OpEdNews

Original Content at http://www.opednews.com/articles/The-Great...080715-847.html

July 15, 2008

The Great Depression of 2008

By Marc McDonald

By MARC McDONALD

Until last week, most economists were divided on whether the U.S. was in a recession or not. Now, with the ailing mortgage agencies Fannie Mae and Freddie Mac on the ropes, it's clear that what's unfolding is far worse than any recession.

As Britain's normally staid The Telegraph newspaper notes, we could be on the verge of a new Great Depression. That might seem far-fetched until you consider that last month, the Dow suffered its worst June since 1930.

But The Telegraph is hardly alone in using such apocalyptic language these days. The "D" word is starting to be mentioned more and more in the business media, as well as by economic commentators. As David Bullock, managing director of investment fund Advent Capital Management, put it in a comment to The New York Times on Tuesday, "We are closer to the Depression scenario than not."

Yes, a real Depression, complete with tent cities now springing up in what once were prosperous suburbs.

This doom-and-gloom language in describing the U.S. economy first began to pick up steam after investment bank Bear Stearns had to be bailed out by the government in May. In describing the bailout, the Associated Press said that Bear Stearns was "On the verge of a collapse that could have shaken the very foundations of the U.S. financial system."

The current crisis with Fannie Mae and Freddie Mac is infinitely larger than Bear Stearns. The two companies either hold or guarantee a staggering $5.3 trillion worth of mortgages. Indeed, the investment magazine MoneyWeek has noted that the crisis is big enough to doom the dollar.

As MoneyWeek notes:

Fannie Mae and Freddie Mac might have been deemed too big to fail---but who's big enough to bail out the US? When investors start seriously asking themselves that question, expect the dollar to plunge.

Make no mistake, a catastrophic U.S. economic collapse is on the way. Such is the inevitable fate of any Ponzi scheme economy that has been running on nothing more than smoke and mirrors (and oceans of foreign capital) now for many years.

Of course, those who are poor or working class know first-hand that the U.S. economy has been in increasingly serious trouble since around 1980. Wages have been steadily declining for everyone but the very rich. And working class people now toil more hours for less pay than their counterparts in any other First World nation. (They have to, as a 40-hour workweek no longer is enough to put groceries on the table).

But as long as America had a tiny elite of prosperous super wealthy, we could always point to them and try to convince ourselves that our economy couldn't be all bad. After all, we would note, there are some people out there making a fortune. All it takes is hard work and ambition, right?

Today, with the stock market in the toilet, and the Fed having to step in to bail out the financial sector, it should be clear to anyone that the U.S. economy is in crisis.

If the U.S. economy actually produced anything of value, this would be nothing more than just another typical downturn in the economic cycle.

The problem is, the U.S. economy no longer produces anything of value. Our economic activity basically consists of importing trillions of dollars from central banks in East Asia---which we then use to prop up our Ponzi scheme economy. The ocean of foreign capital that flows into our nation daily is used to pay for the shopping habits of U.S. consumers.

In fact, in recent years, the Great American Consumer has been hailed by U.S. economists as the "locomotive" of the world economy. There was only one problem: U.S. consumers had zero savings and were depending on foreign capital to finance their shopping binges.

Now, with the stock market crisis and the ongoing housing mortgage crisis, nobody is in much of a mood to do any spending these days. And with the dollar rapidly declining, it's only a matter of time before the East Asian central banks start to unload their depreciating greenbacks (which will accelerate the dollar's fall even further in a vicious cycle).

The frightening thing is that East Asian central banks haven't even begun seriously dumping their dollars and yet the dollar is already plunging.

And the dollar has already lost an astonishing 40 percent against an index of U.S. trading partners' currencies over the past seven years.

The key numbers which measure the current U.S. economic crisis are so far off the chart that it is difficult to even fathom them. As economics writer Eamonn Fingleton has noted, the U.S. current account deficit (the widest and most meaningful measure of our trade position) now represents an astounding 6.5 percent of our gross domestic product.

As Fingleton notes, only one other major nation has ever exceeded this figure: Italy in 1924. That was just before Benito Mussolini seized dictatorial power.



Authors Website: http://www.beggarscanbechoosers.com

Authors Bio: The creator of the progressive site, BeggarsCanBeChoosers.com, Marc McDonald is an award-winning journalist who worked for 15 years for several Texas newspapers, including the Fort Worth Star-Telegram, before he quit his day job and set up shop in cyberspace in 1995. McDonald's articles have appeared in a number of popular progressive Web sites, including OpEdNews.com, BuzzFlash.com, Crooks and Liars, Salon.com, Progressive Daily Beacon, The Neil Rogers Show and The Raw Story. McDonald's Web articles have also been featured and reviewed by various national and international media, including CNN Headline News, the BBC, the Washington Post, USA Today and many more.

Back

European recession looms as Spain crumbles
US faces global funding crisis, warns Merrill Lynch
Analysts say more U.S. banks will fail
Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
Bernanke Forecasts Foiled by Fannie-Freddie Rescue
Meredith Whitney Cuts Wachovia on `Bleak' Prospects
Global stocks close dismal half, outlook grim
Government as the Big Lender
The Fannie and Freddie Fallout
Fannie, Freddie and You
The $5 trillion mess
S.E.C. Warns Wall Street: Stop Spreading the False Rumors
Fannie Plan a `Disaster' to Rogers; Goldman Says Sell
Monetarists warn of crunch across Atlantic economies
Banking regulators close IndyMac
U.S. Considers Takeover of Two Mortgage Giants
Loan-Agency Woes Swell From a Trickle to a Torrent
Slide in house prices is the worst since the Great Depression
Insurance Dilemma Adds to Distress
Foreclosures Rose 53% in June, Bank Seizures Triple
Granddad, Tell How Capitalism Committed Suicide
The Fannie and Freddie doomsday scenario
Mortgage Fears Depress Shares at Two Agencies
Dimon: 'Things Could Actually Get Worse'

The Next Great Deflation? Phill Gramm got it right, says William Greider, or rather half-right. We don’t have an entire nation of whiners, but we do have a very vocal group of them. And they get what they want. To wit, our money.

It is Wall Street — the financial titans and big-money bankers, the most important investors and worldwide creditors who are scared witless by events. These folks are in full-flight panic and screaming for mercy from Washington. Their cries were answered by the massive federal bailout of Fannie Mae and Freddy Mac, the endangered mortgage companies. When the monied interests whined, they made themselves heard by dumping the stocks of these two quasi-public private corporations, threatening to collapse the two financial firms like the investor “run” that wiped out Bear Stearns in March. The real distress of the banks and brokerages and major investors is that they cannot unload the rotten mortgage securities packaged by Fannie Mae and banks sold worldwide. Wall Street’s preferred solution: dump the bad paper on the rest of us, the unwitting American taxpayers.

Greider is the go-to guy on the social impact of economic events, and particularly on the Fed. His magnificent book Secrets of the Temple: How the Federal Reserve Runs the Country is typically accurate and detailed, yet oriented to the big picture and philosophically consistent. He knows what he’s going for, he doesn’t lose track and wander about, and he’s solid on the details along the way.

Though by no means without hope, Greider doesn’t seem to be optimistic about the near term for the American economy. A good deal of the problem comes from the coöperative relationship between the Democrats and Republicans, leaving no one to advocate for the people against Wall Street.

We are witnessing a momentous event — the great deflation of Wall Street — and it is far from over. The crash of IndyMac is just the beginning. More banks will fail, so will many more debtors. The crisis has the potential to transform American politics because, first it destroys a generation of ideological bromides about free markets, and, second, because it makes visible the ugly power realities of our deformed democracy. Democrats and Republicans are bipartisan in this crisis because they have colluded all along over thirty years in creating the unregulated financial system and mammoth mega-banks that produced the phony valuations and deceitful assurances. The federal government protects the most powerful interests from the consequences of their plundering. It prescribes “market justice” for everyone else.

Deflation is a word that doesn’t get used in conversation very often, so it can sound abstract. But it’s not. Discussing the Fed’s attempts to calm the panic, Greider says:




…Read on

Status Report on the Collapse of the U.S. Economy- by Richard C. Cook - 2008-07-16

The Financial Tsunami: The Next Big Wave is Breaking Fannie Mae, Freddie Mac and US Mortgage Debt- by F. William Engdahl - 2008-07-15

• How Bad Is It? Some Say Crisis Worst Since Great Depression- Tech Ticker

The Global Run on Washington - Editorial, Wall Street Journal

Banking Crisis Not Over, More Writedowns and Bank Failures Despite Short-covering Rallies / Companies / Credit Crisis 2008
By: Hans_Wagner

Are the financial woes of the banks over? To beat the market by investing in the stock market, you should have a good understanding of the factors that are driving the trends in the financial sector. For example, are we close to the end of the loan write-offs? If you are learning to invest, it is important to have well ground perspective on state of the financial sector before making any long-term commitments. Expect the financial woes of the banks to continue and be careful when the market make volatile moves in either direction.

Read full article...

