I keep having this weird feeling that the way the financial wizards want to  manage the financial crisis is by lulling us (the public) into a false sense of security...and by stalling and waiting us out. So as a reaction, I feel like it is important to keep putting up statements by more sane economists who are more reality-based (and worried).

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

Galbraith is clearly not a fan of independent central banks...

TPMCafe: Prelude to Disaster

The tragedy, for us, is that the world today has reverted toward the model of the 1920s. In the US, we long ago established (through the Humphrey-Hawkins process) a model for professional and political accountability by the Central Bank. The first Fed Chairman to be subjected to the process, Arthur Burns, hated it: Burns was (like Norman) inept and evasive in public; he didn't think the Central Bank should be subjected to the indignity of actually answering questions. ( I know about this, because it was my job to write the questions.)

Paul Volcker was much more professional; despite his differences with Congress over policy he brought the Federal Reserve much more closely into an appropriate legal relationship with public power. But then, with Alan Greenspan, the capacity for oversight faded, because Congress could not cope with the man's talent for obscure expression -- and largely chose not to try.

In Greenspan's time the Fed's apparent power rose, because the economy recentered itself around bank credit and a global dollar standard, while doctrines of small government pushed fiscal policy back into the background. At the same time in Europe a Central Bank was established on the ancien-regime model, independent, above governments and autocratic, led by deeply limited men from the continental elites, while (under a Labour Government!) the Bank of England was restored to independence from the Treasury. Meanwhile in the intellectual arena the followers, admirers and would-be successors to Keynes were pushed firmly to the sidelines or off the stage.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

a few tangible examples.

Where it will end, is anyone's guess. But the potential for a disaster that cannot be handled by quirky, limited people chosen from insular clubs, and given vast and unaccountable power, is clearly with us again.

What?  Martians will land with a book titled "How to Serve Man"?  The Chinese will finally exchange all of that worthless paper for real estate?  Just give us a hint.

They tried to assimilate me. They failed.

In addition to a sucker's rally in the market we may get a "sucker's recovery" in the economy.  We are certainly getting a "sucker's recapitalization" of the big banks.  Goldman raised $5 billion on its offering this week.  Others will follow.  I wish the purchasers well, but fear that soon we will be saying: "poor bastards!"  

Alan Ableson in Barron's has noted that many of the indicators coming out of D.C. have the aroma of being cooked to perfection. Wells Fargo Corporation released an astounding profits report--a significant fraction of the TARP money they received!  Then Goldman released or leaked news  of how great their quarterly would be, then they released good numbers, then they floated a stock offering.  

Goldman's most recent quarterly was certainly masterful.  By converting to a bank so as to be eligible for FDIC guarantees and TARP funds, (not really necessary, as it turned out), they had to change their fiscal year ending date from November 30 to December 31.  So they just reported on Jan--March '09 and didn't talk about December '08.  Any guesses?  My own are: "Merry Fucking Christmas" to anyone who wants to look.  Push everything you can from Sept-Nov and from Jan-Mar into December and hide it as long as they can, partly as a courtesy to other big banks who are now in the process of issuing their own new stock offerings.  Beats asking the government and the taxpayers for more bailouts.

Soon the effects of the stimulus will kick in.  It is only a $800 billion patch over a $2.4 Trillion hole but it will affect the numbers.  This will be fodder for the stock bulls on MSNBC and elsewhere and the market might break 9,000 or even 10,000.  With happy days here again many will pull money out of safe refuges and "invest" it in the new boom.  The hopes probably are that it will last until November 2010.

But problems will again appear in financing.  The banks haven't been cleaned up.  They just washed and painted the facades.   Right now the world financial industry is playing "hot potato."  Possession of the "hot potato" can prove fatal, as with Iceland.  Unfortunataely, details of the coroner's inquest always leak out.  The "hot potato" explodes and burns everyone who has ever touched it.  

The problems will likely appear as the result of continuing real estate defaults and associated credit default swaps.  One analyst noted that there was a similarity between a bond and a CDS on that bond.  The big difference, (and "advantage"), is that for every bond issued several credit default swaps can be issued.  Geez, what is wrong with that?  We are all likely to find out.

The best hope at that point would be that, somehow, Obama will be shown to be wearing Super Teflon or at least will still be seen as  the best hope for fixing the economy.  But then a greater miracle must occur.  He must find the will and rally the support to do what is necessary.  That he will or that he can is very far from being assured.  The task is daunting.  He will have to pull off a TR and an FDR simultaneously.  And by that time 2008 and 2009 may seem like a golden era.

Or perhaps space aliens will land to save the earth, if not humanity, a la the new version of The Day The Earth Stood Still.

"It is not necessary to have hope in order to persevere."