed many banks to fail. Herbert Hoover concluded that “the Reserve Board was indeed a weak reed for the nation to lean on in time of trouble.”

Mr. Bernanke attributed the severity of the Great Depression to the early reliance on the rigid gold standard. The countries that abandoned it in favor of monetary flexibility fared better. Even so, market fundamentalist extremists are effusing on the relative value of glittering gold during the greatest crisis since the Great Depression. Steve Forbes, for example, in the February 16, 2009 issue of Forbes, bemoans the indefinite definitions of money supply, and rues the inflationary policies of Mssrs. Greenspan and Bernanke. He thinks the Fed should look to the price of gold to determine its monetary policy: “If it moves outside a certain narrow range, the monetary authorities should react by either tightening or loosening the money supply.” Market fundamentalists blame Mr. Roosevelt’s New Deal for prolonging the Great Depression – they claim that countries that did not resort to massive recovery plans pulled out much sooner than the United States. After learning so many lessons from the Great Depression, Mr. Bernanke still hiked rates himself, purportedly unnecessarily, some time after his predecessor’s hands-off approach led to the Dot.com Boom and the Real Estate Credit Boom. But when the credit crunch became all too obvious, he was determined by his interpretation of the Great Depression to curb the violent contraction with buckets and buckets of liquidity, but not enough liquidity as far as Mr. Soros is concerned.

Although Mr. Soros now says that the amount of taxpayer money required for recovery is too big for the political will to handle, he is still harping on his pet liquidity notion, which he apparently thinks Henry Paulson badly botched, hence the believes the banks need recapitalization on a stupendous scale; $1.5 trillion dollars instead of the less than $500 billion he had previously said would do the levitation trick. Reuters Television quoted him at the World Economic Forum on January 26: “They need a thorough reorganization of the mortgage system, and you have to replenish the equity in the banks. That would require an injection of about a trillion and a half dollars – much more than if they had done it previously under the TARP.”

Mr. Soros claims that the ad hoc salvation programs have been much too little and far too late; the first half of the TARP funds was haphazardly and capriciously distributed; therefore the economy is virtually doomed. He has been prophesying doom for some time; if anyone consistently predicts a severe downturn in the general business cycle, he will be regularly be proven correct, albeit less frequently if regulation can gradually raise the troughs and flatten the peaks. His pessimism is making him richer while other hedge funds are losing bundles. This time Mr. Soros’ dire forecast might be right. We hope not. And we hope he himself hopes his prophecy is wrong, or will be made wrong because it will be heeded and appropriate action taken to avert disaster. If he can outlive the global calamity, he will probably be the first optimist to scoop up on the upturn.

In an October 18, 2008 interview published by the Bangkok Post, Nathan Gardels, the editor of Global Viewpoint, asked Mr. Soros why all the efforts of the U.S. government had not stemmed the financial and economic crisis. Mr. Soros implied that the efforts had not worked because of the tardy response of the U.S. authorities who had bought into the fallacious market fundamentalist ideology. Mr. Paulson responded to emergencies on an ad hoc basis, Mr. Soros recounted, and then came up with a $700 billion plan to put money in the wrong place. But the U.S. government has “finally came around, with the government buying equity stakes in banks because they see the financial system is on the verge of collapse.” But on January 28 of the next year, CNBC quoted him as saying the first half of the $700 expended by the Bush Administration has been “wasted”; since that half included the capital injection he had urged, we sense his antipathy towards the previous administration causes him to contradict himself.

Besides, “recapitalizing the banking system by buying equity stakes in the banks,” prescribed Mr. Soros, there must be interbank loan guarantees, and the London Libor and U.S. Fed rates must be aligned, which he said was being done. A safety net must be provided to European banks to prop up the Euro. And the U.S. mortgage system must be reformed “so that mortgages are not worth more than houses.”

