Bernanke Edges Closer To the 'Real' Root Cause Of the Crisis 12 comments
Tim Iacono
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Having long thought that Fed Chairman Ben Bernanke is an exceptionally bright fellow and an excellent writer (if not the best economic forecaster, as seems to be the rule rather than the exception - perhaps even a prerequisite - for someone to have risen so far in his field), his choice of words in yesterday's Wall Street Journal op-ed piece regarding the "root" of the current financial crisis is worthy of note.
The Fed Chief strikes much closer than most to the real root cause of the current problems in noting that it is "a loss of confidence by investors and the public" that has brought us to where we are today, requiring global interventions on a scale never before seen in history with a positive outcome that is still, by no means, assured.
While a huge improvement over the blather about "falling home prices" being at the head of the causal chain, after just a bit of contemplation, "loss of confidence" also seems to fall short of the mark.
Here it is:
We're Laying the Groundwork for Recovery
The necessary policy tools are in place.
By BEN S. BERNANKE
As Americans well know, the challenges we now face in the financial markets and in the economy are both extraordinarily complex and historic in scope. I firmly believe, however, that with the actions policy makers are announcing today, we will be able to meet those challenges.
Our strategy will continue to evolve and be refined, and we will adapt to new developments and the inevitable setbacks. But we will not stand down until we have achieved our goals of repairing and reforming our financial system, and thereby restoring prosperity to our economy.
...As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets. This has had cascading and unwelcome effects on credit availability for households and businesses, and on the value of savings. Under these circumstances, steps to restore confidence in our institutions and markets will go far toward resolving the current market stress. Our economy will not be able to function at its best unless and until financial market stability returns. The bold actions taken by the Congress, the Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation and other agencies, together with the normal recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery.
...I am not suggesting the way forward will be easy. But the tools are in place to respond effectively and with force. These tools will bolster the capital of our financial institutions, restore confidence in their debt, and offer increased access to funding for businesses. Their application, together with the underlying power and resilience of the American economy, will help to restore confidence to our financial system and place our economy back on a path to vigorous growth.
Presumably, if this loss of confidence in financial markets is justified - not just a frightful episode that will soon pass - by the growing understanding that the business model under which the system had previously operated was fundamentally flawed (i.e., that we can't all get rich through rising asset prices - at least not for a long enough time), then, perhaps this "loss of confidence" really isn't the root cause.
Stock prices go up and then when you think they can't go up anymore they go even higher and we all feel rich until they come crashing down.
After the last five or six years, the same can be said about real estate.
Why should investors and the public have any confidence in a financial system that has produced the vanishing wealth of the last decade?
It would have been better to have never been seduced by this wealth at all.
Loss of confidence is not the root cause here.
Loss of confidence is a very rational reaction to the growing realization that the financial system that has been in place for many, many years has fundamental flaws that are in dire need of remedy, a task that seems to get all too little attention as bigger and bigger checks are written in an attempt to preserve the status quo.
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This article has 12 comments:
do you also believe that gold is going to touch $1500 by the end of this year.
Then I will feel vindicated
bye
Kumar
> jack
The confidence issue is curious, in that I see the Main Street confidence issue being the most critical.
The much criticized Amercican Consumer...who really blew up all sectors of the economy with a debt-driven spending spree....they are the ones whose confidence I would be worried about.
If too much time goes by, and too little assistance is directed to Main Street....if they do not feel the love from Benanke, they may really change their habits, andif the consumer goes away and stays in the shadows, we will have an "economic nuclear winter" ...
The economy is a unique sort of partnership between those who produce and those who consume, and this relationship is being strained to a limit that could alter the habits of Main Street radically and permanently...
Watch out Bernanke...confidence at the bottom of the economy is crucial....
Screw the top end of the economy, you have to be wary of this....lose the consumer and watch the blood flow....
Do not underestimate the mood of Main street, of the collective economic force...they may not come back.
2 result in the never ending circle of losses for banks
If this money is put in at the bottom -create jobs , wealth and wage hikes
it would then go into businesses who in turn would have it in banks -
one lesson that should be learned about the current crises -wealth does not trickle down it trickles up and right now it is the consumer who is sick not the banks and not the housing market - it was a sick consumer who created the housing problem not the other way around
I hope this is just Bernanke-spin, because if he genuinely believes it we are truly stuffed. The evidence of the last week does, regretably, seem to be that governments want to rebuild the collapsing financial and economic edifice on the same cracked foundations. In the UK, Brown wants banks to return to 2007 levels of lending - without thought about to whom, for what, or the borrowers' capacity to take on more debt. In Australia, Rudd is handing A$10 billion directly to targeted recipients with the explicitly-stated objective of getting the money directly to the types of consumer who will go out and spend it in the runup to Christmas. In the US, the next Congress will doubtless produce the mother-of-all-stimulus...
The Anglo-Saxon financial and economic model of debt-fuelled binge-spending is broken. If and when signs of a new model begin emerging, ideally one which has consumers doing some saving and bankers doing much less financial 'engineering', then at that point a return of confidence might be justified.
The true cause is more simple and basic. It has to do with the desire of CEO of public companies to "create" profits in order to push up the price of their stocks thereby giving them a winfall from their stock options.
The incentive to have a home run in their compensation made them dream up and create products which are risky but sellable. This in itself is not a hugh problem as the max. loss is 100% of capital. But when they leverage the capital 50:1, their loss suddenly becomes -5000% of capital if the whole investment is written off to zero.
Of course if their risky investment even goes up just 10%, the company will book profit of 500% RO capital based on the 50:1 leverage. The stock will shoot up giving the CEOs and management billions of dollars gain through exercising their in the money options.
The management are more than willing to do this as there is little risk but hugh rewards for them. The shareholders/debt holders finance their schemes. If it goes sour, shareholders/debt holders lose their shirt, while management still get to keep their salaries.
That my friends is why we are in this mess.
The only reason you need to have confidence in something is if it is not tangible. While this is just fine for one's religious faith, it is ill advised in matters of money. A gold coin does not need your confidence!! A gold coin LAUGHS at doubters. But a ponzi scheme fiat currency? A system of grift? A con game like the federal reserve has shown us? THOSE things do need your "confidence" and anyone thats lends it to them can change their name to "sucker" right now.
Gold is money, and nothing else is.
-J.P. Morgan.