The World's Financial Institutions Are Gripped by Fear, Yet Policymakers Can Do Nothing. They Are Ignorant of How Banks Now Work and Have to Take Poacher-Turned-Gamekeeper Henry Paulson at His Word
Buchan, James, New Statesman (1996)
Of all the phantoms conjured from the financial depths in the past ten days, the most ghastly appeared on the dark Wednesday, 17 September, when interest on the short-term obligations of the United States government, the one-month Treasury bill, turned negative and became a penalty. Such terror had overtaken the markets that they were willing to suffer a loss on their money in the hope that, in the deep bosom of the US Treasury, some of it would be kept safe.
Yet the terror of that day was not just to do with loss: money lost, job gone, wife fled, house foreclosed, sailboat beached. It was an elemental panic, such as overran the financial markets on 19 October 1987, the day to Dow Jones Industrial Average fell 23 per cent. It was a recognition that the world is not as we have been told and that the conception of value that lies at the root of modern society is, and has always been, a fiction.
In this panic, there is no reality in the sense of actual existence to prices and Lehman Brothers Holdings can be worth $15bn on Monday and nothing at the weekend. The world is held together only by instances of agreement between two or more people. It is education that everybody should pass through, and my generation has done to twice, in 1987 and 2008. It is as if the gods of financial markets have been reading Hegel, and learnt that "through repetition, that which at the beginning appeared as merely accidental or possible, is confirmed as a reality".
Not that governments are thinking much about Hegel. Like generals fighting their grandfathers' wars, policymakers are haunted by the Depression of the 1930s, where a crash in financial markets was transformed by selfish national policies into a collapse in world trade, and unemployed men walked in droves from Sydney to Melborne, shooting rabbits for food.
Andrew Mellon, the former investment banker who was US treasury secretary at that time, thought to break value down to a sort of puritan or moral core. He is said to have burst out to President Hoover: "Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate! It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."
His reincarnation, Henry Paulson (also once a star investment banker), has opted instead for expediency in which pure fear cuts through all moral entanglements. He has won over the administration and some supporters in Congress to his colossal plan to take $700bn or more of bad loans on to the Federal government's books. It is the equivalent of the entire US budget for social security. In promoting his plan, Paulson said: "I am convinced that this bold approach will cost American families far less than the alternative-a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion. The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."
Ben Bernanke, chairman of the Federal Reserve, was crisper: "There are no atheists in foxholes and no ideologues in financial crises."
In effect, the US public will recapitalise the silly bankers at a cost of perhaps $2,000 per American adult and child, maybe much more, maybe much less. In Britain, the authorities are reluctant to wield that Paulson calls the "bazooka", trying to ensure instead that the banks continue to do business with one another. Banks, under the so-called special liquidity scheme, can shore up their creditworthiness by exchanging their questionable mortgage securities for Treasury bills, securities that carry the faith and credit of the UK, which has never failed.
Already, [pounds sterlings]100bn has been drawn and nobody knows how much more will be required for both schemes. …