Blood bath on Wall Street
Obama and McCain are both recipients of vast Wall Street generosity, and firm believers in the economic orthodoxy that overthrew the Glass-Steagall Act — leading directly to today.
Welcome to the Titanic, an unsinkable pleasure ship.
Bank of America is buying Merrill Lynch for $45 billion, AIG needs an emergency $40 billion bail-out from Uncle Sam to stay afloat, and Lehman Bros is kaput. Whew! The financial world has been turned upside-down overnight. It’ll be a rough day of trading ahead.”
The news of Wall Street’s Sunday night massacre sent foreign stock markets into a deep swoon. Shares tumbled in Asia and dropped more than 4 per cent in Europe. The dollar is steadily losing ground to the euro and gold is on the rise. The question is not whether the Dow will fall, but “how far” and what affect that will have on increasingly fragile financial institutions.
Lehman Brothers, the 158 year old Wall Street warhorse, announced Sunday that it will file for bankruptcy after…
***
House Minority Leader John Boehner is pointing the finger squarely at congressional Democrats over the latest market meltdown, the beginnings of what is sure to be a protracted blame game between the parties over who is responsible for the country’s newest economic woes.
“All across America, families are struggling with the fallout from the turmoil …
***
There’s been talk of a potential failure of Lehman Brothers for months, and the investment bank already had a near-death experience in 1998. Merrill Lynch has been labeled takeover bait for two decades. Insurers do go under from time to time.
Related
Stories* CNNMoney: Dow Closes 500 Points Lower
* Bailout NationBut throw together the collapse of Lehman — the biggest-ever U.S. bankruptcy — the lightning takeover of Merrill Lynch by Bank of America, concerns that giant insurer AIG is now on the brink as well, and a financial crisis that has been rolling along for more than a year now, and you get a day that will be enshrined in the history books. Whether it will go down as an economy-shattering debacle or a near miss is…
Y.K.:
People need to attack this talk about the bailouts as “socialism”. It is crony capitalism, corporatism (fascism), or just plutocracy. But the rhetoric of “socialism for the rich”, as effective as it may be in US political culture, is usually reduced to just “socialism” and shuts off strategy for positive change, more gov’t regulation, even progressivism, etc.
Even Hudson seems to use this tactic and I don’t think it is helpful when capitalism is clearly to blame. US political categories are already horribly muddled and if they aren’t reoriented to the definitions pertaining internationally then they just reinforce US “exceptionalism” instead of creating a new universalism. The same is true of the garbage British import “liberal” vs. “conservative” although at least the British understand the general meaning of socialism better than most US Americans.
By the way, FDIC deposits are exposed to banking risk and this is a populist point against the bailouts. People will be scared and angry if they understood this point about FDIC because they learned about it in school, so the financial crisis will seem more “real”, “risky”, “1930s”, etc.
I’ve put in excerpts from Roubini’s blog, to which I have access, and a few commentators about this rule change. I haven’t put everything in to save space on your blog Stan.
…
Section from the post : “If Lehman collapses expect a run on all of the other broker dealers and the collapse of the shadow banking system Nouriel Roubini | Sep 13, 2008
“Second, the Fed is waving Section 23A of the Federal Reserve Act that restricts how much commercial banks can relend liquidity to their investment banking affiliates; these restrictions are sensible prudential rules aimed at avoiding banks to subsidize their broker dealer affiliates with deposit-insured deposit. Now these sensible prudential regulations are thrown to the wind; so Citi, JPMorgan and Bank of America can happily use or raid their FDIC-insured deposit to support their bankrupt broker dealer operations. This is reckless as abuse of this new form of subsidization of near insolvent broker dealers with commercial banking deposits may eventually impair the viability and solvency of their commercial banking regulation. This is a form of connected lending that eventually led to the Japanese financial crisis and their severe banking crisis. This process of raiding FDIC insured deposits already started in 2007 when the Fed waived Regulation W for Citigroup and Bank of America when the unraveling of their toxic SIVs and conduits occurred with the roll-off of the ABCP paper. So, now all banks – not just two – can happily raid their deposits to save their broker dealers operations where funding mostly occurs with unstable reckless overnight repos. This desperate policy action shows that even the broker dealers arms of non-independent broker dealers (Citi, JPM, BofA) are now at the risk of a run on their overnight liabilities.”
