Bill Bonner
Jimmy Cayne made the list. Alan Greenspan made the list.
Janet Yellen did not. An oversight?
In 2009, TIME listed 25 people who caused the financial crisis of ’08–09.
Alan Greenspan, recently retired as Fed chief, was high on the list. Jimmy Cayne was much further down. Poor Jimmy, then the head man at Bear Stearns, was playing bridge in Las Vegas when the first ship in the flotilla went down. The phone rang:
‘Hey, Jimmy, how ya doin’?’ came the voice of Bear Stearns’ chief financial officer in New York.
‘Great…why are you calling?’
‘I just thought you ought to know. We’re broke. We’re declaring bankruptcy.’
‘Huh?’
The ‘huh?’ hung over Jimmy for months. In 2005, Forbes had put him on the list of the Richest Americans, with a fortune of US$900 million…which was real money back in those days. By the end of 2008, he had lost 95% of it.
Financial gimcrackery
We recall our cheery quote, above. We couldn’t find another source that made the point so economically. The pretension of the ruling class — notably Janet Yellen — is that if the feds are clever enough…and able to act boldly enough…bureaucratic foresight can prevent serious financial/economic problems. They can adjust the Fed Funds rate. Or change the way banks are regulated.
But as with all the other efforts made by the elites to stop the future, they can’t prevent the grim consequences of their own mistakes. They just move the costs onto people who don’t deserve them…and make it worse.
We are now unwinding more than 25 years of financial gimcrackery. The Fed did things it oughtn’t have done — lending too much, for too long, at interest rates that were too low. Now, the nation pays the price. Losses need to be reckoned with…debts need to be refinanced. It will take time.
For months after Bear Stearns sank in March 2008, the Fed turned knobs and pulled levers. It aimed to stop the ‘contagion’. In June, Ben Bernanke told the country that the ‘risk that the economy has entered a substantial downturn appears to have diminished’. Then, in September, Lehman Brothers, with US$639 billion in assets, filed the biggest bankruptcy in US history.
Sticking with Ms Yellen, she has been demonstrably wrong about everything. She was at the Fed when it caused the mortgage finance crisis of ’08–09. She didn’t understand that low interest rates would inflate housing prices…or that a housing bubble would inevitably blow up, leaving mortgage holders with billions in bad debt.
Later, Ms Yellen thought that tweaks to banking regulation — mostly, forcing them to buy more US Treasury bonds, as ‘reserves’ — would make the banks so strong that no further financial crises were likely ‘in our lifetimes’. It was apparently inconceivable to her that Treasuries would go down in value, leaving the banks not only short on cash…but insolvent.
Ultra hack
Generally, when Ms Yellen says something, the opposite is probably true. And so our ears perked up yesterday…Business Insider:
‘Treasury Secretary Janet Yellen said Tuesday the crisis of depositors leaving small and mid-sized US banks is “stabilizing,” and should the problem worsen, the government could provide further support.
‘“Our intervention was necessary to protect the broader U.S. banking system,” Yellen said in remarks for the American Bankers Association’s meeting in Washington, according to The New York Times. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”’
Good to know.
Ms Yellen has spent her whole life in academia and government. As chairman of the Fed, and now Secretary of the Treasury, she has reached the ne plus ultra of hackdom. She knows nothing about how markets work…nor how businesses work. And what she thinks she knows about economics — Keynesian claptrap — is wrong.
And now that she says the banks are stabilising, our bet is that another big bank disaster — a la Lehman Bros — lies ahead. And we have company. From CBSNews: ‘Jamie Dimon says the banking crisis is not over and will cause “repercussions for years to come”’:
‘The stress on the financial sector caused by two bank failures in the United States last month is still a threat and should be addressed by a reimagining of the regulatory process, according to JPMorgan Chase CEO Jamie Dimon.
‘“As I write this letter, the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come,” the longtime CEO said in his annual letter to shareholders Tuesday.’
Got gold?
The banks make profits by lending out money they don’t actually have. This is the ‘fractional reserve’ system. If they have deposits of US$100, they might lend out US$1,000…and hope the depositors don’t want their money back all at the same time.
The Fed was set up to make sure that ‘solvent’ banks could survive a ‘bank run’. Lately, it has been helping insolvent banks survive too. And zombie companies. And reckless speculators. And now, as US Treasuries go down (as interest rates, generally, rise) the whole US banking sector — loaded up with heavy Treasury debt — is in danger of sinking. That is Ms Yellen’s work.
And when the next big bank fails, perhaps she will get the recognition she deserves — at the top of the list of people who caused the calamity.
Regards,
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Bill Bonner,
For The Daily Reckoning Australia
