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Steve Liesman versus Rick Santelli and Independent Markets

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Just now I watched how Rick Santellli and Steve Liesman get into it on the CNBC Business Channel and I wonder if there is a way to analyze their strong disagreement to determine the fundamental issues involved.

I believe that the toxic assets produced by the unregulated financial securitization instruments, i.e., the derivatives of the sub-prime mortgages and loans (a $65 trillion market) insured by credit default swaps (introduced by J.P. Morgan in 1997 and by mid-2007 ballooned to $45 trillion market), pretty much brought down the main brokerage houses that were leveraging at $30 to one: Lehman Brothers took the real hit going bankrupt. But Merrill Lynch was a forced purchase by Bank of America and Bear Stearns, forced to sell at $2 a share to A.I.G. by Hank Paulson, who then injected $173 Billion into this obscure deal. Now Paulson had been the CEO of Goldman Sachs before George W. Bush made him the Secretary of the Treasury. (I wonder about what would have happened if he had been the CEO of Lehman Brothers!)

The great investment banks all collapsed into the banks that were, by and large, too large to fail: Goldman Sachs into Citigroup and Morgan Stanley…. The Federal Reserve allowed Morgan Stanley to change from an investment bank into a Bank Holding Company, while 21% of it was purchased for $9 Billion by Mitsubishi UFJ Financial Group, the largest bank of Japan.

That spelled the collapse of four of the great brokerage houses in the wake of the housing bubble and Wall Street’s novel financial instruments that had been so lucrative. Far from their reducing risk, they placed and still place the whole financial system as well as the whole economy at risk.

Now Rick Santelli is asking for the good old days of leveraging and big chunks of GDP for the United States produced by the financial community lost with the loss of the great brokerage houses. (I wonder what kind of a reality these chunks of GDP had and what justified that kind of leveraging for our financial gain?) He seems to blame the government intervention for the financial collapse. (My point in a previous “blogging my thoughts” was that the government is priming the pump to get the markets up and going again.)

Steve Liesman is saying that the government had to step in because of the collapse of the markets. This was not merely a business cycle, but a bubble that burst, destructive enough to bring a total collapse of the market. This is what Steve Liesman’s language about “the end of the world” stands for.

Rick Santelli and Steve Liesman clashed over Bank of America, CEO, Ken Lewis’ decision to comply with Hank Paulson over not disclosing the shape of Merrill Lynch (the trillions in magnitude of the toxic assets in question is the skeleton in the closet, I believe.) Thus for the sake of saving the whole financial system, the independence of the market, was taken away by Hank Paulson, who acted like a CEO of the government in his treasury position.

Now Rick Santelli took a very ethical position: just because Paulson tells you to cover up the liabilities that Merrill Lynch brought to Bank of America was no reason to do so. Be an independent CEO. This is business and the government has no right to interfere and ask for an illegal cover up. That is why he mentioned David Frost and Nixon. Steve Liesman had argued that Paulson felt non-disclosure of Merrill’s situation at that moment could save both Bank of America and Merrill Lynch, and with it the collapse of the financial system. Rick Santelli argued that a crisis situation is not an excuse to break a rule or a law. Now the government is embedded in the financial system and he wishes it were not.

But the collapse of the whole system could spell a great depression that would take a decade or more to get out of. I wonder why Rick Santelli would ask who Steve Liesman voted for? That sounded like a Republican trying to scapegoat a Democrat in a Republican business ethos. If Steve’s position was “dumb,” then Rick’s was completely unrealistic. (Rick sometimes hits below the belt!) How could the issues between Ken Lewis and Hank Paulson have been taken to the Supreme Court?  Although Rick Santelli seemed to take the ethical stance, he seems to think that the market operates in a world of its own and is an autonomous realm independent of government and society. The jury is still out about whether or not government intervention will get the markets up and running again, but I submit that the markets are always running to the government for contracts, hand-outs, and bailouts, meanwhile giving lip-service to free markets. The government representatives are also taking whopping amounts from Wall Street lobbyists to bring huge profits at the expense of the health of the markets and the society. Perhaps there is a difference between healthy free markets and those gone wild in a frenzy for fast capital that does not help real production and meet the needs of the society, for which the economy, as supported by the financial system, is responsible.

Perhaps the real issue involves irrational distortions of the markets that got out of hand, because real risk is involved with production for fulfilling the needs of society and false instruments are sold to insure the purchasers that they will be immune from any risk in the market. But the management of risk should not include the stand that allows the whole system to collapse because of instruments that promised all risk had been overcome.

Markets are filled by those whose values are trust-worthy and those who trust them. It is faith that fills the financial world as well as its investments in the economy with profitability as the needs of society are met. (This is the economic version of justification by faith.) The distortion of the market took place as some really used the market to avoid the risk that the market constitutes. That is why it came to no risk at all versus risking the whole financial system.

I hope Steve Liesman and Rick Santelli keep fighting. But the latter will not get those great chunks of GDP into the US again by leveraging and using the phony derivatives and credit default swap markets. I guess the question remains, do the irrational financial markets spread healthy global markets or end up destroying them and failing the societies for which they should provide?

See the CNBC video, the “Bernanke Re-Cap”:

for viewing their argument on this Business Channel.


Written by peterkrey

May 5, 2009 at 8:19 pm

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