The Fed, the Bailouts and the Useful Inquest
December 2, 2010
The U.S. public, if it is still keen to listen to talk of economics amid the green shoots of recovery, is soon to get an education in the ways of global central banking. This may not be suitable for tender ears.
Sen. Bernie Sanders, the Vermont Socialist(-Democrat), is upset at word, pried out of the Federal Reserve, that America’s central bank provided crisis loans in 2008 to megabanks such as UBS (nee Union Bank of Switzerland) and Barclays that are headquartered outside the U.S. Meantime, voices on the Republican right are objecting to prospective taxpayer exposure to an International Monetary Fund backing of the latest European debt bailout.
Welcome to the international financial system of the past generation.
Both left and right are correct to call attention to significant strings of the vast financial web that governments have woven in support of commercial banking. The problem will be that in attacking this system piecemeal, which is the way politicians get at reform, they can unhinge a net that is supporting the real economies of Main Streets and High Streets the world over.
Take Sanders’ alarm at the uses to which the Fed put the $3.3 trilliion rescue that went on under names like the Commercial Paper Funding Facility. We already know now that several “American” companies such as McDonald’s and General Electric made use of this huge kitty during the crisis to cover their bills for payroll and keeping the lights on. That is because modern big business relies on a benign kind of Cash Express store to operate. There’s nothing necessarily worrisome about this, it’s just money management, but commercial paper and the like is now the oxygen of the world economy. It was this market (and the correspondent money-market funds most of us use) that was the essential “systemic risk” of 2008, the point of maximum danger to life as we know it. The fact that the world’s biggest central bank, the Fed, stepped in to keep the lifelines open ought to be the least controversial element of the Great Bailout.
But of course, overnight borrowing is tied to everything else in global banking–everything that led to the infamous TARP and now to the mushrooming efforts to backstop the European financial apparatus. And naturally, because we have an integrated world economy, entities such as UBS and Barclays are as tied to the USA as McDonald’s. But they are largely taxed and regulated (to the degree they were regulated) abroad, in their corporate domiciles. This is unnerving to an American politician.
But, guess what, it’s become all one big pot. Every major country is part of the banking mix. The common stakes are now high enough that, though a tiny economy such as Iceland’s can allow its banks to fail and begin to repair itself in the good old-fashioned way, nations such as Greece and Ireland are thought (by the global financial hierarchy) to be too connected to allow bust and renewal to take its usual rough course. That could snip one of the cords of that big hammock that holds our fat financial asses.
That’s also why political attempts to undo what has been sewn to support international finance are fraught with hazard. Even if we are (apparently) not at the stage of systemic risk that we were in 2008, national fixes carry the taint of protectionism, of the “us but not you” attitude that is in the air in Washington. Like so much of macroeconomic policy, that has the potential to trigger currency and trade wars that very soon get us back to the doorstep of financial collapse.
That said, our politicians are doing us the favor of opening up a broader discussion. Just as now is the time for the U.S. to come to grips with its looming fiscal wreck, it is also time to consider how a global banking system has grown up in a world of fiat money, with no anchor or backing (as in the past, to gold) but instead just the full faith and credit of nations and their agents, the central banks. The U.S. has a special place in this, not just because it is still the biggest economy, but because it still has the dominant global means of exchange, the dollar. And, Bernie Sanders, the truth is more sweeping and staggering than the “scandal” you have helped to expose with your nettling of the Fed: We have a world currency and a national central bank. Can this hold?
Suggestion: As we get deeper into this cleansing political ritual, Washington policy makers and all citizens who remain clued into economics should read one or more of the recent books about the nature of the fiat-currency system that the world’s central bankers have erected. My special plug is for Money, Markets and Sovereignty by Benn Steil and Manuel Hinds, which has won the annual F.A. Hayek Book Prize of the Manhattan Institute.
The Austrian economist Friedrich Hayek had a lot to say, nearly a century ago, about where this financial web would have us. Had those in power listened back then, we would not be where we are today. To get out of the fix we’re in, before we do anything else, let’s understand how we got here.