…Start of Roubini Blog Thread…
Paulson is going to give a speech from the White House at 1:30pm east coast time. What do you want to bet that the markets close green on his sage reassurances that the system is coping just fine, and that the plan he has implemented with the Fed is in the best interests of the markets and all Americans? We’ve seen this play so many times before, haven’t we?
Lehman being taken down overnight is bear bait. The trap will be sprung with the announcement of further liquidity arrangements/interest rate cuts/etc. which will shear the shorts.
The elimination of the restrictions of 23A for FDIC deposits really have me scared. There is now no firewall between Treasury credit and speculative lending to investment bank affiliates by FDIC-insured banks. That means that if the system does fail, all the losses will be fully socialised onto the FDIC and the taxpayer. You can bet that all the bonuses and huge payouts are being off-shored to Lichtenstein and Grand Cayman by those in change in the interim so that they won’t be making any contributions to the huge tax burdens they leave behind.
By London Banker on 2008-09-15 08:50:01
LB,
This is scary. I am very nervous, and I knew what was coming and prepared.
By Medic on 2008-09-15 09:08:45
The Professor points out the END GAME in his “Monday Update”. “The Federal Reserve is waiving 23A of the Federal Reserve
Act that restricts how much commercial banks can relend liquidity to their investment bank affiliates”. The FDIC and the
Taxpayers are the long term fall guys. They are bringing all the toxics under the FDIC umbrella into future mammoth
institutions that will corner the market and are Way too big to Fail! The taxpayer is getting drilled!!!
Is this the end game?????????
By mammon on 2008-09-15 07:53:19
I don’t see this as the end game. I see this as the beginning of the end. And the end is a depression (if we are lucky) or hyperinflation and then a depression. Just depends on how the government plays it. At the moment it appears they are playing for hyperinflation.
By Guest on 2008-09-15 08:36:28
London Banker, like you I’m British. Why should we (as Brits) be scared about the elimination of 23A restrictions? How will this affect the rest of the world?
By phil on 2008-09-15 09:10:49
It’s the utter criminal lawlessness of it that scares me. That statute is very black-and-white plain that deposit taking institutions insured by the FDIC are not supposed to use depositors’ funds to prop up their insolvent securities affiliates. The law goes back to 1933 and is a fundamental protection of the US system.
Bernanke and Paulson are doing to banking in the US what Bush did for the police and military – saying the law does not matter and that there will be no law or court recognised that can interfere with executive expedience.
Instead of consulting on the change in law or regulation, even going to Congress for repeal of the law, they are just using administrative authority to overturn a statute which provides a fundamental protection against abuse of the FDIC and the taxpayer.
The rule of law doesn’t constrain executive action in respect of banking or markets in America any more than it applies to civil liberties or warfare. We should all be scared by that.
By London Banker on 2008-09-15 09:21:32
The Professor has to do the taxpayer a favor and highlight this as soon as possible
in his conversations with Bloomberg interviewers! The professor may be
our only avenue for change, now that we have been mugged by the Fed!
He is respected and everyone now knows he just states “the facts”.
The financiers are robbing us blind!!!!!
By mammon on 2008-09-15 09:59:03
….End of Thread…
15 September 2008, 5:31 pmTom:
I share the sentiment regarding ‘socialism’. How to proceed in discussions? One could try to explain the distinction between socializing, nationalizing and privatizing – but ‘socialized’ is a state, and an action can only be called socializing if it achieves a socialized state, whereas nationalizing and privatizing are defined in terms of (change of) ownership or bearing of costs. Of course, one might ask if (to the US populace) it was socializing of costs – will it lead mainly to US inflation (US populace pays), or will China, Saudi etc bear the cost (export of inflation, dollar hegemony etc a la Hudson, Liu)? Perhaps an international socialization of costs?
