The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall. Following these world-shaking events, market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World.It's all clear now. Banks were allowed to move liabilities "off the books" to SIVs because of the collapse of the Soviet Union. That certainly makes sense. Somewhere. Mr. Greenspan somehow fails to note that the shell game indulged in by the banks through the magic of black box algorithms which engendered "no loss" derivatives marketed by unregulated hedge funds has ended with no pea to be seen on the table. His only concession to the phenomenon is by mentioning that:
Arbitragable assets--equities, bonds and real estate, and the financial assets engendered by their intermediation--now swamp the resources of central banks. The market value of global long-term securities is approaching $100 trillion. Carry trade and foreign exchange markets have become huge.I'm not as impressed as I had hoped to be.
Never fear. Today, Bernanke rides to the rescue. Since the credit markets are frozen because absolutely no one in the world has any remaining faith whatsoever in ratings issued by the "Who?" "Not me!!" credit rating crowd, the Fed is going to start shoveling money to - "All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions."
Of course, that determination will be made based upon their rating by Fitch or Moody or Standard & Poor. What a relief.
I don't have any particular objection to special auctions to
inject liquidity. That's the purpose for the existence of central banks. It would be nice if the Fed made it clear that a depository institution had an either/or choice regarding off the books deals and remaining a depository. The mental picture of depository institutions gathered around a blanket, rolling dice on black box outcomes just doesn't inspire a great deal of confidence.
The Fed still has a lot more credibility (IMO) than the IMF or the World Bank or the Asian Development Bank. Those are the folks who have been touting the success of China in following the "third way". It is becoming increasingly clear that China's 'ascent' is chimerical. I've never heard of a 40% cut in a country's estimated GDP before. Except for that one time when the Communist mythos concerning the Soviet Union was completely demolished, of course. It's almost as if China and the former Soviet Union had something in common. Maybe the World Bank, the IMF and the ADP will be able to apply sophisticated analysis to determine whether a common element might exist?
Bernanke needs to clip and save Greenspan's editorial. When China collapses he'll be able to say that not even Greenspan saw it coming.