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Fed Bernanke and the HKMA Donald Tsang

Iqbal Latif - 3/26/2008

Via MediaBistro, we learn that Fox Business Network has bought ad space in the New York Times and the Wall Street Journal, poking fun at CNBC's Jim Cramer, and what he said about Bear Stearns, days before its collapse.

Its an embarrassing quote, but in all fairness to Cramer, he was advising the caller not to pull their account from Bear Stearns, and was not (as is implied by FBN) advising them to buy or keep BSC stock.

The tag line of the Fox advert is "Turbulent Times Call For A Credible Network." 1

Sticking ones neck out and offering an informed opinion is what ‘analysis’ is all about. To run this ad is in bad taste. It a classic example of typical ‘Monday morning quarter backing’, and is not an attempt at fair play.

I will draw your attention to the last word from the famous ‘The Economist’ on oil pricing. In an unequal display of great folly and stupidity they predicted with great spectacle ‘low oil prices for foreseeable future.’ They forecasted just before the oil took off like a rocket in 1999 that ‘low prices will gradually put most such areas out of business-especially if cash-strapped Gulf states conclude that the best way to increase revenues is to boost production, which could drive prices from today's $10 to as little as $5.’

When I see oil hovering around 100$, at an average of 50$ during the last 5 years, my ‘reservations’ on quality of these front-page fairy-tales get further reinforced.

James Cramer has been asking the Fed for the last nine months to open the discount window. That may have created a bigger bubble but that call looks great with hindsight.

He has been both right and wrong on many calls. But he makes a call every day, and that is what differentiates him from those who are pouncing on him. Being neither here nor there is not an analysis and Fox does that more often than not. Those who are right today have been wrong since 1987; overstatement is part of the game. Look at Financier George Soros, who was just as downbeat after the 1987 stock-market crash as he is today, each time predicting a depression.

Predictions about past economic inflection points are highlighted in this weekend’s Barron’s.

‘’[Market strategist James] Finucane has long kept score, carefully cataloguing predictions made. He points out, for example, that Greenspan contemporaneously described the Long Term Capital collapse in 1998 as the worst crisis he'd seen in his lifetime. Time magazine wasn't being intentionally ironic when it called the ad hoc government group cobbled together to grapple with the 1994 Mexican peso crisis the Committee to Save the World.’’

Forecasting history is not short of such frolics. Sometimes we are victims others we are perpetrators. The players need to learn the basic rule that the worst act is 'I told you so’ or 'how wrong he was.' We all make our errors; lets just own up on them instead of basking in the glory of other peoples errors. I wish that Fox could have highlighted before BSC Chairman's announcement on liquidity disappearance that BSC was practically bust.

Overall BSC was salvaged without a huge loss to the tax payers. In the UK, BOE inaction due to ECB regulation led to ambivalence on the part of the BOE. Northern Rock's demise was not only shocking but left tax payers with a state guarantee of 78billion£. The Fed, through very assertive and active management, allayed that. Bravo.

In a rumour infested market, any institution can go under. We are facing threats from vandals who, for their profits, will start any rumour. HBOS, one of the strongest institutions, had a run based on such rumours. The day Cramer talked about BSC, the rumour mongers had not yet attacked the bank with their tactics. In this global market casino of ours, the Fed has finally carved a role of the ‘house’.

The short players have just started realising that there is no way they can win form the deep pockets of the house. In the face of extreme rumours, even triple A’s and B’s can become illiquid and insolvent. It is no more about sub prime toxic debt. Rather, it is now about "mom and pop" normal mortgages' prime instruments that are being affected, and loans which were being normally serviced.

The likes of Soros broke the pound as they did one up on BOE. Today they are cross they were unable to pull a quick one with the Fed's Bernanke. Financial historians will write long analysis and sing praises for Bernanke interventionism ala Donald Tsang in Hong Kong during the Asean contagion crisis. Lets revisit the Asean contagion.

ASEAN countries believed that the well co-ordinated manipulation of currencies was a deliberate attempt to destabilize the ASEAN economies. Former Malaysian Prime Minister Mahathir Mohamad even accused George Soros of ruining Malaysia's economy with "massive currency speculation", an accusation which few economists took seriously. (Soros appeared to have had his bets in against the Asian currency devaluations, incurring a loss when the crisis hit.) The East Asian Financial Crisis was a period of financial crisis that gripped much of Asia at the beginning of the summer of July 1997. It raised fears of a worldwide economic meltdown, a financial contagion. It is also commonly referred to as the East Asian currency crisis, or locally as the IMF crisis. (wiki source)

The Fed has simply borrowed a page from the HKMA and Donald Tsang (then the Financial Secretary), who declared war on speculators. The Government ended up buying approximately HK$120 billion (US$15 billion) worth of shares in various companies. They became the largest shareholder in some of those companies (e.g. the government owned 10% of HSBC) by the end of August, when hostilities ended with the closing of the August Hang Seng Index futures contract. The Government started selling those shares in 2001. They made a profit of about HK$30 billion (US$4 billion). The Fed will make similar kind of returns very soon once the vandals are staved off; economies don’t go into recession when consumers are around. The speculators will learn that.

Bernanke's interventionism is currently being frownded upon. However, financial historians will, in the near future, sing praises for this very internventionism. The last 7 days of Fed assertion has not compromised moral hazard. Rather, it has has strengthened public trust in the institution of state. Donald Sang was critized when he staved of speculators.

Today, Benanke will face the same criticism from the advocates of lassez faire. However, there is a time when any debt instrument can fail as a result of insolvency. There are times when even the best of instruments are discounted. The value of any debt instrument is the ability of people to service the instrument over its life. The ability of service has not been compromised, but the rumours could have taken the values out and brought the entire economy to a standstill. Usually debt instruments fail as a result of macro-economic failure. The speculators had hedged an inadvertant scheme through which they would have failed the economy though the failure of the instruments.