US Dollar Final Decent - Dangers 2008-2009 Part2 / Currencies / US Dollar
By: Christopher_Laird

Part 2 talks about the world post the USD centric world economy. It looks out 1 to 3 years ahead. Part 1 talked about the immediate dangers to the world from a Middle East war, food and energy shortages, and inflation. It looked into late 08 and 09.This part talks about what would happen should the USD begin a final decent to far lower values.

We are now a full year into the credit implosion that started with the collapse of two Bear Stearns hedge funds in Summer of 07. So many dimensions of the world economy have changed dramatically for the worse since that pivotal event…

Read full article...

Fear on Wall Street– The Real Deal / Stock-Markets / Credit Crisis 2008
By: Dudley_Baker

You may recall our previous article in August 2007, “ Fear in the Streets – A Dress Rehearsal ”.

Well it looks like now the fat lady has not only warmed up but is singing and hitting that high C. This time the fear is real with IndyMac Bank in California disappearing, and Freddie Mac and Fannie Mae under a great deal of stress. Yes, more government bailouts which will cost billions and even more reason for a U.S. Dollar collapse. So, the credit and liquidity crisis continues, the economy slows, oil remains high and inflation is rising in the world setting the stage for much higher prices for gold and silver in the coming months and years.

Read full article... Read full article...

Stock Market Trends for 2008

US Banking System Teetering on the Brink of Collapse

The Battle for America Has Begun- Strategic Forecasts

Rising Risk of a Systemic Financial Meltdown:The 12 Steps to Financial Disaster By Nouriel Roubini

President Bush Has been a Disaster for the US Economy - 16th July 08

Credit Crisis Losses Pass $1.6 Trillion as Credit Contraction Ensures Recession - 12th July 08

US Dollar Final Decent - Dangers 2008-2009 Part2
The Market Oracle, UK -
A 10 year world economic depression, that China in particular cannot tolerate, as the world economy readjusts out of necessity into a totally new form, ...

IT'S BIGGER THAN PAULSON AND BERNANKE / IT'S A BUSH DEPRESSION OpEdNews

Economist Predicts Worst is Just Ahead

Unfolding Financial Meltdown: Sorry, But Just the Facts- by Doug Noland - 2008-07-12
Long-term unemployment in the US climbs 37 percent in one year- by Andre Damon - 2008-07-08
Behind the falsification of US economic data- by Peter Daniels - 2008-06-05

Economic depression in America: Evidence of a withering economy is everywhere- by Mike Whitney - 2008-06-02

US jobless figures: The specter of a new depression- by David Walsh - 2008-04-06

Ben Bernanke Is Boxed In - The Economist
This Economy Has "L-ish" Prospects - Paul Krugman, New York Times
Why Not to Panic on Inflation - Alan Reynolds, New York Post
Paulson's View of the Storm - David Ignatius, Washington Post
Fannie & Freddie: Damned by Faustian Bargain - Eatwell & Persaud, FT

The Financial Crisis Could Shake the Foundations of American Politics

William Greider, TheNation.com

Corporate Accountability and WorkPlace: We are witnessing a momentous event -- the great deflation of Wall Street -- and it is far from over.

As Housing Implodes, U.S. Is at an Economic Tipping Point

Danny Schechter, AlterNet

Instead of having a light at the end of the tunnel, we have another train. Brace yourselves for a wreck.

America is Coming Apart at the Seams
by Joshua Holland, AlterNet

Riding it out to rock bottom
Against a staggering load of liabilities and liabilities masquerading as assets equivalent to a third of the annual United States GDP, Fannie Mae and Freddie Mac have only US$80 billion in capital. The companies may "ride out the storm", but their investors will probably lose everything.

THE BEAR'S LAIR
Financial collapse edges closer
By Martin Hutchinson

The financial crisis in the United States and worldwide entered a new phase this week, as Fannie Mae and Freddie Mac, the two huge US home-loan institutions, began what appears to be a "death spiral" similar to that which claimed Bear Stearns four months ago. Fannie and Freddie are unique institutions and will almost certainly be bailed out by the long-suffering taxpayer. However, for the first time, the specter has been raised of a general financial meltdown, such as the US managed to avoid in 1933 but Sweden succumbed to in 1991.

Sweden's financial meltdown of 1991 involved the government guaranteeing the obligations of the entire Swedish banking system, and recapitalizing the major banks, with the sole major exception of Svenska Handelsbanken. The total cost of the



rescue to Swedish taxpayers was around US$10 billion, equivalent to about $1 trillion in the context of today's US economy. The causes of the crisis would be familiar to most Americans today: misuse of off-balance sheet securitization vehicles to invest excessively in real estate and mortgage lending.
It is thus not impossible for the entire US banking system to implode. It didn't happen in 1933 (though about a quarter of US banks failed) because US banks in the 1920s had been relatively conservative in their lending, with many banks requiring a 50% down payment for home mortgage loans, for example. Stock margin lending got way out of control in 1928-29, but relatively few banks were involved significantly in that.

The main problem in 1932-33 was quite simply liquidity; the Fed failed to supply adequate reserves to the banking system, so crises of confidence in individual banks led to panic withdrawals of deposits that caused the banks themselves to fail.

This time around, the problem is the opposite. Whereas the Fed had been appropriately cautious in the late 1920s, so only in the area of stock margin lending did the banking system get out of control, this time around the Fed has been hopelessly profligate in monetary creation for over a decade. The initial result of this profligacy, the tech bubble of 1999-2000, caused only modest problems in the banking system through telecom losses. The more recent profligacy and the housing bubble it caused have had much more serious consequences, mirroring those in Sweden leading up to 1991. The additional loosening since September has distorted the financial system further, producing a commodity price bubble that itself seems likely to have substantial further adverse consequences.

Fannie and Freddie are probably toast, and about time too. Federal Reserve Board chairman Ben Bernanke's statement on Friday that the two companies can discount paper with the Fed may prolong the inevitable, but also increases its likely huge cost to taxpayers.

There can be no economic justification for the government guaranteeing the great majority of the nation's home mortgages, and the spurious "government-sponsored enterprise" structure of Fannie and Freddie merely hid the likely consequences of their default. Their senior employees have been paid as if they were counterparts of Wall Street high-flyers for performing a function that was economically entirely unnecessary, and they have survived for more than 50 years simply through their ability to offer lucrative consulting contracts to ex-congressmen and other politically well-connected people.

It is thus necessary that any "rescue" for Fannie and Freddie be a euthanasia not a lifeline. They have extracted their rents from the market for too long and have encouraged the growth of a securitized mortgage market that has proved entirely unsound because of its perverse incentives. Simply providing them with $100 billion or so of extra capital at taxpayer expense, probably structured as some economically unjustified form of subordinated debt so that the shareholders are left undiluted and allowing them to continue operating, doesn't solve the problem; it exacerbates it.
The simplest from of euthanasia for Fannie and Freddie would be a takeover by the Office of Federal Housing Oversight (OFHEO), their regulator, on the grounds that they were no longer able to operate independently. In Freddie's case that could be carried out at any time, since the company has failed to follow through on a promise to OFHEO to raise $5.5 billion in new capital - which at Thursday's closing share price would dilute existing shareholders by 55%. In any case, further declines in their share prices and withdrawal of funding by the bond markets are likely to cause a sufficient crisis in the next few weeks to make such a takeover inevitable if a rescue is not organized (which it shouldn't be.)

Following a takeover, Fannie and Freddie would need to continue performing their current functions of guaranteeing home mortgages, as without such guarantees home mortgages are currently impossible to obtain. However, changes must be made to recognize the revised nature of the business.

Since the new guarantees would be direct government obligations (OFHEO being an arm of the government) rather than simply implied obligations, the fees for obtaining them should be jerked sharply upwards, perhaps to 1.5% per annum on the outstanding amount of the mortgage. That would allow mortgage finance to remain available at a cost that is still reasonable in current markets (Fannie Mae paper already pays a 0.75% premium over the government for its borrowings), but as markets recovered it would make Fannie/Freddie guaranteed mortgages highly uncompetitive against direct home loans, by far the healthiest way for housing to be financed.

Together with the salary reductions outlined below, it would also begin to reimburse the unfortunate taxpayer for the gigantic costs of this non-rescue operation.

Treasury Secretary Hank Paulson has called for "covered bonds" similar to the German pfandbriefe to be used to finance housing. Since pfandbriefe, bonds issued by German banks to finance housing, remain on German bank balance sheets and retain the bank guarantee, allowing the banks only to escape the funding risk of lending for 30 years at a fixed rate, they avoid the moral hazards of the securitization markets, and are thus an attractive alternative.

To encourage their use, and to reduce the capital cost to banks of holding mortgages on balance sheet, the Basel 1 bank regulations, currently being phased out, should be retained; they allowed mortgages to carry only a 4% capital charge as against 8% for regular loans. By this and other means, the private banking sector would be encouraged to make sound home loans directly, without the unnecessary Fannie/Freddie guarantees.

The objective would be over a five-10 year period for Fannie and Freddie to become insignificant participants in the mortgage market, after which they could be closed altogether. Meanwhile, costs in Fannie and Freddie could be cut drastically, particularly on the staffing side.