This also ties in to how one defines capitalism – in terms of redistribution, one could define capitalism as the socialization of costs and the privatization of gains, whereas socialism is the socialization of costs and gains… How to do this in lay terms? Examples? ‘Making others pay’ vs ‘Making the producer / consumer pay’? It is capitalism specific, but as such within the reference frame of most people…
On a side note (off-topic) I see a co-ethnic of mine has been somewhat obnoxious on your blog (Wessel something or other)… I’d like to share my views on the incident as it ties in with the current situation in RSA, Afrikaner society etc, if you are interested… (Other forum?)
15 September 2008, 11:05 pmLegume Sam:
The “problem” being solved here, through the enactment of securities reforms which are in fact irrelevant to the crisis which ostensibly prompts them, is one of where the banks, investor elites, and other parasites are going to get their profits when the global growth rate is in fact in decline. Harry Shutt points this out in his 1998 book The Trouble With Capitalism. Since the 1970s there has been a surplus of capital by comparison with the actual profit opportunities out there, which are loosely dependent upon the actual global growth rate. The problem keeps getting worse and worse, as Shutt points out, as genuine profits merely allow for the further expansion of capital.
So, yeah, as the crisis reveals its obvious roots in the laxity of regulation upon capital investors, the “solution” underway is to loosen up the requirements even more, so that at some point we can expect the banks to confiscate our accounts for the puny debt relief it will grant them before they go under. But never fear; the FDIC will give us our money back sometime between now and 2050, just like they’ll have global warming solved by then
16 September 2008, 12:53 amTimothy R. Anderson:
Back in 1987 I was but a young fellow, but even though young, I knew that the ” grown-ups ” were antsy. For you recall, hopefully, that
Reagan-onomics had a nervous breakdown during October 1987. For some strange reason it did not damage, to the extent this current financial meltdown likely will, the value of an American dollar.
It is scary whether you are a person with 1 million dollars or
a person with 500 ,000 dollars or a person with 25 , 000 dollars or a person with 8 dollars 42 cents. There are, however, still persons for who this ain’t scary at all. Bush, Bush, Bush’s wife, Bush’s wife,
Bush’s kids, Donald Trump, Buffett, etc. etc.
Timothy R. Anderson.
16 September 2008, 1:39 pmJay Taber:
I for one am shocked to learn there is gambling going on in here.
16 September 2008, 1:41 pmStan:
…shocked, shocked…
Good one, Jay.
16 September 2008, 1:48 pmJay Taber:
As they say, Timothy, all things are connected. The Reagan Administration brought criminal governance to America, and consequently a culture of fraud. That culture could not go on forever, so we will pay the price. Forecasting our future might be as simple as looking at the Argentinean experience, or as complex as examining the economic and religious hysteria of the 14th century as documented by Barbara Tuchman in A Distant Mirror. Given America’s exotic religious foundation and economic record, I know which I’d place my bets on, but either way, public panic and private despair are phenomena we as activist scholars are going to have to deal with. Fortunately, there are some excellent thinkers available to aid us in this task.
16 September 2008, 3:51 pmGary Edelburg:
We haven’t heard from the Economists (Dean Baker, et,al.)yet. What’s up?
17 September 2008, 12:38 pmLisa:
US Seizes Control of AIG with $85 Billion Bailout
The US government has seized control of insurance giant American International Group in an unprecedented $85 billion bailout. The Federal Reserve made the deal on Tuesday to save AIG from collapse in what the New York Times describes as “the most radical intervention in private business in the central bank’s history.” The move comes as a series of financial crises has altered the landscape of Wall Street. We speak with investment banker turned journalist, Nomi Prins, and Michael Hudson, president of the Institute for the Study of Long-Term Economic Trends.
Interview transcript and recording:
http://www.democracynow.org/2008/9/17/us_seizes_control_of_aig_with
17 September 2008, 6:20 pmLisa:
…both the US Gov’t, the Fed and Treasury all work for the largest campaign contributors to the politicians on the major financial committees. The largest contributors are Wall Street financial firms at the federal level, and real estate speculators at the local level.
