Was it the exchange stabilization fund, or the market itself that did the trick for the US financial markets on 17th March, 2008 after Bear Stearns saw its bail out (or negotiated liquidation for Bear Stearns but bail out for JPM for Bear Stearnsâ€™ riskier assets)?
One can never be certain about the market. Lately itâ€™s more so about interlinked financial markets, globally. No one probably expected the US market to be so bullish in the back of relative black-out in rest of the world, not even 24-hrs ago.Â Â But that’s market. It does not necessarily follow the whims of Bernanke, in-spite of the credentials of Bernanke as an academician. It neither follows the whims ofÂ doomsayers.
So as indices from Asia to Europe traded lower by 3-4% on an average yesterday (17th March), all eyes were on the US markets. Call it bail out, market intervention, market manipulations or brilliant market regulation; the US authorities have been at many of those to have credit markets stabilize, at any cost, as often reported by their policy-makers.Â Loss in financial markets at this hour can further devastate the already devastated credit markets.Â
There is no denying of the advantages one gets by being a Super Power, rather the Super Power. Your definitions change with your (short-term) requirements and the rest of the world follow suit. So whatâ€™s capitalism, whatâ€™s socialism, whatâ€™s intervention, whatâ€™s regulation, and whatâ€™s manipulationÂ are all defined by the US by playing with words. One may argue that the definitions of these ought to change as the situation demands so. Absolutely right!
However what about Free Market and Free Market Economy? What about a strong dollar policy?Â
So one need notÂ be too biased against the actions of the Federal Reserves or that of Treasury Department, headed by Ben Bernanke and Henry Paulson respectively. They have been doing what the US is known for – for its double standards all over.
Shoot first andÂ find later.
So they have been shooting all their arsenals just to ensure that things donâ€™t go out of control. Out of control of what? Whatâ€™s â€˜in controlâ€™ and whatâ€™s â€˜out of controlâ€™ for free market economy?
The US did it in Afghanistan in terms of its foreign policy back in the 1980s. It did so in Iraq by colluding with Saddam during the now infamous Kurdish gas attack or even during the Iran-Iraq war. They did shoot it first, and after two decades they found that they did shoot at themselves. However, still the ‘shoot first and find later’ attitude has not changed.
Those were the cold war days. One may argue that there were still reasons to be scared. But now what â€“ when almost all the world has adopted free market economy, with their respective definitions. SoÂ what scares the US? China has allowed its stocks to correct by around 40%. And till sometime back, all western journalists were talking about possible riots had there been such a bloody correction in China? Yes, there is riot in China â€“ but thatâ€™s more in Tibet; and the riot amongst policy-makersÂ is to control inflation.Â Â At any cost!
Defenders of Bernanke et al. would argue that itâ€™s inflation in China. China does not have a 2nd choice. Well, historically ChinaÂ always had twice the inflation of the US. The inflation in the US is also high (though credibility of these officially released inflation figures comes under scrutiny) lately. Would the US allow a 40% correction? Stocks are attractively valued in the US based on PE ratio, and all such logic may pour in. Absolutely fine again, but allow the market to find that.Â
Â The Chinese Central Bank also took an equal hit, if not more,Â on its forex reserves (for bailing the US out, so far!) as the US financial firms did. But it did not show any symptoms that the US financial institutes did. The causes were in the US, the symptopms are widespread. The printing machine and the equivalent liquidity essential comes from the US; the products from the rest of the world.Â
When consumers are having negative savings for years, financial institutes make money by getting levered beyond the risk profile of assets and firms get profit from consumer demandsÂ originating primarily fromÂ credit in different forms that the consumer enjoyed historically; it does not take much to pull the plug of credit toÂ degrow the precariously balanced US economy.
But itâ€™s the land of free market economy, itâ€™s the land of capitalism, and itâ€™s also the land of the B-2 Bombers with the Super Power status, it’s the land of the Central Banker of the world. So at least for now, the financial markets of the rest of the world get butchered, only to safeguard the culprit. Because they donâ€™t manipulate, intervene, bail out hefty bonus-taking investment bankers with tax-payers money. China did tremendous capital injection in its four largest state owned banks before they went public to clean up their balance sheets, but they were state-owned. So tax-payers money were used to create tax-payers asset.
In the US, Fed. takes the risk and JP Morgan shareholders rejoice. One can suggest a quick online auction over eBay to get a fair price. One canâ€™t have anything better than that in the name of capitalism and free market economy.Â J P Morgan shares climbed by 10% or more with that deal, whereas Bear Stearns shareholders and tax payers laughed atÂ their stupidity, and at the logic of the system.Â
Coming back to the reason of their otherwise inexplicable actions, Bernanke et al are scared. They donâ€™t have the luxury to have any moral values. You canâ€™t ask a terminally ill cancer patient to go to the gym and lift weights. This time there isnâ€™t any USSR, but Bernanke et al. are none-the-less scared. They are scared of the market.Â
Sounds ridiculous â€“ isnâ€™t it? But there is no getting away from the truth. The so-called market may be an abstract concept; but it can be even more powerful than the only Super Power of the world.Â
Just like the USA didnâ€™t break-up the USSR, it wonâ€™t be China which will end in the current super-power status of the US. Chinaâ€™s rise is due to market forces; and the decline of the US would again be due to market forces.
For a long time, the US felt empowered to have the chain of a hungry male lion that mauled on other economies whenever their actions were not liked by the US at the pretext of unsustainable market dynamics. The Asian economic crisis is barely a decade old.Â
The markets eventually grew strong, and so did the brutal market forces. And though the US still holds the tether of the free market brutal force by being the de facto Central Banker of the world; the lion is increasingly getting restless.
Bernanke et al. are scared of that free market force. They feel that itâ€™s the one thatâ€™s getting out of control. And they are throwing anything in front of that hungry lion to tame it down, for the time being.Â
Markets evolve, and with that comes new products. If there’s no market for complex esoteric mortgage based derivative products right now, let it be so. There was a market for it sometime back, fine. We see it in all spheres – and financial markets need not be an exception. There is no point in reviving those esoteric derivatives in an ICU. If markets want them back again, they will be back. But Bernanke et al. would love to determine what markets should do and by how much. That’s not market – that’s their wishlist!
Would Bernanke et al. succeed this time â€“ probably yes, as they have succeeded time and again. Would it be good for the US economy and the global economy? Probably no as the brutal market forces would be even more brutal to rectify the global imbalances that Bernanke et al. further creates; and a bigger chunk of meat would be needed every subsequent time to pacifyÂ the market.Â
And thatâ€™s why Bernanke et al. are shooting first. They canâ€™t shoot the brutal market force itself, they wish they could! They are shooting down others to be used as bait to pacify for that hungry lion. Dollar, commodities, Bear Stearns, inflation, etc. are just a few fall out of that shoot first and find later attitude.
One can never be sure what caused the US market to be so strong on the 17th March, after the fifth largest US investment banker went down to market forces, sorry to get it wrong again â€“ rather to Fed. negotiated liquidation. If it was the so-called Exchange Stabilization FundÂ they indeed did a great job at any cost on 17th March as they indeed stabilized the exchanges.Â For a day when each day matters means a lot!
Alternatively, the hungry male lion seems to be satiated for the time being after having a great dinner from Bear Stearns just the day before. It was indeed market forces that resulted in the demise of Bear Sterns, Fed. just tried to tame the market forces with the negotiated liquidation after prolonging its fall by shooting first earlier, and elsewhere.
Ranjit is an Associate ProfessorÂ at Indian Institute of Foreign Trade, andÂ is the author of the book Wondering Man, Money & Go(l)d. Opinion is personal.