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Grasping at Straws
MIKE WHITNEY
Counterpunch
Sunday, Sept 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.
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27 Responses to “Grasping at Straws”
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September 21st, 2008 at 5:32 am
I laugh when I hear my Canadian friends say that this tornada is restricted to south of the border, what a joke. Man, am I going to laugh when they start jumping out of buildings.
http://www.youtube.com/watch?v=Vv3yuRdD2oE
September 21st, 2008 at 7:39 am
Checking if I get it right: “banks refuse to lend to each other” is a code word for “banks are bankrupted unless someone insane enough lends them money to pay for their insolvency and postpone practical bankruptcy, which will probably come even if they get a loan, which is the reason nobody is giving that particular bank a loan”. “Freeze up of the finance markets” is a code word for widespread bankruptcy accross all financial institutions, so that they effectively are already dead “frozen.” BTW, my guess is the eventual bailout might cost somewhere above 9 trillion, because if nobody trusts the USA government anymore (as they shouldn’t), they can`t “roll over” (which is code-word for “continue with the government pyramid scheme which is the issuance of state debt, a scheme now collapsing when it stands at 9 trillion in the game) … they can`t “roll over” their debt anymore, and therefore will either have to mint 9 trillion fresh to pay for it in numbers (but not actual value due to inflation of course, making USA debt even more unattractive), or they will have to default outright on it (after taking care of the cronies of course).
That situation with the national USA debt (a situation mirrored by other western nations, all stupid enough to get into debt rather then honestly tax (the rich)) will cause massive dollar inflation, causing other countries to lose faith in the dollar, ending the use of the dollar for both oil trade and as an internationally used currency. That again will free up quite a pile of dollars, who all have more or less only one place to go: back to the USA. That would then cause even more inflation, if there is any value left in the dollar by then.
This would then constitute total financial collapse of the dollar, and the collapse of USA power as far as tied to that dollar. That then ends USA power to import products above their actual production, because other nations only want dollars to the extend that buys anything inside the USA (as opposed to buy oil from third countries, and be useful in international trade outside the USA). The USA might then also lose its power over their foreign dictatorship friends whom they helped into power, who are then more free to get out of the dollar. The USA might see a severe reduction in living standards, which might spark riots, and which riots might then give the needed excuse to install a USA dictatorship, which fits right in with the already fake USA democracy…
In my humble opinion the answer to this is: the dollar is already lost, divide the USA and reboot new currencies in each country from scratch. All banks would be nationalized to facilitate this shift, some might later be privitized again (but not investment banks), in a differently set up system. The focus meanwhile is on getting food out to all people, and drinking water. From there on it is rebuilding society slowly, while making sure the food / water / shelter / basic-medicine situation remains well taken care off, for as long as the situation is basically an emergency. It would be great if people got food buffers in their home to live on for some weeks, restoring calm and freeing up hands to work even if not payed yet. All companies need to be democratized except those under 10 employees or under original starter, a better government set up, infrastructure nationalized and improved, and wealth needs to be distributed equally (mainly: stripping the rich, giving it to the poor.)
You can’t handle that ? Sure you can.
September 21st, 2008 at 7:48 am
#3… Forgot to mention: in the panic people will try to get their money out of the bank, making many banks fail.
September 21st, 2008 at 8:58 am
Jos boersema, what you are proposing smells a lot like communism. I thought the world agreed 17 years ago that “communism doesn’t work”!:) I
September 21st, 2008 at 10:16 am
no one Says:
September 21st, 2008 at 8:58 am
> Jos boersema, what you are proposing smells a lot like communism. I thought the world
> agreed 17 years ago that “communism doesn’t work”!:) I
Communism (Marxist variation anyway, which is what most communists – if not all – identify themselves with) does not work. My system isn’t marxism, because it is essentially a free trade system. Marxists say “markets don’t work” but they do. The thing that does not work is free capital markets. So the truth is a bit in between the capitalists (who follow Adam Smith) and the Communists (who follow Karl Marx).
I have made a convenient comparison table to compare the varies models, please chect it out (no pop-ups, nothing, small too):
http://www.jhwh.be/party/nl/david-we/chart.en.html
The differences between marxism (Communism) and my system are fundamental, but there are similarities: direct democracy, nationalization of some things that simply don’t work in a market: infrastructure & business investment.
The differences between capitalism and my system are also fundamental because precisely the independent power of private capital is cut out of the system (has to be, because free capital markets will push investment capital to exploitive businesses).
Note: the cure I mentioned for the USA below is for when the situation has spun dramatically out of control. Ideally one would want to make the changes in a slower pace, and keep the dollar going until things are ready to rotate it out (etc).
Thank you for your interest !
