Saturday, March 29, 2008

Pondering

Let's take a moment and lift our eyes from the individual trees of the fighting in Southern Iraq, the ongoing rumblings in Pakistan, the potential chaos lurking in the wings if the run-up in commodities prices collapses (something that would certainly hit close to home for those of us here in the FutureJacked Bunker out in the wilds of Missouri) and the slow-motion avalanche of the credit crisis and focus on a potential macro development of enormous proportions.

Let's start with a story, review and little history and ponder what that may mean for the future of the United States of America.

Treasury’s Plan Would Give Fed Wide New Power
By Edmund L. Andrews
WASHINGTON — The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system...

On the surface, the story is unremarkable for the most part. Another attempt to regulate our way out a mess that was caused by an ugly hybrid of no regulations (hedge funds), bad regulations (the vast incentives to expand credit in the property markets in the form of tax breaks and the million and one other ways property transactions are distorted by laws and regulations), and a Federal Reserve that decided to act like a teenager given the keys to the family liquor cabinet and left alone for a long weekend (Greenspan's 1% rates, encouragement of the most vulnerable buys to take on Adjustable Rate Mortgages at the worst possible moment, his general encouragement of the belief in the 'Greenspan Put' that gave incentive to finance companies to take on insane amounts of leverage).

In addition, the story promotes the plan without any reference to possible Fed culpability in the inflating of the Bubble in the first place. This is like the New York Times running an article about the hiring of a Gambino family operative to run the FBI's anti-mafia operations in New York and running it as straight news. Amazing.

The underlying implications for the "system" are what worries me. Earlier this week, I ranted a bit on what I considered an idiotic comment from Vice President Cheney in Dude, What Are You Smoking (eloquent title, eh?). I'd like to discuss my train of thought and how a stupid comment by the VP on Iraq relates to a potentially stupid shift in the way banks, insurance and mortgages are regulated and disposed of in the U.S.

First, a little history. In my opinion, some of the reasons that the U.S. government maintained a reasonably high level of credibility for over two centuries was because of:

1. A general hands-off approach to economic involvement (note - yes I am aware of the high-level corruptions involved with parceling out railroad land, government contracts for the Army being awarded to insiders, etc. - my focus is on the fact that in a relative sense, there was far less direct involvement of the federal government in the economic lives of U.S. citizens for much of the first 140 years or so of the Republic)

2. The general distrust of bankers in much of the country, especially the areas of the Ohio Valley and the Western Frontier, typified by proponents of Jacksonian Democracy.

3. In the latter half of the twentieth century, the U.S. had grown so wealthy that economic shocks were easier to weather and government assistance began to accepted as a positive thing - and as long as the U.S. has the money to provide all the cash and goodies it has promised, this newer development will still stand.

So what? Well, those first two trends are now long gone, but when they were strong it meant that in times of economic turmoil, recession or depression, the bankers got blamed, the local politicians got blamed, but not usually the federal government. This allowed the feds to build up enormous reservoirs of goodwill in the minds of the public. Again, I am generalizing, but the U.S. government weathered economic storms that toppled governments all through South America and even Europe - so we were doing something right. When the feds weren't directly associated with the day-to-day economic fluctuations in the lives of citizens, it allowed them to be perceived as above the fray.

Well, now we have the Federal Reserve possibly about to move into a position of power over the U.S. economy that is unprecedented. Now, while I don't consider myself a member of the tinfoil hat brigade, I have always regarded the Fed with extreme suspicion. Now the Fed could move into a role where it can regularly buy up assets of the country, set valuations of said assets on a whim (through sham sales at prices it decides, and resulting in 'mark to market' problems for the asset base of those who don't go along with them - and this will be especially powerful if they neuter the SEC in this upcoming regulatory shakeout) and, if the legislation is sweeping enough, gain a say on everything from insurance regulations to commodities trading.

The U.S. will then be in position where the everyday economic life of the citizens are perceived as being directly influenced from Washington D.C. (to the extent that is not already the case). When the ongoing solvency problems continue to wipe out firms, as credit continues to dry up, it will all be laid at the foot of the Fed.

I remarked in the post on Cheney that I cannot understand why the elites are pursuing policies that guarantee their doom. We need elites in the U.S. who are educated, who are far-sighted and who can make tough choices. It appears we are saddled with elites who are book-smart but real-world dumb, who are short-sighted in the extreme and who couldn't face up to tough choices if they had a gun to their collective heads (witness - U.S. Budget Deficit, U.S. National Debt, Medicare Program, Social Security, et al).

When a leader or an oligarchy like we have now, associates their credibility directly with the day-to-day turmoil of market fluctuations in economics or individual battles in war, then they risk the whole system. Those who stay above the fray, allow for the fluctuations and bankruptcies in the econmic realm and allow for setbacks in war by firing those who fail (Lincoln was a master of this, Jeff Davis was not) may suffer at the polls, but the system itself is not thrown into question.

Those leaders who do associate their personal credibility with individual battles by going to the scene and "taking over" (Maliki today in Iraq, the last Russian Czar in World War I) are risking everything on an inherently chaotic process - war. Same for those who associate their credibility directly with economic results - if the Fed does get all these new powers and does become the de jure imperator of the economy instead of the de facto honcho, then when the insolvency crisis really explodes, it will call into question the entire system - the Federal Reserve and the U.S. Executive Branch.

At this point it is too late to reverse such a trend, so I ask that you just think about the implications. Millions of home-debtors will be facing an economy with very bleak prospects. Many will be booted from their homes, with all the psychological baggage that goes along with it. They'll have someone to blame - but these days it will be the federal government.

What types of people will rise to popularity in such an environment? What happens when the very institutions that are the basis of the government lose all credibility?

Sorry for the rambling nature of this post, but I am trying to get my head wrapped around what I consider a potentially explosive, if not revolutionary, mix of circumstances that could bring the whole welfare-warfare state crashing down.

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