Saturday, October 18, 2008
Grant's rant
Jim Grant, long-time author of Grant's Interest Rate Observer and numerous books on credit and its perils (see, e.g., the fascinating -- no, really -- Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken
In the past two weeks, governments in Asia, Europe and the U.S. have effectively nationalized vast swaths of banking. Central banks have ramped up their money printing. In the past week alone, the Fed's balance sheet swelled by $179 billion, to a grand total of $1.77 trillion. In announcing such radical measures, intervening governments never fail to invoke confidence. They say they must restore it.
Destroying confidence, however, is what governments do best. And the confidence they can restore is usually the kind that got us where we are today. Inflation and moral hazard led directly to the immense overvaluation of equities and residential real estate -- and of the bloating of the leverage that sustained those prices. Yet, to cure what ails us, credit creation and the public guarantee of banking liabilities are the policies today most favored.
Perhaps the world has gone so far down the path of socialized finance that there's no turning back. However, the doughty remnant of capitalists should be under no illusion about the risks and opportunities they confront. They can't miss the risks. Mr. Paulson pledges that the government's bank investments will be passive and apolitical, but the record of the Depression-era Reconstruction Finance Corp. suggests that the federal government is a shareholder that can throw its weight around. Besides, would Mr. Paulson's apolitical intentions bind his successor?
For the false confidence that played so important a part in the creation of the late excesses, the government should decently bear its share of blame. It accepts none of it, however, at least none that Messrs. Paulson or Bernanke have admitted to. Not that a federal confession of sin would expunge the financial errors of the debt-financed upswing. But it would, at least, clear the intellectual air and help the country and its creditors find a way to do better next time. For a start, the Fed might foreswear the Greenspan-inspired conceit that it can put the economy back together again after a debt bomb explodes.
And the opportunities? For the first time in a long time, stocks, tradable bank loans and mortgages are becoming cheap. The bear market is truly a value restoration project. Wall Street will be going on sale -- if the government will let it. For the entrepreneur, the silver lining in the federalization of finance is obvious. Start a bank or broker-dealer to compete with the institutions that will soon be smothered in Mr. Paulson's quarter-trillion dollar embrace. There's oxygen, still, in the free market.
Read the whole thing, including Grant's interesting argument that Americans got into this trouble in part because the dollar's status as the world's reserve currency, once again reinforced rather than undermined by the current crisis, allows us to live further beyond our means than other people.
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