Friday, December 30, 2011

Will Wall Street Own Romney?

There's a bit of a dust-up about Kevin Williamson's recent "Repo Man" article in NRO.  Kevin argues that there's a reason why Wall Street went for Obama in 2008 and why they are swinging to Romney in 2012.  They are betting that Romney won't do anything to curb the extra-high leverage tricks and off-balance sheet borrowings that helped make the Crash of 2008 such a mess.  Anyway, they aren't conservative:
Here’s what Wall Street doesn’t want: It doesn’t want to hear from Sarah Palin or Michele Bachmann or even Newt Gingrich, or suffer any sort of tea-party populism. It wants you rubes to shut up about Jesus and please pay your mortgages. It doesn’t want to hear from such traditional Republican constituencies as Christian conservatives, moral traditionalists, pro-lifers, or friends of the Second Amendment.
Radio host Hugh Hewitt says that's all rubbish, and it is "Bilderberger" stuff to think that "they" are working to get the fix in on Romney.
I’m just not going to buy that. I do think they might show up in a Sarah Palin T-shirt, and I do think that they are generally often quite conservative, very Evangelical. Some are deeply Roman Catholic, traditionalist, generous, high-minded people.
Hugh, you are wrong.  There may be some Catholics on Wall Street, but, based on my own limited experience, Wall Street is not evangelical.  In fact evangelical is radio-active for Wall Street.

I think that Kevin has it exactly right.  Finance is important, but the intersection between finance and  politics is nothing but trouble.  That's because the politicians need the finance guys to float their debt.  Right now, with the sovereign debt crisis, they really need the finance guys.  Right now, I read, banks are sopping up all but about 20 percent of government debt.  Why?  Because they don't have to hold reserves against government debt--good as gold, you see.

But there's a problem.  Government debt, especially in Europe, is not as good as gold.  There is a good likelihood that one or more governments will default on their debt.  That means that the banks ought to be holding reserves against those questionable government loans.

The whole point of proper accounting is that it properly accounts for risks and rewards.  The whole point of a balance sheet is to show assets and liabilities as honestly as possible.  But when the Basel banking regulations say that sovereign debt is a "risk-free asset class" then the regulators are encouraging banks to lie on their balance sheets.

You can see the intersection of politics and finance here.  Politicians need the banks to sop up their debt.  Banks like the idea of holding debt that doesn't require reserves.  Very often in this world, people want things they shouldn't get.  And that is certainly true at the intersection of politics and finance.

What happens if things go wrong?  Then the politicians have to bail out the banks because, hey, the banks were just following orders.

Under Dutch Finance, invented by the Dutch four hundred years ago, rock-solid government debt is the foundation of the credit system.  But under French Finance, invented by John Law three hundred years ago, governments trade on the rock-solid reputation of Dutch Finance to game the system.  Government debt turns out to be not so rock-solid after all, and then Poof!

The credit system works when the counter-parties can be trusted.  Trust is important because high-leverage, unavoidable in banking, requires that the parties work to manages their assets so that they will always be able to meet their obligations.  There is no way you can be sure that the other guy is really doing this:  you have to trust him.  That's why J.P. Morgan famously said that the most important factor for a banker in evaluating a would-be borrower is trust and character. "Because a man I do not trust could not get money from me on all the bonds in Christendom."

That's because when trust fails, then the whole system grinds to a halt.

Kevin Williamson is arguing that we need to get back to a financial system where the bankers are expected to manage their banks so that they will not require bailouts.  That means they need to keep a distance from politics: no rent-seeking by the bankers, and no bullying by the politicians.

One fine day, a president is going to need to unwind the present corrupt connection between finance and politics.  Kevin Williamson is afraid that it won't be Mitt Romney.

No comments:

Post a Comment