The Market Ticker

Jim Bunning is the only Senator that I've seen in the Senate's Humphrey-Hawkins testimony who has a clue.

Let's start with THE HONORABLE Senator Bunning's prepared comments yesterday to what used to called "Humphrey-Hawkins", but yesterday was best called "The Grilling of Ben and Hank":

Thank you, Mr. Chairman. I know we have a lot of ground to cover today, but I want to say a few things on the topic of this hearing and of the next.

First, on monetary policy, I am deeply concerned about what the Fed has done in the last year and in the last decade. Chairman Greenspan’s easy money the late nineties and then following the tech bust inflated the housing bubble and created the mess we are in today. Chairman Bernanke’s easy money in the last year has undermined the dollar and sent oil to new record highs every few days, and almost doubling since the rate cuts started. Inflation is here and it is hurting average Americans.

Second, the Fed is asking for more power. But the Fed has proven they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go. As I said a moment ago, their monetary policy is a leading cause of the mess we are in. As regulators, it took them until yesterday to use power we gave them in 1994 to regulate all mortgage lenders. And they stretched their authority to buy 29 billion dollars of Bear Stearns assets so J.P. Morgan could buy Bear at a steep discount.

Now the Fed wants to be the systemic risk regulator. But the Fed is the systemic risk. Giving the Fed more power is like giving the neighborhood kid who broke your window playing baseball in the street a bigger bat and thinking that will fix the problem. I am not going to go along with that and will use all my powers as a Senator to stop any new powers going to the Fed. Instead, we should give them less to do so they can do it right, either by taking away their monetary policy responsibility or by requiring them to focus only on inflation.

Third and finally, since I expect we will try to get right to questions in the next hearing, let me say a few words about the G.S.E. bailout plan. When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America. The Treasury Secretary is asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed’s purchase of Bear Stearns’ assets was amateur socialism compared to this.

And for this unprecedented intervention in the markets what assurances do we get that it will not happen again? None. We are in the process of passing a stronger regulator for the G.S.E.s, and that is important, but it allows them to continue in the current form. If they really do fail, should we let them go back to what they were doing before?

I will close with this question Mr. Chairman. Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next government intervention in private enterprise will be. More importantly, where does it stop?

Ding!

Folks, did you hear that?  Comprehend it?  Note that Senators have much more than the ability to vote "NAY!" to stop something. They can engage in all sorts of Parliamentary games to delay or outright derail something they don't want to have happen, if they care enough about it, including but not limited to a filibuster - literally stopping all business in The Senate for as long as they can manage to physically stand and speak. 

Perhaps The Honorable Senator Bunning will hold court on his years in professional baseball?  I, for one, would be happy to tune into CSPAN and listen to his chronology of every game he ever played, along with the memorable ones in which he did not.

My friends, we have a constitutionalist in The Senate, and one who recognizes when The Rubicon has been crossed.  Not only that, Senator Bunning is willing to shove Bernanke and Paulson in the river if they try to get off the bridge on the wrong side.

That Paulson, who is a member of the executive branch, or Bernanke, who is an unelected, appointed member of a quasi-federal organization thinks he should be able to rewrite The Constitution is an outrage.

All spending bills must originate in The House. 

Period!

There is no such thing as a "blank check."  In fact, I would argue that such a "blank check" is, were Congress to pass it, explicitly Unconstitutional.

The argument that "if one has a Bazooka in one's pocket one is less likely to need to use it than a water pistol", as put forward by Paulson, is true but not material to the argument.

Not everything the government wishes to do makes sense - or is lawful.

This doesn't mean that The Government should or can simply ignore The Constitution when it happens to get in the way.

The fact of the matter is that the GSEs, as constituted and regulated for the last 20 years, were a bad idea.

They have been able to borrow in the public markets with an "implicit" federal backstop for more than 20 years.  This has destroyed market discipline as their balance sheet expanded - a process that should have slowly choked off liquidity and prevented the expansion of that balance sheet to the degree that it has occurred.  As their leverage grew beyond 20:1 or so it should have become simply impossible for them to continue to getting bigger.

The market failure occurred because of the improper implicit guarantee that should have been withdrawn at that time.

And as Senator Bunning made clear, all attempts to impose a strong regulator on Fannie and Freddie have been met with a fusillade of lobbying money from both firms who have done everything in their power to prevent such an imposition.

Why? 