Government has been privatized.
As Aristotle said, democracy is the political stage immediately following aristocracy, and immediately preceding oligarchy.
See the recent discussions at:
http://finance.groups.yahoo.com/group/gang8/
17 September 2008, 6:23 pmJay Taber:
With the present Wall Street fiasco, my concern is that too much attention will be paid to financial confusion, and too little to social disintegration. While public trust is perhaps at an all-time low, political panic and religious hysteria are on the rise. Last time these phenomena converged we had Aryan Nations, Waco and Oklahoma City.
With the Republicans running an openly apocalyptic ticket, and the Democrats running a black man, the violent right-wing underground must be frothing at the mouth. It wouldn’t take much for Far Right social movement entrepreneurs to ignite this tinderbox.
Sad to say, reform groups and law enforcement are almost wholly unprepared for dealing with this type of social pathology, and due to their ignorance (and arrogance) almost always make things worse through inappropriate responses.
18 September 2008, 12:04 amskol:
On the other hand, isn’t this the first time that the internet could have a massive effect on people’s perspective from such a catastrophe so close to home? I don’t think 9-11 counted, since blogging wasn’t that huge a thing… I wonder how to take advantage of this (without seeming partisan, too (I’m rambling), like HP and DK; I’m thinking Wikipedia and the like could become more important)
18 September 2008, 6:15 amCraig:
Start reading the comment threads at sites like Calculated Risk, and start posting. There is essentially no leftist presence there; it’s dominated by libertarians and day traders, but people in the industry read these blogs. This is the kind of place where the “socialism” meme gets fleshed out.
Panic is rampant; Treasury yields are approaching, and passing, zero, the SEC is thinking of outlawing short selling, and TPTB are clearly desperate. Anyone who makes sense at a time like this is going to get an audience.
18 September 2008, 9:19 pmskol:
Thank you for the link – hopefully this can be expanded upon somehow.
I possess a rather cabalish mind, and my main job on WP is mediating.
(has overly boyish dreams of raiding HuffPo and DKos and forming consensuses)
:-p
19 September 2008, 8:25 amLisa:
AIG’s Dangerous Collapse & A Credit Derivatives Risk Primer
Daniel R. Amerman,
Overview
While it may look superficially similar to the recent implosions of such investment giants as Fannie Mae, Freddie Mac and Lehman, the takeover and bailout of AIG is quite different, and means that the market is entering the next and even more dangerous phase. What is driving the fall of AIG – and potential government losses that may far, far exceed the $85 billion bailout announced late on September 16th – is not mortgages or real estate (directly), but fears that AIG’s huge, global credit-default swap positions will unravel. The $62 trillion dollar credit derivatives market is 50 times the size of the subprime mortgage derivatives market, and is indeed larger than the entire global economy.
Unfortunately, few people understand credit derivatives, or the full risks to the United States and global markets and economies. In this article, I will take a Credit Derivatives Primer that I published in the spring of 2008 – which anticipated this exact type of event – and update it for the current situation. Through reading this article, you should be able to greatly increase your knowledge of what credit derivatives are, and why they are a far greater danger than subprime mortgages. We will end with introducing some concepts about how individuals can protect themselves and even profit from these unprecedented market conditions – something you won’t find in recent financial history or conventional investments.
Full article:
http://news.goldseek.com/GoldSeek/1221672153.php
19 September 2008, 1:19 pmLisa:
September 19, 2008
Bailouts for the Rich; Macaroni and Cheese for the Rest of Us
The Dow Jones’ Wonderfully Cheesy Addition
By MICHAEL HUDSON
The bailout of AIG to enable derivatives traders and other gamblers collect on their computer-driven bets is so enormous that it will take another article to describe. But in the meantime there is a development so wonderfully appropriate, almost poetic as a metaphor, that it cannot go unnoticed. The Dow Jones Company announced on September 18 that as of this Monday, September 22, 2008 it will replace ailing A.I.G. in the Dow Industrial Average with Kraft Foods. The company makes processed industrial products such as Cheez’it, Cheez Whiz and Oscar Meyer wieners, but is best known for the Macaroni and Cheese that Sam Kraft introduced in the Depression year of 1937. When milk and dairy products were rationed during World War II, these packaged meals were all that was available. Along with the company’s Hamburger Helper, much of the public may find itself obliged to eat more of this by the time the fallout from this week’s transition from Industrial Capitalism to Hedge Fund Capitalism runs its course.
