Either the Fed Kills the Dollar or the Banks. Is It That Simple?

"Either the Fed kills the dollar or the banks. It's that simple. The poor innocent employees. How touching. Where's RL's concern for poor innocent dollar holders?"

Forbes: Communist Tool - The Skeptical CPA

Succinct, a little overstated to our eye moderated by the graying of experience, but true enough if one adds "the few Wall Street banks that gamed the system" and "the dollar over time." Either the Fed kills the Dollar over time or allows the Banks that have gamed the system and lost to accept their losses as gracefully as can be arranged.

The losses must be taken; they do not simply vanish. Every dollar of loss taken by the public trust is a hidden tax that is levied on all holders of the dollar. Even if one tries to make the improbable case that this inflation is offset by deflation it is still a reallocation of net wealth from the many to financial insiders.

The upper bound of the Fed's latitude is the dollar and our sovereign debt. The recent support of the banks is a policy choice, not a monetary action: a means of socializing the losses of the elite few for the sake of expediency.

A capitalism where an elite keeps all their profits and force their losses on the public is no capitalism and not even a democratic republic: it is a form of unrepresentative taxation by the banks that is a tyranny known as crony capitalism.

How can one set up a free market system in which one set of players have access to the house's funds and cannot lose? How does one sustain a game like that until the other players realize it is a blatant fraud and kick over the table?

The usual response is "but what are we to do? It is a crisis! Act now! Here are your choices!"

Make it an orderly process of receivership if required, but put the losses and the taxes directly on those who profited from the loss generating enterprises: shareholders, management, affiliates, and above all the insiders. By all means the central bank should lend freely, but at high rates of interest, not at subsidies.

Support what must be supported temporarily, but extract all incentive for those who gained so that they might be less tempted to do it again. That which is unprofitable and not rewarded is not desired; that which is punished will be deterred. These are the basics of natural law.

Investigate and punish any wrongdoing with commensurate fines and appropriately deterrent punishment including loss of freedom. Restore the integrity of the system through the enforcement of law and regulation already in place that has been undermined and neglected. Keep and reinstate that which has worked and reform the rest.

But above all, do not allow the situation to be resolved by an injustice to the public trust even 'this one time' for the sake of expediency. That is a moral hazard that stays with us and keeps regenerating. It is a distortion of the capital market system and an invitation to a procession of frauds and bubbles that eventually will wreck the dollar and the nation as we know it.

At first the comparison of this crony capitalism to communism was jarring. But as we thought about it, we saw that it was just another form of statism, in that the unelected few are unjustly apportioning resources at odds with a free market and the law.

Yes, it can be that simple. We might also say that either we restrain the incredible growth of the financial sector as a percentage of GDP and restore the system to some balance of production and capital allocation and accumulation or we will destroy it through this cycle of bubble, bust and credit crisis.

The share of financials in value added has steadily increased and has reached about 8 percent in 2006-2007. The share of profits, however, climbed to reach an extraordinary 40 percent and more!

The Financial Sector and Its Growing Excesses - Mostly Economics

On the Necessity of Regulation To Maintain Free Markets

There is an economic school of thought that believes that all government regulation is an impediment to markets. Markets are thought to be in their most perfect state when unfettered by any external interference or restraints. They are naturally self-ordering because of the dominance of a inherently reasonable goodness in the market participants. As this has been popularized there are many who mouth its slogans without serious thought about the assumptions and implications of those assumptions.

The other primary argument seems to be that since regulations are not perfectly sufficient by themselves without any additional effort then we ought to get rid of them. This is of course a logical fallacy since nothing in the real world is perfect and sufficient in itself without tending. Structures in the physical world tend to weaken and decay over time, requiring renewal, refreshment, endorsement, upholding.

Unfettered or free marketism is a modern variant of the 18th century cult of primitivism and the noble savage; mankind is perfect and most effective in its natural state, unspoiled by laws or civilization. It is a proper cult, because the same notion, when logically applied to any other system of interactions and transactions, is quickly seen to be patently absurd and unworkable. We offer the example of a football game, a traffic interchange, a cocktail party.

To say that some regulation is a necessary good does not imply that a surfeit of regulation is optimal. This is another cult called 'statism.' It is this extreme of over-regulation that is used to promote extreme deregulation for its own sake by the free marketists. Cults tend to be infested with cultish minds, reasoning from one extreme to the other, always and everywhere creating inefficient and untractable problems.

Certainly law and regulation can be abused, misused, overdone. But merely cutting regulations down to free the native economy can have unexpected consequences, even towards those who promote mass deregulation to achieve their personal ends.

Sir Thomas More: What would you do? Cut a great road through the law to get after the Devil?

William Roper: Yes, I'd cut down every law in England to do that!

Sir Thomas More: Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat?

This country is planted thick with laws, from coast to coast... And if you cut them down, and you're just the man to do it, do you really think you could stand upright in the winds that would blow then?

Robert Bolt: A Man for All Seasons

KDB and the Artifice of the Deal Part 3 - Offer on the Table?

