Sunday, March 28, 2010

Surmising Bernanke’s Personality

I was a taken aback when I read in the Wall Street Journal that the Federal Reserve Board had a “director of fine arts program”. It was like learning that the Islamic Republic of Iran had a chief sommelier. You don't quite know what to make of it.

Apparently, both the office and the title are real. A certain Ms. Goley who was in charge of the program for over 30 years had written to the Journal to offer a window into Bernanke’s character from his taste in art. She concluded that the chairman is “creative, innovative and flexible”.

Ms. Goley thinks that these are unconditionally positive adjectives.

But if I have said it once, I have said it a hundred times that nothing exists out of context. Think of corporations using “creative accounting” or politicians who are “ethically flexible”. As for “innovative”, it might be an admirable trait for an architect or a teacher, but what does it mean when applied to a central banker?

When applied in the context of what transpired in the past three years and Bernanke’s role in the events, Ms. Goley’s adjectives describe a man who plays ball, someone who can be counted upon to find ways to accommodate those who must be accommodated.

Now, I don’t know Bernanke personally. But I figured out all these personality traits on my own. See, for example, here, here and, most recently, here.

These people are functionaries. They are not particularly complex characters. You can read them like an open book from the evidence of a single newspaper article.

The Meaning of “System” in Systemic Risk – Part 2: Breakdown of the Law

In the Letter to Mr. Baxter, I touched upon the legality of the Fed's bailout of AIG. The bill currently stands at $182 billion.

Because AIG is a financial institution and the Fed, in the popular understanding of its function, “deals” with money and financial institutions, the matter, when noticed at all, has been given a short shrift. Baxter – recall he is the general counsel to the New York Fed – was not pushed on the subject in his testimony before a House Committee investigation of the crisis. And he used a lawyerly sleight of hand around the word “authorize” to skirt the issue:
On September 16, 2008, the Board of Governors authorized the New York Fed to lend up to $85 billion to AIG through a secured revolving credit facility.
And then again:
In November 2008, the Board of Governors authorized the New York Fed to take a second step to alleviate these pressures.
These statements are technically accurate, but they do not address the central point, which is: the Federal Reserve Board did not have the authority to authorize the New York Fed to bail out AIG.

This point is critical. The Board of Governors of the Federal Reserve is a creature of statute. It can engage only in activities for which it is specifically authorized and nothing else.

The Board, as one example, does not have the authority to have someone executed.

The Board, as another example, does not have the authority to grant Bernanke the right to ignore traffic laws.

Likewise, it does not have the authority to authorize the New York Fed to pay the outstanding balance on my mortgage.

And it does not have the authority to authorize the New York Fed to pay $180 billion to AIG and its various counterparties.

Yet, that is precisely what it did. The justification, as per Counselor Baxter, was preventing a catastrophic systemic collapse:
The policy decision to authorize a loan to AIG was a difficult one ... Nonetheless, the potentially far-reaching consequences of an AIG bankruptcy compelled policymakers to take affirmative action ... Last month, Chairman Bernanke observed that the Federal Reserve did not lend support to AIG for the Fed’s own benefit, “because it obviously has hurt the Federal Reserve in the public’s view. We did it because we felt that there was no other way to avoid what [many] have called the risk of a catastrophic collapse of the financial system.”
You recognize the argument. It is Jack Bauer’s: had to torture the man, else Los Angeles would have been destroyed. (Just ask Antonin Scalia!)

The Fed, likewise, had to do it to save the system. There was no self-interest. Only selfless service, in consequence of which if Bernanke and the Fed are criticized, so be it. That is the fate of the true patriots. Just ask Jack Ryan!

This is the perverted reincarnation of the “general good” idea that the French Materialism in the West – and long before them, Sufis in the East – thought was the driver and the guiding principle of morality.

In its debased reincarnation, the greater good is now the least harm. It is no longer the question of bringing the greatest good to the greatest number of people but minimizing the damage from the catastrophic effects of some crisis. Crisis is the starting point and the driver of the narrative. Like bad weather in the opening scene of a play, it is given and must be accepted as such. And it sets the stage for what is to follow.

But the crises we are discussing are man-made. They are different from floods and hurricanes because they develop from, and within, the social system. By “develop" I mean that crises come about as a result of the logical progression of the events within a “live” system; the social body produces them the way the biological body produces cancer. They are the materialization of internal growth gone bad, the consequence of the body having turned against itself.