Since Fannie and Freddie staff would now be government employees, they should be paid on the GS (government) payscale, with the chief executive, as a GS-15, receiving appropriate remuneration between $115,317 and $149,000, according to his years of service. Even if the chief executive officer was able to argue himself onto the SES (senior executive service) pay scale - after all, he has excellent congressional contacts - he would be limited to about $205,000 in the Washington area.

Naturally, many Fannie/Freddie employees would be outraged at this cut in their living standards and would attempt to find alternative better-paid employment; I venture to suggest that few would succeed in doing so. That way, redundancy payments would be avoided while salary costs were slashed.

There would be a devastating effect on the Northern Virginia housing market, where many senior Fannie/Freddie employees have overextended themselves with giant home mortgages for vulgar McMansions, but that problem too is probably survivable. More important, the now-disgruntled employees would perform their job poorly, making applying for a Fannie/Freddie guarantee a bureaucratic and uncertain process, similar to negotiating with the Inland Revenue Service. That too should hasten the disappearance of the firms from the housing market.

Fannie and Freddie do not represent the entire US finance sector, far from it. Nevertheless their insolvency would further erode confidence in the rest of the sector, very likely leading to a cascade of death spirals among other institutions. After all, the best-run large non-global US bank, Wachovia, has itself got in trouble by its insanely foolish acquisition of the California mortgage lender Golden West Financial at the peak of the market in 2006, while Bank of America, the largest retail-oriented US bank, voluntarily took on more of the mess by its purchase of the diseased and probably criminal Countrywide Financial as recently as last January.

Citigroup is in deep trouble in a number of areas, particularly relating to its over-enthusiasm for the discredited technique of securitization, while JP Morgan Chase chief executive Jamie Dimon wrecked his credibility in May by announcing that the financial crisis was "mostly over" - presumably wishful thinking in the light of his huge holdings of dodgy Bear Stearns paper.

Only Goldman Sachs appears serenely above the fray, but don't forget that at May this year its "Level 3" assets were $78 billion, more than twice its capital. Level 3 assets, you may remember, are those for which there is no market, so can be valued only by the internal mathematical models of the institution concerned. Since this arcane highly illiquid paper is the most likely to suffer catastrophic erosion of "value" in a downturn, Goldman Sachs, like Jamie Dimon, must be keeping fingers crossed that somehow this nightmare must end soon.

It mustn't; from past experience of such follies it probably has at least another year to go. Thus a total collapse of the US financial system, while not inevitable, is a contingency which should now be planned for.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com.

(Republished with permission from PrudentBear.com. Copyright 2005-07 David W Tice & Associates.)

Were Blacks systematically targeted to take the brunt of the Housing melt down? What thoughts do you have about this?

The Next Great Deflation? Phill Gramm got it right, says William Greider, or rather half-right. We don’t have an entire nation of whiners, but we do have a very vocal group of them. And they get what they want. To wit, our money.

It is Wall Street — the financial titans and big-money bankers, the most important investors and worldwide creditors who are scared witless by events. These folks are in full-flight panic and screaming for mercy from Washington. Their cries were answered by the massive federal bailout of Fannie Mae and Freddy Mac, the endangered mortgage companies. When the monied interests whined, they made themselves heard by dumping the stocks of these two quasi-public private corporations, threatening to collapse the two financial firms like the investor “run” that wiped out Bear Stearns in March. The real distress of the banks and brokerages and major investors is that they cannot unload the rotten mortgage securities packaged by Fannie Mae and banks sold worldwide. Wall Street’s preferred solution: dump the bad paper on the rest of us, the unwitting American taxpayers.

Greider is the go-to guy on the social impact of economic events, and particularly on the Fed. His magnificent book Secrets of the Temple: How the Federal Reserve Runs the Country is typically accurate and detailed, yet oriented to the big picture and philosophically consistent. He knows what he’s going for, he doesn’t lose track and wander about, and he’s solid on the details along the way.

Though by no means without hope, Greider doesn’t seem to be optimistic about the near term for the American economy. A good deal of the problem comes from the coöperative relationship between the Democrats and Republicans, leaving no one to advocate for the people against Wall Street.

We are witnessing a momentous event — the great deflation of Wall Street — and it is far from over. The crash of IndyMac is just the beginning. More banks will fail, so will many more debtors. The crisis has the potential to transform American politics because, first it destroys a generation of ideological bromides about free markets, and, second, because it makes visible the ugly power realities of our deformed democracy. Democrats and Republicans are bipartisan in this crisis because they have colluded all along over thirty years in creating the unregulated financial system and mammoth mega-banks that produced the phony valuations and deceitful assurances. The federal government protects the most powerful interests from the consequences of their plundering. It prescribes “market justice” for everyone else.

Deflation is a word that doesn’t get used in conversation very often, so it can sound abstract. But it’s not. Discussing the Fed’s attempts to calm the panic, Greider says:

Bernanke knows the history of the last great deflation in the 1930s — better known as the Great Depression — and so he is determined to intervene swiftly, as the Federal Reserve failed to do in that earlier crisis.

So there’s pain on the way, and the question is how much of it can be off-loaded from the hedge-fund managers and real-estate speculators who caused the problem, and onto the folks who compare prices before choosing a gas station.

Americans should forget about whining; it’s too late for that. People need to get angry — really, really angry — and take it out on both parties.

Mike Whitney: The Second Great Depression"The Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtually all of the industrialized world. ...
www.counterpunch.org/whitney02212007.html

Paul Craig Roberts: Nuking the Economy
Over the past five years the US economy experienced a net job loss in goods producing ... Is death in battle Bush's solution to the job depression? ...
www.counterpunch.org/roberts02112006.html

Gabriel Kolko: Bankers Fear World Economic Meltdown
The Double Standard on Depression. Christopher Reed ..... There has been a profound and fundamental change in the world economy over the past decade. ...
www.counterpunch.org/kolko07262006.html

Yves Engler: The Economics of Health Care in America
This is good for segments of the economy. Pharmaceutical companies are making big ... Isn't depression damaging people's lives and aren't African children ...
www.counterpunch.org/engler05292003.html

Mike Whitney: The Withering Economy
The evidence of a withering economy is everywhere. .... "America's house prices are falling even faster than during the Great Depression. ...
www.counterpunch.org/whitney06032008.html

Dan La Botz: The Economic Crisis, Labor and the Left
And, if this is the kind of economic crisis which many fear, a crisis along the lines of the Great Depression, then we would be talking about an ...
www.counterpunch.org/labotz03182008.html

Mike Whitney: Henry Paulsen's Wild Ride on the Economic Hindenberg
California is in a housing depression. Is a 30-day grace period really the best that ... That has a powerful impact on the economy...The losses are throwing ...
www.counterpunch.org/whitney02152008.html

Dan La Botz: Confronting the Economic Crisis
The Crash, the Depression, Roosevelt. Many think of Roosevelt as a man who took office planning to help workers and to create a fairer economic system. ...
www.counterpunch.org/labotz04092008.html

Robert Freeman: Bush's Tax Cuts: a Form of National Insanity
In 1982, the first full year after the tax cuts were enacted, the economy actually shrank 2.2%, the worst performance since the Great Depression. ...
www.counterpunch.org/freeman05302003.htmlhttp://209.85.215.104/search?q=cache:WaxvF...;cd=9&gl=us

Mike Whitney: Want to Save the Economy?Paulson and Co. would rather see the economy perish in a deflationary ... "real" economy, but large enough to send the world into a agonizing depression for ...
www.counterpunch.org/whitney04122008.html

Mike Whitney: Preparing for the Economic Typhoon
The eroding value of the dollar is just one of the economic crises facing the ... will face the greatest economic challenge since the Great Depression. ...
www.counterpunch.org/whitney04252006.html

'Massive potential' for global 'financial meltdown': Confidence falls in U.S. authorities' ability to ease financial panic

Government Puts Gun to Capitalism's Head
- Caroline Baum, Bloomberg
How Bad Will It Get? 7 Questions for William Poole
- Foreign Policy
America, Too Big to Fail . . . Probably
- Nicole Gelinas, City Journal
Ben Bernanke Is Boxed In
- The Economist

There Are Two Ways of Studying Economic Theory
Daily Reckoning - Australian Edition - Melbourne,Victoria,Australia
In twentieth century history the war debts of the first war played their malign part in the European depression of the 1920s and eventually in the Great ...

Uncomfortable Answers to Questions on the Economy
New York Times, United States -
By PETER S. GOODMAN You have heard that Fannie and Freddie, their gentle names notwithstanding, may cripple the financial system without a large infusion of ...

The debate is over: recession is already here
guardian.co.uk, UK - Jul 13, 2008
Actually, not quite all you need to know. It may be worse than that - we may already be in one. The turn in the economy, although it has been lurking out ...

Snuff has lots of good articles in this thread. I've been hearing more from William Greider the past month and last night he was a guest on Bill Moyer. I'd somehow totally forgotten that all the checks and balances on banking had been removed by Congress in 1980. The word USERY is back in my vocabulary. I'm sending it to a few of my friend, because I think he got it right down to the nutshell in a way that most people can understand.

http://www.pbs.org/moyers/journal/07182008/transcript4.html
:: my bolds ::

BILL MOYERS: With me now is one of America's leading chroniclers of money, power, and politics, who says what's happening is the disgrace of Wall Street, its excesses paid for by people like those in Cleveland and millions like them around the country.

