A Murky Internationalism

by
William Krehm

There is more in our central banks “rescuing” us from the spreading subprime financing crisis than meets the eye. In recent decades since the banking system was deregulated and globalized, our government has been bailing out our banks about once every seven years. And in all but one such bailout, the astounding fact is that at the same time as the deregulated banks were bailed out from their major losses, they were being further deregulated. Indeed, that further deregulation - presented as part of the “cure” for their previous losses, could only ensure that the next bail out would not be long in coming. The only exception to that dazzling series of banking losses combined with their empowerment to gamble bigger if not better, was the bailout of the 1930s.

And the reason that they were not deregulated then is because they were practically non-functioning. 38% of the banks across the United States had actually shut their doors, and the rest were spared a similar fate only by the Roosevelt moratorium. The government stepped in with deposit insurance before they could even pretend that the banks were up to plain, honest banking once more. They had simply gambled themselves out of business. And when they were made a sickly whole once again, for the first time ever - before or since - they were strictly confined to banking and expressly forbidden to acquire interests in any of the other “financial pillars” - stock brokerages, insurance, and mortgage companies. Without that the Second World War could never have bee financed so successfully nor could there have been a quarter of a century of smooth and successful reconstruction from the havoc of the Depression and the war. The central government borrowed increasingly from its central bank. In the case of Canada, that had nationalized its central bank in 1938, the interest it paid the central bank on its borrows came back to it as dividends. In the United States, where the original private banks or their successors are still the shareholders of the Federal Reserve, almost the same proportion of the interest paid by the government comes back to it on other grounds - for having assigned to the central bank the monopoly of the ancestral monarch in coining precious metals.

It is only in the light of what made possible, indeed, unavoidable, this solitary instance of a bank bailout without further deregulation, that we can understand how the next even more disastrous financial adventure is being prepared at the very time that they are still groping to make good the banks last gambling losses.

“Not Intervening Too Much with Markets”

The Wall Street Journal (19/06/08, “Paul-son to Call for New Fed Role” by Kara Scan-nell) informs us from Washington. “Treasury Secretary Henry Paulson is expected to call for quick regulatory changes to the oversight of financial markets, including expanding the role of the Federal Reserve, in wake of the collapse of brokerage firm Bear Stearns & Cos.

“In a speech to be delivered Thursday, Mr. Paulson will say that the fall of Bear Stearns has expedited the need for the government to address the outdated regulatory oversight structure while not intervening too much in the functioning of markets.”

If ever there was a double-header you have it there. In what is delicately called “the expanding role of the Federal Reserve - which can only mean making good the bad debts of the bank-brokerage firm mentioned, but at the same time “addressing the outdated regulatory oversight structure while not intervening too much in the functioning of markets.”

There you have a fistful of semantic problems. How could this mean anything but that the central bank is to make good the debts incurred by Bear Stearns, but not interfering with “the market,” or more reverently not hindering Bear Stearns or those who have acquired it repeating what in fact left the economy in the soup. The role of the Fed has simply been reduced to writing the requisite cheques, and following with pail and mop to clean up the mess on floor, walls and ceiling. In short, to set the stage for the next bailout on an even bigger and messier scale.

Treasury Secretary Mr. Paulson, will be less concerned with the state of the national Treasury after he has written the cheque to cover up the Bear disaster and addressing the other “market “casualties that wait their turn to be relieved of their losses. Once Mr. Paulson establishes this new Fed role that does not interfere with the “market,” he will be allowing globalized deregulated banks onto all continents making good the indiscretions of our banks. The carpet has been laid, and the triumphant martial music for the future processions readied. And surely that is not only going to distract the Fed from its strictly banking business concerns and that is equivalent to ensure that deregulated bankdom will go on expanding into outer space at an exponential clip ensuring the legal tender of the land that happens to be identical with the credit of the federal government to provide interest-free from the Fed. You allow too much that is dark, alien, and incompatible with the legal tender of the country to get between the Federal Reserve and that, its prime task, and the government itself will find its debt to have become non-prime before it even realizes. And when that happens, everything that the US and world economies are already reeling under will appear childs play.

No matter what patchy accountancy reforms have been brought into government bookkeeping, central banks are once again back at their old game of pushing up their benchmark interest rates to prevent what they chose to call “inflation” most of the time merely reflected the faulty bookkeeping of our governments accountancy. For in the US until 1996, and until 2002 in Canada, the government kept careful record of how much it owed on infrastructure investments like buildings, highways, and other capital government investments, but wrote off the asset value that such debt paid for in a single year, and thereafter carried it at a single dollar. That made for some fabulous privatizations - we need only mention the Canadian National Railways, privatized by a leading member of the government bureaucracy in a coup that would make an overnight privatizer in Putins Russia blush with shame.

Come to think of it, in Russia it was in return for a magnificent fee to US economic consultants that invaluable national industries were privatized for a song. Though the US consultants were impatient to let the market do its magic there were no knowledgeable capitalists around in Yeltsins Russia - just ex Secret-Service heavies, and top bureaucrats who knew where the valuable national treasures were buried. Now the same sort of “expertise” is to the fore in disposing of the subprime mess. It may be that in the long run the ex-Soviets will have the final chuckle, And of course, this has a vast relevance on national security that in other areas is so much to the fore in Washingtons rhetoric.