Monday, September 29, 2008

Signs of the Economic Apocalypse, 9-29-08


Gold closed at 887.90 dollars an ounce Friday, up 2.7% from $864.70 for the week. The dollar closed at 0.6845 euros Friday, down 1.0% from 0.6913 at the close of the previous week. That put the euro at 1.4609 dollars compared to 1.4466 the week before. Gold in euros would be 607.78 euros an ounce, up 1.7% from 597.75 at the close of the previous week. Oil closed at 107.26 dollars a barrel Friday, up 2.6% from $104.55 at the end of the week before. Oil in euros would be 73.42 euros a barrel, up 1.6% from 72.27 for the week. The gold/oil ratio closed at 8.28, up 0.1% from 8.27 at the close of the previous week. In U.S. stocks, the Dow closed at 11,140.26 Friday, down 2.2% from 11,388.44 at the close of the previous Friday. The NASDAQ closed at 2,183.34 Friday, down 4.1% from 2,273.90 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.84%, up three basis points from 3.81 at the end of the week before.

Let’s start at the end then go back to the beginning of the past week. The end result, as of Sunday night, the 28th, was a massive, $700 billion bailout agreed-upon by the U.S. Congress and the President.
Lawmakers, White House agree on $700B bailout

Julie Hirschfeld Davis, Associated Press Writer

September 28, 2008, 9:24 pm EDT

WASHINGTON - Congressional leaders and the White House agreed Sunday to a $700 billion rescue of the ailing financial industry after lawmakers insisted on sharing spending controls with the Bush administration. The biggest U.S. bailout in history won the tentative support of both presidential candidates and goes to the House for a vote Monday.

The plan, bollixed up for days by election-year politics, would give the administration broad power to use billions upon billions of taxpayer dollars to purchase devalued mortgage-related assets held by cash-starved financial firms.

President Bush called the vote a difficult one for lawmakers but said he is confident Congress will pass it. "Without this rescue plan, the costs to the American economy could be disastrous," Bush said in a written statement released by the White House. He was to speak publicly about the plan early Monday morning, before U.S. markets open.

Flexing its political muscle, Congress insisted on a stronger hand in controlling the money than the White House had wanted. Lawmakers had to navigate between angry voters with little regard for Wall Street and administration officials who warned that inaction would cause the economy to seize up and spiral into recession.

A deal in hand, Capitol Hill leaders scrambled to sell it to colleagues in both parties and acknowledged they were not certain it would pass. "Now we have to get the votes," said Sen. Harry Reid, D-Nev., the majority leader.

Rep. John A. Boehner, R-Ohio, the House minority leader, said he was urging "every member whose conscience will allow them to support this" to back it, but officials in both parties expected the vote to be a nail-biter.

The final legislation was released Sunday evening, and Republicans and Democrats huddled for hours in private meetings to learn its details and voice their concerns.

Many said they left undecided, and leaders were scrambling to put the most positive face on a deeply unpopular plan.

"This isn't about a bailout of Wall Street, it's a buy-in, so that we can turn our economy around," said House Speaker Nancy Pelosi, D-Calif.

The largest government intervention in financial markets since the Great Depression casts Washington's long shadow over Wall Street. The government would take over huge amounts of devalued assets from beleaguered financial companies in hopes of unlocking frozen credit.

"I don't know of anyone here who wants the center of the economic universe to be Washington," said a top negotiator, Sen. Chris Dodd, chairman of the Senate Banking, Housing and Urban Affairs Committee. But, he added, "The center of gravity is here temporarily. ... God forbid it's here any longer than it takes to get credit moving again."

The plan would let Congress block half the money and force the president to jump through some hoops before using it all. The government could get at $250 billion immediately, $100 billion more if the president certified it was necessary, and the last $350 billion with a separate certification — and subject to a congressional resolution of disapproval.

Still, the resolution could be vetoed by the president, meaning it would take extra-large congressional majorities to stop it.

As Bush's team stepped up its efforts to corral reluctant Republicans, the White House released a letter from his budget chief, Jim Nussle, to Boehner saying the measure would cost taxpayers "considerably less" than its eye-popping $700 billion total.

Lawmakers in both parties were poring over the 110-page bill. Democratic leaders have made it clear they will not support the rescue unless a substantial number of Republicans join them.

"It will take two to make this work," said Rep. Rahm Emanuel, D-Ill.
But it was a tough sell for lawmakers in both parties.

Rep. Joe Barton, R-Texas, an opponent, estimated that half of the House's 199 Republicans are "truly undecided."

Lawmakers who struck a post-midnight deal on the plan with Treasury Secretary Henry Paulson predicted final congressional action might not come until Wednesday.

The proposal is designed to end a vicious downward spiral that has battered all levels of the economy. Hundreds of billions of dollars in investments based on mortgages have soured and cramped banks' willingness to lend.

"If we do not do this, the trauma, the chaos and the disruption to everyday Americans' lives will be overwhelming, and that's a price we can't afford to risk paying," Sen. Judd Gregg, the chief Senate Republican in the talks, told The Associated Press.

Rep. Barney Frank of Massachusetts, the House Financial Services Committee chairman, predicted the measure would pass, though not by a large majority.
"It's not a bill that any one of us would have written. It's a much better bill than we got. It's not as good as it should be," he said.

A breakthrough came Saturday night, with the addition of a requirement sought by centrist Democrats and Republicans to ensure that the government be paid back by companies that got help. The president would have to tell Congress after five years how he planned to recoup the losses.

Another key bargain — this time to draw Republican support — allows, but doesn't require, government to insure some bad home loans rather than buy them. That's designed to limit the amount of federal money used in the rescue.

"This is something that all of us will swallow hard and go forward with," said Republican presidential nominee John McCain.

His Democratic rival Barack Obama sought credit for taxpayer safeguards added to the initial proposal from the Bush administration. Later, at a rally in Detroit, Obama said, "it looks like we will pass that plan very soon."

The rescue would only be open to companies who deny their executives "golden parachutes" and limit their pay packages. Firms that got the most help through the program — $300 million or more — would face steep taxes on any compensation for their top people over $500,000.

The government would receive stock warrants in return for the bailout relief, giving taxpayers a chance to share in recipients' future profits.

To help struggling homeowners, the plan would require the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers' monthly payments so they can keep their homes.

But Democrats surrendered other cherished goals: letting judges rewrite bankrupt homeowners' mortgages and steering any profits gained toward an affordable housing fund.

It was Obama who first signaled Democrats were willing to give up some of their favorite proposals. He told reporters Wednesday that the bankruptcy measure was a priority, but that it "probably something that we shouldn't try to do in this piece of legislation."

Frank negotiated much of the compromise in a marathon series of up-and-down meetings and phone calls with Paulson, Dodd, D-Conn., and key Republicans including Gregg and Blunt.

Pelosi shepherded the discussions at key points, and cut a central deal Saturday night — on companies paying back taxpayers for any losses — that gave momentum to the final accord.

An extraordinary week of talks unfolded after Paulson and Ben Bernanke, the Federal Reserve chairman, went to Congress 10 days ago with ominous warnings about a full-blown economic meltdown if lawmakers did not act quickly to infuse huge amounts of government money into a financial sector buckling under the weight of toxic debt.

The negotiations were shaped by the political pressures of an intense campaign season in which voters' economic concerns figure prominently. They brought McCain and Obama to Washington for a White House meeting that yielded more discord and behind-the-scenes theatrics than progress, but increased the pressure on both sides to strike a bargain.

Lawmakers in both parties who are facing re-election are loath to embrace a costly plan proposed by a deeply unpopular president that would benefit perhaps the most publicly detested of all: companies that got rich off bad bets that have caused economic pain for ordinary people.

But many of them say the plan is vital to ensure their constituents don't pay for Wall Street's mistakes, in the form of unaffordable credit and major hits to investments they count on, like their pensions.

So what caused this massive action, one that no one seems comfortable with, to avoid “a full-blown economic meltdown?” What happened on Wednesday that so spooked the stewards of the global economy, that pushed aside as the top story of the day the largest bank failure in U.S. history? According to the following report on NPR, it had to do with the “commercial paper” market. Money almost couldn’t be borrowed for a day by the most creditworthy borrowers:

The Week America's Economy Almost Died

Adam Davidson and Alex Blumberg

All Things Considered, September 26, 2008 · The potential for disaster was horrifying. For people on Wall Street and in the inner circles of government, last Wednesday and Thursday will long be remembered as the time when the American economy survived a brush with death.

The nation's entire financial system slid toward a terrifying abyss, they say — a landscape where no one would lend and no one could borrow, where no one could buy anything and no one could get paid.
As Congress and the Bush administration continue debating a proposed $700 billion bailout of Wall Street, those with intimate knowledge of the crisis say that whatever solution emerges must avert future brushes with very real disaster.

The nightmare scenario rattled Mark Peterson, far from the halls of finance, in Memphis, Tenn. "For those of you who've experienced an earthquake, some say it's a soul-wrenching experience, and it's massively moving everything," Peterson says. "And that's last week. There was a monster unleashed. The commercial paper market, which is the most liquid market, probably in the world, basically froze up."