William Greider has spent forty years examining how powerful institutions affect ordinary people. Once a top editor of THE WASHINGTON POST, a columnist for ROLLING STONE, and now National Affairs Correspondent for THE NATION, he has produced a series of best-selling books: SECRETS OF THE TEMPLE: HOW THE FEDERAL RESERVE RUNS THE COUNTRY, ONE WORLD, READY OR NOT: THE MANIC LOGIC OF GLOBAL CAPITALISM, WHO WILL TELL THE PEOPLE: THE BETRAYAL OF AMERICAN DEMOCRACY, and this one, THE SOUL OF CAPITALISM. He's working on a new book with the title: COME HOME, AMERICA.

Good to see you in person.

WILLIAM GREIDER: Thanks Bill.

BILL MOYERS: What were you thinking as you saw that report from Cleveland?

WILLIAM GREIDER: Made me angry all over again, even though I know the story. And then I thought, "This is usury." This is a living example of what the Bible prohibited, which is the sin of usury. Most Americans have never heard of it probably.

BILL MOYERS: Usury?

WILLIAM GREIDER: Usury, to be clear about it, is rich people taking advantage of poor people by lending them money on terms that are sure to make them fail. All three of the great religions, Judaism, Christianity, Islam, had a moral prohibition against usury because they recognized that society can't function like that. People of great wealth and their institutions like banks naturally have the power to overwhelm people of lesser means. And you can't allow that in a decent society. It won't survive.

BILL MOYERS: Where were the gatekeepers? Where were the watchdogs? Why did it take the Fed so long to put an end to-

WILLIAM GREIDER: Well-

BILL MOYERS: -predatory practices?

WILLIAM GREIDER: To make the story overly crude, Congress repealed the law against usury. It was done in 1980 by a Democratic Congress, Democratic President. And, of course, the Republicans all piled on and voted for it. And that was the first stroke, only the first of many, in which they stripped away the regulatory laws from the financial system and from banking.

And that allowed the free market modernized gimmicks of one kind or another, all these things we're now reading about, to flourish. And that's where we are. I mean, the gatekeepers said to the banking industry and to the financial industry, "We don't think federal control or regulation is good for you, so we're, therefore, liberating you to do your own thing."

BILL MOYERS: So why did they do that in 1980? I mean, there was, of course, the rise of the backlash to regulation from 40 years of Democratic rule-

WILLIAM GREIDER: The-

BILL MOYERS: -there was the rise, the arrival of the conservatives with their free market ideology.

WILLIAM GREIDER: Right, right.

BILL MOYERS: What was the issue?

WILLIAM GREIDER: Well, the driver then, and it was a powerful driver, was inflation. And through the '70s, for lots of reasons inflation, which tends to undermine the value of financial wealth and money, was out of control. The Federal Reserve had lost control of it, not entirely its fault. But that set up a political climate that said the government is not working and that wasn't wrong at the moment. Let's get the government out of the way.

And that was very appealing as framed by Ronald Reagan and other conservatives. But I think it's fair to say most Democrats yielded to it against whatever their original instincts were because of political necessity. And then the third dimension, maybe the most important, was that you had this very powerful industrial sector, that is banking and finance, that wanted and had pushed for years to get out from under the regulatory controls, limits on interest rates, the law against usury, the merger of commercial banks with investment banks, which had been prohibited in the New Deal because it caused the disaster of 1929.

I can go on and on. But you see the pattern. And the point I keep trying to make to people is that history learned the hard way that you do need prudential controls on industries like banking 'cause they're so central to everybody's well being.

BILL MOYERS: Left to their own devices, they go too far?

WILLIAM GREIDER: Yeah. They will use their power to their own advantage. And that's what we're witnessing now, a kind of recklessness that was set free by political retreat and people, some of them were sincere. Some of them were just on the make. But here's our great American tension. We want an economy that's dynamic, that's growing, puts more jobs out there for people to get, rising wages, all that good stuff. And at the same time, we want an economy that's stable. And that means no inflation, steady as you go, so forth and so on.

And this is the, you know, this is the mortal condition. You're not going to escape that tension. Government is a powerful intervener that tries, ought to try, to balance those two desires. For many years, the Federal Reserve served that role and tried to strike a balance.

BILL MOYERS: And then what happened?

WILLIAM GREIDER: During the last generation, 25, 30 years ago, the Federal Reserve, the central bank that regulates money and credit, tipped hard in one direction.

BILL MOYERS: Toward?

WILLIAM GREIDER: Crudely put, toward capital, in favor of capital and against labor. It not only hardened the value of money by suppressing inflation, but it participated very aggressively in the role of stripping away regulatory breaks on financial system and banks. Declined to enforce many of its own regulatory powers that exist in law. And meanwhile, sort of kept a foot on the brake about economic growth and full employment and all those good things that might help working people by encouraging rising wages.

BILL MOYERS: So at the same time the Fed was helping to keep wages down in order to keep inflation from escalating, its policies were, nonetheless, helping banks and investors to inflate the cost of their-

WILLIAM GREIDER: Right.

BILL MOYERS: -the value of their assets beyond reality-

WILLIAM GREIDER: That's it.

BILL MOYERS: -right?

WILLIAM GREIDER: That's it. At one point, writing in "The Nation," I somewhat playfully and wickedly referred to Alan Greenspan, the Federal Reserve chairman, as the "one-eyed chairman." He can see inflation and wages and goods and services, the prices that consumer prices, even when it doesn't exist. And he'll put his foot down on the brake. But he doesn't see the inflation in the financial system at all.

And the inflation in the financial system is the value, the prices, of financial assets, most obviously stock, rose fantastically over 20, 25 years, two, three times the growth in the real underlying economy. Something's wrong there, right? How do these financial assets, which supposedly reflect the economy, suddenly become worth three times more?

BILL MOYERS: Yes. How did they?

WILLIAM GREIDER: Well, now we're back in the game, aren't we? With deregulation, with the help of the Fed, and with the success of the Super Bull market, everybody's animal spirits in the financial system became more animal. And they and they went for it, and they said, "If you'll get this rule out of the way or you let us make this kind of weird little gimmicky paper innovation, we'll do even better."

BILL MOYERS: Yeah, you-

WILLIAM GREIDER: And you had this force rising up, driving things higher in the stock market while, in many sectors of the economy, if not everywhere, people are saying, "Gee, this doesn't feel that good to us." And particularly working people.

BILL MOYERS: You've written about a fantasy, an illusion that led to the housing bubble. You wrote about a fantasy that was sold, an illusion that led to the housing bubble. Whose interest was it to sell a fantasy?

WILLIAM GREIDER: Well, the merchants of financial paper, to put it bluntly. I mean, the illusion was that you could dismantle or disregard fairly old-time traditional rules of proper banking and stewardship and that that would definitely allow prices, profits, everything to go still higher. But that they could somehow dissolve the risk in that for the society, not just for the society but for themselves.

One example of that was what you heard about in the sub-prime mortgage thing. Who is holding this mortgage that's been lent to these people who we know are going to fail 'cause their incomes just aren't sufficient? Well, it's kind of hard to say because this mortgage is designed as a securitized package of 1,000 mortgages. And you sell it in the financial market to investors all over the world.

And then they sell it to somebody else, and it moves round literally. So what you've done with this innovation is you've distanced the lender from the borrower. Each party, the guy who sold the mortgage, the bank, then the next, the guy who buys the bond, takes his returns upfront, sells it on, and you stripped away the responsibility for that lending. And that's a pretty good microcosm of what happened generally in the financial system.

BILL MOYERS: How is it that these banks wind up holding the rotten mortgage securities that of Fannie Mae and Freddie Mac?

WILLIAM GREIDER: There is a level of fraud here which shouldn't be neglected that, I mean, people lied to their customers' banks-

BILL MOYERS: -mortgage-

WILLIAM GREIDER: -banks, mortgage houses, lied to the people they were selling these bonds to. But as we heard, they also lied to the people who were borrowing the money. I mean, this is fraud with the conflicts of interest. There's an investigation underway now with a number of the biggest banks stuck with all this bad paper, this rotten mortgage securities. Who can they sell them to?

The otherwise savvy investors around the world have gotten burned already, so they won't touch them. I know. Let's sell them to our customers. And so they're literally taking the bonds out of their own portfolio as a bank and selling them to the banks' closed customers. Now, that's going to stop, too, because now everybody's onto the secrets.

WILLIAM GREIDER: I think you can get lost in the mechanics of how all this works. And it's pretty sometimes pretty dizzying stuff. I think the bigger message is that what some of our old folks knew turns out still to be true.

BILL MOYERS: Which is?

WILLIAM GREIDER: Which is the process of lending, borrowing, investing, all of those things, require a personal hands-on knowledge of what you're doing but also a level of integrity that, put it bluntly, does not exist at this time in our financial system.

BILL MOYERS: You see a direct connection between what happened to those people in Cleveland and across the country and the cozy relationship that you've often written about between Wall Street and Washington?