How fitting a metaphor, not only the notorious Depression Diet, but the fact that the Kraft process is fake cheese. About as real as the default guarantees that A.I.G. “insured,” Velveeta and similar so-called “cheese products” are made out of Milk Protein Concentrate (MPC). “The general definition of MPC is a blend of dry dairy ingredients from 42% to 90% casein (pure dairy protein) made by ultra filtering skim milk, retaining anything the size of a protein or larger (bacteria, somatic cell, etc.) and then drying that to form a powder,” describes the Agribusiness Examiner. “Not manufactured in the U.S., MPC’s are added to cheese vats – on the cheap yielding more end products with ‘savings’ retained by the manufacturer.”
The resulting products are not considered milk by the Food and Drug Administration’s (FDA) definitions. This fact legally obliges Kraft to spell many of its consumer items “Cheez” under the “truth in labeling” laws. The intention is for the children at whom most of Kraft’s advertising is aimed will think that this is an affectionate diminutive for the company’s cheesy chemicals, confusing it with real dairy cheese. Much as Kraft’s products are aimed mainly at kids, so about three quarters of A.I.G.’s derivative insurance guarantees for trillions of dollars of computer-driven trades were pawned off on gullible European financial institutions.
Much in line with Thomas Gresham’s quip that “Bad money drives out good,” so Kraft now accounts for no less than 57 percent of the U.S. “cheese” market. And in the sphere of finance capital, the massive computerized derivatives trading insured by A.I.G. has diverted pension fund savings and bank credit away from tangible investment to something almost unworldly, neither tangible capital nor even financial capital, but bets and straddles on cross trades.
Kraft also makes Oscar Mayer meats, mainly frankfurters and other sausages, providing a model for the investment banking industry to emulate with its packaged mortgages (toxic CDOs, collateralized debt obligations), the financial equivalent of sweepings off the floor. People who know what go into sausages or CDOs rarely want to buy them. But a lot of money has been made selling them. And the government is now giving the blessing. There is no health plan for Americans reduced to Kraft Cheez diets, but there is now indeed a financial health plan for all the traders who have choked on the $450 billion unpayable derivatives trades that A.I.G. is said to have insured.
The moral seems to be health and bailouts for the wealthy; let the rest eat Cheese and Macaroni.
19 September 2008, 2:21 pmLisa:
September 19, 2008
Harry Reid: “No One Knows What to Do”
The Point of No Return
By MIKE WHITNEY
Following another erratic day of trading on the stock market, Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke convened an emergency meeting of the Senate Banking Committee and other congressional leaders to request fast-track authority for a sweeping plan to buy back illiquid assets and other complex securities from distressed and under-capitalized banks. The turbulence in the financial markets has intensified and there is every indication that the situation will get worse before it gets better.
There are a number of signs that the financial system is at the brink of collapse and that Wall Street is headed for a 1929-type crash.
Full article:
http://counterpunch.org/whitney09192008.html
19 September 2008, 2:35 pmStan:
I want to encourage people to send Mike Whitney’s article to every list they have, and to every elected official. The level of issue-mystification being promoted by both parites, both prez candidates, and the press is just staggering. It’s a tsunami of prevarication. The government is again (remember Resolution Turst Corporation… a doubly-ironic name if ever there was) about to saddle future generations with an unending pay-out to the rich. We should be very afraid. Last time this happened this big, part of the “resolution” was to jump into the bloodiest war in history. And people need to be reminded, inconvenient as it may seem, that the Glass-Steagall Act was relpealed on Bill Clinton’s watch.
Plant gardens.
