New column: Bernanke walks the line between bailout and bust

My new column is in the issue of Time with Mother Theresa on the cover and online here. It begins:

Much of what Ben Bernanke spends his days doing oscillates between the incomprehensibly arcane and the unspeakably dull. Lately, though, the Federal Reserve chairman has a stark, even exciting task at hand. He’s been imitating Jimmy Stewart in It’s a Wonderful Life and trying to halt a bank run.

While Stewart’s George Bailey had to make do with his powers of persuasion and his honeymoon fund to save the Bailey Building and Loan, Bernanke has the full faith and credit of the U.S. government behind him. The Fed can effectively print U.S. dollars at will. It can even, as Bernanke famously suggested in 2002, drop them out of helicopters, if that’s what it takes.

Unlike Bailey, though, Bernanke doesn’t know all his customers or even his loan officers. He cannot reassure nervous depositors (a.k.a. lenders) by telling them exactly where their money is invested, because he has no clear idea himself. He probably suspects that many borrowers and lenders have been up to no good and richly deserve the bad things that are happening to them. And while he can manufacture cash, he knows that if he overdoes it, hyperinflation and a dollar crash could result.

So Bernanke walks a thin line. Too far in one direction, and he bails out all the irresponsible people and institutions that have gotten us into the subprime mess and subsequent debt-market crunch. Too far in the other, and the global financial system collapses on his watch. Read more.

My editor, Bill Saporito, thought the It’s a Wonderful Life reference was pretty old hat and wanted me to try starting the piece with a colorful account from the Panic of 1907, which comes up later in the column. It was late Tuesday, I was very tired, and the thing had to go to the printer that night. Plus I thought the Wonderful Life parallel nicely set up the quandary faced by Bernanke: He has a lot more wealth at his disposal than George Bailey, but a lot less information. So I left things the way they were. Let me know if you think I made a terrible mistake. And I hope to write a post soon about the Panic of 1907, and the entertaining new book about it that I cite in the column.

I personally sorta like the way Bernanke is handling things. But then what would I know; I’m no Jim Cramer.

Facebook Insiders Are Cashing Out Their Stakes Before IPO

NEW YORK (AP) — Insiders and early Facebook investors are taking advantage of increasing investor demand and selling more of their stock in the company’s initial public offering, the company said Wednesday.

Facebook said in a regulatory filing that 84 million shares, worth up to $3.2 billion, are being added to what’s shaping up to be the decade’s hottest IPO.

Peter Varhol

We know how this is going to turn out. Either the system struggles through, largely on its own, or Bernanke bails it out. We have too much real time information on hand today for the Fed to not know when action is necessary.

Let me ask this: so why not bail out the financial system? At least, after a certain amount of pain. I understand the sense of outrage at those who got us into this situation (in reality, we are the people our parents warned us about), and I understand that he’s acting in moderation so the system doesn’t come to expect a bailout the next time. But why can’t we expect an FDIC-like organization to start safeguarding more of the financial system? Certainly with hedge funds a big problem is the lack of public information, but how about a horse trade – greater disclosure for greater protection? Would it fly?
Henri Tournyol du Clos

Peter : the “I” in FDIC stands for “insurance”. You just can’t insure financial instruments, each of which is a unique combination of just two basic components : 1) Risk and 2) Reward. It would be like having sodium-less salt, roughly… Yep, that’s called chlorine. It would, in a fairly short time, create a massive, moral hazard-induced imbalance, which would lead to a far bigger crisis. Think of 1998 in Russia or 2001 in Turkey, but bigger.

Experience has showed that safeguarding the financial system means enforcing guidelines rather than detailed regulations, which breed distortions and perversely create new, much more dangerous risks. However, local (read : national) legislative and regulatory bodies are loth to give up their petty powers and thus the financial system, however global it has become on the face of the planet, stays riddled with pockets of locally-created imbalances.

The present crisis was caused by insufficient consumer protection rules on mortgages in the US, a fundamental conflict of interest at the rating agencies, which no one really regulates, and over-easy monetary conditions on the dollar market since September 2001. In an ideal world the supervision of consumer finance, the supervision of the rating agencies and the setting of monetary policy would all be under the umbrella of one multinational institution. Central Banks are trying modestly to get closer to there, through the “Basel II” capital adequacy program which sets capital/risk adequacy rules worldwide for banks, but it is a slow and partial process, widely resisted by national governments, not least the US.
http://www.littlefforts.blogspot.com Larry Blumen

Bernanke may be George Bailey, but he’s no J. P. Morgan.
http://www.economicbubblesaregood.com Yadgyu

No safeguards are needed for investors.