Financial Implosion

Anyone who has read my blog for several years will have seen that I've covered the financial markets regularly and based on a socialist analysis of the finanicalized capitalists system, was able to provide arguments for what we now see unfolding.

John Bellamy Foster and Fred Magdoff have written an excellent summary in the current issue of the Monthly Review. I've included an excerpt below and encourage all to visit the link and read the whole article.

Again, if you have any money in a retirement account and have the ability to choose your investment plan, you should seriously consider putting it in something as close to cash as possible, such as a money market fund, TIPS fund or REIT fund. Bond funds are risky but better than equities. Real estate is also a huge risk.

Good luck and Merry Christmas! Remember, Jesus was the original Communist, or so I've heard. Throw the moneychangers out of the temple! :)

Financial Implosion and Stagnation
Back To The Real Economy

But, you may ask, won’t the powers that be step into the breach again and abort the crisis before it gets a chance to run its course? Yes, certainly. That, by now, is standard operating procedure, and it cannot be excluded that it will succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again on a more elevated and more precarious level. But sooner or later, next time or further down the road, it will not succeed… We will then be in a new situation as unprecedented as the conditions from which it will have emerged.
—Harry Magdoff and Paul Sweezy (1988) 1

“The first rule of central banking,” economist James K. Galbraith wrote recently, is that “when the ship starts to sink, central bankers must bail like hell.”2 In response to a financial crisis of a magnitude not seen since the Great Depression, the Federal Reserve and other central banks, backed by their treasury departments, have been “bailing like hell” for more than a year. Beginning in July 2007 when the collapse of two Bear Stearns hedge funds that had speculated heavily in mortgage-backed securities signaled the onset of a major credit crunch, the Federal Reserve Board and the U.S. Treasury Department have pulled out all the stops as finance has imploded. They have flooded the financial sector with hundreds of billions of dollars and have promised to pour in trillions more if necessary—operating on a scale and with an array of tools that is unprecedented.

In an act of high drama, Federal Reserve Board Chairman Ben Bernanke and Secretary of the Treasury Henry Paulson appeared before Congress on the evening of September 18, 2008, during which the stunned lawmakers were told, in the words of Senator Christopher Dodd, “that we’re literally days away from a complete meltdown of our financial system, with all the implications here at home and globally.” This was immediately followed by Paulson’s presentation of an emergency plan for a $700 billion bailout of the financial structure, in which government funds would be used to buy up virtually worthless mortgage-backed securities (referred to as “toxic waste”) held by financial institutions. 3

The outburst of grassroots anger and dissent, following the Treasury secretary’s proposal, led to an unexpected revolt in the U.S. House of Representatives, which voted down the bailout plan. Nevertheless, within a few days Paulson’s original plan (with some additions intended to provide political cover for representatives changing their votes) made its way through Congress. However, once the bailout plan passed financial panic spread globally with stocks plummeting in every part of the world—as traders grasped the seriousness of the crisis. The Federal Reserve responded by literally deluging the economy with money, issuing a statement that it was ready to be the buyer of last resort for the entire commercial paper market (short-term debt issued by corporations), potentially to the tune of $1.3 trillion.

Yet, despite the attempt to pour money into the system to effect the resumption of the most basic operations of credit, the economy found itself in liquidity trap territory, resulting in a hoarding of cash and a cessation of inter-bank loans as too risky for the banks compared to just holding money. A liquidity trap threatens when nominal interest rates fall close to zero. The usual monetary tool of lowering interest rates loses its effectiveness because of the inability to push interest rates below zero. In this situation the economy is beset by a sharp increase in what Keynes called the “propensity to hoard” cash or cash-like assets such as Treasury securities.

Fear for the future given what was happening in the deepening crisis meant that banks and other market participants sought the safety of cash, so whatever the Fed pumped in failed to stimulate lending. The drive to liquidity, partly reflected in purchases of Treasuries, pushed the interest rate on Treasuries down to a fraction of 1 percent, i.e., deeper into liquidity trap territory. 4