WILLIAM GREIDER: Yeah. Yeah. The point I want to make, though, is that this is deeper than politician rolling over for his campaign contributor, the guys who finance the Democratic Party or the Republican Party. They do that, too. But they were sold a fantasy, an illusion, which sounded wonderful about how markets make better judgments than government and the public. And that liberating finance and business from prudential rules that society imposes upon them will produce a bigger, better economy and better returns for everyone.

All those fantasies have been destroyed by these events, I mean, wiped out. And if you think about it, as we go through the hard months ahead, America's going to have to take some pain, right? In one form or another. The government's going to have to probably ask for some sacrifices.

How do they do that when the American people have just seen the government rush in three days, five days or less, to bail out the biggest, most powerful institutions in the country? That is, the financial investment houses and banks and major banks.

BILL MOYERS: In your opinion, the bailout of Freddie Mac and Fannie Mae, good or bad?

WILLIAM GREIDER: I think it's bad. I mean, I think the way they're doing it is terrible. It's not done in the public interest. The bailout is necessary. They are failing at the bailout. And I believe they're failing because they haven't gone far enough.

They need to start thinking of, okay, how do we save the folks? That is, the broad interests of the American people as a nation, as workers, as family, blah, blah, blah. And the way to deal with Fannie Mae and Freddie Mac and some others like it is to nationalize them. Make them agencies of the federal government. That's what they were originally. And they performed for many years a really valuable service to housing markets.

They sort of re-circulated the capital and the mortgages and so forth. Make them a sub-agency of government. Let the shareholders of Fannie Mae and the rest eat their losses. They were playing risk taker shareholders. Let them suffer the consequences of their wrong bets. And go back to a more normal configuration.

Not a casino. No private shareholders. Look, the bailout of Fannie Mae that they're proposing says, somewhat generously I think, we'll put $300 billion on the table to buy the shares of stockholders in Fannie Mae and Freddie Mac. And just us saying that should give them a lot of confidence. Well, yeah, wouldn't it if you've just had the federal government promise to buy your shares if you don't want to hold them anymore.

BILL MOYERS: Maybe that's why all the foreign investors rushed in yesterday to buy Fannie Mae and Freddie Mac-

WILLIAM GREIDER: It might have some connection, yes.

BILL MOYERS: -if they know the taxpayers are going to put the money in, they've got a pretty good-

WILLIAM GREIDER: They've got what you might call a no-lose proposition. And the other part of that, and this would be simple. You could pass this in three days. Restore the federal law against usury. That won't have too many details to it at first. But it'll be a general statement that the federal government is prohibiting the kind of outrageous predatory practices, which have become general in this country, of not just banks but other financial firms.

BILL MOYERS: Credit card companies and-

WILLIAM GREIDER: Credit card - yeah, it's a long list. We know those abuses.

BILL MOYERS: Put some limits, some boundaries?

WILLIAM GREIDER: Well, eventually you have to draw very precise boundaries, I think, and restore some structure that says, okay, you can get a return of X on credit cards, but you can't get a return of triple X, right? And that kind of regulation. And that's not easy to draw. It takes a while.

But the first law that would just reassure the public, we're against usury. Muslims are against it. Christians are against it. Jews are against it. And we're going to develop a government laws that prohibited and penalized these institutions when they get caught doing it.

BILL MOYERS: Excessive interest, owned loans.

WILLIAM GREIDER: Excessive-

BILL MOYERS: That's what you mean by usury?

WILLIAM GREIDER: That's the narrowest meaning. But the larger meaning is wealthy people, whether they're banks or individuals, ought not to be able to use their power, their wealth to exploit people who don't have wealth, great wealth. That's not too complicated. And I'm not being utopian here. I'm just saying that you can reestablish legal-slash-moral limits on the behavior of finance and their wealthy patrons. And if they don't want to observe those rules then they need not apply for emergency loans at the Federal Reserve or the Treasury Department.

BILL MOYERS: In other words-

WILLIAM GREIDER: You see what I'm getting at? And-

BILL MOYERS: Yeah, in other words, so-

WILLIAM GREIDER: -and this is a-

BILL MOYERS: -if there's a bailout, certain conditions on that bailout.

WILLIAM GREIDER: Absolutely.

BILL MOYERS: Not just a free pass.

WILLIAM GREIDER: And what they've done in the last year, now two or three times and they're going to do more is to say, "Oh, my goodness, the biggest investment bank, houses are in trouble. We don't usually lend directly to them. We only lend to big banks, but they're in trouble, too. Let's lend to both of them. Let's open the windows and pour out the capital, the liquidity, and so forth." And there wasn't a day that where they paused to say, "What are we getting in return? That these guys promise not to fail?" You see what I'm getting at? It's-

BILL MOYERS: I do.

WILLIAM GREIDER: -it's a wildly grotesque transaction where the public guarantees the life of these firms, and there isn't any effort that we know of to say, "And in return, you're going to behave in the following ways for the next ten years or maybe forever. We'll pass a law later that spells that out more clearly, but this is our starting demand." And I suppose they would say, "Well, we don't have time to do that. This is a crisis, blah, blah, blah." I don't buy that. I think that's a way to avoid those questions is not even mention them.

BILL MOYERS: You have been writing for a long time now that America's moving toward a corporate state. If we become one, can we exercise the self-correcting faculty that prevents us from hitting the iceberg out there?

WILLIAM GREIDER: One of the reasons I think politics is going to change fairly dramatically is that the Federal Reserve, accompanied by the Treasury Department and I think will be accompanied by the Congress, has crossed a very dangerous line in their bailout. They have essentially said, "We will put money on the table, taxpayers' money on the table, for any financial institution or business that is too big to fail." That is, if it fails, it'll send dangerous ripples through the economy.

And we've got a list now of maybe 30, 40, depending on how you count them, that we will be there to save you. I regard that as profoundly dangerous for the American Republic because once you cross that line and you have this special club that's privileged, that has benefits from government that nobody else can get, where do you stop it?

I mean, if I were running a big manufacturing company, I would have quickly run out and buy a subsidiary that's a bank or a financial firm that looks like a bank. And I would then try to get myself on that list. Who wouldn't? What's going on right now it's gotten a little attention - the union SEIU is fighting it, is these private equity firms, which are huge money pots of investors that take over and change corporations and come away with huge profits. The private equity firms are trying to buy into the banks and financial firms.

BILL MOYERS: And what would that mean?

WILLIAM GREIDER: That would mean that this private unregulated equity fund would be participating behind the door, so to speak, in the management of our regulated banks. But it would also, in a pinch, if it's big enough, maybe have a tap into that federal guarantee that if you're too big to fail, we'll be there for you.

BILL MOYERS: Even if-

WILLIAM GREIDER: You see what I'm getting at? And-

BILL MOYERS: I do. This morning in the "New York Times" one of the big stories in the business section is the financial industry is organizing to stop Congress from trying to regulate excessive speculation on oil and energy. They don't want this capacity for exploiting-

WILLIAM GREIDER: Well-

BILL MOYERS: -people's needs.

WILLIAM GREIDER: Well, I could lay us alongside that the Securities and Exchange Commission, which, remember in olden days, was supposed to defend us innocent investors against the guys running corporations. And that's why we have all these reports and so forth and so on. They announced this past week that they're going to go after the short sellers in the stock market.

The short sellers are the guys who say these folks at the corporate headquarters are lying to you or the folks at Citigroup are still not telling the truth about their losses and liabilities. So you see what I'm getting at. It's equivalent to saying we don't want anybody bad mouthing us in the middle of this trouble. And we'll try to penalize them if we can. Isn't that contradictory to the public interest?

BILL MOYERS: Have we hit bottom?

WILLIAM GREIDER: I don't think so. But I think the short answer is nobody knows. My sense is, partly because the rottenness, the bad assets and so forth and the inflated housing prices and all the other defaults have so much more to play out - I think they will then feed back, and are already, into real economic consequences for the general life of the economy.

BILL MOYERS: Meaning?

WILLIAM GREIDER: Well, people lose jobs. Unemployment will rise.

BILL MOYERS: Like Cleveland. Yeah-

WILLIAM GREIDER: And like, you know, a perhaps less vicious story because it'll be more gradual than what's happening in those neighborhoods in Cleveland. But then as that happens, the losses feed back into banks because they've got consumer loans, they've got car loans, they've got business loans. And even banks that have been more or less virtuous in their behavior will be impinged by that. So I'm not making some grandiose calamity prediction. I'm just saying we got a lot more pain to take in this society before this works out.

BILL MOYERS: Both parties have put the watchdogs to sleep, right?

WILLIAM GREIDER: A better metaphor, instead of putting them to sleep, would be castration.

WILLIAM GREIDER: I don't know what you want, I mean-

BILL MOYERS: Both parties of complict-

WILLIAM GREIDER: Putting them to sleep is just a metaphor that stops me-

BILL MOYERS: Both parties have been complicit in tipping the balance of power to capital, right?

WILLIAM GREIDER: I'm afraid so. That's right. I mean, if you go back over the last 20, 25 years, it was always portrayed as a cause of conservative Republicans, even right-wing Republicans. And that was, of course, true. But I think a majority of the Democrats were in collusion virtually every step of the way, and sometimes they led the way.

BILL MOYERS: Do you think Washington really knows what's going on? Do you think they really understand what's happening out there in Cleveland and places like that all over the country?