Peterson is treasurer of Servicemaster, which owns, among other things, a lawn care company, Merry Maids and Terminix, which will get rid of your termites. By "commercial paper," he means a specialized kind of short-term loan. It's one of those obscure financial tools that help make the world go around.

"Let's just say you have Terminix come out and treat your house, you write a check," he explains. "Our billing department marks your account as having been paid. What's our cash position? Do you have money or do you need money? Today, our company, we have money.' "

Peterson's company might or might not have cash money the next night. It's no big deal — maybe it needs to buy a lot of termite poison or upgrade its fleet of termite-fighting vans. All companies move between having cash on hand and not having it every day. Some days they have extra money. Some days they need to borrow.

If you're an ordinary consumer, you might use a credit card to bridge the gap. If you're a gigantic company, you use the commercial paper market, a way of borrowing a lot of money.

What Peterson witnessed that frightened him so badly was the sudden seizure of that market. After the failure of the investment bank Lehman Brothers and the near-collapse of insurer AIG, commercial paper suddenly became very difficult to get. On Sept. 17 and 18, the market came dangerously close to freezing entirely — an event that could have paralyzed the financial system.

All Locked Up

Tom Corona works with Tradition Financial in lower Manhattan in what he describes as a relatively boring business — at least under normal circumstances. He's the guy companies call when they need to borrow short-term money. The numbers involved in his profession are large, but the processes are routine.

"We would say, 'I'm going to give you a million dollars tomorrow, if you give me $999,000 today,' " he says. "It's hundreds of billions of dollars — every day, every single day." Corona is used to moving sums like that for relatively cheap interest rates.

Last week, Corona's business suddenly stopped being so boring. The cost of borrowing money shot up, as nervous lenders pulled back the reins. The river of capital narrowed to a trickle. "Banks were forced to start paying usury rates to get money," he says. "And even when they were paying usury rates, even if they could get money, they could get only $50 [million] or $100 million. In our market, it's nothing. It's so small. These banks normally could raise billions in an eye blink."

This is what happened last week that terrified Treasury Secretary Henry Paulson, Fed Chief Ben Bernanke and President Bush. This was not a bunch of big investment banks getting their comeuppance for making bad loans.

This was the fundamental flow of the American economy breaking down. Money stopped moving. Big, safe, respected companies far away from all the subprime lending problems had trouble getting the short-term loans they needed to pay their bills.

'Breaking The Buck'

"I don't think I've ever been this nervous in my career," says Paul Balika of Daiwa Securities, "because the financial system was so close to locking up. I think we were close to the abyss."

Balika watched the meltdown from what he calls courtside seats — his chair in front of a computer screen filled with numbers. What happened that scared Balika so much was the realization of one of Wall Street's most dreaded hypotheticals: a money market mutual fund "broke the buck."

It sounds obscure, and probably bad, but just what does it mean? In normal times, money market funds have much in common with a savings account. They're ordinary means of saving money for many, many Americans. In ordinary circumstances, people view money market funds as totally safe, nearly free of risk. Investors put $1,000 in and get at least $1,000 out — more with interest. But they never expect to lose money.

If a money market fund loses money, that's called "breaking the buck." It's like a wrinkle in time or a tear in the space-time continuum. It's simply not supposed to happen.

Except that it did, last week. On Monday, the Reserve Fund broke the buck. And people freaked out.

"Breaking the buck is sort of like having a serial killer in a high school — it causes a little bit of panic," Balika says. Frightened investors raced to escape money market mutual funds.

It so happens that the main thing money market mutual funds own is commercial paper, the same financial short-term loans that make ordinary businesses like Peterson's Servicemaster outlet possible.

The run on money market mutual funds is why, no matter how safe and trusted a company was, they couldn't borrow money last Wednesday. The people who usually loaned those companies money — meaning the many ordinary people with money market mutual funds — had hauled too much of their money out of the system.

This chain of events is part of what convinced Paulson and Bernanke that the situation had gone too far. If the panic had continued for more than a day, they reasoned, the wider economy would start to shut down.

"What would happen is nobody would be able to borrow money," says Balika. "And how does capitalism work if you can't borrow money? You're back to bartering, pretty much. The extension of capital almost came to a halt — just ended, period."

They key word there is almost. Those short-term credit markets froze for around 12 hours. Then they thawed a bit. If they ever stayed stuck for days, or weeks, well, Bernanke said, the consequences would be worse than the Great Depression.

Other economists, respected ones, argue that's not true. They say people with money will always start lending it, when the price is right. Eventually, the dissenters say, the problem would work itself out.

Right now, how quickly that would happen, if it happened at all, is the $700 billion question.

What the $700 billion bailout plan intends to do is to have the U.S. government buy, if necessary, that much worth of shaky debt securities that no one wants now. They may not actually be as worthless as people fear, but the problem with the type of securitization that was done is that it is very hard to tell what they are really worth. Then, by taking these off the balance sheets of financial institutions, these institutions can then start lending again. The hope then is that the government doesn’t actually end up losing money on the deals. Certainly the plan that was announced on the 28th is much better than the three-pager announced by Treasury Secretary Paulson on the 21st. That one gave all power and discretion to the Treasury Secretary with no oversight.

But is the plan of September 28 the only way out? Of course not! There are always other options, and the ones not seriously considered can indicate limitations in outlook. For example, some have pointed to a “Swedish solution.” Right there, with the adjective “Swedish,” right-thinking Americans will recoil and think: “socialism, taxes: bad!” But consider this:
Stopping a Financial Crisis, the Swedish Way

Carter Dougherty

September 23, 2008

A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.

But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s deputy minister of finance at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.

A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.

The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.

Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said.

The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.

Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times.

Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.

After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.

Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.
“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”

By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.

More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.

The politics of Sweden’s crisis management were similarly tough-minded, though much quieter.

Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.

“The only thing that held back an avalanche was the hope that the system was holding,” said Leif Pagrotzky, a senior member of the opposition at the time. “In public we stuck together 100 percent, but we fought behind the scenes.”

The difference between the Swedish plan and the Paulson plan is that in Sweden the government obtained ownership of the financial institutions in exchange for the bailout, in Paulson’s plan the government gets ownership of the debt securities no one wants to buy.

In any case, the amount of debt taken on by an already almost bankrupt U.S. government is mind-boggling. Here is Gregg Easterbrook with a recap of all the bailouts of 2008:
Here is the borrowing that's happened in 2008 alone, with precious little public debate:

• $29 billion to bail out Bear Stearns.

• $40 billion in the first mortgage-holder bailout.

• $80 billion for an additional year of Iraq war operations. (Another $150-$200 billion in war costs such as future veterans' disability benefits were incurred but not funded.)

• Up to $85 billion to bail out AIG.

• $153 billion to households for "economic stimulus."

• $200 billion, and possibly more, to bail out Fannie and Freddie.

• $290 billion in farm subsidies, despite agricultural prices and grains profits being at record highs.

• $700 billion general bailout of securities backed by bad debt. (The International Monetary Fund estimates this figure will rise to at least $1 trillion.)

That comes to $1.6 trillion, explaining the debt-ceiling rise, and does not include roughly $300 billion in essentially interest-free cash issued to banks by the Federal Reserve on an emergency basis, which may or may not be repaid, but which in any case make all existing money somewhat less valuable. Why is the debt aspect of the splurge barely being remarked on by the mainstream media and by politicians? Why are the young not furious? And about that $700 billion about to the shoveled to the Wall Street elite -- in 2007, George W. Bush vetoed an increase of $7 billion per year in health care spending for the poor, saying the country couldn't afford it.

Fans of Austrian economics will say that this is inflationary. And it could be. Except that the money is being created to replace the money that has disappeared as the bubble pops. The hard part is figuring out the exact amount of new money to pump in to match what has been lost. The larger the bubble, the more likely that when the target is missed you will get either catastrophic deflation or catastrophic inflation.

What has been surreal during recent weeks for those who have seen this coming for years, is that, after years of telling us that the economy is the healthiest thing in history, now we are being told to freak out in panicked fear. Why now? As Stef Zucconi puts it:

It would be fair to say that the debt-laden masses are now been given official establishment permission, nay, encouragement to crap themselves royally.

The Golden Rule when consuming all mass media coverage of economics is, of course, to remember that it is always wrong; either factually or in its timing, or both.

Which means, given the universally bleak tone of last night's Crunchy TV, that either:

a) the economy is about to boom

b) the situation is even worse than portrayed and we're facing The Apocalypse

Or, those calling the shots want the economy to crash now. Since all the assets were propped up by optimism, basically, making everyone severely pessimistic will ensure a crash. And, as the blogger, Badtux points out, deflation is to be feared more than inflation by average people. The rich, however, are hurt more by inflation. After a deflationary crash, those with cash can buy up all the assets for pennies on the dollar.
Sayin' it again...

