Along with much of the world, I have watched with increasing disquiet as the United States of America morphed under President Bush into a lawless soft dictatorship more like the USSR than the USA. Under his theory of the "unitary executive" the laws that Congress enacted were disapplied by signing statements and secret legal opinions. The protections of the Constitution were eroded and marginalized by police powers and warrantless surveillance. International treaties governing the protection of sovereignty, rules of war and the universal rights of man were distorted by unilateral interpretation and willfully hidden misconduct. Court rulings and judicial review were avoided, and where forced, were ignored or overridden or negated by executive pardon. Transparency and audit became a joke with refusals to cooperate with tribunals or to comply with supeonas or produce evidence. This lawlessness has not made the world or the United States or its allies safer in the age of terrorism as it has degraded and confused what we might have hoped to defend.
Just as we here in the rest of the world hoped we might breathe easy with the end of the Bush administration in sight, and several creditable candidates for president coming forward, the lawless unitary executive has expanded to embrace the Treasury and the Federal Reserve, debasing and contaminating the financial markets globally with its spread to our own central banks and market authorities and destabilizing our banks and investment markets. Once again in the name of crisis and expediency the laws are ignored, decisions are taken in secret, extra-judicial reapportionment of property and contract is mandated by executive fiat, and legislative review and judicial intervention are impossible. Over the past year every financial crisis has been met with lawless and Enron-esque innovation by the Federal Reserve and Treasury, and this week was arguably more extreme.
After this week's secret and unaccountable and extra-legal moves by the US financial authorities, I will not be holding any assets in the United States. I do not understand the rules. I doubt any rules will be applied fairly to all the players. I cannot be sure who the umpire works for, or what principles the umpire thinks they should uphold. I will not play the game.*
Let's look at a timeline of some of the decisions I would class as extra-legal or Enron-esque:
The (Selectively Leaked) Discount Rate Cut (August 2008)
Super SIV (October 2007)
Term Auction Facility (December 2007)
Bear Stearns/JP Morgan bailout and subsidy (March 2008)
Primary Dealer Credit Facility (March 2008)
Reverse MBS Swaps (April 2008)
Equity investment and collateral (September 2008)
Administrative Repeal of 23A (September 2008)
AIG nationalisation (September 2008)
Expansion of the Fed Balance Sheet through unprecedented Treasury refinance without appropriation by Congress (September 2008)
Central bank dollar liquidity draws (September 2008)
Resolution Trust Company/Super SIV Redux (next)
And that's just the list of actions we know about. Much may have been orchestrated and influenced behind the scenes in credit markets and traded equities and commodities.
At no stage have any of these significant enhancements to the prerogatives of the Federal Reserve, these derogations of explicit statutory limits, these stark departures from past authority and conduct, been the subject of democratic legislative proposal or review, or even public consultation and comment. In the name of exigency, they have all been sprung as fait accompli on a shocked financial community, and since been treated as unquestionable and unreviewable. Every initiative introduced as a temporary measure has become a permanent fixture.
The unitary executive of the Bush presidency eroded and disregarded the civil rights of Americans and others. The unitary Federal Reserve disregards the property and contract rights of Americans and others. Arguably the actions of the Federal Reserve over the past year represent the largest state confiscation of wealth in the history of man, dispossessing currency investors, equity investors, bond investors and taxpayers of literally trillions of dollars of current and future wealth by executive fiat.
The hypocrisy of the Bush administration criticizing Chavez while defending Paulson and Bernanke should be the stuff of late night stand up comedy.
And the answer to the crisis so created, according to those in authority in Washington and Wall Street, is to give more concentrated power with less review and less oversight to the Federal Reserve. The reforms now being discussed in Washington are aimed at (1) gutting the SEC so that it can no longer challenge the Fed's primacy in investment bank and financial conglomerate prudential supervision, oversight of clearing and settlement systems, market integrity and stability and introducing “principles based” regulation so that no one well connected need ever worry about prosecution or conviction ever again; (2) gutting the FDIC so that it can no longer challenge the Fed's determination of capital adequacy or prudential supervision at insured banks or restrain cross-affiliate financing or excessively risky activity within bank holding company groups; (3) gutting the CFTC so that the Fed has primacy to oversee risk management in all OTC and exchange-traded derivatives clearing and margin; and (4) providing explicit powers to the Federal Reserve to promote "market stability" by means which shall be secret, unreviewable, and above challenge in the courts; and (5) making the Federal Reserve the prime global regulator for review of the regulatory and prudential supervision arrangements everywhere else in the world through mandated “harmonization” of global standards as a quid pro quo for foreign market recognition and access.
Stalin couldn’t have drafted a better plan for central control of the global economy after wreaking such havoc and devastation.
Up until this week I thought the gold bugs a bit mad. I couldn't see the sense of holding something that couldn't be spent but could be seized (as gold was seized in the 1940s). I still think they are a bit mad, but I am actively looking for any alternative to currency and market investments as a medium of exchange and store of value. Given the very public concerns now being expressed in China and Russia, I am keeping company I would have once thought very surprising indeed.
For now the ECB, Bank of England and others are content to cooperate with the Fed, but as the chaos deepens and it becomes clear that the losses are to be allocated principally outside the US borders to those foolish enough to hold assets the Fed’s policies degrade and debase, they will begin to question and to look to each other for common interest and alignment.
The loss of 1200 lives on the Lusitania was deliberately allowed to justify US entry into World War I. The attacks on Pearl Harbour were known in the White House three days before the bombs fell, but were ignored to justify entry into World War II. Tonkin Gulf was a fraud. WTC hijackers were financed by US allies and WTC 7 was . . . whatever. Saddam’s weapons of mass destruction were fabricated in the forgery shop of Ahmad Chalabi’s Iraqi National Congress. You get the idea.
Not all catastrophic events were willful or anticipated, but all were used to force through an agenda that was pre-agreed by a powerful elite that stood to profit from a preferred course of policies that could only be pursued in the undemocratic atmosphere of crisis. Crisis prevents objective determination of the public interest. Crisis undermines both markets and democracy.
I no longer believe that every financial collapse is unanticipated or without behind the scenes orchestration of effects. I no longer trust the authorities to act fairly, honestly, in the public interest.
In the past year and just this past week, trillions of dollars of wealth have been allocated or misallocated, preserved, appropriated or destroyed by central bank fiat. If we really have nations of laws and not men, capitalist markets and not command economies, then it’s essential we peek behind the curtain to ask by whom and why and hold them accountable.
Lawlessness has not enhanced our security as citizens, and lawlessness will not enhance our security as investors or depositors either. Banks and markets require regulation in the public interest, and determination of the public interest requires transparency, accountability and the rule of law.
* For those cynics out there, let me remind you I gave up trading in January this year. I had a small amount of cash in a US dollar account. That account is now closed.
Hat tip to Joe Mason, for expressing similar views here on RGE Finance and Banking yesterday: Crisis Policy is Redrawing the Boundaries of our Financial System - and not necessarily in productive ways
And, as ever, thanks to the courageous Professor Roubini for providing a forum for views challenging the orthodoxy.