That sort of mortgage reform, with mortgages being written down to the fair market value of the collateral, with the banks and the government sharing the costs of the write down, is seldom mentioned by public officials, but it has been publicly advocated in the U.S. by failed banker and free-enterprise professor Charles Calomiris, who, in an October 14, 2008 Forbes Magazine article entitled ‘How To Prevent Foreclosures’ cited Mexico’s El Punto Final (final point or last chance) program as a successful example. But in an academic paper (‘A Taxonomy of Financial Crisis Resolution Mechanisms: Cross-Country Experience’, World Bank Policy Research Working Paper 3379, August 2004) Mr. Calomiris authored with scholars Daniela Klingebiel and Luc Laeven, certain doubts were raised: "It is difficult to assess the effectiveness of the Punto Final program, not least because it was preceded by, and coincided with, numerous other financial support and debtor relief programs. After all, the Punto Final program, as its name indicates, was intended to finalize the bailout of the banking sector and the debtor relief program in Mexico. There were also other positive developments: growth, increased banking sector income, and foreign entry into banking, which improved the condition of banks and the supply of credit during this period. Nevertheless, despite the difficulties of attribution, we note that the banking system did show some improvements in indicators of asset quality, profitability, and capital adequacy during the years 1997-2000, and that Punto Final may have played a role in those improvements....”

Mr. Soros also supports a sort of steady-drip infusion of capital as a solution, from a central pool into the veins of sick countries throughout the globe. He said that “the IMF must deal with the vulnerability of countries at the periphery of the global financial system by providing a financial safety net. This is also in the works. The Japanese have already offered $200 billion for this purpose.” (Underlining supplied). That underlined “must” stems from his sense of injustice. In the absence of social justice on a global scale, globalization, which can be a good thing, must fail. Indeed, all civilizations and nations must fail unless justice is done. A Greek myth claims that almost everyone is naturally endowed with a sense of justice, and that adults who do not have it should be put to death. Taking our cue from the American jurist Edmond Cahn, we speak of the sense of injustice rather than the sense of justice, for justice is ill-defined except through bad feelings of its absence. Countless tomes have been written in attempts to define justice in itself, but we know right away, even as children, when some injustice has been done to us. For instance, our sense of injustice is aroused when we are not treated equally and deservedly in accordance with out human dignity.

Now it has been offered, by those who would separate politics from economics, that the provision of equal political justice under the law, so that all persons are treated the same by the authorities and get their just deserts regardless of their rank or status, is one thing, and that economic justice, that everyone get the things they deserve, is quite another, for some people deserve more than others, and a few deserve much more than the many. But the many may claim that necessary goods are equally deserved by all human beings; food, shelter, and health care. And everyone, no matter how “peripheral”, should be afforded the dignity all humans equally deserve, instead of being exploited like slaves.

Mr. Soros advocates “social justice”, and by that he means political-economic justice, wherefore a number of his privileged critics, many of whom prefer the hierarchical, authoritarian order of corporatism hence are sometimes called fascists, refer to him as a frustrated socialist whose justice, instead of liberating people, would actually condemn the masses to totalitarian serfdom. Yet, despite his support of pot-smoking homosexuals and the like libertines, and being characterized by fundamentalist preachers as the Devil incarnate, he is actually somewhere in the middle of the secular spectrum, between communism and fascism, revolution and reaction – as we know, he posed as a Christian and survived the battle between the Nazis and the Communists over Budapest.

In his book, The Bubble of American Supremacy, Mr. Soros outlined the social injustice of the current globalization scheme, which, he wrote, has its origins in the absurd market fundamentalist undertaking spearheaded by Margaret Thatcher and Ronald Reagan when they took power in 1980. The main idea was to reduce state interference in the global economy so the Invisible Hand could miraculously bring the markets into utopian equilibrium – there is no such thing, the atheistic Mr. Soros insists. Leading neo-imperialist countries, embarking on a new phase of economic colonization, and amply endowed by the first world’s main financial centers, naturally grabbed the advantage and roundly exploited weaker countries about globe.