WILLIAM GREIDER: The short answer is, no, I've been in Washington as a citizen and resident for 40 years. And I'm still occasionally shocked by its ignorance of the rest of the country. And some of that is willful, of course. But some of it is just, it's a very nice life in Washington. You get used to certain protective qualities.

We saw that recently with these political players, who got good mortgages. How do they do that? Well, we know how they did it. And in any case, Washington doesn't yet see the depth of the problem.

If you ask me, well, who's figured this out? Who understands, at least in general terms, where we are? The guys in Washington? The politicians and their governing policy advisors? Or the dimwitted public? I would say the public. And I think there's a lot of evidence in that. You know, they keep seeing these polls where the public expresses doubt about this, about-

BILL MOYERS: Eighty-one percent of the people in the most recent polls say we're heading in the wrong direction.

WILLIAM GREIDER: I call that an extreme consensus. Why do the newspapers not celebrate that? They're always looking for consensus politics. Here's the American public, they've got an eighty-- you know, that's extraordinary.

WILLIAM GREIDER: We have an opening in this crisis for, this is really going to sound grandiose. We have an opening in this crisis for a deep transformation in American politics. I don't say it happens this year, next year, or it's going to take a number of years. But we are in the shock of reality. And people get it everywhere and see the blood in the streets. And you tell them how this worked and who did what to whom, and that's a basis for a new politics.

But it requires people - this is the hard part - to get out of their sort of passive resignation to, "Well, we follow the Democrats" or "we follow the Republicans" or "we let this group or that group tell us how to think" and engage among themselves in a much more serious role as citizens. And when, as they do that, they have to be willing to punish the political powers, in smart ways or crude ways, however they can, first, to get a place in the debate. But, secondly, to force the changing values of the system.

And I, this may be wishful, but I think in the next year, two years, five years, you're going to see both political parties floundering. What do we believe about all this stuff? We've told folks this, you know, lovely story for 20, 25 years about the magic of the marketplace. Do we still want to kind of prop that up? That's where they are now. They're still trying to prop up the marketplace vision and make it work again. It's over.

I think events will demonstrate that. So if they're not willing to change then we need to change the politicians. And that's all a bloody process and doesn't happen quickly. But that's why I'm optimistic.

BILL MOYERS: Bill Greider we look forward to your new book, the title of it will be-

WILLIAM GREIDER: "Come Home, America"

BILL MOYERS: And you come back to the Journal.

WILLIAM GREIDER: Thanks.

Wall Street's Great Deflation posted by William Greider on 07/14/2008 @ 12:38pm


Phil Gramm, the senator-banker who until recently advised John McCain's campaign, did get it right about a "nation of whiners," but he misidentified the faint-hearted. It's not the people or even the politicians. It is Wall Street--the financial titans and big-money bankers, the most important investors and worldwide creditors who are scared witless by events. These folks are in full-flight panic and screaming for mercy from Washington, Their cries were answered by the massive federal bailout of Fannie Mae and Freddy Mac, the endangered mortgage companies.

When the monied interests whined, they made themselves heard by dumping the stocks of these two quasi-public private corporations, threatening to collapse the two financial firms like the investor "run" that wiped out Bear Stearns in March. The real distress of the banks and brokerages and major investors is that they cannot unload the rotten mortgage securities packaged by Fannie Mae and banks sold worldwide. Wall Street's preferred solution: dump the bad paper on the rest of us, the unwitting American taxpayers.

The Bush crowd, always so reluctant to support federal aid for mere people, stepped up to the challenge and did as it was told. Treasury Secretary Paulson (ex-Goldman Sachs) and his sidekick, Federal Reserve Chairman Ben Bernanke, announced their bailout plan on Sunday to prevent another disastrous selloff on Monday when markets opened. Like the first-stage rescue of Wall Street's largest investment firms in March, this bold stroke was said to benefit all of us. The whole kingdom of American high finance would tumble down if government failed to act or made the financial guys pay for their own reckless delusions. Instead, dump the losses on the people.

Democrats who imagine they may find some partisan advantage in these events are deeply mistaken. The Democratic party was co-author of the disaster we are experiencing and its leaders fell in line swiftly. House banking chair, Rep. Barney Frank, announced he could have the bailout bill on President Bush's desk next week. No need to confuse citizens by dwelling on the details. Save Wall Street first. Maybe lowbrow citizens won't notice it's their money.

We are witnessing a momentous event--the great deflation of Wall Street--and it is far from over. The crash of IndyMac is just the beginning. More banks will fail, so will many more debtors. The crisis has the potential to transform American politics because, first it destroys a generation of ideological bromides about free markets, and, second, because it makes visible the ugly power realities of our deformed democracy. Democrats and Republicans are bipartisan in this crisis because they have colluded all along over thirty years in creating the unregulated financial system and mammoth mega-banks that produced the phony valuations and deceitful assurances. The federal government protects the most powerful interests from the consequences of their plundering. It prescribes "market justice" for everyone else.

Of course, the federal government has to step up to the crisis, but the crucial question is how government can respond in the broad public interest. Bernanke knows the history of the last great deflation in the 1930s--better known as the Great Depression--and so he is determined to intervene swiftly, as the Federal Reserve failed to do in that earlier crisis. By pumping generous loans and liquidity into the system, the Fed chairman hopes to calm the market fears and reverse the panic. So far, he has failed. I think he will continue to fail because he has not gone far enough.

If Washington wants real results, it has to abandon the wishful posture that is simply helping the private firms get over their fright. The government must instead act decisively to take charge in more convincing ways. That means acknowledging to the general public the depth of the national crisis and the need for more dramatic interventions.

Instead of propping up Fannie Mae or others, the threatened firm should be formally nationalized as a nonprofit federal agency performing valuable services for the housing market. That is the real consequence anyway if the taxpayers have to buy up $300 billion in stock.

The private shareholders "are walking dead men, muerto," Institutional Risk Analytics, a private banking monitor, observed. Make them eat their losses, the sooner the better. The real national concern should be focused on the major creditors who lend to Fannie Mae and other US agencies as well as private financial firms. They include China, Japan and other foreign central banks. Foreign investors hold about 21 percent of the long-term debt paper issued by US government agencies--$376 billion in China, $229 billion in Japan.

It is not in our national interest to burn these nations with heavy losses. On the contrary, we need to sustain their good regard because they can help us recover by bailing out the US economy with more lending. If these foreign creditors turn away and stop their lending now, the US economy is toast and won't soon recover.

Americans should forget about whining; it's too late for that. People need to get angry--really, really angry--and take it out on both parties. What the country needs right now is a few more politicians in Washington with the guts to stand up and tell us the hard truth about out situation. It will be painful to hear. They will be denounced as "whiners." But truth might be our only way out.

• Tough Love for Bankers Robert Scheer : Presidential Election 2008
  
  Our current financial disaster is the real legacy of the Reagan Revolution. So why don't we let the deregulated banking industry sink or swim?
• 
  
  Portrait of a Panic Nicholas von Hoffman : Banks & Banking
  
  America is shaken by images of panicked customers lined up to withdraw money from the failed IndyMac Bank.

Thanks, Snuff. Good article.

• Disowned by the Ownership Society Naomi Klein : George W. Bush
  
  Bush turns out to be the undertaker of the free market's false promises to ordinary Americans.
• Wall Street's Crisis The Editors : U.S. Economy
  
  It was a record day in the history of the Stock Exchange and, coming as a climax to more than three weeks of declining prices, it was most disastrous in hammering down security values.

• Desperately Seeking Stimulus Barbara Ehrenreich : U.S. Economy
  
  An economy addicted to growth, bubbles, downsizing and lending sprees--has become disconnected from the real economy of ordinary human needs.
• Recession--Who Cares? Barbara Ehrenreich : Presidential Election 2008
  
  Politicians and economists find it hard to admit that we have two economies--one for the rich and one for everyone else--and the latter has been in a recession, if not a depression, for a long, long time.

End of illusions - Economist (07/18/2008 05:28 AM)

Fear of failure - Economist (07/18/2008 05:30 AM)

he Bear's Lair, by Martin Hutchinson

Are we entering a financial meltdown?
July 14, 2008 Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005) -- details can be found on the Web site www.greatconservatives.com

The financial crisis in the United States and worldwide entered a new phase this week, as Fannie Mae and Freddie Mac, the two huge US home loan institutions, began what appears to be a similar “death spiral” to what which claimed Bear Stearns four months ago. Fannie and Freddie are unique institutions, and will almost certainly be bailed out by the long-suffering taxpayer. However for the first time the specter has been raised of a general financial meltdown, such as the US managed to avoid in 1933 but Sweden succumbed to in 1991.

Sweden’s financial meltdown of 1991 involved the government guaranteeing the obligations of the entire Swedish banking system, and recapitalizing the major banks, with the sole major exception of Svenska Handelsbanken. The total cost of the rescue to Swedish taxpayers was around $10 billion, equivalent to about $1 trillion in the context of today’s US economy. The causes of the crisis would be familiar to most Americans today: misuse of off-balance sheet securitization vehicles to invest excessively in real estate and mortgage lending.