Here is the story this evening from the Korean news agency Chosun Ilbo. Make sure you check out the second story from The Economic Times of India in which the other Korean banks deny all knowledge of the deal most emphatically.

Lehman closed today with a market cap of $11.20 Billion. If the Korean government approve the deal, KDB seems to be valuing Lehman at about $20-24 Billion which is a handsome premium. If this is the offer that Lehman management considers too low then we'd be a bit surprised.

There is an earlier report in Reuters that HSBC has expressed an interest in Lehman citing sources at ... you guessed it, Chosun Ilbo.

Curiouser and curiouser. A Wall Street bond trader of our acquaintance has suggested that Hank made some princely gestures vis à vis Korea's huge holdings of Fannie and Freddie in return for some sugar on the Lehman problem.

Our own take is that someone is trying to push this deal through their government bureaucracy via the media and is starting to make Jim Cramer of Mad Money look like James Pierpont Morgan.

Let's see what happens and what the details might be. We remain guardedly agnostic.

Korean Banks Consider Bidding For Lehman Brothers
Chosun Ilbo (English Edition)
Sep.3,2008 06:58 KST

Banks such as the Woori and Shinhan Financial Group are taking keen interest in joining a consortium the Korea Development Bank is trying to form to jointly buy Lehman Brothers, the U.S.’ fourth largest investment bank.

A financial industry insider said Tuesday that KDB sent to Lehman a proposal expressing its intention to buy 25 percent of the U.S. bank’s shares for Won 5-6 trillion (US$1=W1,134) and is now awaiting the answer.

Woori and Shinhan reportedly discussed joining the consortium with KDB with the condition that they acquire a comparable amount of Lehman’s stocks to KDB. This raises the likelihood of a Korean bank acquiring a global investment bank for the first time -- if the government does not oppose its bid and Lehman accepts the proposal, whose proposal reportedly includes a term that guarantees a priority right of KDB, so that it can increase its stake in the U.S. bank from 25 to 49 percent.

KDB sent offer to Lehman, Korean banks deny role
3 Sep, 2008, 0848 hrs IST
The Economic Times of India

SEOUL: (Reuters) State-controlled Korea Development Bank (KDB) proposed buying 25 per cent of US bank Lehman Brothers for up to $5.3 billion, media reported, but Korean banks rumoured to be joining a bid consortium denied they were involved.

Media reported on Wednesday that KDB had sent the proposal to the troubled US bank and that leading local banking groups Woori Finance Holdings and Shinhan Financial Group were seriously considering joining. Shinhan and Woori, whose shares were hit hard on Tuesday on concerns about the extent of Lehman's problems and their potential exposure, were quick to deny the media's report.

"We have not seriously considered the idea and have no plans to do so in the future," said a spokesman at Shinhan, South Korea's second-biggest financial services firm. Third-ranked Woori Finance also said in a statement: "We have not received any offer about the Lehman deal nor have we considered it internally."

The smaller Hana Financial Group reiterated its previous denial, while KDB declined comment on the report. KDB confirmed on Tuesday it was in talks with Lehman over a possible joint investment in the bank with other Korean banks, but declined to give details of its negotiations.

The Chosun report also quoted an unnamed financial industry source as saying top European bank HSBC Holdings, several US hedge funds and an unidentified Chinese bank were among other potential buyers of Lehman. HSBC officials in Hong Kong and Seoul declined to comment.

Lehman prefers KDB, whose CEO used to head the US bank's South Korean operations, over other contenders as KDB plans to keep its current management after an acquisition, but the deal may fall through as KDB's bid price is considered very low, the paper said.

According to the report, KDB was offering 5-6 trillion won ($4.4-5.3 billion) for 25 per cent of Lehman and also wants a guarantee it can later increase its stake to 40-50 per cent. South Korean authorities have publicly said they are against the state-controlled bank playing more than the role of a catalyst in any purchase of Lehman, preferring private banks to take the lead.

Lehman, which has more than $60 billion of mortgage and mortgage security exposure, is under pressure to raise capital as Wall Street firms continue to reel from the fallout of the subprime mortgage crisis. The fourth-largest US investment bank is looking for buyers for some $40 billion of commercial mortgages and property on its balance sheet.

By 0224 GMT, Woori shares had rebounded to trade 2 per cent higher, while Shinhan was off 2 per cent. Hana Financial dropped 3.2 per cent. The broader Korean share index was up 0.8 per cent.

Where Was the Safe Place for Savings from 1929-1933?

The answer is that there was NO single safe place for your savings, not even 'cash' dollars throughout the three years that marked the stock market crash of 1929-1932. The individual had to use their minds and keep their eyes on the markets to steer through that most perilous of financial times.

Many believe they understand the coming debt deflation and know where THE safe place will be to put their savings. History suggests they may be consumed for their faith in theory rather attention to market reality.

And this was a relatively straightforward case of unwinding and deflation. What twists and turns does this brave new world of derivatives and fiat reserve currencies have in store for us as it unwinds? And what new policy errors unforeseen and consequences unexpected await because of the Fed's continual experimenting in the markets?

We'll be talking more about this in the days ahead.