``What we do want, what we insist upon, is that no longer will decisions that carry so much economic weight be made in absolute secrecy. We want to know what arrangements the Fed makes with other governments and central banks. We want to know who is benefitting from the actions of the Fed and what deals are being made. The Fed is already reacting to pressure by scaling back its liquidity facilities and returning to more traditional monetary policy through direct asset purchases. With nearly $800 billion in mortgage-backed securities on its books already, $800 billion in Treasury securities, and no real limit to what the Fed can acquire, there is a tremendous opportunity for malfeasance. We need to know who the Fed deals with, what they buy, how much they spend, and who benefits. As good as any step towards Federal Reserve transparency is, anything less than full disclosure at this point is unacceptable.”-Congressman Ron Paul, Anything Less Than Full Disclosure is Unacceptable
The meltdown in the US market’s have largely been attributed to the proposed Volcker Rule, where US President Barack Obama endorsed Former Fed Chair Paul Volcker plan to overhaul the banking sector’s risk taking activities by restricting in house trading activities or proprietary trading and by preventing them from also investing in hedge funds or private equity operations.
While reducing the banking system to its original function of warehousing (deposit safekeeping) and loan services (acts as intermediary to finance business undertaking) would seem pretty ideal, the radical approach to “cleanse” the banking system of the so-called “greed” appears to be in reaction to the massive political capital loss suffered by President Obama at the hands of Republicans in the recent Massachusetts senatorial election, reportedly one of the main bailiwicks of liberal forces in the US.
The electoral loss signaled Obama’s health reform bill as losing popular support, which may likewise translate to a mighty comeback for the GOP (Grand Old Party) in the upcoming 2010 senatorial elections. The prospects of the Republicans back at the helm of the Senate risks enervating Pres. Obama’s programs, hence like all politics, desperate times calls for desperate measures.
The massive loss of political capital meant that President Obama had to piggyback on a popular issue, which at this point has been no less than to bash on the highly unpopular banking sector to regain some points.
Nonetheless while we mentioned that reducing the banking sector to its basic function should have been ideal, the Obama-Volcker tandem has merely been passing the buck.
They’ve fundamentally ignored the role of government failure that led to the recent two boom bust cycles, which essentially had been due to easy money policies, albeit for the recent housing bust these should have included the skewed capital regulations that encouraged excess leverage and regulatory arbitrage, housing policy that pushed home ownership by subsidizing mortgages and regulators sleeping at the wheel or in cahoots or captured by the industry, as well as, tax policies that encouraged debt take up.
Policymakers frequently deal with the superficial, it has never addressed the roots of “too big to fail” which is largely a product of crony capitalism emergent from bubble policies.
As per Constantino Bresciano-Turroni as quoted by Gerard Jackson ``The increase in banking business was not the consequence of a more intense economic activity. The work was increased because the banks were overloaded with orders for buying and selling shares and foreign exchange, proceeding from the public which, in increasing numbers, took part in speculations on the Bourse. The banks did not help in the production of new wealth; but the same claims to wealth continually passed from hand to hand.”
In other words, the so-called banker’s greed is a result of policy based support to the banking sector, and it’s kindda obvious where this leads to-another Potemkin village or poker bluff.
Unfortunately these desperate attempts by the US President risks unforeseen consequences, considering that major banks engage in these activities have been supported by the US government.
This translates to policy contradictions which increase the overall risk environment thereby heightening uncertainty, and thus, perhaps the market’s sharp reactions.
Figure 6: stockcharts.com: S&P ETFs By Sector
Well based on the sectoral performance by the S&P ETFs, the materials, financials and energy took the brunt of the recent selloffs, these implies that since China has emerged as a major force in the demand for commodities then the fall in materials and energy could have been construed as China related and the fall of the Financials as imputed on the Volcker Fund issue.
Figure 7: Danske: US treasuries
Moreover, this week’s meltdown didn’t come with higher interest rates. Therefore the issue wasn’t about funding, interest rate and or rollover risks. Instead the lower yields signaled a supposed flight to safety as Danske Team indicates above (right window) which has been corroborated by a rising US dollar.
Considering that the net supply of bonds have shriveled due to Fed QE purchases, the selloff wasn’t also indicative of concerns over exit plans.
One analyst offered a conspiracy theory and wrote that for the US to be able fund its intractable deficits she would need to engineer a stock market crash, as the frightened public (domestic and foreign) will likely buy into US treasuries. Although I would tend to dismiss this as normally outrageous, as any short term benefits will offset by medium to long term losses, desperate politicians may embrace almost anything silly for as long as it could preserve their privileges or power.
Lastly there is also the issue of the Ben Bernanke’s reconfirmation as the Federal Reserve chairman. Considering Mr. Bernanke needs 60 votes in the Senate to extend his term, the current anti-bank sentiment has prompted several Senators to cross partylines and move against extending Bernanke’s tenure which expires on January 31st.
``According to a Dow Jones Newswires tally, 26 senators have said they will back him; 15 have said they will oppose him. The remaining 59 haven't said what they will do. Under Senate rules, the earliest a vote could come is Wednesday,” notes the Wall Street Journal.
So why could the market crash with Bernanke’s confirmation in the line?
Perhaps Connecticut Democrat Senator Christopher Dodd, a Bernanke backer, gives us an inkling of what Ben Bernanke may or may not do, "I think if you wanted to send the worst signal to the markets right now in the country and send us in a tailspin, it would be to reject this nomination."
In other words, there seems no easy or better way to get reconfirmed than by holding the market hostage!
Yet all these political muddling makes us wonder, why would US debt get supported when regime uncertainty appears to be snowballing? Why should the US dollar become the safe haven when the pillars of central banking appear to be in jeopardy?
Other than all three variables-China’s efforts to quash a homegrown bubble, the US Volcker Fund brouhaha or the Bernanke confirmation controversy and fears of default Greece default-the markets could be looking for an excuse to correct.
So who says the markets are solely about the economy?
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