finem respice

Human Sacrifice At The Altar Of The Cult Of Buoyancy

Submitted by ep on Tue, 04/21/2009 - 18:34
float ever up

So strong has been the indoctrination administered by what can only be called the "Cult of Buoyancy" that several of its most dangerous teachings slip by in broad daylight, totally unnoticed by even professionals who should know much better. The acolytes of Buoyancy, that is the unrelenting upward cultural pressure on equity prices and the marks of certain commodities (but not others), cannot be blamed entirely for the fervor of their belief. They have, after all, endured nearly three decades of constant and unwavering reinforcement until each of them has come to expect year after year of volatility-less gains, marching Madoff-like, ever upward without risk or variance. A compliant Federal Reserve's willingness to patch the lanced dot-com bubble and commit to sacrifice the green blood spilled before the great Altar of Lift in the Temple of the Cult of Buoyancy (education centers in participating Best Buy stores nationwide) either gives lie to the political insulation supposedly guarding the Fed from such base and dangerous idolatry, or says something deeply worrying about the competence of the Board of Governors. Everything in the present climate and the events of the last 30 years is suggestive of bubble worship, unshakable and dangerously, even dogmatically religious in its practice, and consequences. The only aspect of the Cult of Buoyancy in opposition to its title is the lack of fringe status. The Cult of Buoyancy is mainstream. Despite this, and despite the blinding pervasiveness of the tenant of beliefs that has taken hold of the United States, Professor Gary Becker highlights a major tentacle of the Cult right under our noses, and critiques it:

It appears that not all banks wanted to take government loans in October, but some large banks were apparently "forced" to as part of the TARP loan program devised by then Secretary of the Treasury Henry Paulson. According to some accounts, the government exercised this pressure in order to avoid disclosing which banks were the weakest and needed these loans to survive.

This explanation of the government's behavior is strange since generally participants in financial markets do not have an excess of information about the financial viability of different banks, but rather they do not have enough information. It is wrongheaded for the government to try to mislead markets about which banks are weak. Indeed, the purpose of disclosure requirements mandated for banks and other companies is to raise the degree of public information available about different companies in order to assist participants to make wiser decisions. In any case, most firms and individuals active in financial markets already had a fair idea of which banks were stronger and which ones were weaker.1

That a question so obvious as "Is obfuscation the proper function of The Treasury," would have escaped the notice even of the High Priests of Capitalism as they received the dicta of Henry Paulson that "You will take government money and like it," is telling. Equally telling, the comically recursive argument forwarded by the present administration that returning the money might also release information not to the liking of the Cult of Buoyancy. Apparently, back when the checks were first being written, no one thought fit to point out that everyone in the same moment or no one at all would have to pay back the TARP if the illusion was to be maintained. This is pretty obvious stuff if you are paying attention, and pretty damaging. One is reminded of certain progressive school experiments abolishing grades in favor of the universally awarded "certificate of attendance," (lest anyone's feelings be hurt, you understand).

Treasury Secretary Timothy Geithner indicated that the health of individual banks won't be the sole criterion for whether financial firms will be allowed to repay bailout funds, a position that might complicate their efforts to give back the cash.

In an interview, Mr. Geithner laid out some broad principles, including the need to consider the overall health of the financial system and the flow of credit in judging whether banks can repay their government investment.2

This is somewhat amusing because it doesn't appear that Mr. Geithner actually has the authority to restrict TARP repayment. To wit:

NO IMPEDIMENT TO WITHDRAWAL BY TARP RECIPIENTS.

Subject to consultation with the appropriate Federal banking agency (as that term is defined in section 3 of the Federal Deposit Insurance Act), if any, the Secretary shall permit a TARP recipient to repay any assistance previously provided under the TARP to such financial institution, without regard to whether the financial institution has replaced such funds from any other source or to any waiting period, and when such assistance is repaid, the Secretary shall liquidate warrants associated with such assistance at the current market price.3

Oops.

It has lately become fashionable to assign structural blame to the inability of the present administration to resist spilling more and more green blood to pour atop altars in the Buoyancy Temples of GM, Chrysler, AIG, and so on. That the administration has been captured by a financial oligarchy has become almost a boring observation it is so commonly believed. This premise rests on such weak foundation, however, the slightest breeze tumbles it.

For an administration so in the thrall of the High Priests of Capitalism, this collection of economic central planners has spent a great deal of time sabotaging the very banking institutions that house them. Strange indeed for the political clients of a potent oligarchy. Two possibilities could resolve this basic paradox:

  • The administration is so dogmatically fascist4 that even obviously inefficient and economically disastrous policies will be adopted in furtherance of the political belief structure they favor. This seems somewhat unlikely in the face of the almost trivial observation that the present administration simply lacks the coherence to express much less implement a cohesive, directed political goal of such ambition.
  • The administration is in the thrall not of the High Priests of Capitalism, but of the Cult of Buoyancy. In retrospect it is quite obvious. The administration wants banks for one purpose. To pump out more loans. Period. This perspective makes almost all of the administration's actions perfectly logical.