Countering crises, then, requires interfering with – disrupting, destroying and weakening – the regular functioning of the system. Because a civil society functions within the law and is sustained by it, it follows that countering social crises necessitates breaking the laws that hold the system in place. In this way, through crises, the focal point of the coming together of all internal contradictions of a system, we arrive at the final contradiction where the attempt to save the system from immediate collapse weakens its foundation and undermines its long term survivability. It is the old “destroying the village to save it” that has come back to haunt and taunt the inventor, not that a functionary like Baxter would know or even suspect that.

In speaking of the breakdown of laws, it is clear that I am not talking about common lawbreaking by ordinary citizens or the usurping of dictatorial powers by this or that strongmen. What I am discussing here is the dislocation of the legal system in its entirety, the wholesale unraveling of the Anglo-Saxon jurisprudence.

The chief characteristic of this phenomenon is that it is institutional and system-wide and yet, not organized. If it were organized, in the sense of being consciously directed from a political command center, it would be a revolution. But it takes place through sporadic events with no obvious connection to one another. Torturing a suspect to learn of the location of a “ticking bomb”, dismissing the Magna Carta as “quaint”, dispensing $180 billion without having the authority to do it – such are the instances of manifestations of a breakdown.

(Lawbreaking is an anti-social act, which is why the functionaries who are attracted to process are stigmatized. The public correctly recognizes them for the doers of the dirty work that they are. Even Hollywood and TV programs which must sell these new elements to the public must relegate them to a different, "anti-hero" category, separate from the traditional heroes.)

On the surface, these matters seem to be removed from finance. They are more in the realm of politics, social science and national security. But facts are not isolated to events.

In Decline of the West, Spangler writes: “What concerns us is not what the historical facts which appear at this or that time are, per se, but what they signify, what they point to, by appearing.”

I suggest we need to go even further. The important point is not what historical facts point to by appearing but why they appear in the first place. If that question is answered, the question of where the facts point to will be self-evident.

The culprit in the breakdown of the law is finance capital. Because it can no longer function – i.e., generate profit – within the historically established legal framework, it moves to dismantle the “whole intellectual edifice” in the attempt to create a "living space" for itself.

I am not overstating the case.

Observe this ruling by the three-judge panel of the United States Court of Appeals for the District of Columbia Circuit that found, according to the New York Times, the presidential war power to detain those suspected of terrorism [without trial] is not limited even by international law of war. Judge Janice Rogers Brown wrote: “War is a challenge to law, and the law must adjust.”

The law must adjust.

If that statement strikes you as nothing particularly out of the ordinary, you, too, have been softened by the assault of finance capital.

By way of comparison, look at this ruling of the Supreme Court in the 1866 in the Ex Part Milligan case, where a civilian detained during the Civil War had been denied a civilian trial. The justices of the Supreme Court described the rules applying to men in the military and went on to add:
All other persons, citizens of states where the courts are open, if charged with crime, are guaranteed the inestimable privilege of trial by jury. This privilege is a vital principle, underlying the whole administration of criminal justice; it is not held by sufferance, and cannot be frittered away on any plea of state or political necessity. When peace prevails, and the authority of the government is undisputed, there is no difficulty of preserving the safeguards of liberty; for the ordinary modes of trial are never neglected, and no one wishes it otherwise; but if society is disturbed by civil commotion-if the passions of men are aroused and the restraints of law weakened, if not disregarded- these safeguards need, and should receive, the watchful care of those trusted with the guardianship of the Constitution and laws. In no other way can we transmit to posterity unimpaired the blessings of liberty, consecrated by the sacrifices of the Revolution.

Comparing the two rules, one is compelled to ask: What changed in the past 150 years to give rise to these diametrically opposite views of the U.S. Constitution by professional judges?

The answer is that the position of civil society in the timeline of history changed. One ruling belongs to the era of construction and ascent, when immediately after the Civil War, the U.S. was poised to become a great industrial power.

The other belongs to the era of destruction and descent, where the established business models and economic theories and even the moral and ethical standards are no longer functional. So, the “system” in systemic risk is the civil society itself. Even those without a theoretical clue can somehow sense it. So, for its review of Paulson’s book, The Wall Street Journal chose the heading Present at the Destruction, the exact wording that I had used for one of the postings on this blog in a different context.

The unraveling of the system is a process. The Supreme Court justices in the Ex Part Milligan case understood this when they wrote about “transmitting to posterity ... the blessings of liberty”.

When the legal foundation of a system begins to decay, the transmission to posterity of the blessing of liberty slows down. This, the vile usurer of the Merchant of Venice understood better than all the Supreme Court justices and moral philosophers who were to follow him:

And by our holy Sabbath have I sworn
To have the due and forfeit of my bond
If you deny it, let the danger light
Upon your charter and your city’s freedom

And later:

If you deny me, fie upon your law!
There is no force in the decrees of Venice.