I actually always argue that marxism doesn’t work, although I fully agree with some of the communist ideals such as “everyone is equal” “no class society” “democracy” and “solidarity between all workers and the needy” and “international peace.” But the “plan economy” is wrong, we need free business initiative, freely flowing trade in products, labor and services, because it shuts out the lazy and criminal, is dynamic in its adaptations to the needs of the markets, it distributes decision making, it gives people power to influence their country through the democracy of purchases, and makes lives more interesting when businesses go through adventures as they try to stay alive in the markets. Marxists make the mistake that they think free markets will always lead to poverty for workers, but the markets are in principle neutral in direction, the consumer is free to decide what to stimulate. That can be low prices and that causes exploitation of workers of course, but the consumer could also decide to stimulate fair prices. The consumer is of course none other then the worker during spare time. Big big mistake of the communists, it cost them the world and the revolution.
September 21st, 2008 at 11:06 am
Let it melt down. I just wonder who is going to get shot first?
“Sit down and shut up?”
I don’t think so.
September 21st, 2008 at 11:10 am
It’s the deriviatives stupid! Now these things are net sum zero. Somebody is making a ton of money, I wonder why nobody is talking about the winners here?
September 21st, 2008 at 11:34 am
jos boersema and others, they are doing this TO usher in the lousy “amero” which WILL finish off America! AND OUR PRECIOUS FREEDOMS TOO! WAKE UP, THEY CREATE THE MESS’S AND THEN FOR THEIR OWN PURE EVIL SATANIC AGENDA CONVIENTLY HAVE THE SOLUTION, WHICH IS NO SOLUTION AT ALL BUT MORE POWER GRABBING AND MORE SHREDDING OF OUR PRECIOUS CONSTITUTION! WAKE UP! And PRAY TO GOD AND JESUS TO SAVE US FROM THESE PURE EVIL, MFING SATAN WORSHPPING BASTARDS IN D.C. AND ELSEWHERE WHO ARE,ARE,ARE AND HAVE, HAVE DESTROYED AMERICA FROM WITHIN AND are worldwide too! they are pure EVIL NWO! And we can NOT stop them but God and Jesus can and WILL! Pray to God and Jesus and get others to pray too and also bring others to Jesus and God! We are in a race to save souls from Satan! And HURRY!
September 21st, 2008 at 12:39 pm
Ben LaBelle rated this product 5 stars Sun, May 30, I have had insertional Achilles tendonitis on and off for 8 years. Banking
September 21st, 2008 at 2:51 pm
Sue: What religeon let’s you run everybody else down, puts your butt on a throne so you can cuss out everyone that you really don’t know, in other words, what authority do you have over everything? Are you queen of a toilet bowl or what? I’d get another religeon if I were you, because the one you have is full of hatred towards every single one that does not believe as you do. That’s kind of hypocritical, isn’t it? Do you have fun throwing your verbal filth all over the place? Do you get some kind of award for your potty mouth?
September 21st, 2008 at 8:35 pm
you republican morons were pushing deregulation since that dumb ass ronald reagan was president now we are all bankrupt thanks a lot
September 21st, 2008 at 8:39 pm
“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.”
Unless that was the intention.
Problem
Reaction
Solution
September 21st, 2008 at 8:51 pm
Susan you are a sad pathetic little woman god created you whether you like it or not you will face
judgment in the end by the lord Jesus Christ you can say whatever you want because God made that possible for you and us all. What is sad is so many blinded sheep don’t see they are limited by their confusion. Can a tree rebel against the sun and survive with no sunlight? of course not. Do yourself a favor and listen to your soul more closely. You arrogance will not preserve you in the end. Arrogance and pride has destroyed us all and Satan is laughing even he knows the Lord is Jesus Christ. Ignorance has never been bliss. Find your lord before time is over.
September 21st, 2008 at 9:08 pm
This emerging depression was just as contrived and orchestrated as the first one. Sadly we will suffer and all of us that have banked a retirement will be homeless and the thieves will get off scott-free. This should be a wake up call to all of us. There was a reason why the founders insisted on gold and silver for payment of debt. The electronic entries created an easier way to steal for all thieves that are too damn lazy to haul the weight of metals. Please cease and desist the use of CREDIT CARDS, learn to trade, grow your own food, become truly independent. Use cash, not cards, help your neighbor. Do not look at the government for help! They allowed this to happen. They are going to come help you just like they rushed in to help the people that were needy during Katrina. Do you think that Central Banks were a good idea now? What are we gonna do about it? God Bless and love your neighbor.
September 21st, 2008 at 11:52 pm
Very well written article. Astute and entertaining. See, I’m a near-pennilless European revolutionary Marxist, and whilst I hope the broad mass of Americans realise the shit they’re in nd rise up against their duff leaders, I can’t help but find this, at times, hilarious.
September 21st, 2008 at 11:54 pm
Charlie,
‘Can a tree rebel against the sun and survive with no sunlight?’
You sound like a fortune cookie; stop drinking the Kool-Aid.