In the first instance, commercial and retail loans don't require CEOs with multi-million dollar compensation schemes. Since this is the primary function of banks in the administration's eyes, killing the compensation scheme flushes out the banks without a bunch of ugly accusations that the administration is overstepping by firing key executives, and leaves behind balance sheets for lending. Very tidy.

The administration can be under no illusions at all that senior bankers will remain so long as dicta with respect to credit card rates, loan quotas, concessions with respect to the debt of favorite pet-industries and the like become the order of the day. That all these issues have emerged anyway tells us that the administration is entirely unconcerned with the fates of senior bank officials (or terminally stupid). While there is an argument for the second, the first appears more compelling. Banks, in this view, are tools to accomplish one thing: lending to voters. To keep the life raft filled. To re-inflate the bubble. This reminds us easily of the administration's criteria- alarmingly, one need not even read between the lines anymore once this vantage point is taken:

In an interview, Mr. Geithner laid out some broad principles, including the need to consider the overall health of the financial system and the flow of credit in judging whether banks can repay their government investment. (Emphasis added).5

Going back through the tenor of the administration's discourse over the last several months, this theme "why aren't banks lending," returns over and over. Judge Posner, responding to Professor Becker, outlines the arguments nicely:

(1) because banks were undercapitalized, as a result of being overinvested in assets that had lost much of their value, such as mortgage loans and interests in mortgage-backed securities; (2) because they anticipated big losses from their outstanding credit card and commercial real estate loans, and perhaps from other loans as well (this is related to the next point); (3) because lending in a depression is highly risky--the default risk is high, and if the lender tries to compensate for the risk by charging a very interest rate this will increase the risk of default, because interest is a fixed cost of the borrower, that is, invariant to his revenues; (4) because as businesses reduced their output their need for borrowing fell and the risk of default (as I just mentioned) rose, making them reluctant to borrow; and (5) because consumer borrowing fell as a result of consumers' being overindebted as a consequence of the fall in house and stock values, the principal source of their savings.6

But, of course, none of this matters to the administration. One can almost feel the frustration that followed when TARP money was not immediately poured into newly lowered credit card interest rates. Maxine Waters looked mercifully ready to have an embolism when presented with Ken Lewis behind a microphone. Instead of permitting the mechanisms that Judge Posner outlines to work to delever the economy and bring the water levels down to a reasonable depth, the "flow of credit" must be restored to all borrowers. Not only that, but interest rates must be pressed down at the same time. Forcibly, if necessary.

It should be difficult to feel any sympathy at all for an administration that happily fanned the flames of class warfare now that no bank whatsoever wants anything to do with anyone bearing a Washington, D.C. zip code on their business card. This was an entirely self-inflicted wound. Moreover, it was inflicted with the Sacred Blade of the Cult of Buoyancy.

Someone is going to have to stand up and point out to the investing public that there is no quick fix. Someone is going to have to work to start deprogramming the United States after three decades of indoctrination. So long as the Cult of Buoyancy holds such sway, we will never see rational measures to put the economy back on track. We will see the same, tired and now clearly very dangerous tools at work. Inflation. Centralized interest rate planing. Underwriting standards tinkering. Rampant consumerism. Class warfare.

The United States investor/consumer is a child spoiled rotten to the core. Real leadership in the United States would be pulling that child aside in the middle of the supermarket and pointing out that not only will no candy be forthcoming, but that there is a substantial body of homework to be done upon returning home and that no, there will be no time in front of the high definition television for awhile. Instead, it seems clear that this child's silence will be purchased with handfuls of candy dumped into the shopping cart with the silent prayer that no screaming will entail until November 2012, when the shopping cart is safely at checkout. The real question is how anyone plans to pay for the dental bills.

  1. 1. Professor Gary Becker, "Repayment of Tarp Bank Loans," The Becker-Posner Blog (April 19, 2009).
  2. 2. Doborah Solomon, "Geithner Weighs Bank Repayments," The Wall Street Journal (April 21, 2009).
  3. 3. American Recovery and Reinvestment Act of 2009, Division B, Title VII, Sec. 7001, SEC 111(g).
  4. 4. While "socialism" is often misused in this context, the tendency to use political power and allegiance to the state to influence industry though private owners as proxies is "fascism." Direct and complete ownership of the industries themselves by the state is "socialism."
  5. 5. Doborah Solomon, "Geithner Weighs Bank Repayments," The Wall Street Journal (April 21, 2009).
  6. 6. Judge Richard Posner, "Repaying the Governments Loans to the Banks," The Becker-Posner Blog (April 19, 2009).
[Art Credit: Javiy "Cool Balloons Underwater," Photograph (October 18, 2008), From the Artist's Collection. Muñoz, Canary Islands.]

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