Oh Dear, Mises.org

First Published as ‘Overegging the Pudding’, 30th September 2008

In his latest piece, Frank Shostak approvingly quoted Jeff Tucker’s earlier rhapsody as follows:-

But as wonderful as the daily shifts and movements are, what really inspires are the massive acts of creative destruction such as when old-line firms like Lehman and Merrill melt before our eyes, their good assets transferred to more competent hands…. This is the kind of shock and awe we should all celebrate. It is contrary to the wish of all the principal players and it accords with the will of society as a whole and the dictate of the market that waste not last and last. No matter how large, how entrenched, how exalted the institution, it is always vulnerable to being blown away by market forces — no more or less so than the lemonade stand down the street.

While I approve of the sentiments, I am forced to demur at their application.

More competent hands“? Do me a favour! More like hands privileged with more political clout, greater regulatory support and enshrouded in more opaque accounting regulations.

JPM has more risk on its books than any other (large) bank in America, both numerically and proportionately, yet it has somehow come thru’ with shining colours. Was this all due to the superlative entrepreneurial skill of its management? It hardly seems likely. Citi paid an enormous price to buy a hedge fund manager who promptly closed his old shop the minute the embarrassed departure of his ‘dancing queen’ predecessor left him in charge. BoA? Well, who knows whose mess it was they were actually covering up when they took on that nest of vipers which was Countywide?

Nor have Merrill’s assets been ‘transferred to more competent hands’ either – they have been bailed into a more friendly fold where the same senior managers who got them into the mess (and who were probably selling much of their exposure to their new co-managers over the past few years) will still reap fabulous remuneration as the guiding lights of the new bastard offspring.

The US Govt has effectively decided that its corporatist national champions in the coming forced consolidation will be JPM, Citi, BoA and now GS and Morgan Stanley – the latter pair newly transformed into banks where the teat of succour runs more profusely, and where the Fed/FDIC accounting regulations are less onerous than those of the SEC; where they can sit, jaws agape waiting, not to be explicitly bailed out from their funding difficulties, but to pick up cheap deposits from the authorities at the expense of an arbitrary denial of the contractual rights of debt and stock holders in those small fry firms who are seized the moment they totter.

I have to say this next piece of special pleading also made me involuntarily spit my Assam half way across the room:

‘Only a few weeks ago, we saw that the liquidation of a large bank such as Lehman Brothers and the sale of Merrill Lynch did not cause massive disruptions. In fact, the adjustment was swift and almost invisible. The reason for the smooth adjustment is that the market was allowed to do its job. If government and Fed bureaucrats had tried to intervene with bailouts, the whole process would have taken much longer and would have been very costly in terms of real resources.’

No ‘massive disruptions’?!? A ‘swift and almost invisible adjustment‘? The god of the market doing its work?

We had a $200 billion run on money funds; a plunge in many commodity prices; a jump in credit risk premiums to unprecedented levels; renewed stresses at regional banks; bail outs in all of the UK, Russia, Iceland, Denmark, Belgium, Germany and, effectively, Ireland; a near global criminalisation of short selling; wild and damaging gyrations in foreign exchange; what is feared will be the decimation of whole cohorts of hedge funds (many of whom have not only had their business model outlawed but had their assets frozen at Lehman, their prime broker); a further freeze of money and capital markets; the launch of government stock support schemes in Asia and, even before yesterday’s rout, what I think is now in excess of $1 trillion of global central bank injections to try – so far to no effect – to prevent the whole house of cards falling in one quick heap!

I confess that I don’t quite see where the ‘free market’ was at work in any of this. Moreover, I should well imagine that it might just prove ‘very costly in terms of real resources’, indeed, by the time its ramifications become clear. As Fritz Machlup once wrote: “the bust always starts as a monetary crisis and then becomes a real one“.

To call a spade a spade, Lehman was an ill-judged gamble at restoring a little macho credibility to a team which had swung drunkenly between paying handsomely for Bear to be folded into JPM, putting FNM/FRE into ‘conservatorship’ (whatever THAT actually means in practice), semi-rescuing AIG, summarily dumping Lehman (on the ludicrous grounds that, unlike the others, the market ‘could see it coming;!), brokering a Merrill wedding, elevating Goldman to unimpeachability, expropriating WaMu debtors, then taking over Wachovia as a fictional ‘open bank’.

All of this, too, despite a long litany of expressed false optimism and prevarication, not to mention the subtle diplomatic pressure aimed at inveigling America’s long-suffering foreign creditors into pouring more money into these sumps of moral corruption and managerial ineptitude. Failing a positive response from their would-be ‘marks’, the authorities themselves have meanwhile broken every rule and violated every custom in the urge to lend to them on ever easier terms, all without once demanding that they account consistently for what is on their books as a quid pro quo.

Therefore, to add to liquidity problems, deep suspicions about the asset side of the balance sheet, and worries about the future income stream, all this flip-flopping has now engendered an even more debilitating opaqueness about the regulatory treatment of the whole legal ranking of liabilities, to the extent that proper market solutions seem, sadly, ever more remote.

So while you might cheer all this, let’s not pretend that it has been serene and untroubled or else our ideological foes are going to be able to strike back to good effect by quoting such La-la land outpourings of joy when the bankers’ problems become those of a whole host of otherwise blameless enterprises and families, as they inevitably will.

In a ringing condemnation of Wall St welfare I am foursquare behind you: in singing false paeans to an impossibly Panglossian reading of events and in trying to gloss over the wrenching – if ultimately salutary – consequences of a collapse, I suggest you are being naively counterproductive.

Our enemies are on the run, so a little less hysteria and a deal more calm ratiocination and sober exegesis might prove far more profitable than all these ill-judged – and, frankly, jejune – bromides which are being loosed off willy-nilly by people who – judging from both the blog and the mail-list – are in many cases not in any way current with either the institutional framework, the policy implications, or the international repercussions of what is going on and who (perhaps understandably) reveal themselves to be totally unversed in the perverse functioning of modern financial markets, for all these commentators’ undoubted academic brilliance.

It seems that a sizeable faction of the Mises group has become so intoxicated at the chance of getting a date at last with the girl of its dreams, that it has dipped too deeply in the punchbowl of ‘I told you so’ and has ended up goosing her mother instead, in front of all the family. Come on guys, get real – and leave the empty hosannahs to the Collectivists!

I am sorry if this sounds abrasive, but I strongly feel that, in many instances, the rush to print is being mirrored by a rush of blood and I fear that immoderate language and the blind quotation of Misesian scripture during what is clearly one of THE great upheavals of our irretrievably flawed monetary and political system can only be to the detriment of the cause over the longer haul.

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