Yesterday, Paul Krugman breathed a small sigh of relief and said a little prayer of thanks for Ben Bernanke:
I believe we’ve been lucky to have Ben Bernanke as Federal Reserve chairman during these trying times. He may lack Mr. Greenspan’s talent for impersonating the Wizard of Oz, but he’s an economist who has thought long and hard about both the Great Depression and Japan’s lost decade in the 1990s, and he understands what’s at stake.
Mr. Bernanke recognized, more quickly than others might have, that we were in a situation bearing a family resemblance to the great banking crisis of 1930-31. His first priority, overriding every other concern, had to be preventing a cascade of financial failures that would cripple the economy.
The Fed’s efforts these past nine months remind me of the old TV series “MacGyver,” whose ingenious hero would always get out of difficult situations by assembling clever devices out of household objects and duct tape.
Because the institutions in trouble weren’t called banks, the Fed’s usual tools for dealing with financial trouble, designed for a system centered on traditional banks, were largely useless. So the Fed has cobbled together makeshift arrangements to save the day. There was the TAF and the TSLF (don’t ask), there were credit lines to investment banks, and the whole thing culminated in March’s unprecedented, barely legal Bear Stearns rescue — a rescue not of Bear itself, but of its “counterparties,” those who were on the other side of its financial bets.
Well, that's one way to look at it. Here's another by Spot's favorite prophet of doom, James Kunstler:
The Fed has, in effect, made itself the world's largest financial shit-magnet. It has already taken in a few hundred billion in securities based on non-performing real estate loans, and has now opened the window to securities based on non-performing credit card debt, car loans, and other miscellaneous IOUs still drifting un-hedged in the banking ether. [italics are Spot's]
That's an arresting image isn't it, boys and girls? Kunstler continues:
It's a mark of our collective desperation to avoid the consequences of so much reckless behavior that no credible authorities have stepped up to denounce this racket -- no Fed governor, no politician of standing (including the candidates for president), no newspaper-of-record. The Attorney-general of New York, Andrew Cuomo, may be quietly cooking up some cases in the deep background, but the SEC and the federal banking regulators hung up their "out-to-lunch" signs on this long ago.
Meanwhile, the basic situation is this: the world is awash with bad investment paper. The standard of living in the US can't be supported on debt anymore. The people of the US don't produce enough real value to service their debts. Institutions can no longer be supported on debt gone bad. Something's got to give -- meaning something has to bring the US standard of living down to a level consistent with our declining actual wealth.
Everything else going on right now is a dodge. The Fed maneuvers, the "coordinated actions" of the western central banks, the postponements of default, the non-disclosure of contents in bank portfolios, the pretense that risk alone is a kind of fungible resource that can be endlessly traded to generate fees -- all this fucking nonsense will only make the eventual unwinding much worse.
Spotty, we had better hope that Krugman is right!