19 September 2008, 4:17 pmMark:
In regards to the big two-day gain in the stock market, a term I heard years ago never seemed more appropriate; Dead Cat Bounce
19 September 2008, 8:59 pmCraig:
Stan: “I want to encourage people to send Mike Whitney’s article to every list they have, and to every elected official.”
I don’t think this particular article is the way you’d want to represent yourself, but the urgency to speak out and act is very real. The course of action that Congress, the Treasury, and the Fed will take is undecided, and the people making the decisions are doing so on the fly, this weekend. The analogy I made with a co-worker was comparing to William H. Macy’s character in Fargo. The guy had it all figured out except for all of the details.
For example, the SEC finally came to the realization today that the ban on short selling destroys the options market. The market makers, who act like bookies, want their transactions to have as little risk as possible, so that they just take a cut off every sale of an option. To do this, they use shorts as hedges, since buying a put option and selling a call option is equivalent to a short. If they can’t hedge using a short, they will ask for more of a cut, which is precisely what happened today. More and more of these issues will come up when major policy decisions are made in cram sessions over the weekend.
The other thing to note is that the RTC from the S&L Crisis took on assets from banks that had already failed. It didn’t buy shitty bonds from troubled banks to keep them solvent (which, by the way, they aren’t; that’s why this is happening). The last example of a bank crisis, Sweden in the early ’90′s, also took over assets from failed institutions.
The only way to resolve this crisis is to let the failures happen in an orderly fashion, and that means wiping out the common shareholders at a minimum, not banning shorts to artificially pump up stock prices. The country does need the infrastructure of banks, but how many investment banks does it really need?
19 September 2008, 9:36 pmCraig:
Stan: “And people need to be reminded, inconvenient as it may seem, that the Glass-Steagall Act was repealed on Bill Clinton’s watch.”
I think you’re wrong; people don’t need to be reminded of this right now. In this panic, no one is listening to anyone trying to score cheap political points. It’s why, for example, no one cares what Bush thinks. When the chips are down, everyone knows he’s an empty suit. If you want to use this to disqualify Phil Gramm from the discussion, then by all means do so, since he is still a relevant figure in the campaign. Clinton, however, is not.
The more sense you make, the more people will listen, and right now, the most important fact to convey is that the American banking system is insolvent, and it’s not because of evil short sellers. If AIG was solvent and a “national treasure” that was in a short term liquidity pinch, as described by the loathsome Hank Greenberg, then:
1. Why don’t they know precisely how much money they need, and
19 September 2008, 9:49 pm2. How is it the world’s largest insurance company, with over one trillion dollars in assets under its name, can’t offer anything in the way of collateral?
Lisa:
IT’S THE DERIVATIVES, STUPID!
WHY FANNIE, FREDDIE AND AIG ALL HAD TO BE BAILED OUT
Ellen Brown, September 18, 2008
http://www.webofdebt.com/articles/its_the_derivatives.php
“I can calculate the movement of the stars, but not the madness of men.”
– Sir Isaac Newton, after losing a fortune in the South Sea bubble
Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .
The Fed is buying an insurance company? Where exactly is that covered in the Federal Reserve Act? The Associated Press calls it a “government takeover,” but this is not your ordinary “nationalization” like the purchase of Fannie/Freddie stock by the U.S. Treasury. The Federal Reserve has the power to print the national money supply, but it is not actually a part of the U.S. government. It is a private banking corporation owned by a consortium of private banks. The banking industry just bought the world’s largest insurance company, and they used federal money to do it. Yahoo Finance reported on September 17:
“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”
Treasury bills are the I.O.U.s of the federal government. We the taxpayers are on the hook for the Fed’s “enhanced liquidity facilities,” meaning the loans it has been making to everyone in sight, bank or non-bank, exercising obscure provisions in the Federal Reserve Act that may or may not say they can do it. What’s going on here? Why not let the free market work? Bankruptcy courts know how to sort out assets and reorganize companies so they can operate again. Why the extraordinary measures for Fannie, Freddie and AIG?
The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.