Mind you that Mr. Soros approves of globalization but only to the extent that the winners compensate the losers. He swears that markets on their own are incompetent when it comes to “taking care of collective needs, of ensuring social justice. ‘Public goods’ can only be provided by a political process. Globalization has severely impaired the capacity of the state to provide public goods for its citizens by interfering with the most convenient and copious source of revenues, mainly taxation of incomes and profits….. As a result, the welfare state cannot be preserved…. Collective needs and social justice received short shrift because the development of the international institutions that would be necessary for their promotion has not kept pace with the development of the markets…. Globalization has favored the pursuit of profit and the accumulation of wealth over the provision of public goods…. There is a growing inequality between rich and poor…. The trouble is that the winners do not compensate the losers either within states or between states…. Countries at the center of the global capitalist system enjoy far too many advantages over countries at the periphery. Perhaps their greatest advantage is that they can borrow in their own currencies. This allows them to engage in counter-cyclical tendencies, that is, they can lower interest rates and raise government expenditures to fight recessions.”

The United States is still king of the mountain. Despite the financial calamity in the United States and the fundamentalist clamors for golden pegs, the dollar remains relatively strong because it is perceived as safest, at least the lesser of evils, and is, ultimately, backed by the biggest guns instead of gold. Nevertheless, beware, for nothing lasts forever. Princeton economist and former vice chairman of the Federal Reserve Alan Blinder’s explanation was quoted on that subject, in the January 30 New York Times coverage of the World Economic Forum: The dollar as a reserve-currency is unlikely to be threatened because “there aren’t that many safe havens.” But the dollar’s long-term value against other currencies would be vulnerable if the Treasury debt reaches such heights that investors feel they are holding too many dollar assets. Several attendees at the conference worried about the rising tide of economic protectionism where countries encourage their banks to lend domestically, and credit protectionism, a. new sort of mercantilism where nations sop up credit availability. Trevor Manuel, the South African finance minister, said he wants the big countries to share their borrowed wealth, but he fears they will not: “Large countries are accessing international capital for themselves,” he said. And Mr. Blinder said the risk of credit protectionism would rise if banks were nationalized

The January 30 Times article referred to the nationalization bugaboo in a headline on page 4 of the business section: “A Sense of Danger In Letting Government Direct Investment.” Nationalization of any business, and especially the banking business, is greatly feared by businessmen who do not own the nation. On January 26, 2009 the New York Times quoted Nancy Pelosi on the touchy bugbear: “Whatever you want to call it, if we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization. I’m not talking about total ownership. Would we ever have thought we would see the day when we’d be using the terminology, ‘nationalization of banks?’ ”

Never mind that, notwithstanding the Federal Reserve Board’s public-private alliance posture, the all-powerful Federal Reserve Bank is a so-called independent national bank presenting itself as a virtually independent branch of government; that the nation’s corporatist banking system is virtually nationalized and centralized under the all-seeing eye at the apex of the pyramid; and that the financial system is still in the few dangerous and irresponsible hands declaimed by Andrew Jackson in his attack on the Second Bank of the United States, the charter for which was not renewed in 1836. The corporatist principle was laid down well by Steve Forbes’ corporatist hero, Alexander Hamilton, on February 23, 1791, in his implied-powers argument for the First Bank of the United States:

“In entering upon the argument, it ought to be premised that the objections of the secretary of state and attorney general are founded on a general denial of the authority of the United States to erect corporations. The latter, indeed expressly admits that if there be anything in the bill which is not warranted by the Constitution, it I the clause of incorporation. Now it appears to the secretary of the treasury that this general principle is INHERENT in the very DEFINITION of government and ESSENTIAL to every step of the progress to be made by that of the United States, namely: that every power vested in a government is in its nature sovereign and includes, by force of the term, a right to employ all the MEANS requisite and fairly applicable to the attainment of the ENDS of such power, and which are not precluded by restrictions and exceptions specified in the Constitution, or not immoral, or contrary to the essential ends of political society.... If it would be necessary to bring proof to a proposition so clear as that which affirms that the powers of the federal government, as to its objects, were sovereign, there is a clause of its Constitution which would be decisive. It is that which declares that the Constitution, and the laws of the United States made in pursuance of it, and all treaties made, or which shall be made, under their authority, shall be the supreme law of the land. The power which can create the supreme law of the land in any case is doubtless sovereign as to such case.”

