Heading into the Financial Maelstrom

These are indeed uneasy times. All hands on deck.

From Nouriel’s blog, here is a comment from London Banker, a writer and commentator for the blog:

I was briefed on the proposed US financial reforms which will be shoved through with minimal review. Short version is that the Fed wins an explicit “financial stability” role which gives it powers and secrecy to do pretty well whatever Tim Geithner chooses to do for his capitalist crony clientele. The role will include comprehensive, global data collection which will give the Fed visibility of all open positions. In the wrong hands, this insight could be used to selectively induce volatility and margin calls which would selectively hurt some and advantage others. That could help the Fed’s friends over time.

The FDIC will be stripped of financial supervision and prudential intervention powers in favour of the Fed. That makes the Fed totally unreviewable and unchallenged by other authority in the USA.

Additionally, the SEC will be forcibly reformed to be more like the CFTC – a service entity for the interests of those who pay good money for bad regulators. Instead of fixed rules, SEC regulation will become “principles based” which will mean that no one is ever held accountable for breaking the law unless they have done something to break the code of omerta and anger their peers.

Federal law and regulation will pre-empt all state laws, and states attorney generals will be stripped of authority to investigate or sue. That means no more inconvenient Elliot Spitzers to get in the way of Wall Street excess.

This may not meet Professor Roubini’s recommendations, but the deal is going through with little review so far because the cries for reform are only going to be met with this one pre-agreed proposal. After all, who in Washington or Wall Street would ever suggest that Geithner, Bernanke and Paulson didn’t have the best interests of American and global investors at heart?

And, from the China Daily:

China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation’s biggest investment banks.

The US government this week seized control of the two mortgage-finance companies, which account for almost half of the home-loan market in the world’s biggest economy, to prevent defaults from crippling them. China holds up to $400 billion in the two firms’ debt, CICC Chief Economist Ha Jiming said in a report Thursday.
“The crisis has made Chinese officials realize it’s a bad idea to put all their eggs in one basket,” wrote Hong Kong-based Ha. “This will likely lead to greater diversification of foreign exchange reserve investments.”

China held $447.5 billion of US agency bonds as of June 2008, according to the CICC calculations using disclosures by the US Treasury. It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, he said.

Countries in Asia have stockpiled foreign exchange reserves since the 1997-98 financial crisis to act as a cushion against a run on their exchange rates. That in turn has increased pressure on policymakers to ensure higher returns from more than $4 trillion in assets.

China will expand its investments in corporate bonds and equities, according to Ha. Treasury and agency bonds account for 50 percent and 40 percent of total dollar assets held by the central bank, he wrote.
[Italics mine]

In a year’s turning, we may well not recognize the new emerging world order. The fall of Fannie and Freddie has set in play falling dominoes whose ultimate pattern is still not clear. Will China pull back from supporting U.S. debt? Will others follow suit?

Some have argued that China simply cannot disengage; the price for them is too high.

To that I answer: The present arrangement cannot continue. It will and must change. We have been joined at the hip like Siamese twins: One falls; the other falls.

But doctors have been assembled, both at home and abroad. The delicate severing operation may be about to begin.

China will protect its interest. And is London Banker correct about whose interests in the states will be protected?

In every system there is a dynamic. Look closely at the gears and you will see its direction. Globalization as it has been structured has its dynamic as well. China as exporter and saver: America as consumer and debtor. There have been winners–and rest assured, they will do their best to protect their gains.

We, we the bit players, are like Rosencrantz and Guildenstern in Tom Stoppard’s marvelous play. Around us move the great ones, making plans we cannot see, arranging the world according to their needs. They tell us all is well, proceeding as planned. A glorious future awaits us; we simply have to obey directives. Like blind pawns, we are moved around the board.

Well, I for one, am not convinced all this will end happily…at least not for us.