Wednesday, April 13, 2011

Henry Kaufman Warns Credit is Becoming Socialized

In the 1970's and 1980's warnings from Henry Kaufman would have reverberated around the world. He was the economic flavor for two decades on Wall Street and with the media. A former economist at the Federal Reserve of New York,  from 1962 to 1988 Kaufman worked at Salomon Brothers Inc, where he was Managing Director and member of the Executive Committee. He was also a Vice Chairman of the parent company, Salomon Inc.

Back then, Kaufman pronouncements from his perch at Salomon would rock the markets, for at least 24 hours.

The now 84-year old Kaufman attended the recent conference held by George Soros in Bretton Woods and was interviewed there by FT's Gillian Tett. Although a Keynesian, Kaufman has always had good instincts about the economy and has a very good understanding of the way government regulations interfere with the financial sector.

In the interview with Tett, he correctly warns that the current government philosophy of Too Big To Fail is creating super banks and shrinking the number of small banks. He warns that the government support of these TBTF banks will ultimately lead to the socialization of credit in the United States.

In his suggestion for unwinding these monstrosities, Kaufman suggests that certain divisions of banks be forced to be spun off. I would just leave this up to the markets to adjust the shapes of banks. it seems highly unlikely that the mega banks could survive on their own in their current shape without the implicit TBTF backing of the government.

On another note, Kaufman, although from a slightly Keynesian perspective, sees the corner Fed chairman Bernanke is backing himself into by his current propping up of the stock market. Kaufman clearly warns how unstable of a structure the Federal Reserve has built, and implies that it has serious consequences for the stock market and economy.

The Kaufman interview is here and well worth viewing.

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