Facing what Business Week called a “financial ice age,” as lending ceased, the financial authorities in the United States and Britain, followed by the G-7 powers as a whole, announced that they would buy ownership shares in the major banks, in order to inject capital directly, recapitalizing the banks—a kind of partial nationalization. Meanwhile, they expanded deposit insurance. In the United States the government offered to guarantee $1.5 trillion in new senior debt issued by banks. “All told,” as the New York Times stated on October 15, 2008, only a month after the Lehman Brothers collapse that set off the banking crisis, “the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks.”5 But only a few days later the same paper ratcheted up its estimates of the potential costs of the bailouts overall, declaring: “In theory, the funds committed for everything from the bailouts of Fannie Mae and Freddie Mac and those of Wall Street firm Bear Stearns and the insurer American International Group, to the financial rescue package approved by Congress, to providing guarantees to backstop selected financial markets [such as commercial paper] is a very big number indeed: an estimated $5.1 trillion.”6

Despite all of this, the financial implosion has continued to widen and deepen, while sharp contractions in the “real economy” are everywhere to be seen. The major U.S. automakers are experiencing serious economic shortfalls, even after Washington agreed in September 2008 to provide the industry with $25 billion in low interest loans. Single-family home construction has fallen to a twenty-six-year low. Consumption is expected to experience record declines. Jobs are rapidly vanishing. 7 Given the severity of the financial and economic shock, there are now widespread fears among those at the center of corporate power that the financial implosion, even if stabilized enough to permit the orderly unwinding and settlement of the multiple insolvencies, will lead to a deep and lasting stagnation, such as hit Japan in the 1990s, or even a new Great Depression.

24-Dec-2008. Foster, John Bellamy. Financial Implosion and Stagnation. Monthly Review.

Subprime Plot Thickens

I found out about Minyanville today, a website by investing guru Todd Harrison. He is hardly a progressive, but he writes with candour and wit, both rare commodities in the financial journals.

Part of a recent article of his is posted below; in it he covers the past few months of financial machinations connecting the dots and it is is well worth the read.

If you have any retirement whatsoever, READ IT.

As for me, I'm moving everything into cash and bonds (see Strategies for a Bear Market) until things shake out. It seems very clear that this going to be much worse than the dot.com bubble burst.

David Walker, the U.S. comptroller general, proclaimed that the U.S government was on a "burning platform of unsustainable policies with fiscal deficits, chronic health-care underfunding" and "chilling long-term stimulations" as he mapped the parallels between modern-day society and the fall of the Roman Empire.

These are not my words. They come from a nonpartisan figure in charge of the Government Accountability Office, which is often described as the investigative arm of the U.S. Congress.

"I'm trying to sound an alarm and issue a wakeup call," he said in the midst of his 15-year term, which began during the Clinton administration. "The U.S is on a path toward an explosion of debt."

Excerpt of the article by Todd Harrison:

NEW YORK -- They say that if you're playing poker and don't know who the sucker is, chances are it's you. For those currently holding trading cards, the stakes have never been higher.

Over the past few weeks, as risk chips stacked around the table, investors have been forced to call the bluffs of some of the savviest players in the global game.

The winners will walk away with a royal flush of profits, smiling all the way to the casino pool. The losers? They'll self-loathe and second-guess themselves on the hitchhike home, hungry for redemption and wanting for more.

Let's review the series of seemingly inconsistent hands we've been dealt during what was supposed to be a quiet stretch on the summer deck.

At the beginning of the summer, when "collateralized debt obligations" and "subprime mortgages" were first introduced into the mainstream vernacular, Treasury Secretary Hank Paulson was quick to assure us that the problems were "contained."

To be fair, Mr. Paulson wasn't alone. In fact, he was in very good company. See Minyanville article. San Francisco Fed President Janet Yellen, Federal Reserve Chairman Ben Bernanke, Dallas Fed President Richard Fisher and Federal Reserve Governor Fredric Mishkin were unanimous in their assuring voices that we had nothing to fear but fear itself.

Fast forward a few months. That's when things really started getting strange.

[...]

Two days after the FOMC meeting, BNP Paribas, France's largest bank, halted withdrawals from three funds because it couldn't fairly value holdings tied to the stateside subprime mess.

IKB Deutsche Bundesbank confirmed that it was holding special meetings to discuss
its "financial situation."

The U.K. issued a statement that its subprime crisis might be worse than the one in the U.S.

Those concerns, on the margin, were disconcerting. But as actions speak louder than words, the sequence of events that followed offered a more telling view that strange things were afoot at the Circle-K.

The European Central Bank, in an "unprecedented response to a sudden demand for cash," injected $130 billion into the financial machination. The U.S., Japan and Australia also stepped up to the plate with piles of dough, upping the ante to more than $300 billion.