Tuesday, September 23, 2008

Regarding the bailouts, sooner or later, the bad paper has to be replaced with good paper (Treasuries). Otherwise they'll continue to poison the entire financial system. Unfortunately due to the realities of fractional reserve banking we can't just evaporate 3 trillion dollars of assets out of the economy without setting up a deflationary spiral similar to 1930-1932. So there will have to be a bail-out. The problem is that the Busheviks just don't seem able to do anything without adding some way to loot the Treasury for the benefit of their cronies, and sent out a poison bill to Congress that basically says, "give us $700B and we'll throw it around anyway we feel like." No Congressional review, no review in the courts, just a blank check to the Bush Administration to just give the dough out any way they please. Even when risking a second Great Depression they can't get rid of that same old crony capitalism instinct to steer money to their cronies.

If you are wondering, I believe the AIG bailout is a very good model for how it has to go down. These institutions get the money -- but the government gets ownership of them and can throw out the bad managers and reform their practices so they don't do this stupid evil s**t again, and then sell off the workable assets and fold the part that's not workable. Any bailout that's going to work long-term is going to have to work like that, else this nonsense is just going to happen again. You can't just throw money at these institutions. You have to take them over and reform them.

Now, a short aside about deflationary spirals and the 1930-1932 scenario. Here's what happens. A bank collapses. Now, let's say that this bank had $200B in assets (it's a regional bank, not one of the biggest ones). This removes $2 TRILLION dollars from the economy if those assets are marked down to $0, because of the marvels of fractional reserve banking (check out the Wikipedia article for that and note that the current Federal Reserve reserve requirement is 10%, which means that $1 in deposits generates $10 in currency in the economy).

Okay, so you have less money in the economy, but the same amount of "stuff". So prices AND wages go down. No big deal, you're making less money but things are cheaper. *BUT* your *debts* have not gone down. You can no longer afford to pay your credit card bills. You default on them, along with 100 million *other* Americans. This causes the collapse of yet *MORE* banks. Which in turn collapses the currency even further so prices and wages go down *again*. Which in turn means that yet *more* debts are unpayable. Wash, repeat, rinse, until all assets in the economy are concentrated in the hands of the 5% of the population that had cash in the bank at the start of this cycle, and the remainder of the population, the percentage that owed money (which is virtually all of us), is utterly destitute.

Now, at that point economic activity has *also* fallen, since economic activity needs cash to lubricate it and a lot of cash has been diverted towards futile attempts to pay unpayable debts rather than buying stuff. Figure that the economy is moving 10% of the goods and services that it formerly moved. Furthermore, food was planted and picked at the older, cheaper value of the food. So the stores are full of food, but nobody can afford to buy it because an orange that costs $1 is now only worth 1c but the store can't sell it to you for 1c and make money because they paid the farmer 50c for it at the beginning of the year (thanks to the futures market). The end result is food riots, crops rotting in the fields, and the real threat of a fascist takeover of the country. Look up Father Coughlan and get back to us -- it was only barely that FDR kept Father Coughlan's cronies from taking over (see: Business Plot) and sending us down the same path that Germany and Italy went down. And that was before twenty-five years of rote recitation of "government is the problem, not the solution" discredited FDR's brand of liberalism in the minds of most Americans -- today, a FDR would not be allowed to be elected (I don't consider Obama to be an FDR, looking at his policy proposals on his web site they appear to be fairly moderate free-enterprise-oriented proposals, not something shockingly socialist like the CCC program that built much of the infrastructure in Death Valley).

In other words, I don't expect the U.S. to go down the path of FDR if we have another Great Depression. I expect a Mussolini, probably some general taking charge to "restore confidence and pride in our government", and the usual stuff that happens when you have a Mussolini in charge. Bad things. Really bad things. You know the drill.

Now, here's the good news. Bernanke over at the Federal Reserve? He is the world's leading expert on the Great Depression and steps that the Federal Reserve could have done to prevent the deflationary spiral that crashed the dollar and crashed the economy. He has been writing papers on this stuff since he was a 22 year old grad student, and has written some of the classics on the subject, such as his 1983 paper "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression". He knows his s**t. Paulson over at Treasury? He's no Bernanke, but he's no idiot either. He is a pretty good economist in his own right, he is smart enough to both listen to and understand what Bernanke is telling him, and if the politicians in Congress take out the license to loot that his cronies wrote into the proposed bill and instead assigns ownership of the institutions that get the money to a new "Resolution Trust Corporation" to be completely cleaned out and re-formed as honest financial institutions without the crooks who issued the bad paper to begin with, his proposal actually will work -- it'll re-capitalize the banking system, it'll get all that poison paper out of the system, and things will start working right again. So we have good people in charge, and they know what they're doing, and what they're doing will work once the looting provisions are taken out of the proposal. I'm guardedly optimistic, and if you know me, I'm not much of an optimist.

Yes, it's discouraging that to make all this work we have to replace the bad paper with Treasuries or else we deflate the currency, crash all the banks, and end up with a new Great Depression. So it goes. See my signature. The American public thought we could get something for nothing, and voted in politicians who told us we were right. Now we get it, good and hard.

-- Badtux the Monetary Penguin

So the stage is now set for a fascist, Mussolini-style takeover of the U.S. Take a look at the following list of laws passed since 9/11, courtesy of George Ure:
1. USA Patriot Act - A 342 page document presented to Congress one day before voting on it that allows the government access to your bank and email accounts, as well as your medical and phone records with no court order. They can also search your home anytime without a warrant.

2. USA Patriot Act II - This one allows secret government arrests, the legal authority to seize your American citizenship, and the extraction of your DNA if you are deemed a potential terrorist.

3. Military Commissions Act of 2006 - Ends habeas corpus, the right to an attorney, and the right to court review of one's detention and arrest. Without this most basic right, all other rights are gone too since anyone can be detained indefinitely. Now anyone may be arrested and incarcerated and nobody would know.

4. NSPD 51 - A directive signed by George W. Bush on May 9, 2007, that allows the President to declare martial law, effectively transforming the U.S. into a dictatorship with no checks and balances from the Legislative or Judicial Branches. Parts of this directive are considered classified and members of Congress have been denied the right to review it.

5. Protect America Act of 2007 - Allows unprecedented domestic wiretapping and surveillance activities with a reduction in FISA court oversight. Probable cause is not needed.

6. John Warner Defense Authorization Act - Signed by George W. Bush on October 17, 2007, this act allows the President to declare a public emergency and station troops anywhere in America without the consent of the governor or local authorities to "suppress public disorder."

7. Homegrown Terrorism and Radicalization Act - Passed overwhelmingly by Congress on October 23, 2007, is now awaiting a Senate vote. This act will beget a new crackdown on dissent and the Constitutional rights of American citizens. The definitions of "terrorism" and "extremism" are so vague that they could be used to generalize against any group that is working against the policies of the Administration. In this bill, "violent radicalization" criminalizes thought and ideology while "homegrown terrorism" is defined as "the planed use of force to coerce the government." The term, "force" could encompass political activities such as protests, marches, or any other form of non-violent resistance.

So when you add in:

· Halliburton Confirms Camps Constructed
· Halliburton's Immigrant Detention Centers
· Homeland Security Contracts for Vast New Detention Camps
· Halliburton Confirms Concentration Camps Already Constructed
· KBR awarded Homeland Security contract worth up to $385M
· From Halliburton's own website

It starts to get a little scary.

Labels: , , ,

Monday, September 22, 2008

Signs of the Economic Apocalypse, 9-22-08


Gold closed at 864.70 dollars an ounce Friday, up 12.5% from $768.70 for the week. The dollar closed at 0.6913 euros Friday, down 1.7% from 0.7032 at the close of the previous week. That put the euro at 1.4466 dollars compared to 1.4221 the week before. Gold in euros would be 597.75 euros an ounce, up 10.6% from 540.54 at the close of the previous Friday. Oil closed at 104.55 dollars an ounce Friday, up 3.8% from $100.69 at the end of the week before. Oil in euros would be 72.27 euros a barrel, up 2.1% from 70.80 for the week. The gold/oil ratio closed at 8.27 Friday, up 8.4% from 7.63 at the close of the previous week. In U.S. stocks, the Dow closed at 11,388.44 Friday, down 0.3% from 11,421.99 at the close of the previous Friday. The NASDAQ closed at 2,273.90 Friday, up 0.6% from 2,261.27 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.81%, up nine basis points from 3.72 the week before.

What a week! It began with Treasury Secretary Henry Paulson’s decision to let Lehman Brothers go bankrupt. Then news began to come out on Sunday and Monday about the shaky finances of the insurance giant AIG. Then the Federal Reserve took over AIG in exchange for an $85 billion loan. So the stock markets crashed as fear an panic spread, only to recover late in the week as the rescue plan to end all rescue plans was announced. They even brought Bush out of hiding to announce it. When the details were released, everyone was shocked. The U.S. government will be on the hook for at least $700 billion, but probably for more than a trillion. The taxpayers will be forced to buy whichever bad mortgage securities Henry Paulson tells them to. In other words, Bush’s friends will get bailed out again by the rest of us. Oh, also, short selling of financial firms’ stocks was banned.

Where will all this lead? It could go two ways. Since now the entire U.S. government and all the taxpayers will own shaky mortgages, if they decide to pay U.S. workers more, housing prices can start to rise again and the collapse can be prevented. If not it will probably the end of the U.S. dollar, its replacement by the Amero, the new currency of a North American Union ruled by U.S. military’s Northern Command and Blackwater Consulting. Unfortunately, given who is calling the shots, the latter plan seems more likely.

Before we look at some startling evidence for the latter scenario, let’s look at some commentary on the events of the past week. The best and calmest summary comes once again from Barry Grey:

US government to bail out Wall Street

Barry Grey

20 September 2008

The Bush administration on Friday announced plans for a massive and unprecedented federal bailout of the US banking system. In separate appearances Friday morning, Treasury Secretary Henry Paulson and President Bush announced a series of measures to shore up collapsing financial markets and called on Congress to pass legislation next week to use, in Paulson’s words, “hundreds of billions” of taxpayer dollars to buy virtually worthless mortgage-backed assets that cannot be sold on the market from banks and other financial institutions.

Paulson said he would meet over the weekend with congressional leaders to lay out the details of the government plan.

With this plan, the full cost of the immense debts piled up by the banks will be imposed on the American people. It will shift the banks’ liabilities onto the federal government, sharply increasing government budget deficits and the US debt, a process that can only further erode the creditworthiness of the United States and place a bigger question mark on the value of the US dollar.

In the past week alone, the US Treasury has announced cash injections into the Federal Reserve Board of $200 billion to bolster the sagging balance sheet of the central bank, which has already expended hundreds of billions in loans and subsidies to the major Wall Street banks and put out another $85 billion in the takeover this week of the insurance giant American International Group.

The presidential candidates of both major parties, Republican Senator John McCain and Democratic Senator Barack Obama, quickly signaled their support for the wholesale bailout of the banks and big investors, and prominent congressional Democrats issued assurances that they would obey the demands of Paulson, Federal Reserve Board Chairman Ben Bernanke and Bush and pass the required legislation by the end of next week.

The immediate line-up of both parties and the media behind the bailout plan for Wall Street stands in the starkest contrast to their indifference and inaction in regard to the plight of millions of American working people, who face a rising tide of home foreclosures, layoffs and sinking living standards. When it comes to the social needs of the people, the universal cry from corporate America and the two parties is, “There is no money,” but when the fortunes of the financial elite are threatened, the full power of the government and unlimited resources are marshaled virtually at a moment’s notice.

There was no suggestion in the statements of Bush and Paulson of any relief for the working class—nothing to stop home foreclosures or help those who have already lost their homes. Rather, hundreds of billions—and more likely trillions—of dollars in public funds will be used to prop up the banks.

The resulting bankrupting of the government will be used to justify a brutal assault on what remains of social programs, including Medicaid, Medicare and Social Security, and demand even greater financial “sacrifices” from workers, whether the next administration is headed by Obama or McCain. Nothing could more clearly demonstrate that behind the façade of American democracy there stands a dictatorship of big business.

Paulson made his announcement following a meeting Thursday night, with Bernanke and Securities and Exchange Commission Chairman Christopher Cox also in attendance, along with congressional leaders from both parties. At the meeting, Paulson warned that the US and global financial system was on the brink of collapse and outlined in general terms the plan to set up some form of government agency to take “illiquid” mortgage-backed securities off of the balance sheets of the banks.

News of the plan first broke Thursday afternoon, at a point when a massive injection of liquidity by the Federal Reserve and central banks in Europe, Canada and Japan had failed to unfreeze credit markets that had collapsed over the previous days. The Fed loaned $180 billion to the other central banks and then added another $120 billion in an attempt to get banks to lend to one another and to other companies, under conditions where confidence in the financial markets and major institutions had fallen so sharply that credit markets had ceased to function. But instead of lending the fresh money to other companies, the big banks were hoarding it to protect themselves against possible default.

The breakdown in the world capitalist system—widely acknowledged to be the worst crisis since the 1929 stock market crash and heading toward another Great Depression—came in the wake of the US government takeover of the mortgage giants Fannie Mae and Freddie Mac less than two weeks ago and the collapse this week of Wall Street icons Lehman Brothers and Merrill Lynch, followed on Tuesday by the US takeover of American International Group.

In the aftermath of these developments, other major US banks had come under immense pressure and were facing bankruptcy, including the investment bank Morgan Stanley and the savings and loan giant Washington Mutual. Both were scrambling to find buyers as their share prices plummeted. The domino effect of falling banks was threatening the biggest US investment bank, Goldman Sachs, headed by Paulson prior to his becoming treasury secretary, whose stock had suffered enormous losses in the course of the week.

The crisis reached the tipping point on Tuesday and Wednesday when major US money market funds announced losses and some were forced to close. This sparked a growing run on the funds, with $78.7 billion withdrawn from the largest funds on Wednesday and, according to one industry estimate, a total of $145.3 billion over a two-day period.

Money market funds are considered the safest form of investment, and tens of millions of Americans have their savings in them. More immediately, from the standpoint of Wall Street, the funds pump money into credit markets by buying short-term IOUs issued by banks and companies, called “commercial paper.” The growing crisis of the money market funds threatened to collapse the commercial paper market, precipitating a chain reaction of defaults and bankruptcies across the economy.

“It’s the ultimate nightmare to have a run on the money markets—that is truly Armageddon—and they’re not going to allow that to happen,” said Paul McCulley at Pacific Investment Management Co.

The Dow Jones Industrial Average had already lost nearly 800 points in the first three trading days of the week, and by Thursday afternoon a rally sparked by the coordinated action of the Fed and other central banks that morning was faltering. At about 3 PM news broke of the government’s plan for a bailout of the banks, the floor of the New York Stock Exchange erupted in cheers, and the market immediately reversed itself and rocketed upward in a frenzy of buying.

In the final hour of trading, the Dow Jones Industrial Average recouped most of Wednesday’s 449-point loss, rising 410.03 points in the biggest percentage gain in almost six years. From its midday low to its late-afternoon high, shortly before the finish, the Dow swung 617 points.

The biggest winners were the financial stocks, including Morgan Stanley and Washington Mutual, which lurched from heavy losses to big gains.

On Friday morning, the government announced a series of immediate measures to bail out the markets, including a temporary ban on short-selling (betting on a fall in prices) of financial stocks and a $50 billion government program to insure money market funds. The Treasury Department also announced that Fannie Mae and Freddie Mac, now under government ownership, would increase their purchases of mortgage-backed securities and the Treasury would directly buy up a larger number of such assets. The Fed added that it would extend low-cost loans to the banks to unfreeze the commercial paper market.

These moves and the statements of Paulson and Bush set off another orgy of buying on the stock exchange, with the Dow closing up 368.75 for the day.
In his statement, Paulson said “comprehensive” action was needed “to address the root cause of our financial system stresses. The underlying weakness in our financial system today is illiquid mortgage assets that have lost value as the housing correction has proceeded.”

This is a lie. The root cause of the crisis is the unbridled parasitism of American capitalism, which over a period of decades has dismantled huge sections of industry in order to reap super profits for the rich by means of financial speculation and fraud, based on a colossal buildup of debt. Now the bill is being passed to the American people.

Bush, flanked by Paulson, Bernanke and Cox, called for a government bailout of Wall Street in the name of “our system of free enterprise.”

“There will be ample opportunity to debate the origins of this problem,” he said. “Now is the time to solve it.”

There will, in fact, be no debate or discussion. Nobody will be held accountable for the greatest financial scandal in world history. There will be no penalties. No one who made tens and hundreds of millions from the plundering of America will be forced to give back a dime.

All of the financial resources of the United States are being placed at the disposal of Wall Street and every American citizen, without being asked, is being given the responsibility for covering the debts of the richest people in the country.

Certainly no debate or resistance will come from the supposed political opposition—the Democratic Party. Speaking Friday in Miami, Obama said he fully supported the bailout plan. “John McCain and I can continue to argue about our different economic agendas for next year, but we should come together now to work on what this country urgently needs this year,” he said.

Obama is no less bound to Wall Street than his Republican opponent. In fact, he has received more campaign money from the financial industry—$22.5 million—than McCain, who has taken in $19.6 million.

Democratic congressional leaders lined up Friday to back the administration plan. New York Senator Charles Schumer, who chairs the Joint Economic Committee, said he was optimistic that Congress could approve the package in a week.
House Financial Services Committee Chairman Barney Frank, Democrat of Massachusetts, said his panel could hold a vote on the package as soon as Wednesday. “They said they would like legislation to do it, and there was virtually unanimous agreement that there would be legislation to do it,” said Frank.

Rep. Nancy Pelosi, the Democratic speaker of the House of Representatives, added, “We hope to move very quickly—time is of the essence.”

All of those involved in pushing through this scheme to funnel the entire wealth of the country into the coffers of the financial elite have direct financial stakes in the outcome. Paulson made hundreds of millions of dollars as chairman of Goldman Sachs. Pelosi reportedly has major investments in American International Group. Many of the congressional leaders of both parties are themselves multi-millionaires and rely on handouts from big business to get elected. They are all ruled by personal interests that reflect the interest of the American ruling class.

The result of the government moves announced Thursday and Friday has already been to not only cover the debts of the super-rich, but to expand their stock portfolios and bank accounts by millions more through the run-up of share prices.

As for the mother of all bailout plans itself, even more shocking than the dollar amount were the terms. Glenn Greenwald summarizes:

Here is the current draft for the latest plan. It's elegantly simple. The three key provisions: (1) The Treasury Secretary is authorized to buy up to $700 billion of any mortgage-related assets (so he can just transfer that amount to any corporations in exchange for their worthless or severely crippled "assets") [Sec. 6]; (2) The ceiling on the national debt is raised to $11.3 trillion to accommodate this scheme [Sec. 10]; and (3) best of all: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency" [Sec. 8].

Put another way, this authorizes Hank Paulson to transfer $700 billion of taxpayer money to private industry in his sole discretion, and nobody has the right or ability to review or challenge any decision he makes.

More commentary from the Housing Panic blog:

The end of America as you knew it is at hand. It was a good 232 year run. But it is about to be stolen in the night.

America is about to be legally stolen from the people, and given to a very small group of powerful men.

Yes, HP can be a bit dramatic sometimes.

This is not one of those sometimes.

The Patriot Act of Finance, otherwise known as Paulson's $700 billion bailout bill, if passed in its present form will be the nail in the coffin for an America by, for and of the people.

Just like the Patriot Act appeared to be written before 9/11, so does this Patriot Act of Finance appear to be written before the housing crash. And yes, both were rushed through a panicked Congress and complacent media in the middle of the night.

A nation founded by the people, for the people will be given to a very select group of bankers. Legally. Without a shot fired. Because Americans were too distracted and too dumb to know what was going on.


Here's how it will be done:

1) The key line in the proposed bill is this one:

"The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to 700,000,000,000 dollars outstanding at any one time"

What this does is give Hank Paulson, acting as an emperor with unchecked control over the nation's treasury, a $700 billion line of credit in which he can buy up toxic debt for whatever price he'd like to pay, $700 billion at a time.

In other words - he could buy trillions. Trillions and trillions and trillions. Buying and selling, buying and selling.

He can sell the junk he buys from his banker friends for whatever price he wants, saddling the taxpayers with the loss. He keeps this process going, using his $700 billion credit card. Buy for 60 cents on the dollar, sell for 30 cents on the dollar. Buy for 80 cents on the dollar, sell for 5 cents on the dollar. He's in charge.

$700 billion folks IS JUST THE LINE OF CREDIT. He can purchase trillions and trillions of bad debt with this credit card, as long as only $700 billion is OUTSTANDING at any one time.

2) Hank Paulson, CEO of Goldman Sachs on leave, has complete and total control over the nation's treasure. He would be unchecked by Congress, unchecked by the President. He will be king. Here's the text:

"The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation"

Using this power, Hank Paulson of Goldman Sachs could pay Goldman Sachs anything he wanted for their mortgage assets. Let's say the market value was 20 cents on the dollar. Hank Paulson could pay them 100 cents on the dollar. Its his decision and his alone. No oversight. No limitations. Hank Paulson could simply give the nation's treasure to Goldman Sachs.

Get it now?

3) Deputizing the banks and investment banks as "agents of the government". Seriously. Here's the text:

"Designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them"

4) Have no outside control over the firesale of assets and loss to the taxpayer. Again, Hank Paulson and Hank Paulson alone shall be in control. No auditors. No oversight. No multiple bids. No nothing. Hank Paulson and Hank Paulson alone. Here you go:

"Sale of Mortgage-Related Assets. The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act."

5) Hank Paulson has final say. Hank Paulson knows what's best. Hank Paulson cannot be reversed. Hank Paulson cannot be sued. Hank Paulson is king.

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency"

So, what can you do? Normally here I'd say contact your corrupt Congressman or Senator. Contact the media. But folks, Congress has been bought. The media have been bought.

The American people have lost.

Deal with it.

So unless there's rage in the street, which there won't be - the new Fall TV season is starting - it's over. They win. In eight short years, they took everything they wanted. And nobody could stop them.

The only hope, for the hopeful? That we can run out the clock, and this bill doesn't pass until Bush and Paulson are gone. But if that's the case, and the bill does pass after January 2009, then the question is - who do you trust more - the outsider or the insider. And with this much on the line, will the outsider be allowed to win?

If this bill does pass ASAP, well, then watch Paulson get busy with his new credit card as fast as he can. He only has four more months. He'll be buying up crap as fast as he can in a desperate and reckless orgy of greed.

Regardless of how this plays out, prepare the best you can. Know what is happening in your former country, and do what is best for you and your family to survive.

I'm off to go find my tin foil hat now. I'm not usually one for conspiracy theories.

Until now.

Here is Mike Whitney on the consequences:

Full-Spectrum Breakdown: Grasping at Straws

Mike Whitney

September 20 / 21, 2008

On Friday morning, Senator Christopher Dodd, the head of the Senate Banking Committee, was interviewed on ABC's “Good Morning America.” Dodd revealed that just hours earlier at an emergency meeting convened by Secretary of the Treasury Henry Paulson and Federal Reserve chairman Ben Bernanke, lawmakers were told that "We’re literally maybe days away from a complete meltdown of our financial system.” Dodd added somberly, that in his three decades of serving in public office, he had "never heard language like this.”

The system is at the breaking point, and despite Wall Street's elation from the proposed $1 trillion dollar bailout to remove toxic mortgage-backed debt from banks balance sheets, the market is still correcting in what has become a vicious downward cycle. This cycle will persist until the bad debts are accounted for and written off for or until the exhausted dollar-system collapses altogether. Either way, the volatility and violent dislocations will continue for the foreseeable future.

Most people don't understand what happened on Thursday, but the build-up of bad news on the Lehman default and the $85 billion government takeover of AIG, triggered a run on the money markets and a freeze in interbank lending. The overnight LIBOR rate (London Interbank Offered Rate) more than doubled to 6.44 per cent. Bank of America reported overnight borrowing rates in excess of 6 per cent. Longer-term LIBOR rates also rose sharply. On Wednesday, jittery investors removed their money from money markets and flooded short-term US Treasurys for the assurance of a government guarantee on their savings even though interest rates had turned negative which means that their balance would actually shrink at the date of maturity. This is unprecedented, but it does help to illustrate how raw fear can drive the market.

The TED spread (the TED Spread measures market stress by revealing the reluctance of banks to lend to each other) widened and the credit markets froze in place. Borrowing three-month dollars on the interbank market and the U.S. Treasury's three-month borrowing costs widened five full percentage points. That's huge. The banking system shut down.

What does it mean? It means the Federal Reserve has lost control of the system. The market is driving interest rates now, and the market is terrified. End of story.

When the Fed announced its emergency program to dump $180 billion into the global banking system, short term Libor retreated slightly but long-term rates have remained stubbornly high. The noose continues to tighten. These rates are pinned to 6 million US mortgages which will be resetting in the next few years. That's more bad news for the housing industry.

The entire system is deleveraging with the ferocity of a Force-5 gale touching down in the Gulf, and yet, Henry Paulson has decided that the prudent thing to do is build levees around the system with paper dollars.
Naturally, many people who understand the power of market-corrections are skeptical. It won't work. Libor is pushing rates upwards--that's the "true" cost of money. The Fed Funds rate (2 per cent) is supported by infusions of paper dollars into the banking system to keep interest rates artificially low. Now the extreme pace of deleveraging has the Fed on the ropes. Trillions of dollars of credit is being sucked into a black hole which is raising the price of money. It's out of Bernanke's control. He needs to step out of the way and let prices fall or the dollar system will vanish in a deflationary vacuum.

The problems cannot be resolved by shifting the debts of the banks onto the taxpayer. That's an illusion. By adding another $1 or $2 trillion dollars to the National Debt, Paulson is just ensuring that interest rates will go up, real estate will crash, unemployment will soar, and foreign central banks will abandon the dollar. In truth, there is no fix for a deleveraging market anymore than there is a fix for gravity. The belief that massive debts and insolvency can be erased by increasing liquidity just shows a fundamental misunderstanding of economics. That's why Henry Paulson is the worst possible person to be orchestrating the so called rescue project. Paulson comes from a business culture which rewards deception, personal acquisitiveness, and extreme risk-taking. Paulson is to finance capitalism what Rumsfeld is to military strategy. His leadership, and the congress' pathetic abdication of responsibility, assures disaster. Besides, why should the taxpayers be happy that the stocks of Morgan Stanley, Washington Mutual and Goldman Sachs surged on the news that there would be a government bailout yesterday? These banks are essentially bankrupt and their business models are broken. Keeping insolvent banks on life support is not a rescue plan; it's insanity.

