21 July 2008

That dreaded phrase: ''The system is fundamentally sound''

Concern is growing over the present instability of financial markets among senior officials at the Bank of England and the US Federal Reserve.

The Bank of England’s Governor meanwhile sounded a warning last night that markets and the global economy may be set for a period of greater turbulence triggered by rising interest rates around the world.

AntiSpin: "Period of turbulence" is not the signal to run for serious cover. When central banks seek to assure us that "the system is fundamentally sound" that means that the system is most certainly not sound, and that the wheels are about to come off. Watch for phrase "the system is fundamentally sound."
Protesting too much is a time honored tradition of US Treasury secretaries in such periods, and the phrase "fundamentally sound" comes up on each occasion when, after a year or so of debt deflation and systemic breakdown, the system becomes most certainly fundamentally unsound.
"Traders, talking over the Morgan meeting, failed to remember any previous occasion on which a stock market conference had been called while a trading session was still in progress. They did recall, however, that in 1907, with call money at 125%. Secretary of the Treasury Cortelyou conferred with J. P. Morgan, put $25,000,000 of Government funds into Manhattan banks, halted the Panic. They remembered too the Northern Pacific crash of 1901. when, after Northern Pacific stock had gone overnight from $150 to $1,000 a share, the House of Morgan, representing the late great James J. Hill and the House of Kuhn, Loeb, representing the late great Edward H. Harriman, compromised at $150 a share, saved from ruin many a short. Then there was the U. S.-England war scare of 1895 when, with money at 80%, J. P. Morgan offered money at 6%, averted a threatened crash. Thus bankers have for a long time recognized their responsibilities as panic-preventers, and when the glass house of speculation has cracked and splintered, it has most often been the strong House of Morgan that has assumed the responsibility of fame and brought order out of confusion." - Bankers v. Panic, TIME Magazine, Nov. 4, 1929
Tonight, reading the century old script, Treasury Secretary Henry Paulson asserts:
Paulson braces public for months of tough times
Sunday July 20, 2008 (AP)

Treasury chief braces people for months of tough times ahead, says US banking system is sound

Treasury Secretary Henry Paulson sought to reassure an anxious public Sunday that the banking system is sound, while also bracing people for more troubled times ahead.

"I think it's going to be months that we're working our way through this period -- clearly months," he said.

Paulson said the number of troubled banks will increase as they struggle to cope with big losses on bad mortgages. The government this month took over IndyMac after a run led it to become the largest regulated thrift to fail.

"Of course the list is going to grow longer given the stresses we have in the marketplace, given the housing correction. But again, it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation," he said in broadcast interviews.

Paulson used appearances on the Sunday talk shows to tell people that deposits up to $100,000 are fully insured. He said no one has lost a single penny on an insured deposit in the 75 years that the Federal Deposit Insurance Corporation has operated.

"We're going through a challenging time with our economy. This is a tough time. The three big issues we're facing right now are, first, the housing correction which is at the heart of the slowdown; secondly, turmoil of the capital markets; and thirdly, the high oil prices, which are going to prolong the slowdown," he said.

"But remember, our economy has got very strong long-term fundamentals, solid fundamentals. And you know, your policy-makers here, regulators, we're being very vigilant."
Banker's reputations suffer for bad calls, and I suspect Hank's will as well.
"Al Wiggin has never been known as a hard banker like President William Chapman Potter of Guaranty Trust Co., but he saw to it that his bank was ready for the 1929 stockmarket crash. Last week, in acknowledging Mr. Wiggin's letter, the executive committee revealed that in October 1929, Chase had less than $1,000,000 in brokers' loans. In the week of the panic, while frightened outside lenders were scrambling to call their Stock Exchange loans, Chase expanded its loans $373,000,000. It was National City Bank's Charles Edwin Mitchell, a rampant bull, who became the popular scapegoat of the Crash with his insistence that conditions were fundamentally sound." - Wigging Out, TIME Magazine, Jan 2, 1933
Ultimately, politics decides the outcome.
Tireman Harvey Firestone: "Business is good all over the country. But is it going to keep on? Are we fundamentally sound? I don't know. I can't subscribe to some of the principles being put into effect."

Banker Claude Ashbrook of Miami declared that President Roosevelt's promise to keep the U. S. out of the war was worthless, "like all his other promises."

Frank Bornn, Brooklyn distiller, predicted that "unless the Government does something drastic about it," bootleggers would force legitimate liquor concerns to the wall. "Just another example of how the Roosevelt Administration has fallen down on the job," said Mr. Bornn.

President George A. Hughes of Chicago's Edison General Electric Appliance Co., which just electrified the White House kitchen, reported business 100% better, denied that the New Deal was in any way responsible, predicted a Roosevelt defeat in the 1936 campaign.

Republican George H. Moses, onetime New Hampshire Senator, tartly remarked that the country was "going to hell in a hack," that the "sons of the wild jackass are multiplying like jack-rabbits," that "this country cannot continue to exist half Roosevelt, half Frankfurter." - Millionaires' Talk, TIME Magazine, Oct. 14, 1935
Of our more modern banks we are not assured that they are any better than previous over-leveraged and poorly structured systems.
...ex-Fed Chairman Paul Volcker had this to say: "Simply stated, the bright new financial system, for all its talented participants, for all its rich rewards, has failed the test of the marketplace," Volcker said during a speech Tuesday to the Economic Club of New York. "What has plainly been at risk is a disorderly unraveling of the mutual trust among respected market participants upon which any strong and efficient financial system must rest." San Francisco Chronicle, April 13, 2008
The system is fundamentally unsound. Today, as ever before, sons of wild jackasses are coming out to offer scripted reassurances. They are multiplying like jack-rabbits. If you are counting on them to save the day and prevent both the loss of your money, and of its purchasing power, I recommend you put aside at least a few month's cash just in case they prove to be as incompetent and full of shit as in previous instances.

No comments: