Wednesday, December 8, 2010

The Secret Fed

The cause of the Lehman Brothers debacle was their reliance on risk as a moneymaker, or the "undervaluing of risk" as former Federal Reserve Chairman Alan Greenspan liked to put it. The problem with risk was that the investment firms and banks were hiding it from the investors. One of the main features of capitalism is advertising. Advertising is mostly misleading and just plain old lying about a product. I learned this long ago when my "Hotwheels" toy cars weren't as hot as they were advertised on Saturday morning when I actually got them for Christmas as a child. I never forgot it. I look at the new commercials for the investment banks and see them saying the same things they said before. You can trust us, we'll see to your future.

Banks and investment firms were making tons of money selling investments like Credit Default Swaps and Securitized Debt Obligations on the high end of the scale, and Mutual Funds for peoples 401k's, risky mortgages and other instruments on the low end. Risk was incredibly high but it was "undervalued" or hidden. We know that some people in the government knew the risk. Some of them testified before congress. Economists like Nouiel Roubini, or  "Dr. Doom," as he was labeled because he was always talking about the risk, knew about the problem. (And he is even doomier than the news media even today. See :
He would actually like to be called "Dr. Realist," and having been completely correct in his former prediction and warnings, it seems like a small request. The media still calls him Dr. Doom highlighting the media's former cheer leading for balloon salesmen and their smearing tactics for anyone with a pin.

After the giant mistake of the Fed allowing Lehman to go under, panic was everywhere. This made the bailout critical to our national interest and the interest of world society as a whole.  As we dealt with the unforeseen consequences of the Fed's big oops moment, the bailout was definitely pretty smart, well following pretty darned dumb

"Helicopter money" is the established method of stopping the downward spiral of a depression. The idea is to throw as much money, as if from a helicopter, into the economy protecting it from imploding like it did in 1929. Values increase. Milton Friedman coined the term for this way to stop spiraling deflation. It just didn't matter who you give the money to as long as it drifted through the economy. Inflation fights deflation.

In an article in Financial Times (UK), an analysis is made of documents that the Fed has leaked recently. Many American newspapers figure the news from the Fed is about what they expected. Rah! Rah! Britain Sebastion Mallaby has a different take on the subject. The TARP fund was $700 billion with the blessings of congress. However, $3,300 billion more was loaned without congressional approval to banks and companies. I wrote that figure correctly. It's just being revealed now in the leaks. That is, it was hidden before.

Sounds kind of secretive don't you think? It was. We only learned of the risk we were undertaking because of a small clause in Dodd-Frank bill which forced the Fed to disclose. They had to disclose the risk they had hidden from us. Not only the amount of the money was hidden but the risk of many of the investments being based on collateral like subprime mortgages and junk assets.

The people who got the helicopter money, well, it wasn't the people losing their houses. And, under a new administration, to get the money for people who lost their jobs and have now run to the end of their unemployment, there must be a compromise for the continuation of tax cuts for the millionaires who are still millionaires because of the very risky hidden bailout, a bailout risking a substantial portion of every one's money. It is mind boggling in its insidiousness.