No one has any idea of the magnitude of the deleveraging ahead or the size of the debts that will have to be written down. That's because 30 years of deregulation has allowed a parallel financial system to arise in which over $500 trillion dollars in derivatives are traded without any government supervision or accounting. These counterparty transactions are interwoven throughout the entire "regulated" system in a way that poses a clear and present danger to the broader economy. It's a mess. For example, there are an estimated $62 trillion of Credit Default Swaps (CDS) alone, which are basically insurance policies for defaulting bonds. AIG was as heavily involved in CDS as they were in regulated insurance products. So why would AIG sell CDS rather than conventional insurance?

Because, just like the banks, AIG could maximize its profits by minimizing its capital cushion. In other words, it didn't really have the capital to pay off claims when its CDS contracts began to blow up. If it had been properly regulated, then government regulators would have made sure that it was sufficiently capitalized with adequate reserves to pay off claims in a down-market. Now taxpayers will pay for the lawless system which men like "industry rep" Henry Paulson put in place. That's deregulation in a nutshell; a system that allows Wall Street banksters to create credit out of thin air and then run weeping to Congress when their swindles backfire.

Inflating the currency, printing more money, and increasing the deficits won't help. The bad debts have to be accounted for and liquidated. The Paulson strategy is to create another ocean of red ink while refusing to face the underlying problem head-on. This just further exacerbates the consumer-led recession which economists know is already setting in everywhere across the country. Demand is down and consumer spending is off due to falling home equity, job losses, and tighter lending standards at the banks. The broader economy does not need the added downward pressure from higher taxes, bigger deficits, or inflation. Paulson's plan is a band-aid approach to a sucking chest wound. The debts are enormous and the pain will be substantial, but the problem cannot be resolved by crushing the middle class or destroying the currency.

The malfunctioning of the markets and the freeze-over in the banking system are the outcome of a massive credit unwind instigated by trillions of dollars of low interest credit from the Federal Reserve which was magnified many times over via complex derivatives contracts and extreme leveraging by speculative investment bankers. This has generated the biggest equity bubble in history. That bubble is now set for a "hard-landing" which is the predictable result of an unsupervised marketplace where individual players are allowed to create as much credit as they choose.

Stef Zucconi has some fun with the statement sometimes heard in the mainstream media that no one could have predicted it would get this bad.

Rambling #2 - aka The Genius of Darwin

… As it happens, whether Darwin was right or wrong about the Evolution of Life makes virtually bugger all difference to most people's daily lives. However, Darwinism has affected the way people interpret tangible events that do impact on their daily lives.

Before Darwinism and the Enlightenment, most people believed that someone, or some entity, was responsible for everything that happened. The weather, the outcome of battles, the shape of tea leaves in a cup, the outcome of the throw of some dice; all was the Will of some god or other.

There was no such thing as chance. Everything that happened was the predetermined outcome of a controlling intelligence.

After Darwin, it was considered very clever to believe that everything of any importance or scale was the result of blind chance. Any pattern of events that appeared to be result of design was simply the result of blind chance combined with some kind of selection mechanism.

The result was that, in the act of denying the Hand of God in natural affairs, Darwinism also had the consequence of denying the Hand of Man in human affairs.

Anyone who suggests that the course of human, or natural affairs, may be the result of the interplay of intelligent planning and the natural selection of random events is now branded an irrational religious lunatic or a conspiracy theorist.

Shit just happens.

And if you don't believe that Shit just happens then you're only fit for the Funny Farm.

Because I'm a Loon I believe that the promotion of this kind of thinking, as an essentially exclusive model to explain how the world works, was an entirely deliberate course of action - but I would wouldn't I?

If you would like to witness a nice example of what I'm talking about, the mainstream coverage of the recent financial turmoil is a nice case history.

The unwavering message of the mainstream coverage of the 'Credit Crunch' is...

-- The impending implosion of our financial system is an unintended consequence of unreasoning, animalistic, undirected greed and fear.

-- No-one could have predicted it.

-- There is no predetermined objective.

-- The people responsible for our great financial institutions are honestly trying to unf*** things as best as they can for the Common Good.

The possibility that the crisis could have been deliberately engineered in some way, and that some very clever, powerful people knew exactly what was going to happen, is deemed so unlikely it is not raised even to be debunked.

Presumably, the fact that so many on-line Conspiranauts have been predicting this crash for years, in accordance with their insane models of how the world really works, is merely blind luck.

And if all those CCTV cameras, databases, terrorism laws and detention infrastructure are turned towards, instead of the shadowy terrorists, a general public f*****-off with being robbed blind that will be an unintended outcome too.

Speaking of “detention infrastructure,” here is a bit of news courtesy of the U.S. Army Times (thanks to Cryptagon for finding this), that might offer some clues as to the future planned for the U.S. if the economy should collapse:
Brigade homeland tours start Oct. 1

3rd Infantry’s 1st BCT trains for a new dwell-time mission. Helping ‘people at home’ may become a permanent part of the active Army

Gina Cavallaro

Monday Sep 8, 2008

The 3rd Infantry Division’s 1st Brigade Combat Team has spent 35 of the last 60 months in Iraq patrolling in full battle rattle, helping restore essential services and escorting supply convoys.

Now they’re training for the same mission — with a twist — at home.

Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.

It is not the first time an active-duty unit has been tapped to help at home. In August 2005, for example, when Hurricane Katrina unleashed hell in Mississippi and Louisiana, several active-duty units were pulled from various posts and mobilized to those areas.

But this new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities.

After 1st BCT finishes its dwell-time mission, expectations are that another, as yet unnamed, active-duty brigade will take over and that the mission will be a permanent one.

“Right now, the response force requirement will be an enduring mission. How the [Defense Department] chooses to source that and whether or not they continue to assign them to NorthCom, that could change in the future,” said Army Col. Louis Vogler, chief of NorthCom future operations. “Now, the plan is to assign a force every year.”

…They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack.

Training for homeland scenarios has already begun at Fort Stewart and includes specialty tasks such as knowing how to use the “jaws of life” to extract a person from a mangled vehicle; extra medical training for a CBRNE incident; and working with U.S. Forestry Service experts on how to go in with chainsaws and cut and clear trees to clear a road or area.

The 1st BCT’s soldiers also will learn how to use “the first ever nonlethal package that the Army has fielded,” 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them.

“It’s a new modular package of nonlethal capabilities that they’re fielding. They’ve been using pieces of it in Iraq, but this is the first time that these modules were consolidated and this package fielded, and because of this mission we’re undertaking we were the first to get it.”

The package includes equipment to stand up a hasty road block; spike strips for slowing, stopping or controlling traffic; shields and batons; and, beanbag bullets.

“I was the first guy in the brigade to get Tasered,” said Cloutier, describing the experience as “your worst muscle cramp ever — times 10 throughout your whole body.

“I’m not a small guy, I weigh 230 pounds ... it put me on my knees in seconds.”

The brigade will not change its name, but the force will be known for the next year as a CBRNE Consequence Management Response Force, or CCMRF (pronounced “sea-smurf”).

“I can’t think of a more noble mission than this,” said Cloutier, who took command in July. “We’ve been all over the world during this time of conflict, but now our mission is to take care of citizens at home ... and depending on where an event occurred, you’re going home to take care of your home town, your loved ones.”

While soldiers’ combat training is applicable, he said, some nuances don’t apply.

“If we go in, we’re going in to help American citizens on American soil, to save lives, provide critical life support, help clear debris, restore normalcy and support whatever local agencies need us to do, so it’s kind of a different role,” said Cloutier, who, as the division operations officer on the last rotation, learned of the homeland mission a few months ago while they were still in Iraq.

Some brigade elements will be on call around the clock, during which time they’ll do their regular marksmanship, gunnery and other deployment training. That’s because the unit will continue to train and reset for the next deployment, even as it serves in its CCMRF mission.

Should personnel be needed at an earthquake in California, for example, all or part of the brigade could be scrambled there, depending on the extent of the need and the specialties involved.

…“I don’t know what America’s overall plan is — I just know that 24 hours a day, seven days a week, there are soldiers, sailors, airmen and Marines that are standing by to come and help if they’re called,” Cloutier said. “It makes me feel good as an American to know that my country has dedicated a force to come in and help the people at home.”

Any questions?

Labels: , , , ,

Monday, September 15, 2008

Signs of the Economic Apocalypse, 9-15-08


Gold closed at 768.70 dollars an ounce Friday, down 4.4% from $802.80 for the week. The dollar closed at 0.7032 euros Friday, up 0.3% from 0.7009 at the close of the previous week. That put the euro at 1.4221 dollars compared to 1.4267 the week before. Gold in euros would be 540.54 euros an ounce, down 4.1% from 562.70 at the close of the previous Friday. Oil closed at 100.69 dollars a barrel Friday, down 5.5% from 106.23 at the end of the week before. Oil in euros would be 70.80 euros a barrel, down 5.2% from 74.46 for the week. The gold/oil ratio closed at 7.63 Friday, up 0.9% from 7.56 at the end of the week before. In U.S. stocks, the Dow Jones Industrial Average closed at 11,421.99 Friday, up 1.8% from 11,220.96 at the close of the previous Friday. The NASDAQ closed at 2,261.27 Friday, up 0.2% from 2,255.88 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.72%, up 2 basis points from 3.70 for the week.