Full article:
http://www.webofdebt.com/articles/its_the_derivatives.php
19 September 2008, 10:31 pmStan:
Uh… people DO need to be reminded of the truth that Glass-Steagall went down under Clinton’s signature… if we are to tell the truth about what happened. And I think I DO want to represent myself — to the degree I just did — with the Whitney article.
This is not a new topic here. I’ve cited Liu, Hudson, and Gowan countless times over the last few years before the bubble burst. Ralph Nader has been hollering about Glass-Steagall for years. This did not just happen; and it is not the fault of Democrats or Republicans, but Democrats and Republicans… and more precisely, of capitalism. Positing some naive libertarian fantasy about free markets unfettered by the state utterly fails to account for what the state is. Liu has taken aim at derivatives trading for a minute now. Hudson mapped the evolution of the debt-imperialism system. Gowan laid out the macro-economics. As to outcomes that will go far far beyond the financial collapse, I like the term exterminism.
20 September 2008, 5:22 amCraig:
Stan:
It’s a question of tactics and how you express yourself to people. The repeal of Glass-Steagall is clearly a factor in all of this, and calling for its reinstatement is proper. However, if you throw Clinton’s name in people’s faces, you’ll turn people off, because this isn’t just about Clinton, or even just about Glass-Steagall. There are systemic problems that go back decades, and that’s what people need to understand. Focusing on blaming one person over another is a distraction and counter-productive.
As to the Whitney article, do you actually believe in the Plunge Protection Team? Every time I come across this paranoid delusion, I want to puke. In the wake of possibly the most overt market manipulation of U.S. financial markets in history, are you actually suggesting there is a covert cabal behind the wild fluctuations in stock prices?
20 September 2008, 8:45 amCraig:
New Bailout Proposal Costs Estimated at $500 Billion to $1 Trilloin(sic)
by Yves Smith @ Naked Capitalism
FULL.
20 September 2008, 9:43 amLisa:
September 20 / 21, 2008
The Market and the Terminator Machines
America’s Own Kleptocracy
By MICHAEL HUDSON
…
Overnight, the U.S. Treasury and Federal Reserve have radically changed the character of American capitalism. It is nothing less than a coup d’êtat for the class that FDR called “banksters.” What has happened in the past two weeks threatens to change the coming century – irreversibly, if they can get away with it. This is the largest and most inequitable transfer of wealth since the land giveaways to the railroad barons during the Civil War era…
http://counterpunch.org/hudson09202008.html
20 September 2008, 11:12 amLegume Sam:
One thing to note, though, is that the Ellen Brown article seems to be part of this “back to Keynes” rhetorical trend that you see in the progressive blogosphere. Brown says:
Uh, no, it’s not. 2008 is not 1932, for a bunch of reasons. I discuss them in my recent diary here.
What we need is a wholesale abandonment of the commodity form…
20 September 2008, 12:20 pmLisa:
September 20 / 21, 2008
CounterPunch Diary
Is This the Stake Through Neoliberalism’s Heart? It Should Be, But …
By ALEXANDER COCKBURN
…
For the practicalities and implications of the thievery on Wall Street I highly recommend the pieces on our site this weekend by Michael Hudson, Pam Martens and our other writers. I also press upon our readers the reminder, which CounterPunchers surely don’t need, that when it comes to fingering the perpetrators this crisis is indeed truly bipartisan. What exploded last week was an economic credo that has been rolling along since the early 1970s: neoliberalism.
By all rights, this last crisis has brought us to the crossroads where neoliberalism should be buried with a stake through its heart.
We’ve had thirty years worth of deregulation – the loosening of government supervision. This has been the neoliberal mantra preached by both major parties, the whole of the establishment press and almost every university economics department in the country. It is central to the current disasters. And if you want to identify symbolic figures in the legislated career of deregulation, there are no more resplendent culprits than the man at McCain’s elbow, Phil Gramm, and the man standing at Obama’s elbow at his press conference, Robert Rubin…
http://counterpunch.org/cockburn09202008.html
20 September 2008, 4:09 pmHenry:
Re: “Uh, no, it’s not. 2008 is not 1932, for a bunch of reasons. I discuss them in my recent diary here.”