It is thus not impossible for the entire US banking system to implode. It didn’t happen in 1933 (though about a quarter of US banks failed) because US banks in the 1920s had been relatively conservative in their lending, with many banks requiring a 50% down payment for home mortgage loans, for example. Stock margin lending got way out of control in 1928-29, but relatively few banks were involved significantly in that. The main problem in 1932-33 was quite simply liquidity; the Fed failed to supply adequate reserves to the banking system, so crises of confidence in individual banks led to panic withdrawals of deposits that caused the banks themselves to fail.

This time around, the problem is the opposite. Whereas the Fed had been appropriately cautious in the late 1920s, so only in the area of stock margin lending did the banking system get out of control, this time around the Fed has been hopelessly profligate in monetary creation for over a decade. The initial result of this profligacy, the tech bubble of 1999-2000, caused only modest problems in the banking system through telecom losses. The more recent profligacy and the housing bubble it caused have had much more serious consequences, mirroring those in Sweden leading up to 1991. The additional loosening since September has distorted the financial system further, producing a commodity price bubble that itself seems likely to have substantial further adverse consequences.

Fannie and Freddie are probably toast, and about time too. Fed Chairman Ben Bernanke’s statement Friday that they can discount paper with the Fed may prolong the inevitable, but also increases its likely huge cost to taxpayers. There can be no economic justification for the government guaranteeing the great majority of the nation’s home mortgages, and the spurious “government sponsored enterprise” structure of Fannie and Freddie merely hid the likely consequences of their default. Their senior employees have been paid like Wall Street for performing a function that was economically entirely unnecessary, and they have survived for more than 50 years simply through their ability to offer lucrative consulting contracts to ex-Congressmen and other politically well-connected people.

It is thus necessary that any “rescue” for Fannie and Freddie be a euthanasia not a lifeline. They have extracted their rents from the market for too long, and have encouraged the growth of a securitized mortgage market that has proved entirely unsound because of its perverse incentives. Simply providing them with $100 billion or so of extra capital at taxpayer expense, probably structured as some economically unjustified form of subordinated debt so that the shareholders are left undiluted and allowing them to continue operating doesn’t solve the problem, it exacerbates it.

The simplest from of euthanasia for Fannie and Freddie would be a takeover by the Office of Federal Housing Oversight (OFHEO) their regulator, on the grounds that they were no longer able to operate independently. In Freddie’s case that could be carried out at any time, since the company has failed to follow through on a promise to OFHEO to raise $5.5 billion in new capital – which at Thursday’s closing share price would dilute existing shareholders by 55%. In any case, further declines in their share prices and withdrawal of funding by the bond markets are likely to cause a sufficient crisis in the next few weeks to make such a takeover inevitable if a rescue is not organized (which it shouldn’t be.)

Following a takeover, Fannie and Freddie would need to continue performing their current functions of guaranteeing home mortgages, as without such guarantees home mortgages are currently impossible to obtain. However, changes must be made to recognize the revised nature of the business. Since the new guarantees would be direct government obligations (OFHEO being an arm of the government) rather than simply implied obligations, the fees for obtaining them should be jerked sharply upwards, perhaps to 1.5% per annum on the outstanding amount of the mortgage. That would allow mortgage finance to remain available at a cost that is still reasonable in current markets (Fannie Mae paper already pays a 0.75% premium over the government for its borrowings) but as markets recovered it would make Fannie/Freddie guaranteed mortgages highly uncompetitive against direct home loans, by far the healthiest way for housing to be financed. Together with the salary reductions outlined below, it would also begin to reimburse the unfortunate taxpayer for the gigantic costs of this non-rescue operation.

Treasury Secretary Hank Paulson has called for “covered bonds” similar to the German pfandbriefe to be used to finance housing. Since pfandbriefe, bonds issued by German banks to finance housing, remain on German bank balance sheets and retain the bank guarantee, allowing the banks only to escape the funding risk of lending for 30 years at a fixed rate, they avoid the moral hazards of the securitization markets, and are thus an attractive alternative. To encourage their use, and to reduce the capital cost to banks of holding mortgages on balance sheet, the Basel 1 bank regulations, currently being phased out, should be retained; they allowed mortgages to carry only a 4% capital charge as against 8% for regular loans. By this and other means, the private banking sector would be encouraged to make sound home loans directly, without the unnecessary Fannie/Freddie guarantees.

The objective would be over a 5-10 year period for Fannie and Freddie to become insignificant participants in the mortgage market, after which they could be closed altogether. Meanwhile, costs in Fannie and Freddie could be cut drastically, particularly on the staffing side. Since Fannie and Freddie staff would now be government employees, they should be paid on the GS payscale, with the CEO, as a GS-15, receiving appropriate remuneration between $115,317 and $149,000, according to his years of service. Even if the CEO was able to argue himself onto the SES pay scale (after all, he has excellent Congressional contacts) he would be limited to about $205,000 in the Washington area.

Naturally many Fannie/Freddie employees would be outraged at this cut in their living standards, and would attempt to find alternative better-paid employment; I venture to suggest that few would succeed in doing so. That way, redundancy payments would be avoided while salary costs were slashed. There would be a devastating effect on the Northern Virginia housing market, where many senior Fannie/Freddie employees have overextended themselves with giant home mortgages for vulgar McMansions, but that problem too is probably survivable. More important, the now disgruntled employees would perform their job poorly, making applying for a Fannie/Freddie guarantee a bureaucratic and uncertain process, similar to negotiating with the IRS. That too should hasten their disappearance from the housing market.

Fannie and Freddie do not represent the entire US finance sector, far from it. Nevertheless their insolvency would further erode confidence in the rest of the sector, very likely leading to a cascade of death spirals among other institutions. After all the best run large non-global US bank, Wachovia, has itself got in trouble by its insanely foolish acquisition of the California mortgage lender Golden West Financial at the peak of the market in 2006, while Bank of America, the largest retail-oriented US bank, voluntarily took on more of the mess by its purchase of the diseased and probably criminal Countrywide Financial as recently as last January. Citigroup is in deep trouble in a number of areas, particularly relating to its over-enthusiasm for the discredited technique of securitization, while JP Morgan Chase CEO Jamie Dimon wrecked his credibility in May by announcing that the financial crisis was “mostly over” – presumably wishful thinking in the light of his huge holdings of dodgy Bear Stearns paper.

Only Goldman Sachs appears serenely above the fray, but don’t forget – at May 2008 its “Level 3” assets were $78 billion, more than twice its capital. Level 3 assets, you may remember, are those for which there is no market, so can be valued only by the internal mathematical models of the institution concerned. Since this arcane highly-illiquid paper is the most likely to suffer catastrophic erosion of “value” in a downturn, Goldman Sachs like Jamie Dimon must be keeping their fingers crossed that somehow this nightmare must end soon.

It mustn’t; from past experience of such follies it probably has at least another year to go. Thus a total collapse of the US financial system, while not inevitable, is a contingency which should now be planned for.

The End of the Beginning – Developments in the Credit Crisis
May 27, 2008 Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).

Equity markets believe the worst is over. Banks also seem to have convinced themselves that the worst is behind us. An alternative and, arguably, better view of the current state of the financial crisis is that stated by Winston Churchill: “… this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Nuclear De-leveraging

There is acknowledgement that an extraordinary level of debt and leverage precipitated the problems. However, there is limited recognition of the massive de-leveraging of the global financial system that is under way. Leverage amplifies returns but also accelerates de-leveraging.

The Exhibit below shows how de-leveraging takes place in a highly levered world. Assume a hedge fund with $20 of unlevered capital. If a bank or prime broker allows it to leverage 5 times, then the hedge fund can acquire $100 of risky assets with $20 of equity and $80 of debt. Assume the asset falls $10 (10%) in value. The hedge fund leverage increases to 9 times ($10 of equity (the original amount less the loss) and $80 of debt supporting $90 of assets). If the permitted leverage stays constant at 5 times then the hedge fund must sell $50 of assets - 50% of its holdings ($10 of equity and $40 of debt funding $50 of the asset). If lenders (more realistically) reduce permissible leverage, say, to 3 times, then the hedge fund must then sell $70 of assets - 70% of its holdings ($10 of equity and $20 of debt funding $30 of the asset).

Exhibit
Impact of Losses on a Leveraged Investor







De-leveraging requires liquid markets and buyers with capital to purchase the assets. Ultimately, prices of risky assets must adjust to market clearing levels as the system reduces debt. The process described is now under way in the global economy.

The first phase of de-leveraging is focused on financial markets. Banks have suffered losses in excess of US$200 billion (with more possible). Approximately US$1 trillion of assets have returned onto bank balance sheets. This included “warehoused” assets that could not be securitised and assets previously “parked” in asset backed security commercial paper (“ABSCP”) conduits, structured investment vehicles (“SIVs”) and Collateralised Debt Obligations (“CDOs”). An additional unknown amount of assets will return onto bank balance sheets as hedge funds gradually de-leverage.

Banks require funding and capital to cover losses and returning assets (christened IAG (involuntary asset growth). High inter-bank rates and the deceleration in bank lending reflect, in part, banks husbanding their cash resources to accommodate the involuntary increase in assets.