One week after the takeover of Fannie Mae and Freddie Mac by the Fed, the financial giants on the verge of collapse are Lehman Brothers, Merrill Lynch and Washington Mutual. No one seems to know where the bottom is. Even the New York Times is nervous:
In Frantic Day, Wall Street Banks Teeter

Andrew Ross Sorkin

September 15, 2008

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, hurtled toward liquidation after it failed to find a buyer, people briefed on the deals said.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of tens of billions of dollars in losses because of bad mortgage finance and real estate investments.

They culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.

“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I‘ve ever seen,”
said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street. Questions remain about how the market will react Monday, particularly to Lehman’s plan to wind down its trading operations, and whether other companies may still falter, like the American International Group, the large insurer, and Washington Mutual, the nation’s largest savings and loan. Both companies’ stocks fell precipitously last week.

Though the government took control of the troubled mortgage finance companies Fannie Mae and Freddie Mac only a week ago, investors have become increasingly nervous about the difficulties of major financial institutions to recover from their losses.

How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation’s growth rate has slowed.

What will happen to Merrill’s 60,000 employees or Lehman’s 25,000 employees remains unclear. Worried about the unfolding crisis and its potential impact on New York City’s economy, Mayor Michael R. Bloomberg canceled a trip to California to meet with Gov. Arnold Schwarzenegger. Instead, aides said, Mr. Bloomberg spent much of the weekend working the phones, talking to federal officials and bank executives in an effort to gauge the severity of the crisis.

The weekend that humbled Lehman and Merrill Lynch and rewarded Bank of America, based in Charlotte, N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the Federal Reserve building in Downtown Manhattan.

The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets — and then agreeing to bail out Fannie Mae and Freddie Mac.

The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman’s stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.

Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation.

The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation’s largest brokerage force and its name is known in towns across America, while Lehman’s main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.

…The weekend’s events indicate that top officials at the Federal Reserve and the Treasury will take a harder line on providing government support of troubled financial institutions.

While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed chairman, Ben S. Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at risk simply to prevent a Lehman collapse.

The tough-love message was a major change in strategy, but it remained unclear until at least Friday whether the approach was real or just posturing. If the Fed was faced with the genuine risk of another market meltdown, analysts said, it would be almost duty-bound to ride to a rescue of one kind or another.

What few people anticipated was that the Treasury and Fed officials might reach for an even broader strategy.

“They were faced after Bear Stearns with the problem of where to draw the line,” said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors, a forecasting firm. “It became clear that this piecemeal, patchwork, case-by-case approach might not get the job done.”

At first glance, the new strategy by Mr. Paulson and Mr. Bernanke represents a much purer and tougher insistence that Wall Street work out its own problems without government help.

But that is only the first glance. If Bank of America acquired Merrill Lynch, its capital reserves would immediately fall below the minimum requirements for bank holding companies. Federal regulators, including the Federal Reserve, would have to show lenience for as long as it took the capital markets to regain their confidence — which could be quite a while.

And Merrill Lynch is hardly the only troubled financial institution on the horizon. Administration officials acknowledged this week that more bank failures were inevitable, and the main protection for depositors — the Federal Deposit Insurance Corporation — is likely to exhaust the reserves it has built over the years from bank insurance premiums.

“What we need now is a systemic solution and to admit that this is an extraordinary situation,” Mr. Meyer said. He said the government should go to the heart of the crisis — the mortgage market — and start buying mortgage-backed securities in a broad rescue.

That is similar to an approach urged by Alan Greenspan, Mr. Bernanke’s predecessor as chairman of the Federal Reserve. Mr. Greenspan, who has long been a staunch opponent of government intervention in the economy, said Sunday that the federal government might have to shore up some financial institutions.

“This is a once-in-a-half-century, probably once-in-a-century type of event,” Mr. Greenspan said in an interview on ABC. “I think the argument has got to be that there are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investment in an economy that on very rare occasions — and this is one of them — it’s desirable to prevent them from liquidating in a sharply disruptive manner.”

Most economists say that bailouts are often bad economic policy because each rescue tends to encourage “moral hazard” — the tendency of institutions and investors to take even bigger risks because they assume the government will rescue them, too.

Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout of Fannie Mae and Freddie Mac.

Officials noted that Lehman’s downfall posed a lower systemic threat because it had been a very visible and growing risk for months, which meant that its customers and trading partners had had months to prepare themselves.

Outside the public eye, Fed officials had acquired much more information since March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives.

But James Leach, a former Republican congressman from Iowa and chairman of the House Banking committee, said the Fed and Treasury might not be able to avoid a broader rescue.

“The Fed’s historic position is to object philosophically to a rescue role but in the end to do everything in its power to avoid anything that poses systemic risk,” said Mr. Leach, now a lecturer at Harvard.

“My sense is that the systemic question will be the only question on the table if Lehman falters,” he continued. “If systemic risk is considered grave, the Fed, perhaps with Treasury playing at least an advisory role, will intervene.”

Andrew Leonard reminds us that earlier this year failing firms got bailed out by “sovereign wealth funds” controlled by sheikdoms. Now no one but the Federal Reserve is willing to step in:
Rest of world to Wall Street: Not this time

Andrew Leonard

Friday, Sept. 12, 2008

Not so long ago, when Wall Street's best and brightest investment banks first started reeling from the credit crunch, sovereign wealth funds from around the world came riding to the rescue. Need to shore up your bottom line after a few billion dollars worth of write-downs? The Abu Dhabi Investment Authority or Singapore's Temasek Holdings were here to help.

In January, in "How Wall Street Broke The Free Market," I wrote about how both the left and right in the United States were wringing their hands at the prospect of foreign governments buying such big stakes in elite American financial institutions.

Not too worry! Eight months later, reports the Wall Street Journal in a big page one story (warning, ominously, that the credit crisis "could be entering a critical stage,") foreign governments aren't so eager to spring to the aid of beleaguered Americans.

Stung by mammoth losses on those investments, many investors are now balking. Sovereign-wealth funds, many of them facing criticism at home over the investments, have stayed on the sideline as Lehman and other firms have struggled to raise capital.

So what's worse -- getting bailed out by authoritarian petro-states, or being deemed too shaky an investment to be worth the trouble?

Raising adequate capital to weather the credit crunch storm is getting tougher and tougher for everybody, including commercial banks such as Washington Mutual, reports the Journal. Not only are foreign investors getting skittish, but some potential local white knights are running into problems. Private equity firms, for example, are limited to ownership of no more than 25 percent of a deposit-taking financial institution before they must be considered a bank-holding company subject to federal regulation.

Executives from such firms as Carlyle Group and Blackstone Group have been using the credit crunch to lobby the Office of Thrift Supervision and the Federal Reserve to allow them to own bigger stakes of financial firms without having to face regulation.

That's a good one. Because clearly the answer to Wall Street's problems over the last year is less regulation.

Since wealthy sheikdoms won’t bail out failing U.S. financial firms, and since the past weekend’s events have signalled that the U.S. Federal Reserve can’t keep doing this, banks are going to have to start bailing each other out, either by a healthier one buying up an unhealthy one, or by creating a bailout pool:
Banks roll out $70 billion loan program

Joe Bel Bruno, AP Business Writer

September 14, 2008

NEW YORK - A group of global banks and securities firms announced late Sunday a $70 billion loan program that financial companies can tap to help ease a credit shortage that threatens global financial markets.

The ten banks, which include JPMorgan Chase & Co. and Goldman Sachs Group Inc., said they were committing $7 billion each for the pool. The pool would act as a signal to the marketplace that banks, brokerages, and other financial companies can lean on the fund to take care of borrowing needs.

The banks said the program will be available to participating banks which can get a cash infusion up to a maximum of one-third of the total size of the pool. The size of the loan program might increase as "other banks are permitted to join."

All participating banks intend to use this facility beginning this week, the statement said.

The banks also include Bank of America Corp., Barclays PLC, Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, Merrill Lynch & Co., Morgan Stanley and UBS.

The banks made the announcement to try to head off market disruptions after the possible failure of investment bank Lehman Brothers Holdings Inc. Lehman was expected to file for bankruptcy by Monday after succumbing to dwindling investor confidence due to losses from its real estate holdings.

What are we to make of all this? For one thing, an era is ending. The era of neoliberal “financial innovation” or new, complex ways of parasitically funelling wealth up the pyramid is coming to an end. So, too, is the era of U.S. hegemony.

US bailout of mortgage giants sets stage for wider financial crisis

Barry Grey

12 September 2008

Since the Bush administration announced on Sunday the US government takeover of mortgage finance giants Fannie Mae and Freddie Mac, in the largest corporate bailout in American history, developments have underscored the profound and systemic nature of the crisis that precipitated the action.

A week of wild gyrations on US stock markets, fueled by fears of an impending collapse of the Wall Street investment bank Lehman Brothers and the country’s largest savings and loan bank, Washington Mutual, demonstrates that the rescue of the government-sponsored mortgage companies is a stop-gap measure that does not begin to resolve the underlying crisis of American capitalism.