September 21st, 2008 at 11:54 pm
Boersema – it depends on what u mean by market. I mean , a market where people sell carrots, fich and cheese on a Saturday works very well. Capitalism, on the other hand, doesn’t. Obvioulsy given recent and forthcoming events.
September 21st, 2008 at 11:55 pm
wtf is ‘kool-aid’ anyhows?
September 22nd, 2008 at 12:58 am
Communism isn’t dead! At least not in the minds of most utopians. WAKE THE FUCK UP!
The same people who are behind this economic meltdown were the same pricks who crashed the party back in 1929, not to mention the ones who financed the Bolsheviks in Russia. Its divide & conquer folks get used to it, you see this shit in your lives everyday and still don’t get it !?! If you don’t take responsibility and govern yourselves some prick with a gun will gladly do it for you. Herr Bush and Herr Cheney are just the bagmen for the not necessarily NWO.
Not to worry, Fall is here and its time for the new season premiers of your favorites shows, so go back to sleep you fucks! And to paraphrase a hero of mine …let posterity forget ye were our countrymen!
Why are commie turds even coming to this site? de de de!
September 22nd, 2008 at 1:54 am
how much does that vincente’ fox douche look like saddam?
USA born mexico president..
some brother in law sh*t going on..
global plantation is for chumps and chickeneck circus chimps
This is the USA bitch.
you have about pushed far enough.
WE the people will push back and you wont wonder where we come from.
Americans must find their own way, we are being sold like cattle.
You will not like us when we are angry.
http://www.youtube.com/watch?v=ErFOsoKzpD0
the runaway train is folly
next stop nowhere land
GS
September 22nd, 2008 at 3:17 am
Everyone asks “how could this happen”, But I rememberat the end of 06 and hearing on the news that a lot of morgages were going to change at the beginning of 07. So here I am at work say “watch what happen now with people having to pay almost double a month for morgages”. A year and a half ago a high school drop out could see the writing on the wall.
NOW…, back in the 70,s my father told us “I won,t see it in my lifetime, but you will see it in yours, that mankind will wage war over water” and look were we are today….the writings on the wall
September 22nd, 2008 at 3:37 am
Dodd has been slapped into reality and is in a state of shock.
He knows EXACTLY who Lyndon LaRouche is, and him and Barney “bail em out” Frank know exactly what the Homeowner and Bank Protection Act is, and who wrote it.
The moron’s on the Senate Finance Committee are realizing the horrible truth that “the nut” is one of a handful of sane, competent economists in the US.
http://www.larouchepac.com/hbpa
September 22nd, 2008 at 8:37 am
When you consider that 95% of Americans are waiting for the TV to guide them through this mess, there’s no telling where this is going.
The game is over.
September 22nd, 2008 at 9:40 am
grab your bow and your stave and head for the forrest
September 22nd, 2008 at 10:10 am
@17 steve brown
That kind of market: fish, chips, labor. Labor ?! It depends on who does the hiring ! Who is that supposed to be, then: the workers in worker ruled companies (only with an exception for startups, to stimulate company startups). My kind of market has the usual things traded, but: capital investment is non-profit (that makes the system officially “socialist”), no trade in natural resources (they ought to be distributed with a right to lend out for money), and with rules that make businesses become worker ruled after starter leaves. Its all worked out in my 239 “socialist” constitution at http://www.jhwh.be/law
What you should get is: all the good things of a market system, minus all the bad things from capitalism. The marxists always claimed to be scientific. That means that marxism can be proven wrong, which is what I have done (quite a long proof though). Read my book so we can get started with the revolution. The Commune of Paris was the warm up, the Communist revolution was training, now its time for the real thing that will last. 3 strikes out for capitalism, how about it ?
September 22nd, 2008 at 2:26 pm
Fu*K ‘EM…let them file bankruptcy and go to court…loose their assets to cover their own debt…just like us average American taxpaying citizens would have to…or let Congress dig into their own stock portfolios to help them out, if they want to…the damn “no regulation, free market and trade” assholes did this!..every one, but the taxpayers has profitted, we can’t even get health care cuz it would cost to much…(as much as a TRILLION dollars, I wonder?)…so go take a flyin’ leap at the moon…
September 22nd, 2008 at 5:20 pm
to say the current “crises” is caused by the failure of governmental oversight is the height of naiveté and a thorough lack of economic understanding.
there is but ONE and only one cause for these problems – alan greenspan and his outlandish and unending issuance of excess currency. since 1980 the us money supply has increased 700 PERCENT. he was responsible for 95+% of that increase.
without the slosh of excess cash, the banks, homeowners, governments and businesses in general would not have had the wherewithall to make suspect investments. and these include wars of choice, mortgage backed securities, government bonds, dotcom companies, houses, cars, etc etc etc. none of these items would have experienced an “increase” in value without the excess cash.
all of these ill advised investments relate back to ONE MAN – alan greenspan.