Look how modern his use of the word “freedom” is. He uses it in the context of enforcing a bond’s covenant. The Anglo-Saxon jurisprudence, I pointed out in Vol. 3 of Speculative Capital, has its foundation in “the commercial consideration of the early stages of capitalism in England. So the system had to be flexible to allow for commercial eventualities”.

When even this flexible system gives way under the onslaught of finance capital, more than the legal and financial system is in jeopardy: it is the social system that encompasses them.

That is the meaning of the systemic risk: the social system being unable to reproduce itself.

Sunday, March 14, 2010

Parsing the Categories of Necessary and Accidental By Means of Mortgages

In the past three years, I have looked high and I have looked low, but never – not once – have I seen even a hint of a reference to the conscious, premeditated and deliberate destruction of Fannie Mae and Freddie Mac that set the stage for the ongoing crisis.

Everyone was involved in the conspiracy: The Wall Street Journal, The New York Times, Alan Greenspan and his Fed machinery, Wall Street, chief executives of financial conglomerates. I chronicled the destruction in a two-part series on this blog, here and here and in a subsequent epilogue. If you have not read them, I urge you to do so. In light of what has transpired, they read even better today. And more evidence keeps coming in.

Look at this admission from today’s New York Times. It comes from the paper’s real-estate section:
But many of guidelines that New York City apartment buildings don't meet have been in place for years. Fannie and Freddie guidelines have long held, for example, that no single person or entity can own more than 10 percent of the units in an established condo or co-op building. During the boom, that didn’t matter much. Investors were hungry to buy bundled residential mortgages, and banks could bypass Fannie and Freddie and sell the loans elsewhere. Now, Fannie and Freddie are by far the biggest games in town, so on conforming loans, their rules are gospel.

During the boom years, that didn’t matter much.

“That” is the defenestration of the rules and conditions for mortgage qualification, so that a Mexican strawberry picker in California who did not speak English and had made all of $14,000 the year before, would not get a $700,000 mortgage – which he did, courtesy Countrywide.

But more important is the phrase "during the boom years". How did the boom years come about in the first place?

The answer is: by banks and mortgages companies getting together to deliberately and consciously destroy Fannie Mae and Freddie Mac whose strict, “gospel-like” borrower qualification conditions stood in the way of unqualified borrowers getting a mortgage.

Here is the seed of the conspiracy, as reported by The Wall Street Journal. I do not provide a link because the paper requires subscription, but it is from March 9, 2001, page A2.
A coalition of chief executives from more than a dozen large financial institutions has decided to press for reform of Fannie Mae and Freddie Mac, even as another company joined in accusing Fannie Mae of threatening to take business from critics.

The decision to seek a review of the way the government-sponsored mortgage giants conduct their business was made two months ago at a meeting in Amelia Island, Fla., of the Financial Services Forum… The group, an intentionally low-profile organization of chief executives from the country’s biggest financial companies, backed the successful effort to repeal laws separating the banking and securities industries, and has also endorsed an overhaul of the federal bankruptcy code that now appears imminent.

Tensions have risen in recent years between the mortgage companies and other financial-service concerns amid fears that rapidly growing Fannie and Freddie would diversify and take business away from other companies.
Now, place yourself, if you will, in early 2001 in Amelia Island, Florida. George Bush is at the White House. You are the big shot executive of an important financial institution: a Sandy Weill, a Hank Paulson, a Richard Fuld. You have just arrived by your private jet to Amelia Island. The world is your oyster. Everything is yours for the taking – money, women, favorable press coverage, sycophant journalists.

Your institution needs to generate even better and steadier profits. Borrowing at the commercial paper rate of about 2 percent and buying mortgages that yield 6% is the best game in town. That is 4% profit margin without doing anything and God Bless America.

Your borrowing power has virtually no limits. But you need mortgages to buy with the borrowed money. And Fannie and Freddie rules stand in the way. So, what would you do?

As an individual with free will, you could certainly walk away. You know by training, by instinct, and by logic – however arrested the three might be – that ultimately no good could come out of weakening and then breaking the lending standards. You are a financial executive, for God’s sake. All you have to do, then, is walk away and let Fannie and Freddie be.

But could you, realistically speaking, walk away, just say No? Would you be there, in the first place, if you were the type or person who would/could say No?

