Posts

Showing posts from May, 2008

The Meaning of the "Bernanke Doctrine”

The New York Times informs us that there is a new doctrine in town. It is called the Bernanke Doctrine. The president of the New York Fed described it as “the overpowering use of monetary policies and lending to avert an economic collapse”.

On one level, what we have here is the ex post facto rationalization by Bernanke’s sycophant underlings of his actions in the past several months. But there is a subtext to the story.

Firefighters use an overpowering supply of water – as well as fire retardant and explosives, if need be – to fight fires, but they have no “doctrine” about the use of these measures because the need is self-evident and thus, sanctioned.

The Bernanke Doctrine, by contrast, involves policy actions that might violate the by-laws of the Federal Reserve Board. “Over a frantic weekend in mid-March, Ben S. Bernanke rewrote the rule book as chairman of the Federal Reserve,” we are informed.

The rule book of the Federal Reserve is a technical document. It does not lend itself to b…

How're They Doing?

Ed Koch, a cutting edge lowlife who was made the mayor of New York City in the late 70s – once collapsed in a restaurant from overeating – had a catchphrase. He used to ask, addressing no one in particular, How'm I doing? Not that he gave a damn about the answer, but it was good p.r., this show of going to the rabble for feedback.

How should we respond if the central banks, specifically, the European Central Bank, the Bank of England and the Federal Reserve, ask the same question? How are they doing in handling the ongoing liquidity/credit crisis?

The Financial Times of May 16, under the heading “ECB liquidity scheme fears” gave the answer in black and pink. The highlights are in red:

The European Central Bank yesterday voiced its “high concern” at growing evidence that banks are exploiting its efforts to unlock the frozen funding markets by using its liquidity scheme to offload more risky assets than it envisaged. Yves Mersch, a governing council member ... was speaking amid sign of…

US Financials and Fair Value Accounting

A few days ago, AIG reported first-quarter losses of $7.8 billion resulting from the sharp drop in the value of its mortgage securities and credit derivatives. If you were paying attention, you knew that something was in the offing. For some time now, the company’s CEO had been railing against the idea fair value accounting. As reported by Financial Times in March 14:

American International Group is urging regulators to change controversial accounting rules on asset valuation … Under AIG’s proposal, which has been presented to regulators and policymakers, companies and their auditors would estimate the maximum losses they were likely to incur and only recognise these in their profits … Martin Sullivan, AIG’s chief executive, told FT that “mark-to-market” rules forces companies to recognise losses even when they had no intention of selling assets at current prices.First, note the word "controversial." That is FT's characterization. The paper's editors know where their …

On Junk Bonds, Mike Milken and the Current Crisis

Martin Lipton, an old time Wall Street operative and a founding member of Wachtell Lipton recently blamed Drexel Burnham and, by implication, Michael Milken and his junk bond enterprise, for the current credit/liquidity crisis. “The financial crisis we’re in today stems from the invention by Drexel Burnham Lambert of the junk bond,” he was quoted in the New York Times. “You can draw a straight line from Drexel Burnham to the financial world today.”

No single firm, especially a firm that collapsed almost two decades ago, can be the “source” of crisis of the magnitude we are witnessing. What Lipton is looking at, but cannot articulate because he does not comprehend, is the role of speculative capital.

What oiled the machinery of arbitrage was the U.S. Treasury market which the massive borrowing of the government in the 1980s institutionalized. The Treasuries provided a convenient and practical tool for simulating borrowing and lending. All one had to do was to go short or long. In a “reve…