WASHINGTON (Reuters)-Wall Street high-rollers are desperately making tracks and leaving the USA as Ben Bernanke takes over from the retiring Alan Greenspan as Chairman of the once powerful US Federal Reserve this January.
"There's an economic disaster about to happen in America and Bernanke is the perfect bozo to preside over it, as the cheap-money era ends, the housing market starts to collapse, the dollar plunges along with the stock and bond markets, and inflation rises," said Warren Wartman, a New York hedge fund manager about to flee for the Cayman Islands. "Then there's the gruesome debt build-up that can only end in a deflationary depression. All the easy pickings are finished, and I'm out of here."
Wartman is not alone with such worries. Bob Bompup formerly Director of Debt Concealment at Refco says, "Bernanke is inheriting the monster problems created by Greenspan's 18-year policy of loose money that is about to precipitate some kind of crisis. What we won't have now though is Greenspan's ability to foster new financial bubbles and sweep problems under the rug before they blow up. The financial markets are now waiting for Bernanke to screw up big-time. So for a lot of reasons, and to stay one step ahead of the law, I'm heading to Switzerland."
It was Greenspan's ability to manipulate financial markets to stave off panic and collapse that earned him his Christ-like status on Wall Street. He constantly supplied liquidity to prevent collapses, preventing the stock market crash of 1987 from turning into a deepening crisis. He did the same in to stabilize global financial markets in 1997 during the Asian currency crisis, also in 1998 after the failure of the hedge fund Long-Term Capital Management, during the Y2K transition, again in 2000 after the tech stock market bubble burst, and also after 911.
The "Greenspan put" was the market's belief based on those market interventions that the Federal Reserve will always act as the buyer of last resort, even if prices fall fast in a collapse, with the Fed supplying the coin to prop up the markets. That belief led to careless and highly leveraged risk taking, since if the Fed will always bail out traders, why should they worry about risk?
This belief also has led to the monstrous growth of the derivatives markets, now worth over $200 trillion and due to collapse at any minute. With derivatives, banks, pension funds, insurance companies, hedge funds and others sought to insure themselves against their risky investments. Just like the Greenspan put, the derivatives players put off the day of reckoning and their credit-quality problems with derivative insurance.
Now, they are all doomed, since for instance, General Motors and Ford Motor and their bonds are about to collapse.
Thus entrepreneur Floyd Flotsam has set up a locator database of high buildings in major US cities that corporate CEOs and stock and bond traders who are being wiped out can jump off of once the crash starts.
"When they want to take a dive, they will call me first and pay my fee," he said proudly.
Gus Groundhog is building executive bomb shelters in Colorado in abandoned mines and selling them already provisioned to those seeking shelters to weather the coming economic and financial storm.
"Are you sure you really want this job, Ben?" asked Stephen Cockroach, Chief Economist at Morgan Stanley. He notes that most fed chairmen are blindsided early on in their tenure with problems they never anticipated and with which they simply cannot cope.
Bernanke will be fighting inflation when the deflationary debt collapse lands on his ears.
"I suspect that the current inflation scare will turn out to be a false alarm," said Cockroach. "As always, energy prices will come down when demand sags - some of that may already be occurring - and the new and powerful forces of globalization should continue to hold other prices largely in check. The U.S. economy actually faces far greater threats than inflation - threats that an inflation targeter such as Bernanke may be ill-equipped to deal with."
At the top of the list is a record U.S. current account deficit - the broadest measure of the nation's trade balance (imbalance, in this case) with the rest of the world. Running at an annual rate of close to $800 billion in the first half of 2005, it requires foreign funding to the tune of $3 billion per business day. To accomplish that without a sharp drop in the dollar and/or a related backup in interest rates requires extraordinary confidence on the part of foreign investors in U.S. assets, he warns.
In short, the U.S. is going to be asking a lot more of the foreign investor at precisely the moment the Fed is transitioning from Greenspan to Bernanke, notes Cockroach.
"As the maestro leaves the building, the hard-won aura of foreign confidence that surrounds him could be quick to follow. Bernanke could be faced with a dollar crisis and the related need on the part of foreign investors to seek compensation for taking currency risk. That compensation invariably spells higher interest rates - the last thing the nation's housing bubble and overly indebted consumers need."
During the Greenspan era, the U.S. economy pushed the envelope in sustaining an increasingly dangerous strain of unbalanced growth. In doing so, it experienced an equity bubble, a housing bubble, a record current account deficit and a monstrous overhang of household debt.
The U.S. has gotten away with these imbalances because of the "kindness of strangers" - the willingness of foreigners to keep investing in dollar-based assets.
History warns us to expect the unexpected when the nation's second-toughest job changes hands, added Cockroach.