Tuesday, October 7, 2008

The Absence of Leadership is Killing Us!

The absence of leadership in the United States government is costing us…and the rest of the world…dearly! (See my post of September 25, 2008, “The Absence of Leadership.) Many have declared that Bush 43 is MIA. Whatever, there is a void at the top of the current administration…and, we are paying the price for this void!

Without any leadership, members of the Bush 43 administration were hoping and praying that events would be relatively quiet until they were able to sneak out of Washington in January 2009 and let someone else handle the situation.

They didn’t make it!

And, like any other organization that does not have a leader…short of staging a revolution and disposing the top man…good people with good intentions when faced with calamities try to come up with some plan or some action that will plug the hole in the dike.

The problem with this is that they have to work around the leader. And, there is no unifying force present is such situations, no calm hand on the tiller listening to alternatives, asking questions, and guiding responses. And there is no one around to punish dissidents.

Up until a couple of weeks ago, Treasury Secretary Paulson and Fed Chairman Bernanke tried to band aid the system, proposing temporary responses to the growing crises that would tide things over until the new government came into office to deal with the problems. It seemed as if Paulson and Bernanke had reached a game plan…a bailout took place for Fannie and Freddie…and, Lehman was to fail with no help and nothing would be done for AIG.

Then, it appears by all reports…Bernanke panicked!

Bernanke called Paulson and indicated that the financial markets were falling apart and that if nothing were done the economy might not be there the next Monday. The Congressional leadership had to be informed of this development and brought on board for a major flood of liquidity. In no instance could the financial system and the economy come up short of liquidity!

Paulson set up the meeting with the Congressional leadership and at that meeting Bernanke poured out his story of woe. And, according to some of the members of Congress that were there…Bernanke scared the life out of them!

One question needs to be asked at this point…where was the “decider”?

The Treasury plan was assembled as quickly as possible for passage by Congress as quickly as possible…no hearings…really, no questioning…things were so bad that there was no time for these niceties that could take place when things were not so dire.

And, then the financial markets froze!

Why not?

Here was the Chairman of the Board of Governors of the Federal Reserve System saying that the economy might not be there on Monday. What did he know that market participants didn’t? What was going on in Europe and elsewhere? Here was a major case of asymmetric information. And the people that were without information were the suppliers of funds.

Bear Stearns had failed. Merrill Lynch had failed. Fannie and Freddie had failed. Lehman had failed. Washington Mutual had failed. AIG had failed. Wachovia had failed. Who was going to be next? What did the Fed and the Treasury know that market participants didn’t know?

The initial effort to get “the bill” through Congress failed! There was no one in a leadership position that could call the troops to order. (Even presidential candidate John McCain road out at the head of his Calvary to lead the charge to get the bill passed…only no one followed him! No leadership here.) Paulson could not do it…he was not the leader…there was no leader!

The straw-leader was marched out…but he was dazed and only mouthed the words that were given. Why should anyone have any confidence in what was being done?

Is the bill passed Friday any good? After what went on in the two previous weeks the bill seems somewhat irrelevant…a very costly irrelevant. There is still no leadership going forward. There is no vision. There is no structure. There is nothing. At best we are told that maybe in four weeks the “plan” will be up and running.

That will be after the election and we will have a president-elect. But, the president-elect will have to wait for over two months before he can do anything about the financial crisis.

And, what about the Fed?

The Federal Reserve System is flooding the world in liquidity. Bernanke’s study of the Great Depression taught him that during such a crisis the world cannot have too much liquidity. And, so “Helicopter Ben” is acting on that premise. Total reserves in the United States banking system, for the two weeks ending September 10, averaged about $44 billion on a non-seasonally adjusted basis. For the two weeks ending September 24, the total reserve figure was about $111 billion. Never has the United States banking system received so many reserves so rapidly. And look at the sources and uses statement of the Federal Reserve System…the H.4.1 release. In the last three weeks the sources of reserves in the banking system increased by more than 50%!!!!!

Never have we seen anything like this!

This is what happens when there is no leadership. One cannot blame this situation on previous administrations or other conditions within the world. The current leader of the free world is absent.

Unfortunately for the financial markets, for the economy, for workers, for families, for everyone else…there will not be a new president for several months yet. And, we still have to worry that one of the two candidates, when in office, will be able to provide the leadership we need.

We still face uncertainty about our leadership for the future. Therefore, uncertainty will reign in the markets until such leadership surfaces. And, the financial markets will still remain tentative as they attempt to discern who will fail next…and then next after that…and then next after that…

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