They have been raising money both via “helpful” central banks and in the market. Major financial institutions have issued substantial volumes of term debt at very high credit spreads. In one week in April 2008, financial institutions raised a record US$43.3 billion in debt at the highest credit spreads since 2001.

Banks will also need substantial new capital to cover losses and the regulatory capital required against returning assets as follows:

Losses: US$ 200 to 400 billion

Additional Capital: US$ 100 to 300 billion (calculated as 10% (the Basel minimum is 8% but few banks operate at that level) of returning assets)



For bank’s operating under Basel 2, probabilities of default in credit models will increase resulting in regulatory capital increases. This is the pro-cyclical nature of the capital ratios in the current regulatory model.

The capital required is around 15-25% of total global bank capital. Banks have raised in excess of US$ 200 billion in new capital. The pace of new equity raisings is accelerating.

It is not clear how this capital requirement will be meet. Initially new capital was supplied by sovereign wealth funds (“SWFs”) and Chinese banks. Given that most investors have (sometimes) significant losses on their investment, this source of capital is less likely to be available in the near term. Banks have resorted to “hybrid” capital issues such as perpetual preference shares. The major attraction for investors has been the high income. Investors, especially retail investors, may not understand the equity risk in these structures. Rating agencies have expressed concern about the increasing level of hybrid securities in the capital structure of many banks.

Other sources of capital include asset sales. The current state of asset markets makes this problematic. Asset sales will put further pressure on available liquidity and prices.

One bright spot is investment in emerging market banks; for example, investments in Chinese State banks. For those lucky enough to have made these investments, there are still significant unrealised gains. Many banks see disposition of these shareholdings as an attractive source of capital. The recent decline in the Chinese stock market, the large size of many stakes and the unknown liquidity of the underlying stock remain issues.

The new capital noted above will merely restore bank balance sheets. Growth in lending and assets will require additional capital. The banking system’s ability to supply credit is significantly impaired and will remain so for the foreseeable future. Credit is clearly being rationed in the global financial system. If the banks are not able to re-capitalise, then the contraction in credit supply will be sharper.

In recent years, off-balance sheet vehicles – ABS CP conduits, SIVs, CDOs and hedge funds (collectively known as the “shadow banking” system) – provided additional leverage. These vehicles relied extensively on bank funding or support. The withdrawal of this support means that these vehicles are also de-leveraging rapidly.

ABS CP conduits, SIVs and CDOs are being gradually dismantled and the assets returning onto bank balance sheets. Hedge funds have been forced to reduce leverage by between a third and a half times. Prime brokers and banks have significantly tightened credit, increasing the level of collateral needed even against high quality assets. Each 1 times leverage reduction in hedge fund leverage represents in excess of US$2 trillion of assets. This accelerates the de-leveraging process.


High quality corporations with maturing debt face face higher borrowing costs. For companies with less than stellar business outlook and credit quality, refinancing may prove difficult. Some US$150 billion + of leveraged loans comes due in 2008. A similar amount also must be refinanced in 2009.

Non-investment grade bond issuance over the last few years was concentrated in the weaker credit categories and is vulnerable to deterioration in economic conditions. Standard & Poor’s rating agency estimates that Two-thirds of non-financial debt issuing companies are junk-rated currently, compared with 50 per cent 10-years ago and 40 per cent 20 years ago. In recent years, around half of all high yield bonds issues were rated B- or below. These borrowers will face refinancing challenges.

Personal balance sheets will also de-leverage. Consumers in the USA and to a lesser degree in the UK, Ireland, Australia and New Zealand have used borrowings (against inflated real estate values) to offset a reduction in real incomes. Falling real estate prices and the reduced availability of “easy” credit will force de-leveraging.

Inflation is also a factor in the de-leveraging in personal balance sheets. Higher prices for the necessities of life reduce cash flow available to support debt. Higher food and energy cost, especially over a sustained period, may affect the degree of de-leveraging if income levels do not adjust.

An economic slowdown will exacerbate the de-leveraging. A fall in asset values can be sustained where the borrower has sufficient income and cash flow to service the debt.

In the US economy, the household, housing and financial sectors constitute over half of all economic activity. A (perhaps protracted) slowdown may be difficult to avoid. US demand is a significant driver of global activity. Recent reductions in global growth forecasts reflect these concerns.

Reduction in corporate cash flows as revenues slow down reduces the ability of companies to sustain leverage. Loan covenants (debt and interest coverage) will reinforce the de-leveraging.

There has been a systemic “financialisation” of corporate balance sheets. Changes in financial markets will have a significant impact on many companies that now rely on “financial engineering” rather than “real engineering”. The problems of GE may not be isolated.

For personal borrowers reduced personal income and unemployment will sharply accelerate the de-leveraging. Uncertainty about the future and market volatility will also accelerate the de-leveraging as companies and consumers reduce debt and aggressively save.

De-leveraging in the real economy may result in increasing defaults. Firms and individuals with unsustainable borrowings will fail. This will result in further losses to financial institutions setting off negative feedback loops as both asset prices and the level of aggregate leverage adjusts.

Central banks and governments actions have been directed at maintaining liquidity and (increasingly) directly supporting the financial sector. In the US and Spain, direct fiscal stimulus is already being administered.

These actions are designed to prevent a catastrophic collapse in the financial sector. They are also designed to help maintain a normal supply of credit to creditworthy business and individuals. These actions are designed to help the real economy from slowing down to a degree that the de-leveraging accelerates further. At best, these actions will smooth the inevitable de-leveraging and adjustment to financial asset prices.

What is to be Done?














Proposals to accelerate Basel II or increase bank capital are ill considered in the present market conditions. The banking system needs significant amounts of capital to cover losses. It also needs additional capital to cover assets returning onto balance sheet. Increased capital ratios would accelerate the de-leveraging already under way worsening the contraction in economic activity.

The final step is a government guarantee of all major bank liabilities. The step is not as radical as it appears. The Federal Reserve (for example, in the case of Bear Stearns), the Bank of England (Northern Rock and the Special Liquidity Scheme (“SLS”)) and Germany (the Landesbanks) have de facto already done this.

The extent of central bank support is significant.(1)http://www.prudentbear.com/index.php/archive_menu#_ftn1. For example, the US Federal Reserves 7 May 2008 statement shows that it holds $537 billion of US Treasury bonds out of a total of US$795 billion in securities. This amount to 68%, a fall from 98% a year ago. Closer scrutiny reveal that the US$537 billion includes US $143 billion of Treasury bonds lent to dealers under the liquidity support schemes. The US$143 billion is “fully collateralized by……. highly-rated non-agency mortgage-backed securities”. In effect, the Federal Reserve has provided over US$400 billion (around 3% of US GDP) in funding to banks and (now) investment banks. This funding is at subsidised, negative real interest rates.

Term lending through the support facilities means that the central bank is doing more than providing liquidity. The central banks are underwriting the solvency of banks. If at maturity, the bank can not repay the advance, the central bank will be forced to continue to fund the borrowing bank to avoid triggering default. Bank’s generally fail due to liquidity risk. It is sobering to consider that Bear Stearns was technically solvent when a withdrawal of liquidity brought it to the brink of a bankruptcy.


The Central Bank would charge explicitly for the guarantee based on the underlying risk. In this way, the taxpayer is properly compensated for the risk assumed. Central banks currently are providing a similar underwriting of financial risk at money market rates. This contrasts with the high costs being paid by banks on their equity capital raisings. For example, banks are paying 7% to 11% on hybrid capital raisings. Similarly, bank equity offerings are at substantial discounts to already low stock prices.

Support of the global banking system will be difficult to avoid. The originate-to-distribute and risk transfer models did not, as we now know, distribute risk through the financial markets. Instead, it linked the financial solvency of all financial market participants in a complex web. Government underwriting of the banking system is now critical to resuscitating normal financial activity.

The proposed actions are contrary to free market orthodoxy and raise familiar concerns about moral hazard and rewarding greed. There seems to be no choice. There will be a high price to be paid but that will come later. As Charles Kindleberger noted in his history of financial crisis: “today wins over tomorrow”.

Credit markets have become dysfunctional. As Walter Bagehot observed: “Every banker knows that if he has to prove that he is worthy of credit, however good may be his argument, in fact his credit is gone”. The outlined actions would help restart the credit heartbeat in the US and global economy. Vital life signs need restoration before longer-term lifestyle changes are contemplated.

Implementation of the three steps outlined above allows monetary policy, interest rates and fiscal policy to be directed to ameliorate any economic slowdown. As noted above, falls in asset values can be sustained where the borrower has sufficient income and cash flow to service the debt. Initiatives in the US mortgage market to help those with salvageable debt positions to avoid foreclosure are also valuable in this regard. Attempts by governments in the USA and England to maintain supply of “normal” housing finance are also targeted at this objective.

The defibrillator shocks must be accompanied by far reaching and fundamental changes in financial architecture and global capital flows. Regulation of banks, capital regimes, risk transfer, asset valuation, risk management, use of collateral, counterparty risk, model risk, rating agencies and financial accounting need radical surgery. Fundamental economic imbalances - excessive reliance on US consumption and excessive savings by other nations – must be addressed.

Present proposals by various bodies are t