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Mitch Feierstein

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A Hundred Billion Here, a Hundred Billion There

Posted: 05/28/2012 2:37 pm

Last week, on 21 May, the Financial Times ran a short piece which opened thus: "There has been no official announcement. No terms or conditions have been disclosed. But Greece's banking system is being propped up by an estimated €100 billion or so of emergency liquidity provided by the country's central bank -- approved secretly by the European Central Bank (ECB) in Frankfurt." The news barely made it into the U.S. press.

But wait up. A hundred billion Euros? Lent secretly? On unknown terms and conditions? And the entire operation conducted by a bunch of unelected officials and scarcely reported in the media?

Please don't think that these things happen in Europe but could never happen in the United States. They happen here all the time and on a colossal scale. Remember that Bloomberg fought the Federal Reserve all the way to the Supreme Court in order to establish that the Fed lent over $1.2 trillion to the U.S. banking system and that those loans went ahead unbeknownst to and unauthorized by Congress. Oh, and although I say 'the U.S. banking system' what I really mean is 'any bank that puts its hand out for some cash.' So the Federal Reserve considered it appropriate to hand over some of your dollars to such not-very-American institutions as the Royal Bank of Scotland, the Belgian bank Dexia, Credit Suisse, Deutsche Bank, the Italian Unicredit, and too many others to name.

Yet nothing happens. When Bloomberg broke its story about the Fed's secret lending program, a few other news outlets picked it up, but nothing changed. The same people are in charge of the Federal Reserve. They don't think they did anything wrong. No central banker thinks that the ECB did anything wrong by handing a hundred billion euros to the collapsing banks of a failing country. It's just the way these guys do business.

Just to be clear, though, there are alternative ways to do business. You might, for example, think that we should follow the following elementary rules: the central bank should avoid printing money and generating inflationary pressures which affect us all; bankers should lend money prudently and with proper due diligence; if those loans go bad, the banks should lose their money; and, over time, those banks are either left to go out of business (if they're dumb) or encouraged to shape up and improve (if they're not.) That system even has a name. It's called capitalism. We had it in America once.

But not any more. We live in a world where moral hazard reigns supreme, where acts of gross stupidity seem to lack consequence. Where central bankers print money and no one cares. Where banks make dumb loans and get bailed out. Where politicians just want to get reelected and know that the media is going to analyze the spin down to the very last molecule and leave the substance well alone.

Take some other recent news items. Facebook's IPO saw its shares trade up to $45 before falling back to as little as $31, a fall of some 31 percent. It is alleged that Morgan Stanley, one of the banks running the stock offering, revealed data to its institutional clients that it did not share with its retail clients -- data that, in effect, called into question whether Facebook's high valuation could be justified. Morgan Stanley insists it followed every dot and comma of the relevant regulations, and perhaps it did. But retail investors have still lost a shedload of money. And Morgan Stanley and its peers have still made a huge amount in fees. If Morgan Stanley truly did follow procedures, those procedures are plainly inadequate.

Or take JP Morgan's recent $2+ billion trading loss. That arose in a bank which prides itself on its careful risk management. Which has lobbied vociferously against regulations which would prohibit the kind of activities which led to that loss. A bank which is surely 'too big too fail' -- and in my eyes, therefore, also too big to exist.

Yet nothing changes. Just ask yourself these questions. Will the Fed never again extend secret loans to dodgy banks? Will Wall Street firms never again run an IPO that destroys billions of dollars in value for retail investors? Will Wall Street so clean up its act that it never again reports billion dollar losses because of dumb-but-greedy trades?

You know the answers. Nothing changes. In Europe at the moment, a calamity is unfolding. The Spanish bank, Bankia, has had its shares suspended as it seeks to apply for yet more state aid. The Spanish government, terrified by the way the ground is moving under its feet, is beseeching the Germans to help them borrow more money, so they can pass that money on to the same unreconstructed banks that lost it all in the first place. And meantime government deficits go on adding to the ever-less-supportable mountain of debt.

The United States is not yet in that position, but the preconditions are all here. An uncontrolled deficit. An out-of-control banking system. And politicians who would rather defer any problem than tell the truth about the mess we're in.

 
 
 

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