why are the libertarians quite on this, you think with their strong
convictions that would be screaming out of the stock markets in horror
as the nanny state props up the fat cat wall streeters with a massive
subsidy that is benefitting them also, perhaps there is some hypocrisy
here:)
http://commentisfree.guardian.co.uk/thomas_palley/2008/03/crony_capitalism.html
Crony capitalism
In the face of Wall Street panic, the Fed is subsidising the biggest
and most powerful investment banks
Thomas Palley
March 24, 2008 5:00 PM | Printable version
The Federal Reserve's recent decision to grant Wall Street access to
special borrowing facilities smells of panic and special dealing for
special interests. The decision subsidises the biggest and most
powerful investment banks, thereby distorting financial markets in
their favour. Behind the decision lies the problem of excessive
representation of Wall Street interests within the Fed.
The Fed's decision should be reversed quickly and in an orderly manner
that prevents renewed financial turbulence. After that, Congress
should launch formal hearings into the governance of the Fed, which
has remained largely unchanged since the 1930s. In recent years the
Fed has displayed massive policy failure in its refusal to address
asset price bubbles. Now, its decision to subsidise Wall Street raises
further questions about its independence and judgment.
The Fed's new Primary Dealer Credit Facility (PDCF) effectively gives
Wall Street's primary government securities dealers, which includes
all the large investment banks, access to discount window borrowing.
That means access to funding at the bargain basement interest rate of
2.5%, and all that is asked is for borrowers to post some form of
investment-grade collateral.
This arrangement constitutes a massive subsidy, which would be large
in normal times. However, it is especially large at a time of market
uncertainty and liquidity shortage. While other market participants
are being forced to de-lever at fire-sale prices, the Fed's friends
are being given near-free government money to snap up assets.
Wall Street has been quick to embrace the facility, and within four
days borrowing reached $29 billion. Erin Callan, chief financial
officer of Lehman Brothers, enthusiastically declared the facility to
be "incredibly attractive ... Our ability to access that form of
financing to do more business for clients is incredibly interesting."
Morgan Stanley's chief financial officer, Colm Kelleher, described the
facility as being "there for normal business. It's not meant to be
there as a last-recourse thing." A Goldman Sachs spokesman declared:
"We think the Fed window provides a good alternative to the secured
funding markets and we welcome the initiative."
The new facility represents a complete break with the past.
Previously, discount window borrowing was restricted to regulated
depository institutions, and access was always described as "a
privilege and not a right". That meant banks could only get access to
cover seasonal shortfalls of funds or dire emergency needs, and any
borrowing was subject to regulatory disapproval - so-called Federal
Reserve "frown" costs. Now, the Fed has apparently made the discount
window available to Wall Street as a source of ordinary business
finance.
This means the Fed is providing risk capital to the likes of Goldman
Sachs at paltry interest rates that confer a significant subsidy.
Moreover, the mere right of access enables them to borrow more cheaply
from other lenders because of the back-stop reassurance provided by
discount window access. It also establishes incentives for future
excessive risk-taking.
These subsidies are a travesty. Goldman Sachs, Lehman Brothers, and
Morgan Stanley are extraordinarily profitable companies. They have
also been the drivers of the worst trends in the American economy over
the past generation, pu****ng excessive CEO pay that has spread like a
cancer throughout cor****ate America, even reaching into universities
and non-profits. Additionally, they have pedaled the shareholder value
paradigm, that has pushed companies to emphasise short-term gain over
long-term investment, and contributed to ripping up America's social
contract. Meanwhile, their business model has promoted speculation
that is behind repeated asset and commodity price bubbles.
Subsidising these firms is an insult to Main Street. Many families are
losing their homes as part of the mortgage crisis. If they had access
to 2.5% financing that would not be happening. Likewise, manufacturing
firms are being forced to close because of lack of affordable capital,
which is destroying jobs and the economic foundation of communities.
The Fed will claim it had to institute these measures to calm Wall
Street. That is nonsense. The fair and economically efficient way to
deliver emergency liquidity to Wall Street is through an auction
facility that is open to all financial firms, and in which
participants supply good collateral. Those who need the funds most
will bid the highest. That way, taxpayers get properly paid for their
sup****t, and the funds go to those who need them most.
Geologists say they learn the most from extreme events like
earthquakes that reveal the reality of the earth's crust. For the past
25 years, critics of the Fed have been dismissed, and the Fed's high
standing has blinded the reality of its revolving door with Wall
Street and its class-based conduct of policy. Now, the Fed's response
to Wall Street's panic has revealed the reality of its crony
capitalist world. That provides an opening for long-needed reform.
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