Wednesday, December 14, 2011

Charles Hugh Smith puts forward his case for transparency

Periodically, I like to let readers hear a different voice calling for transparency.

On his blog, Of Two Minds, Charles Hugh Smith examines the perpetuation of opacity and related policies since the beginning of the solvency crisis.

All statements in bold are the author's.

... If we had to distill down the Fed Chairman and the Federal Reserve's policies since the wheels came off the Fed's "shadow banking" system of fraud, collusion, embezzlement and free-floating leverage, we'd have to start with a systems-analysis perspective. 
Any system which separates risk from results (gain/loss) is doomed to implode, as the lack of feedback from the real world (also known as consequences) enables the self-reinforcing feedback known as "moral hazard": losses by those who took the risk to reap a gain are made good by those who did not take the risk and who do not stand to gain from the risk they are covering. 
In this case, the mortgage origination and packaging "industry" and the investment banks' origination and marketing of fraudulent-from-inception derivatives "industry" took the risks to reap outsized gains from the financialization of mortgages and other debt instruments via leverage, commodifying debt and arcane derivatives, all of which were sold as "low-risk." 
Capitalism's primary characteristic is that capital is put at risk for a gain/loss. If risk is off-loaded onto the Fed's bottomless balance sheet and the taxpayer via government-funded bailouts and guarantees, then capital is not actually at risk. Thus what we have isn't capitalism, but cartel crony-capitalism, a phony version of the real thing which guarantees private banking profits and socializes banking losses. 
The Fed was recently revealed as having arranged billions in private gain via secretly backstopping the banks with $7.7 trillion. This highlights Bernanke and his buds' second catastrophically wrong policy, that of systemic opacity. 
The acme of open markets is transparency. Without transparency, markets are not free or open, they are manipulated-- both to hide those who are benefitting from the destruction of transparency (monopolies, cartels, fiefdoms, kleptocracies, oligarchies, etc.) and to manipulate the market as part of a permanent propaganda campaign to "manage perceptions:" the market's up, everything's dandy. 
Bernanke and his faithful banking-sector lackeys have destroyed transparency at every turn, refusing an audit (an audit smacks of--sniff--democracy--how distasteful), masking the $7.7 trillion in backstopping, and hiding the toxicity of the Fed balance sheet...
Sounds like he is making the case for the Fed as a member of Wall Street's Opacity Protection Team.
The Fed cannot dare grasp that "healing" in capitalism means writing off uncollectable debt and sending insolvent lenders and debtors to bankruptcy court. ...
ZIRP has myriad pernicious consequences. Let's say you have some capital that you want to apply such that it earns a fair return. If interest rates are near-zero, then a fair return has been rendered impossible by Fed policy. 
The Fed leaves you only two choices: either put your capital into "risk-on" assets that are inherently risk-laden, or loan the capital out at low rates in an opaque market and hope you'll actually get the principal back.... 
You might hesitate to loan out large sums of money (jumbo mortgages) in a market where the risk of a decline in the asset (real estate) is obvious but official manipulation means you can only receive a very paltry return on the capital you're putting at risk. 
Since the market isn't able to price real estate, risk or credit transparently, then prudent investors would be forced to shun the market: how can you invest wisely when assets, debt and risk can't be priced by the market? 
Prudent lenders would withdraw from such a rigged, risky market, which is precisely what has happened.... 
The only way to restore trust and clear the market of uncollectable debt is to let the market transparently price, risk and credit--precisely what the Fed's policies are designed to stop. ... 
Separate risk from gain, obliterate transparency and choke the market with zero interest rates, and you've not only destroyed capitalism, you've also destroyed the economy by rewarding the most venal, corrupt, fraudulent and capital-destroying players while stranding the prudent on an island of opacity where the true price of assets, credit and risk cannot be discovered. 

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