On the contrary, the bailout of Fannie Mae and Freddie Mac sets the stage for an intensification of the crisis in the coming months. At heart, the demise of the mortgage firms, which account for 80 percent of new home mortgages in the US and have a combined liability of $5.3 trillion in mortgage-backed securities which they own or guarantee, is a result of the collapse of the colossal credit bubble which sustained the super-profits of US banks and investment firms and the seven- and eight-figure salaries of their top executives.

It is the product of an economic system that has increasingly based itself on speculation and various forms of economic parasitism, while gutting the productive base of the country—at the cost of millions of jobs and the living standards of the American working class.

The decay of American capitalism has produced an economy that is drowning in debt and is dependent on massive inflows of capital from abroad for its survival. Now, the assumption by the government of the debt of the mortgage companies, carried out to protect the financial interests of banks and big investors, has placed a question mark over the solvency of the US government itself.

This threatens a curtailment of the inflow of international capital, a further erosion in the status of the US dollar and a drastic increase in the interest paid by the government to borrow money from its creditors. The US is already by far the world’s biggest debtor nation, with a balance of payments deficit of $800 billion and an economy that is sustained by a yearly inflow of $1 trillion in overseas capital.

The quantum leap in the national debt and government budget deficits resulting from the bailout of Fannie Mae and Freddie Mac—and the further corporate bailouts that are all but certain to follow—must inevitably lead to a realignment of social conditions within the US in accordance with the actual, deeply eroded, position of the United States in the world economy. This means an even more drastic lowering of the living standards of the American people.

On Tuesday, the Congressional Budget Office (CBO) declared that as a result of the government bailout, the finances of Fannie Mae and Freddie Mac had to be “directly incorporated into the federal budget,” and its liabilities added to the US national debt. This means, in effect, a near doubling of the US sovereign debt to a figure equivalent to the country’s gross domestic product (GDP).

The Financial Times reported Wednesday that the bailout had already resulted in a sharp rise in the price of credit default swaps on five-year US government debt. Credit default swaps are private contracts to buy insurance against the default of various forms of debt.

As the Financial Times wrote, “... the price suggests the market believes the US government is more likely to default on its obligations than some other industrialised countries.” It went on to cite a credit research strategist as saying, “The USA is now ‘riskier’ than Norway, Germany, Netherlands, Sweden, Finland, Austria, France, Denmark, Quebec and Japan.”

The CBO statement on Fannie Mae and Freddie Mac accompanied its report on the US government budget deficit for the current fiscal year, which ends September 31, and its projections for fiscal 2009 and beyond. The CBO put the current deficit at $407 billion, more than double the $161 billion deficit for fiscal 2007.

It projected, on the basis of current tax laws, that the budget gap would rise to a record $438 billion in the 2009 fiscal year that begins October 1. However, as CBO Director Peter Orszag noted, that figure could easily climb to $540 billion if Congress acts in the coming months, as expected, to curtail the growth in the alternative minimum tax and extend a variety of expiring business tax breaks.

Orszag further noted that these figures did not take into account the full scale of government expenditures related to the bailout of Fannie Mae and Freddie Mac. Treasury Secretary Henry Paulson said on Sunday the government would commit up to $200 billion to prop up the companies. Given the continuing decline in home prices and rise in foreclosures, that figure is virtually certain to rise by tens, if not hundreds, of billions.

Orszag said that the deficit would remain at between 3 and 4 percent of the GDP for the next decade, resulting in a $7 trillion rise in the national debt. Even these dire projections assume that Bush’s massive tax cuts for the rich will not be extended beyond their scheduled expiration in 2010.

Significantly, Orszag pointed to government health care spending—not the cost of corporate bailouts or the wars in Iraq and Afghanistan (which have to date consumed a combined sum of $850 billion)—as the main source of exploding deficits going forward. The CBO warned that Medicare and Medicaid spending, which currently account for an estimated 4.6 percent of GDP, could account for up to 12 percent of GDP by 2050.

The mounting financial crisis of American capitalism was further underscored by the Commerce Department’s report Thursday on the US trade deficit, which surged in July by 5.2 percent to $62.2 billion, the highest level in 16 months.

The headlong rush of Lehman Brothers and Washington Mutual toward collapse—or new federal bailouts—within days of the government takeover of Fannie Mae and Freddie Mac has underscored the depth of the financial crisis.

The stock of the 158-year-old Wall Street investment bank collapsed this week after it was reported that Lehman’s efforts to secure a capital infusion from the state-owned Korea Development Bank had collapsed. At the close of the financial markets on Thursday, the value of Lehman’s stock—down by more than 90 percent since its peak last February—was about $2.9 billion. It stood at $37.2 billion at the start of 2008.

Once the biggest underwriter of mortgage-backed securities, the firm has seen its speculative investments collapse and would have already gone bankrupt were it not for the Federal Reserve’s decision, taken at the time of the government-subsidized sale of Bear Stearns to JP Morgan Chase last March, to extend low-cost loans to investment banks and accept virtually worthless mortgage-related securities in return for highly rated Treasury securities.

It was reported Thursday that the firm was in talks with potential buyers, including Bank of America, for a buyout that would avoid bankruptcy or a government bailout—at the cost of billions in losses to shareholders and the jobs of thousands of Lehman employees. On Wednesday, when it announced a third quarter loss of $3.9 billion and a plan to spin off much of its business and shrink its operations, the company said it was slashing 1,000 to 1,500 jobs, its fourth round of layoffs this year.

Over the past year, US banks and brokerages have cut more than 110,000 jobs.
The collapse of both Lehman and the two government-sponsored mortgage giants starkly illustrates the immense dependence of American capitalism on overseas capital. Lehman went to ground after its bid for funds from a South Korean bank failed, and the government bailout of Fannie Mae and Freddie Mac was precipitated by the dumping of the firms’ securities by central banks and major investors in Asia and Russia.

The stock of the giant savings and loan bank Washington Mutual, which has some $180 billion in mortgage-related loans, has fallen by 34 percent since Monday and 92 percent over the past year. This week it reported a $3.33 billion second quarter net loss and has said its mortgage losses could reach $19 billion through 2011.

Raising the possibility of another government bailout, Christopher Whalen, a managing partner at Institutional Risk Analytics, said of Washington Mutual, “If this goes on until the end of the year, the bank is either going to have to be sold or recapitalized by the government. Those are the only choices.”

The Financial Times on Wednesday worried that the massive US budget deficits were limiting the ability of the government to continue propping up Wall Street with injections of hundreds of billions in capital. It wrote:

“Yesterday’s new deficit projections by the Congressional Budget Office highlight the troubled state of US government finances as it embarks on a new stage of interventions to contain the chronic impact of the credit crisis....

“Some economists worry that as the Federal Reserve has spent much of its ammunition, and as fighting the credit crisis falls more to the government, weak public finances mean the government does not have unlimited ammunition either.”

Noting that the Federal Reserve was seeking to conserve its capital for further corporate bailouts, the newspaper wrote, “Many Fed officials share this view, which is why the Fed is lukewarm on further fiscal stimulus, preferring to see the limited government funds spent on shoring up the financial system.”

The response to mushrooming budget deficits and soaring national indebtedness, as well as the spreading crisis on Wall Street, by the next administration, whether headed by Republican John McCain or Democrat Barack Obama, will be a policy of brutal austerity directed against the working class.

One can safely predict that not long after the November election, the incoming president will announce that his transition advisers have shown him the country’s financial books, that the dire state of the nation’s economy makes inoperative any and all promises of health care reform or relief to distressed homeowners, and that a regime of discipline and “sacrifice” will have to be imposed in the “national interest.”

Senator Kent Conrad, the Democratic chairman of the Senate Budget Committee, sounded just such a note when he said, in response to the CBO report, that “the next president will be inheriting a budget and economic outlook that is far worse than most people realize.”

As the CBO report indicates, the next administration will be tasked with dismantling basic entitlement programs such as Medicare and Medicaid.

If the demise of the U.S. empire happens in an orderly fashion, it would be an unalloyed Good Thing. Such things hardly ever happen smoothly, however. There will be increasing temptation for the Empire’s leaders to place an all or nothing bet, to go “all in” in poker terminology. Especially now that the Empire’s opponents are openly thumbing their noses at the U.S. Look at what has happened just in the past month. The United States (and Israel) egged its ally in the Caucasus, Georgia, to attack Russian-controlled territory. Russia inflicted a crushing defeat on U.S. and Israeli military hardware, software and personnel (yes, even personnel). The United States then launched illegal attacks in Pakistani territory. In its so-called “backyard” (what an insulting term!) in Latin America, the U.S. Ambassador to Bolivia began to coordinate a coup against Evo Morales and Bolivia expelled the Ambassador. The U.S. threatened Bolivia, but who believes them anymore? Venezuela then also ordered the U.S. Ambassador to leave, after earlier in the week inviting Russia to deploy two strategic bombers (“strategic” means they can carry nuclear weapons).

What will the world be like in a month or two?

Labels: , , ,