Bernanke Rolls Snake-eyes

Fed chief Ben Bernanke is in a bit of a bind. He’s being asked to restore a system for credit expansion which collapsed more than two years ago and has shown no sign of life ever since. During the boom years, securitization accounted for more than 40 percent of the credit flowing into the economy. No more. When two Bear Stearns hedge funds defaulted in July 2007, the system crashed as investors of all stripes backed away from complex, illiquid assets. The Fed’s TALF lending facility — which provides up to 94% government funding for investors who are willing to purchase bundled debt for credit cards, mortgages, auto loans and student loans — was intended to breathe new life into securitization, but has fallen woefully short of its original objectives. It pretty much fizzled on the launching pad. Even the shrewdest hedge fund sharpie couldn’t figure out how to make money on (what amounts to) fetid assets.

Ironically, the Fed’s original plan for the TALF would have involved a $20 billion loan from the Treasury levered 10 to 1 to provide up to $200 billion in funding support for applicants. In other words, the Fed was planning to borrow money, to lend to people (investment banks and hedge funds) who were borrowing money to lend to people who were borrowing money (consumer credit cards, mortgages, car loans etc). Read that sentence again to fully appreciate how utterly fouled up the credit system really is. The Fed and Treasury are like private equity hucksters overseeing an inherently corrupt and immoral system. Michael Moore is right.

Fortunately, Bernanke’s plan to rebuild securitization has no chance of succeeding. The system can’t be restored because it required conditions which no longer exist; a strong currency, mega-surplus capital, and credulous investors who were unaware of the implicit risks of illiquid assets. Today, the dollar is wobbly, money is tight, and the pool of dupes ready to be fleeced has been greatly reduced. The notion that Wall Street can better perform the tasks traditionally left to highly-regulated banks, has also been called into question and rightly so. Unfortunately, the largest banks in the country — which have transformed themselves into investment casinos — don’t have the ability to return to the more conservative model of long-term lending to qualified applicants. They are stuck in a post-Glass Steagall mold, incapable of turning a profit on conventional loans to consumers and businesses. There’s a glaring need for some opportunistic entrepreneur (Warren Buffet?) to step into the breach and create a bank where depositors feel comfortable leaving their life savings knowing their bank is at least a notch-or-two above a Monte Carlo roulette table.

Bernanke will not give up the hope of resuscitating securitization because the financial mandarins who employ the Fed chief see it as an exportable model which will give them greater control over the global financial system. This is not taken lightly by the powers behind the curtain. The beauty of securitization is its utter simplicity; it simply transfers the authority to generate credit (money) from highly-regulated banks to rogue players in the shadow banking system. By borrowing short to invest in dodgy long-term assets, fund managers and PE smarties are able to expand credit to unimaginable levels, skimming off fat bonuses and salaries for themselves while the monster bubble limps slowly towards earth.

This is the system that Bernanke is trying to electroshock back into consciousness, albeit with negligible results. The Fed is essentially pumping blood into a corpse hoping for some fleeting sign of life. But dead is dead. Capitalism requires capital. This is the disturbing truth behind securitization — which was not developed to allocate resources to productive activity more efficiently but to allow credit expansion on smaller and smaller chunks of capital, further enriching a handful of well-connected speculators. This is the sole function of off-balance sheets operations and unregulated derivatives — to conceal the abysmal lack of capital that supports the debt. When trillions of dollars in complex debt-instruments, derivatives contracts, and loans to unqualified applicants are stacked atop a tiny scrap of capital, disaster is inevitable.

Bernanke is now busy sifting through the rubble trying to reassemble Wall Street’s Golden Goose for one-last wild credit fling, but with no luck. So far, he’s come up snake-eyes, which is probably best for everyone.

Mike Whitney lives in Washington state. He can be reached at: Read other articles by Mike.

4 comments on this article so far ...

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  1. Don Hawkins said on October 7th, 2009 at 2:44am #

    But capitalism is not only inhuman and anti-democratic; it’s also unsustainable, and if we don’t come to terms with that one, not much else matters. Capitalism is an economic system based on the concept of unlimited growth, yet we live on a finite planet. Capitalism is, quite literally, crazy. Robert Jensen

    STRANGER: Well, there won’t be any more concerts for a million years or so, and no nice little dinners at restaurants. If it’s amusement you’re after, I guess the game’s up.

    People’s radio station broadcast,{near future}

    “Be well this is the people’s radio station. First reports this morning are saying more troops are massing on the Southern boarder of Russia. China has called for calm and trying to get food and water to the estimated 200 million people now on the Northern boarded. Reports out of India are hard to get and the best we know today July 2029 India is still under Marshall law. The fires in California have stopped for now and the central valley is almost uninhabitable and LA still under Marshall law gas in short supply. Temperatures in Southern California are expected to reach records again today. The government is asking for calm in Texas and promising more water and food and gas as people move North. Flooding again in the Northeast and more new settlements on the border with Canada. The government and NASA again in talk’s to see if aerosol injection into Earth’s atmosphere can be used. All for now and temperature updates in one hour save energy be well”.

    Let’s watch the Senate in a few months on the climate bill and what was it that a Senator just said. “The climate bill is as dead as a door nail”. “All for now and temperature updates in one hour save energy be well”.

    “Ladies and gentlemen, I have a grave announcement to make. Incredible as it may seem, both the observations of science and the evidence of our eyes lead to the inescapable assumption that we are all in deep do do”.

    It sure looks like so far it’s the last fling from the few who know Capitalism is, quite literally, crazy and now in control of an out of control system and we all know you can’t eat or drink money but the few are going to try anyway. It’s to bad we can’t see a leader like the one from say the United States give the speech and level with people and gave it a try. What system might work well that’s a hard question so everything should be made as simple as possible but not simpler. We use the knowledge we have now not illusion the big one and the hardest to do work together reason. “The climate bill is as dead as a door nail” is it, well cap and trade is complex just an illusion and there is a much much better way, everything should be made as simple as possible but not simpler.

    The Greatest enemy of knowledge is not ignorance, it is the illusion of knowledge. –Stephen Hawking

    So far snake-eye’s.

  2. Josie Michel-Brüning said on October 7th, 2009 at 4:52am #

    Well done, dear Don Hawkins!!!

  3. David said on October 7th, 2009 at 8:46am #

    I second Josie’s kudos to Mr. Hawkins’ post. Black humor it is but entirely appropriate now.

  4. Deadbeat said on October 7th, 2009 at 2:13pm #

    There’s a glaring need for some opportunistic entrepreneur (Warren Buffet?) to step into the breach and create a bank where depositors feel comfortable leaving their life savings knowing their bank is at least a notch-or-two above a Monte Carlo roulette table.

    I would recommend credit unions over banks.