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March 11, 2009

Geithner Ex Machina
by Adrian Ash

"Deus does not exist.
"But if he does, He lives above me,
"In the fattest largest cloud up there..."
- The Sugarcubes, Deus

DEUS EX MACHINA has been a "rock opera" band from Italy, a punk band from Greece, a best-selling British computer game for the ZX Spectrum, a character in The Matrix movies (apparently) and also a top-selling video game this decade.

Mixing shoot-em-up with role-play, Deus Ex also features a lot of that speaker-rattling background rumble which is apparently how all dystopian futures will sound when the space age arrives.

Most recently, however, deus ex machina has become the prayer of investors and policy-makers the world over, too. Just click your heels, Dorothy! If only someone (or something) now watching from outside this mess would just step in and fix things.

Y'know, the way foreign money stepped in to save the Asian Tigers when they ran out of cash in the late Nineties?

This god-like visitor, free from the baggage of debt deflation everyone else seems to be stuck with - say, an inter-galactic John Pierpoint Morgan perhaps - could then vanish again...leaving his money behind, of course...and let us all get back to turning a buck from credit and debt, speculation and lending.

"The financial disasters became economic disasters in the countries concerned," wrote a Harvard economics professor two years after the Asian Crisis began. "But fortunately from a global point of view they were like a big recession in Italy, difficult but manageable."

Whereas today?

All the obvious supra-national do-gooders rushed into Asia in 1997. The IMF, the World Bank, the US Treasury...Hundreds of advisors and consultants worked on their tans as they worked on a rescue, gathering pool-side at the Bangkok, Seoul and Jakarta Hiltons.

After all, this was "the gravest global economic crisis in a half-century," as then-World Bank economist Joseph Stiglitz called it before today's global crisis showed up. So you needed the best minds, from the biggest and brightest international bodies, to jet in...survey the trouble...prescribe a solution (while signing a check)...and then jet out again, back to whichever hushed corridors they had just emptied.

Whereas today?

Originally from the Latin - and meaning "god from the machine" - the phrase deus ex machina was coined by arts critic Horace to describe a plot twist, first wheeled out by the Ancient Greek playwrights. This "improbable contrivance" (as Aristotle had sneered) saw a god suddenly arrive on the stage - whether dropped by a crane or jumping up through a trap-door - whenever a play was close to ending with too many loose ends for the hack-author to fix.

In steps the god, out goes confusion. Boy gets girl without having to slit his dad's throat or sleep with his mother. Cue applause and the after-show party.

Sadly, however, financial crises - let alone major debt-deflation depressions - don't mend as easy as Greek tragedy lite. But the logic's the same, or it has been whenever localized crises needed fixing before. A little over 10 years ago, for instance, cleaning up the post-bubble mess in Asia required a full scrubbing of bank-equity holders, soaked in return for a bucket of external cash that washed out the crisis before it become catastrophic.

Yes, it seemed catastrophic back then; "The Asian financial crisis was viewed as the worst since the Great Depression," as Stephen Roach, head of Morgan Stanley Asia, wrote in Tuesday's Financial Times. But it "depicted a squall compared with the current tsunami," he goes on. And "ironically, the seeds of the current crisis may have been sown by policies aimed at arresting the Asian crisis.

"Then, US authorities did everything they could to ensure that the crisis would not infect the real economy. The Fed's three emergency rate cuts in late 1998 worked like a charm. The US consumer never looked back. The personal consumption share of real GDP rose from 67% in the late 1990s to 72% in the first half of 2007. The US antidote to the Asian crisis was the greatest consumption binge in history."

At ground-zero too, the Asian Crisis soon vanished under the weight of cheap cash from the Fed. South Korea, for example, saw 23 of its 30 merchant banks suspended, while a $57 billion fund to support commercial deposits was pumped in by the International Monetary Fund (37%), the World Bank (17%), the Asian Development Bank (i.e. Japan, 7%), and the major Western economies (38%).

In Thailand, some 56 of a total 91 non-bank financial firms were wiped out, leaving the rest to scramble for private overseas cash - cash that overseas banks were only too willing to lend in return for chunky stakes in the equity, bagging phenomenal gains as the crisis began to blow over and the next consumer and real-estate booms got underway.

Over in Indonesia, the central bank's own emergency funds made up just 12% of the $40bn rescue. (Don't these numbers look quaint today!) Eight foreign nations between them stumped up $17bn, with the various supra-national funds and advisors - all financed by other rich nations, of course - making up the bulk of the cash. In return, 16 bankrupt banks were allowed to fail in the first 12 months of the crisis, with shareholders wiped out and only "small deposits" getting compensation up to a limit worth some $1,500.

Why? Because "You have to make the depositors whole," as a consultant involved at the time has since explained to us here at BullionVault. Let the equity hang, in short, but defend the savers if you don't want faith in the entire money system to vanish.

Whereas today? In lieu of globe-trotting advisors bearing deus ex machina solutions, each national government is left trying both to recapitalize its banks and also defend its cash savers. Trouble is, each government's funds are precisely limited to the cash inside its own borders. We, the people, are indeed the state, and you can only tax or rip off the savers for so long before all their money is spent. But everyone else is now stuck in the same fast-sinking boat too, so there's no one stood ready to bail us all out.

Perhaps the Martians might help. Or failing that, maybe we'll have to ask God for a loan. Because we guess that Tim Geithner's money won't do.

And we guess Tim Geithner knows it won't either.

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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