James Madison got stuck by political circumstances with the unwelcome task of arguing against the establishment of a national bank – George Washington, who had been Madison’s silent partner at the Constitutional Convention, reportedly denounced Madison, in his dying statement, for his defection. We excerpt this juicy tidbit from Elliot’s Debates report of his February 2, 1791 argument before the House of Representatives:

"This power of establishing a bank had been, [James Madison] said, deduced from the right, granted in the Constitution, of borrowing money; but this [bill to establish a national bank], he conceived, was not a bill to borrow money. It was said that Congress had not only this power to borrow money, but to enable people to lend. In answer to this, he observed that, if Congress had a right to enable those people to lend, who are willing, but not able, it might be said that they have a right to compel those to lend, who were able, and not willing.”

While attending the World Economic Forum in Davos, Mr. Soros said the United States needs to recapitalize its banks, but the way that the TARP funds were used has “poisoned the well,” wherefore anyone in their right mind would be reluctant to commit any more money to the banks in view of how the funds were misused. At first, Mr. Soros reportedly spoke favorably about the so-called bad bank or virtual bank nationalization proposal floated in the United States; we quote the January 28 Reuters account: “Speaking to Reuters Television at the World Economic Forum in Davos, Soros said the planned U.S. fiscal stimulus and proposals for creating a ‘bad bank’ to pool banks’ bad loans and assets may help ease the economic crisis stateside.”

Ironically, the “bad bank” proposal to sequester toxic assets would bring the government full circle, back to the original intent of the so-called bailout bill. And we might suppose on that ironical note that Mr. Soros is allegedly in favor of the asset management company approach he originally opposed due to his preference for direct purchase of shares in banks. After all, under the “bad bank” plan calls on the government to take the toxic assets off the hands of the banks and put them into the “bad bank”, in effect a federal asset management company, for eventual resolution, just as the troubled real estate assets of failed S&Ls were put into the Resolution Trust Corporation.

But according to other reports from Davis, Mr. Soros said the “bad bank” idea was a lousy one. The fatal flaw would of course be in the evaluation of the toxic assets, which are so difficult to evaluate that the price might fall with a rather broad range, hence might be too favorable to the banks, leaving the taxpayers with an enormous loss, or it might not be favorable enough, and the banks would have to come back to the public trough for more capital transfusions, but by that time the public would already be fed up with them. Under the “bad bank” proposal, the price received by the cleansed banks along with their good assets would then remain in private hands, and the asset management company would constitute a public toxic dump. Mr. Soros is interested not in the toxic dump but in the good bank left over: He would seize the troubled banks and dump the unsecured debentures and capital into a “side pocket” or asset management company, and then recapitalize the good banks with a direct capital infusion, using the $1 trillion the government would have expended buy toxic assets instead of seizing them according to his nationalization plan, which he admits Americans do not have an ideological stomach for; a $1 trillion recapitalization under the choice parts of the banks’ balance sheet might allow for the expansion of good loans up to $12 trillion pursuant to Mr. Soros’ understanding of the capital requirement rules. The lousy assets stripped off and put in the government’s “side pocket” would be managed and liquidated. Since the capital and unsecured debt were put in the side pocket too, we suppose the proceeds would be distributed to those shareholders and debtors, hence the government would get nothing in return for is salvaging plan unless some fee were included – we await Mr. Soros’ explanation on that point when he clarifies his plan. We imply from his statements thus far that he believes the original capital injection plan fell short not only because of the amount advanced and the despicable manner in which the funds were allegedly mishandled by misleaders, but also because the toxic assets were left on the banks’ balance sheets; the burned banks were inclined to hoard the new capital, and/or broaden their capital base by acquisition of lesser banks, pending disposition of those assets; the uncertainty of the value of the toxic assets also made the creditworthiness of the banks dubious. Who, besides Congress, the bought and paid for political bureau of big business, would throw good money after bad?