Even Canada -- Canada! -- chimed in to "assure financial-market participants that it will provide liquidity to support the stability of the Canadian financial system and
the continued functioning of the financial markets."

MarketWatch: If the wheels fall of the financial wagon, you were warned

Real-Estate Meltdown, Just the Beginning?

Yesterday I posted on the mortgage crisis and the effect on the credit market and homeowners. The other side of the finance equation is of course real estate values. Today the Wall Street Journal reported that real-estate mutual funds (or 'REITs' in the finance world parlance) are posting huge losses with no end in sight.

From a Wall Street Journal article by Tom Lauricella:

Mutual funds specializing in real estate are getting clobbered, hit by a one-two punch of woes in the property markets and the tumult in the debt markets.

Although real-estate stocks staged a late rally yesterday, their recent troubles were highlighted this week by a 31% one-day drop in the stock of KKR Financial Holdings LLC Wednesday, a real-estate investment trust, after the company reported financing problems.

The result is that after seven years of spectacular gains, funds investing in real-estate investment trusts are posting huge losses -- some with losses topping 15% over just the past month. That is particularly bad news for investors who poured nearly $18 billion into these funds in the past year and a half.

Meeting Redemptions

As some investors sell, fund managers are forced to sell holdings to meet those redemptions.

The average real-estate fund investing primarily in the U.S. has lost 17.2% over the past three months and is down 16.5% so far this year, according to Morningstar Inc. In contrast, the average diversified U.S. stock fund is up 0.7% so far this year and down 5.9% over the past three months.

[...]

The average global real estate fund -- which will invest both in and outside the U.S. -- has shed 15.2% over the past three months and is down 10.3% since the start of 2007.

Wall Street Journal: Real-Estate Funds Are Hit Hard

Lets face it folks, we are at the beginning of a serious crisis in capital. Where will the bailout come from this time?

The end of the 90s saw the 'dot com' bubble burst which affected millions but was relatively isolated to a specific sector (information technology) and confined to specific urban markets, such as San Fransisco. This was a stage in the increasing finanicialization of capital.

Now capital needed a new outlet for reinvestment and real-estate provided the perfect opportunity. Combined with the massive boost given by investments in the war sector, the real-estate boom provided the much needed new outlet for capital investment.

It was clear from the outset, however, that with real wages decreasing and job growth static, that the real-estate investment strategy required cheap credit and lots of it. This, as we have seen, has been achieved through a combination of extremely low interest rates with increasingly aggressive (until recently) lending practices.

The current crisis is huge. Nearly every financial institution will be affected. Nearly every country will be affected. Consumer demand will be affected on a global scale. Real estate prices will deflate on a global scale.

It seems increasingly likely this very irresponsible and unsustainable run-up will lead to a global depression with dire consequences for all.

The financial capital sector must be reigned in. A socialist program for managing and regulating the financial sector is the only way to prevent such irresponsible behavior and prevent the cyclical boom and bust pattern that is inherent to capitalism, and which has (as we have seen) and will continue to, become increasingly painful with each subsequent cycle.

Crisis in Legitimacy

The sky is falling, the sky is falling - or at least the stock market is...

Today we will see whether Wall Street follows the tumble some of the global exchanges, notably Europe and Japan, took today. Notably, Communist China's market posted a 100+ point rebound. This seems to show that socialism is even better at managing stock markets than capitalism (I'm being witty here of course).

It would be too easy to say that the only people affected are the speculative elites. Unfortunately the reality is that many workers in the west have most of their savings tied to equity markets, so a prolonged decline will hurt a lot at a time when we can ill afford it.

Therefore the news that economic ministers in Europe are calling on businesses to share their profits with workers is very encouraging. The Financial Times reports:

European companies must give workers a bigger share of their soaring profit or risk igniting a “crisis in legitimacy” in the continent’s economic model, Germany’s finance minister warned on Tuesday.

Peer Steinbrück’s comments were part of a concerted attempt by Europe’s economic leaders in Brussels to persuade companies to share profit with workers as well as shareholders.¹

I applaud these leaders for standing up in the face of business might in an extremely hostile climate and stating the truth - we the workers create the wealth of the world and deserve our rightful share. Of course we should not have to rely on meek government officials to go begging for business to behave in an ethical manner.

The gains of the working class have been fought for and died for by countless nameless agitators and organizers. These heroes of the past must be honored by a new generation who will stand up and demand the wealth they create be given back to them - reversing the current trend.

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