The financial crisis that began in the United States spread to many corners of the globe. Now, the U.S. bailout looks as if it is going global, too, a move that could raise its cost and intensify scrutiny by Congress and critics. Foreign banks, which were initially excluded from the plan, lobbied successfully over the weekend to be able to sell the toxic U.S. mortgage debt owned by their American units to the Treasury, getting the same treatment as United States banks. On Sunday, the Treasury secretary, Henry Paulson Jr., indicated in a series of appearances on morning talk shows that an original proposal introduced on Saturday had been widened. "It's a distinction without a difference whether it's a foreign or a U.S. one," he said in an interview with Fox News. – Herald Tribune
Dominant Social Theme: Finance is global, so there!
Free-Market Analysis: Goodness, it didn't take very long to realize our prediction that the current debacle would be used as a way to further "globalize" domestic financial systems, especially America's. And so long as we're keeping track (and we do), we wish note once more, as we have before, that the "subprime' conflagration is likely wiping out Wall Street's domestic, indy-bank business. Indeed it has. Only a few significant Street indys are left standing now and over the weekend, apparently, two of them became bank holding companies.
The Federal Reserve Board approved the applications of Morgan Stanley and Goldman Sachs Group Inc. to become bank holding companies, the Fed said. “The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies,'' the central bank said in an e-mailed press release in Washington. (Bloomberg)
After the Crash of 1929, commercial and investment banks were split apart via the Glass-Steagall Act. While that law went away in the 1990s, there are plenty of folks who believe that had it been in place, the current sour mortgages that are clogging up big American banks would never been bought to begin with. Well, maybe yes – but it seems a moot point as Wall Street and Congress apparently are heading in the other direction. Banks, big banks are the flavor of the month and Morgan and Goldman are in on it too.
Lest it seem we're not living up to our free-market orientation by mentioning regulation without a caveat, we'll add one now: It is impossible to "regulate" finance. Doesn't work, can't work, won't work and those doing the regulating know it very well.
Glass-Steagall didn't prevent American market meltdowns in the 60s, 70s, 80s or 90s, and while its vanishing may have made things a tad worse in the late "oughts," (2000s) the culprit always remains the same: the central bank – in this case the largest of them all, the Federal Reserve.
Heck, we'll go a step further and suggest that if you threw almost every financial regulation overboard, you'd still have roughly the same business cycle. The timeline might shorten somewhat as financial regulation likely tends to "clog the works" so markets are not as efficient as they would be otherwise. But because the engine of finance is fiat-money printing courtesy of central banking, the business cycle would still be in place.
How could it be different after all? Central banks almost always print too much "money" and eventually people start wondering what they can buy with the extra moola. Gradually, there's increased market interest, then gradual buying of various goods and services alongside increasing financial corruption, market manipulation, kickbacks, etc. – and finally a virtual buying mania. It all ends, of course, with a big blow off. As always, this is accompanied by much chest beating and the offering up of sacrificial lambs to the penitentiary.
On the other hand, you could also make the argument that financial regulation inherently makes things worse, homogenizing what is purchased in such a way that enormous money pours into specific and supposedly "safe" vehicles that turn out to be just as risky as anything else at the end of the day. Let's see … money market funds come to mind. Maybe because absent a Fed bail out on Friday past, there apparently would have been a half-billion run on those short-term "rock solid" investments.
But back to banks. We can't shake the feeling that the endless boom-bust cycle is being cynically used to promote financial globalism. Now we don't have any "skin" in that game, and were international investing and global banking to become inordinately popular within a free-market context, we wouldn't have a word to say. But what's driving globalism is patently something other than the free market. Globalism is being driven forward by what appears to be a combination of elite cronyism, government intervention and, of course, various kinds of central banking manifestations, each seemingly more ruinous than the last.
As far as this last and greatest bailout is concerned, we wonder if Americans truly understand what US$1 trillion or so (we've seen several figures but a trillion is a nice, round number) means to them and the rest of the world.
Americans spent almost a decade borrowing against their houses and buying other houses, or houses they could not afford, or cars and trips and "higher" education – and now most if not all of those purchases are not worth very much. In fact, they're basically gone. But America stills owes China, Japan and Europe trillions because of its Treasury IOUs. That means two things: Those Treasuries are worth a whole lot less to those who are holding them and Americans will paying for them, and other equally questionable assets, for a long, long time.
Hm-mm. That's probably another way of spelling "stagflation: – though it may not even seem like a stagflation for America depending on how long prices "de-leverage." Is a Japan-style non-recovery in store for America over the next several decades? That's perfectly timed, unfortunately, to run right into the retirement of America's baby boom generation. The yammering and yowling you hear from 100 million overfed former hippies is likely to continue, though it's doubtful whether they'll finally have the spare time to figure out who's at fault since many of them will spend their "golden years" working two jobs.
The bail-out of American markets currently being organized by the US monetary elite is quite a thing to behold. And in a way it is actually a down-payment on the continued utilization of fiat money itself. You would think that people would start to question why they have to pay trillions so that global bankers get to continue to print as much money as they want when they want it – and blow up the financial marketplace at regular intervals to boot. But such is "high finance."
Indeed, it's huge money isn't it? Hindsight will show us exactly what was necessary and what was ginned-up to further particular agendas. (Most of it?) And, yes, we do wonder a bit if the financial system will truly collapse if a trillion isn't found by next Thursday. There's something awful fishy about a system that depends on a handful of players sticking their hands deep into taxpayers pockets, all the while making up the rules as they go. As the American baseball player Yogi Berra used to say, "It ain't over ‘til it's over."