Near as I can tell the credit freeze currently squeezing the economy is a result of a kind of financial HIV. Collateral Debt Obligations, Credit Default Swaps and all other manner of financial chicanery allowed everyone to lend money to anyone; but things got so out of hand that now no one knows how much they owe and how much they own. As a result, if I lend money to you I’m not only lending money to you, I’m lending money to everyone you’ve ever lent money to. Nobody trusts anybody and as a result nothing gets done.
And so we had stories like this one from Wednesday’s New York Times detailing the federal government’s basically forcing nine private banks to take taxpayer money and start using it to get things moving again.
The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left.
. . .
But by 6:30, all nine chief executives had signed - setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier.
It was as though the American government was waving a magic wand over these banks, absolving them of their bathhouse sins and promising that no one else will be allowed to die. That’s all well and good, but what happens if no one trusts the guy with the wand?
Henry “Hank” Paulson, whatever one may think about him or his performance as Secretary of the Treasury, is on his way out. His job won’t formally end until three months from tomorrow (probably), but his authority is going to evaporate in just two short weeks. The same goes for his boss, our beloved president, Bush the Younger.
From his imperial and godlike throne in the White House, on Air Force One or inside your television set the President can seem like an all powerful figure. Of course, he isn’t; but his omnipresence means that he and his minions frequently get blame and or credit for swings in the economy over which they have very little influence (and certainly no control). Obviously over the long term the policies of a president have tremendous effects on the economy, but on a month-to-month and quarter-to-quarter basis there usually isn’t much he can do. As luck would have it, this is not a usual time, in finance or politics.
Consider stock indexes. Stock market averages are not the world’s most informative numbers if you want to gauge the overall health of the economy, but they are very useful when it comes to determining the psychology of the world’s moneyed classes. Recently they’ve been all over the map, creating and destroying trillions of dollars of value seemingly without regard to the status of bailouts or bank rescues. For the last several weeks stock markets, from Tokyo and Hong Kong to London and New York, have been alternately plunging and surging, sometimes within the same day’s trading.
None of the private actors trust each other because each one of them is worried that the other guy’s case of finance HIV is worse than his own. There is only one entity large enough and secure enough to pacify things and restore trust. Unfortunately it’s getting ready to put up an “Under New Management” sign because the last guys sucked.
As long as those guys are still in charge nothing of long term substance can be done, even if anyone still trusted them (no one does) it wouldn’t matter because after eight years nobody respects their judgment. Depending on how you want to count, Paulson has flip-flopped on what to do anywhere from four to six times in the last month alone. The reputation he spent a lifetime building has been shredded by a mere two years in the employ of George W. Bush. When this is all over he’ll probably share a rueful drink or two with Colin Powell, Paul O’Neill, and everyone else who had their credibility pissed away by that man.
In the meantime the financial institutions of the world will just have to hold their collective breath and wait for the new management to arrive. Regardless of what form that management takes, even if McCain won and went so far as to rehire Paulson, no one is going to trust the American government until after November 4th. Having the world’s largest financial actor essentially paralyzed can only be exacerbating the current problems and you don’t need to know anything about economics to see that.
In the meantime, don’t let the doom and gloom articles get you down too much, nor the “hey it might be working” variety overly cheer you. The air is thick with uncertainty right now and it isn’t going to clear until we have a new president (elect). So chill out for a couple of weeks and we’ll see where we are then.
Side note: I always knew the Bush Administration’s fuckups would come crashing down on them some day. I way off on the timing, but I knew it would happen sooner or later. As much as I’d have liked to see him impeached two years ago, if the economy was going to melt down it couldn’t have happened at a better time. Please don’t screw this up Mr. Obama. We’re counting on you.
