“An economist is a man who wears a watch chain with a Phi Beta Kappa key at one end and no watch at the other”
Harry S. Truman
And this isn’t even Truman’s most famous economics joke. He is known more prominently for his forlorn search for a non-equivocating (i.e. “one-handed”) practitioner of the dismal science — one that would not dilute his core prognostications by subsequently describing why the exact opposite conditions may prevail.
I have some sympathy with these self-styled two-handed economists, because, as I tell my droogies, the essence of economics is the socialization of tradeoffs. Take Path A, and one may obtain a specified benefit at a defined cost; adopt Path B and the payoff matrices change, or, perhaps, reverse themselves entirely.
Or anything else might happen. Which is what makes it all the great game that it is.
However, our purloined quotation is, plainly, a nastier jab at the econ crew. Here, Truman, never one to mince words, asserts unambiguously that the entire field of economics is worthless. He may have a point, and, as a trained economist (I do have an advanced degree in the discipline – for which I paid good money), I will strive not to take this too personally.
And besides, the modern-day world appears indeed to be over-loaded with double-pawed/timepiecebereft analyzers of the exchange of the world’s goods and services. Many, indeed, support fancy degrees and high honors, but do any of them have the first clue as to where the economy is headed?
Didn’t think so.
We must begin our inventory of those who know not in Washington – at the Treasury and the Fed, who have spent the better part of the last two decades printing, spending, and taxing – to the tune of trillions – and expecting no consequences for this madness.
All of which was justified by the work of watch-less, key-carrying, two-fisted economists.
But the Fed, at least, has gotten some religion of late, and intrepidly continues its rate raising journey, having taken its key overnight rates from 0.0% to nearly 5% in warp speed. The consensus of, er, economists is that they’ll now rest. At least for now.
I will cop to being a bit surprised at this last hike. It was, indeed, the likeliest outcome, but I had a hunch that the just might pause – ostensibly to insure against further losses by banks and insurance companies holding pant-loads of unhedged, Fixed Rate paper (ala SVB).
However, as it happened of course, the FOMC session – long billed to be the headliner of the month, turned out to be mere sideshow – upstaged by the Big Banking psychodrama.
Events here were something of a whirl, but I’m pretty certain that it began on Sunday night, when the Swiss National Bank pushed Credit Suisse into the superficially reluctant arms of rival UBS. There was more here than met the introductory eye, as the state-mandated transaction featured two elements that violated market protocols of at least 50 centuries standing: 1) it rammed through the transaction without bothering to hold a shareholder vote; and 2) in doing so, it unilaterally zeroed out $17B of bond obligations – owed by Credit Suisse to its creditors.
These two bedrock concepts of Private Enterprise – that the owners of a company for sale are afforded a vote on the terms, and that debt holders get paid before the equity guys — date back to before King David and maybe even King Saul. I shudder to contemplate the longer-term implications of these rudely rendered improvisations. All I know for sure is that lawsuits will abound, smart, patient entities will bank profits for years on these now-worthless obligations, and the ADD public will soon forget the whole affair.
Presumably, the Swiss Government will justify its action by reverting to the old bromide about doing all in its power to protect the interests of their lederhosen-wearing constituent/depositors. But nay, my friends, methinks something else is at play here.
It is, instead, and as Harry S. Truman might have said, a case of more fat to a fat pig’s arse.
Let’s begin with who I believe to be the biggest winner in this here game: The Union Bank of Switzerland. Though it kicked and screamed in Brer Rabbit “oh please Brer Fox, don’t chase me into the briar patch” fashion, it comes away from this here trade having vanquished its biggest domestic rival, and copping a half tril in wealth management balances and an equal amount in liquid demand deposits. It now lords over the Swiss financial realms, and, perhaps, over those of the entire Continent (more about this below). And it barely had to spend a penny or lift a finger to do so.
I strongly suspect that other financial behemoths, say, U.S. bulge bracket firms and hedge fund whales, made tidy sums of varying sizes in their successful efforts to euthanize CS.
It was ever thus (see Lehman, Bear, Baring, MF Global, Continental Illinois, etc.). And now they’re out in search of their next victims. On these here shores, First Republic is at the top of the hit list and appears to be wavering.
But the bigger game – for now — is in Europe, with, of course, Deutsche Bank as the primary target.
Now, to fully articulate my viewpoints here, I must state my belief that DB has been economically insolvent for eons. Like the fancy, fabled SVB, it holds most of its assets in a Held to Maturity portfolio which has not been marked to market since Bush II and the Great Financial Crisis. Were these wonky securities ever priced at their prevailing economically accurate valuations, it would likely wipe out the bank’s equity by a factor of five or more.
But this has been the case for more than 15 years, over which time both DB and the world have endured (if not prevailed).
And here’s a one-handed economic projection:
DB ain’t going nowhere. It carries the full weight of the German political economy behind it, which, if its vigor has deteriorated nominally from the reign of Frederick the Great (1740 – 1786), should be sufficient to sustain the viability, if not the vitality, of its largest and most important financial institution.
But DB is, by no stretch of the imagination, a well-run bank and is now under indecorous attack by its industry peers.
If only Frederick the Great were still around:
Let us acknowledge upfront that Fred was not the manliest of men. More of a Freddie Mercury/Fred Rodgers than a Fred the Hammer Williamson. And whatever other accomplishments might be to his credit (including, it must be allowed, a remarkably long string of military successes), he never had to deal with a Prussian Banking Crisis. Moreover, if he was around to discharge the current mess, he wouldn’t have the luxury, afforded to the Swiss, of simply shoving DB into the lap of a competing bank. Because, in Germany, there are no competing banks.
He might also be ill-equipped to tackle the Rothschilds or whoever was around to abet the destruction of said, non-existent competitor(s).
But (he might have asked) why would the competitors do this? Answer: Because they can.
So, they’ll continue to short the stock, bonds, and OTC positions of the institution, until a Teutonic bailout is required, or they tire of the game. I suspect they will then move on to other impaired financial institutions. The French banks look like a big fat target, so stay tuned.
Meantime, the watch-less Phi-Betas (with an emphasis on the Beta) at the Fed assure us that the domestic banking sector is adaptable and sound. And, down the road at Treasury, an institution presided over by a PhD economist whose husband sports an Econ Nobel, we are assured that all American demand deposits either are – or are not – backed by the full faith and credit of the Greatest Nation on Earth.
As indicated above, all this renders the productive part of the economy something of a sideshow. The wheels appear to remain in motion, but at what force and for how long is anybody’s guess.
I won’t hazard one at the moment. Because I feel unqualified to do so. I am an economist. With 2 hands, but without a Phi Beta Kappa key, a watch chain, or, for that matter, a watch.
Thus, according to the Truman standard, I’m half an economist. Or maybe less. I am, however, at peace with this, and will leave it to the readers to form their own, associated judgments.
TIMSHEL