Well, if you can borrow with the market perceiving less (or no) risk when in fact there is much risk, you make a fortune and the bondholders make more as well (by getting a fatter coupon) than should otherwise be the case.

Who loses?

You. 

The Taxpayer. 

Why?

Because when the charade falls apart you are then asked (as you're seeing now) to make that backstop explicit.  All manner of whiners from Pension Funds to PIMCO to foreign governments appear and demand that you not let them suffer losses even though they made improper profits as a direct consequence of the scam.

Suddenly, that extra 50 basis points of coupon that has been achieved by the bondholders - some $50 billion dollars every year that has gone to places like investors in Asia and Europe, along with the fat salaries that have gone to Fannie and Freddie's executives along with the gains and dividends of shareholders - comes straight out of your hide in the form of additional Federal Debt.

This is blatant theft and it must not be allowed to happen.

Shelby is 100% full of crap.  He stepped out to pontificate on CNBC about how Treasury should get what it wants, but the fact remains that regulation must come first, and if we are going to backstop these firms, then the people should extract from those people who got the additional "fat" coupon all of that ill-gotten gains.

Since that would be truly outrageous (and impossible) there is only one solution - forget about backstopping the GSEs.

Cut 'em loose.

Let the market enforce the discipline on their borrowing.  They will be flatly unable to continue to borrow at anything close to reasonable interest rates with their leverage and the market will force them to divest their holdings.

If they choke and die trying to get the pig through that python, then so be it. 

If we need this function in the market (and I am not convinced that we do), then create a NEW entity as an agency under Congressional oversight and operation, so the benefits belong to the taxpayer and there is no "excess coupon" that can be stolen from us all.

At the same time if Fannie and Freddie cannot deleverage on their own successfully then place them into conservatorship and runoff.  This puts the firms in a place where, over the duration of their bonds, they wind up their business, pay the coupons and redeem the principle as those bonds come due.  If there is a deficiency, then losses will be taken - as should be the case when you buy debt that goes bad.

As for The Fed having "more control" and "more power", once again Jim Bunning has it right.  The Fed has mismanaged the power they already have, and has been largely responsible for the monetary and market messes of the previous 25 years.

• The Fed is directly (although not solely) responsible for the weak dollar in the United States.  If you want something to be valuable, you don't make lots and lots of excess of that something available.  You reduce availability of something you want to be more expensive, not the other way around.  Paulson and Bernanke both are always careful to say "A strong dollar is in our nation's interest", not "we are promoting a strong dollar" - because they're not.  Bernanke has made lots of extra dollars available and he not only is unrepentant in this regard, he refuses to admit that he has done so - yet The Slosh does not lie.
• The Fed has caused price inflation.  By intentionally fueling "feel good" credit bubbles The Fed and Treasury have created an environment where spending beyond one's means can be conducted, and thus driven up asset prices to match this imaginary "income" that is in fact nothing other than debt.  This can't happen without the explicit support and actions of the monetary authorities.
• The Fed has refused to allow market discipline to put a stop to the stupidity that is necessary to create credit and asset bubbles. As just one of many examples, The Fed stepped in to stop the collapse of Bear Stearns.  Had Bear been allowed to collapse it would have sent a powerful and indelible message to all market participants - if you do business with and intertwine yourself with someone who does imprudent things, you can get killed by being inside the blast radius whether you're one of the imprudent or not.  By bailing out Bear's debt The Fed and Treasury said loud and clear "we will make it ok if you don't use due care in your selection of trading partners and market activities."
• The Fed has refused to use its authority to rein in the act of depository institutions in the making of unsound loans.  It has further refused to rein in institutions who have deployed excessive leverage through gaming the regulatory framework through machinations such as off-balance-sheet "SPEs" and "SIVs", although they are within their right to do so by refusing to lend to institutions who are imprudent.

We had a credit and housing bubble through, in no small part, the direct actions of The Federal Reserve and The Treasury Department.  We had a tech bubble through, in no small part, the actions of The Fed.  And we have $4/gallon gasoline due, in no small part, to the actions of The Fed.

That The Honorable Senator Bunning recognizes this, and is willing to put his foot down to stop it, makes clear that he is one of the very few Statesmen that I have seen in our elected Houses of Congress (the other obvious example being The Honorable Mr. Garrett.)

Senator Bunning, you are A Great American. 

May you find the testicular fortitude to follow through on the promises embedded in your speech.