Mr. Soros’ approach would be somewhat similar to that taken by Sweden in the early 90s. In fact, U.S. banking experts have cited Sweden’s experience in support of the so-called bad bank program floated, which is better called a bad bank/good bank approach; the mainstream press has generally waxed enthusiastic about it, thinking that it might be el punto final or last chance for the United States to save its banking system so the rest of the economy has a basis for recovery. Sweden swallowed two large banks whole, and split them into two good banks and two bad banks. The bad banks or toxic asset management companies were dubbed Securum and Retrieva. The good banks were eventually re-privatized. The two bad banks were apparently merged and the assets were successfully managed and disposed of much earlier than expected, at some considerable net cost to the public. Other Swedish banks, fearing nationalization, scrambled for private solutions to the predicament.

But the Swedish success was rather limited, as can be see from Daniela Klingebiel’s expert paper on the subject, ‘The Use of Asset Management Companies in the Resolution of Banking Crises, Cross-Country Experiences’ (Working Paper 2294. Washington, D.C.: World Bank): “The track record of … Sweden … did not record any renewed banking system distress but real credit to the private sector contracted significantly…in the years that followed the establishment of the AMCs, indicating that the restructuring of banks was not yet complete…. While Securum (AMC) may have helped to expedite restructuring in the real estate and construction industry by enhancing the coordination among debtors, its impact on the restructuring efforts in other sectors of the economy appears limited…. Real lending to private sector by banks did not recover. In 1993/94 real credit to the private sector contracted significantly.

Mr. Soros, who is no doubt more familiar with the Swedish crisis on a practical level than most American experts, confessed to Reuters Television that he believes that the good/bad bank measures would be mere palliatives. In any event, he has repeatedly observed that the fallout in the real economy is gathering momentum, and that repairing the financial system will not stop a severe worldwide recession. Following his line of thinking on social injustice, we opine that such a recession would have a much greater hence unfair impact on peripheral countries than on the major economies at the center that helped prop them up for awhile. Instead of banding together and pooling resources for use wherever needed, the wealthier countries might tend to withdraw and hoard their resources in order to fend for themselves. The negative impact will naturally arouse the sense of injustice every person of conscience is endowed with, especially denigrated persons in the virtual colonies who are suffering the most. In the final analysis, the people of the world might resort to war and revolution to settle their accounts.

Most of the above is a skeptical recounting that might lead one to believe that it would be better to do nothing at all because nothing really works – salvation may be in faith and not works, as the firebrand preacher Martin Luther rudely insisted on in such a convincing manner that even classical humanists were enthused. President Obama – prejudicially perceived by some as a messiah and by others as the persuasive anti-Christ forewarned of – fresh from the campaign trail, seems to be very long on recounting the ill consequences of the mistakes of the preceding administration, and somewhat short on innovative solutions nobody has heard of hence might believe in for awhile. He seems to rely on the classic solutions concocted and managed by the same old people whose lackadaisical libertarian attitude caused the current crisis. At least they know what happened; and now they would throw fuel on the smoldering coals in hopes they might burst into flames again, and this time they would do what every repentant soul has done before, better regulate its sins by organizing the greed for more and more fuel – religion worships power while politics distributes it.