Now you see in what sense the developments in the world of finance can be said to have a direction and an “outcome”. It is precisely the free will of individuals, which, through being capable of being shaped, acts as the medium and agent for the manifestation of the laws of economics and finance. Which is why I often repeat that the subject of finance is studying the laws of movement of capital in circulation – and nothing else.

Wednesday, March 10, 2010

The U.S. Senate Exempts Payday Loans from Regulation

Today’s New York Times reported that “Payday loans get exemptions in Senate bill”. No surprise there. That was/is par for the course. Just a few comments on the subject:
  • In a payday loan, you receive an immediate cash loan against your employment paycheck. The rate, according to the Times, is generally around 400%. But if you count late fees and rollover fees, the rate is about 600%.
  • Who borrows under these conditions is clear: the absolutely, totally desperate. The Times said that payday lenders charge “exorbitant fees for low income consumers with little financial sophistication.” But that is The Times maligning the poor. I’ll match the financial knowledge of any payday borrower against any Madoff “investor” any day. It is just that the poor are desperate. They have no option, no choice. So they yield.
  • The Times made it sound like one senator, Bob Corker of Tennessee, was the culprit behind the exemption. Don’t you believe that spin. Everyone was involved. Dodd of sophisticated Connecticut, the chairman of the Senate Banking Committee, “went along in an effort to reach a bipartisan deal.”
  • The name of the lobbying organization on behalf of the payday lenders is the Community Financial Services Association. I like the name, especially the way the word “community” is used. Reminds me of that old Twilight Zone episode when the main book of aliens, titled “To Serve Man”, turned out to be a cookbook
  • ”Steven Schelein, a spokesman for the Community Financial Services Association, said the industry should not be dragged into regulatory reform.” Of course not. God forbid.
  • ”In 2006, Congress adopted a bill ... to cap at 36 percent ... on loans to active-duty members of the military and their families ... The industry says a cap would be devastating to its profitability”. Note the wording. The cap would be devastating not to the industry, but to its profitability. Also, a 36 percent loan to “active-duty” members of the military is considered fair and reasonable. Imagine the Fed raising the interest rates to 1/2 of that, or a mere 18%. The entire financial system would come to an immediate halt.
Finally, the payday loans are not risky loans to bad credits, where the high interest rate would compensate for the potential high default rate. That is the junk bond business model. The payday borrowers have an iron-clad collateral: their employment paycheck, which they will receive at most in two weeks. So charging these borrowers 600%, now with the blessing of the U.S. Congress, is beyond simple robbery. It is also rape.

Tuesday, March 9, 2010

The Meaning of “System” in Systemic Risk – Part 1: Blair’s Morality Play

Michael Foot, the British Labor leader, died past Wednesday at the age of 96. Gordon Brown half-praised him as a “genuine British radical [who] possessed a powerful sense of community”.

Reading the obituaries, I came upon this picture of him with a young protégé.

Yep, that’s Tony Blair on the left. The year was 1982. You know the rest. He could have been a contender. He could have had class.

How did an intelligent, socially active and presumably well-intentioned young man become “Yo Blair”, the disgraced politician of late – a moral “elephant man”, disfigured by the charges of deceit and war crimes?

Blair was not a politician of Berlusconi or even Sarkozy mold. These latter men are hacks, with no sense of community or continuity. For them, politics is an escapade. You can see this in their lack of social decorum: giving finger, spewing obscenities. They are recruited to advance private agendas, and nothing else.

Tony Blair had élan. He came from a tradition of active political involvement that produced the Cambridge Four. His extreme turnaround was in fact similar, only he went the other way.


The trajectory of Blair’s political life is the interaction of individual and social. Part of the answer then lies in the man’s personality; someone else might have acted differently.

But a “flawed personality” is no explanation. Standing next to Michael Foot as his lieutenant and going on to become “Yo Blair” is like standing next the Pope as a cardinal and going on to become a pimp – and running a brothel from Vatican. The turn of events transcends the individuals. It demands an explanation at the social level.

What force, what sort of pressure then, pushed a young labourite into such “deep place”, to use Dante’s expression?

Reviewing the social history of England since 1982 is not possible here. Nor is it necessary. The culprit is finance capital. We only have to recognize the different instances of its manifestation, the different forms under which it appears and pressures the social order.

Those ignorant of the dynamics of finance capital feel the pressure and, not seeing the cause, attribute it to “natural” change, of the kind brought about by the evolution of cosmos. In yielding to it, then, they imagine that they yield to God’s will – or do the God’s work. And what could be more moral, morality being Tony Blair’s mantra, his sword and shield.

Meanwhile, the social system disintegrates with accelerating pace.

I will return to elaborate.