What, then, does Yours Truly believe, and what does he do? I am doing better the closer I get to the end. As for contributions, mine is in the form of the interminable bourgeois musing that fascist philosophers of action have complained about. I confess that the whole crisis is a great mystery to me, and I feel it has something to do with the existential crisis each individual lives out. I do have my beliefs to give me confidence during downturns. Indeed, the worse things get, the more of an optimist I am. I have little desire to posses much of what I see as the junk, trash, and garbage of so-called prosperity. If it were not for my proverbial conflict with totalitarian authority, I might like to enjoy the crisis in a world laid out in crosses according to Joachim’s monastery system. Yet I do not resent people who want a lot of stuff as long as those who do not want a lot can have enough to live on and have plenty of leisure to be silly or serious. As risk-averse and impoverished as I am, I am making token investments, or rather gambling, on tremendously risky ventures such as Wells Fargo Bank and General Electric, and I have invested pittances in Cisco and Equity Residential, but I have the highest hopes for my tiny investment in Capstone Turbine’s little engine that could. That is to say that I believe a material turnaround is imminent if repentance is had. But I do not believe that Wall Street, no matter how it is regulated, is essential to economic success. Whole countries and countless business ventures have prospered without a secondary stock market. Puritan critics say the casino is the epitome of vice, and that the house is now churning the market to fleece the small investors on the ups and downs. Apparently fools like me are born every second in Japan, where millions of small investors seem to be snapping up shares as the big investors flee.

I believe that we are part of nature, and that we are experiencing some very bad weather, but fair weather shall return bye and bye, and then the arc of our civilization shall continue on its voyage, with fewer beasts. In mythical terms, I believe that Demeter stooped over to pick the narcissus, sniffed it, fell into a trance, and was abducted into the underworld by its god of the underworld, but she shall return periodically to feed us if we do not abuse her. I believe our translation of Gaea is hysterical; no seeds planted during her period will do any good, but if we abstain and cultivate our nature, which is hers, for awhile, she shall be ready to bear good fruit. I believe that the world is both mentally and spiritually ill, and that no mechanical devices including the injection of capital drugs can be effective absent a moral and spiritual rejuvenation – the moral inclination is rational and wants righteousness, while the spirit is irrational and desires absolute power that it may eternally endure. I am fascinated by the rational economic theories; none of them are really scientific in the predictive sense, and I certainly would NOT have a professional economist manage my financial future, although I might invest 10% of my meager savings in a hedge fund managed by Keynes & Soros – of course my entire savings would fall short of the minimum investment required.

President Obama is well aware of the need for moral rejuvenation, and he is responding with the liberal theology that actually gives precedence to the poor instead of giving it lip service on Sundays, a theology best espoused in North America by the Black Church. It remains to be seen if he can maintain a high moral ground without the fertilizing corruption that helps things grow. The essence of religion is mystical, not moral, and it appears that the President may want to develop his intuition, and rely not so much on his advisors’ well-worn advice. i

His sermons on sacrifice, that everyone must give some “skin” to the cause, finds deaf ears not only in the sort of wealthy people whose fortune is built on greed, but on those lesser folks who have already sacrificed their homes and jobs to the policies previously forwarded by several of his appointees.

Grand plans of action are to be announced on the morrow. Money will have to be created to advance those plans – that is what banks do for their living. We certainly do not need gold-backed dollars, for gold is something to be hoarded by misers. We do not need cement-backed dollars either, although cement can be put to good use. We need infrastructure-backed dollars, for infrastructure investments in the likes of health care and education can provide us with profitable uses for many years. Yet none of the plans will work without widespread confidence in one scheme or the other. The scheme or logos has to be spiritually inspired. Confidence is not something that can be made from without but is something that can be found within. With faith, con-fidence, some plans will still fail, but enough of them shall succeed to get the ball rolling merrily along again. The rolling consensus is forged from conflicting evaluations. When more people are buying than selling a security, its value shall rise in this sphere. Every once in awhile the reputable confidence man is exposed as a complete fraud, and he may smile at this irony on the way to jail. If we cleave to fundamental values, the secondary and derivative markets are less likely to do us harm. The basic principle was set forth in the ancient texts at everyone’s fingertips, so I need say no more except that if liquidity is wanted in this spiritual desert we had better pray for rain.