Brown says “similar,” not identical. There are in fact striking similarities, as well as equally obvious dissimilarities. I don’t think she would disagree with anything you appear to be promoting. Also, I think it is very clear that she would agree that the system needs to “strip out the swarms of gamblers, fraudsters and profiteers now gaming the system.” In this sense, you are preaching to the choir.
See the American Monetary Institute proposals at http://www.monetary.org, as well as similar ones by Richard Cook at http://www.globalresearch.ca.
Both are people who realize we live–like it or not–in a world that has been immensely urbanized and industrialized.
20 September 2008, 4:24 pmCraig:
Legume Sam: “Uh, no, it’s not. 2008 is not 1932, for a bunch of reasons. I discuss them in my recent diary here.”
If you read this post, you see the quote from Alan Blinder that exemplifies this (foolish) line of thinking. The current consensus in Washington believes the answer is to pump up home prices the same way the short selling ban pumps up equities. It’s doomed to failure, though, because the housing market is too big, too “sticky” and illiquid, and Americans spend too much of their incomes on housing to make this anything more than a short term band-aid. Now that the housing market isn’t driven by wishes and happy thoughts, so that borrowers can refinance out of foreclosure, the market is driven by what people can actually afford, and that turns out to be a whole lot less than where home prices sit now even after such sharp declines.
Another important difference is the massive amounts of debt the U.S. has incurred to foreign countries. The U.S. could easily afford to borrow to prime the pump in the 1930′s, but it is becoming increasingly harder now. There is no “money for schools not bombs” argument to be made here because the money in question is borrowed, and it’s reaching a point where it no longer makes sense to buy Treasuries due to negative yields. Dollar hegemony is about to end.
Why is it every time I read something by Ms Brown I always come across a phrase like “swarms of gamblers, fraudsters and profiteers” that makes me feel like I need a shower?
20 September 2008, 7:10 pmLisa:
Global Financial Meltdown
by Michel Chossudovsky
Global Research, September 18, 2008
The Most Serious Financial Crisis since the 1929 Wall Street Crash
When viewed in a global context, taking into account the instability generated by speculative trade, the implications of this crisis are far-reaching.
The crisis, however, has by no means reached its climax. It could potentially disrupt the very foundations of the international monetary system. The repercussions on people’s lives in America and around the world are dramatic.
The crisis is not limited to the meltdown of financial markets, the real economy at the national and international levels, its institutions, its productive structures are also in jeopardy.
As stock values collapse, lifelong household savings are eroded, not to mention pension funds.
The financial meltdown inevitably backlashes on consumer markets, the housing market, and more broadly on the process of investment in the production of goods and services.
War and the Economic Crisis
What is of utmost significance is that this plunge in stock market values occurs at the crossroads of a major military adventure. The global financial crisis is intimately related to the war.
A spiraling defense budget backlashes on the civilian sectors of economic activity. The war economy has a direct bearing on fiscal and monetary policy. Defense expenditure is in excess of $500 billion. A separate $70 billion is earmarked “to cover war costs into the early months of a new administration. Those amounts combined would represent the highest level of military spending since the end of World War II (adjusted for inflation).” (Csmonitor.com February 06, 2008).
“War is Good for Business”: The powerful financial groups which routinely manipulate stock markets, currency and commodity markets, are also promoting the continuation and escalation of the Middle East war. The financial crisis is related to the structure of US public investment in the war economy versus the funding, through tax dollars, of civilian social programs. “More broadly, this also raises the issue of the role of the US Treasury and the US monetary system, in relentlessly financing the military industrial complex and the Middle East war at the expense of most sectors of civilian economic activity.” (See Michel Chossudovsky, The Democrats endorse the “Global War on Terrorism”: Obama “goes after” Osama, Global Research, August 29, 2008)…
http://www.globalresearch.ca/index.php?context=va&aid=10268
20 September 2008, 8:36 pmLegume Sam:
First, my apologies to “Henry,” who thought the quote about “swarms of gamblers” etc. was me quoting myself. It wasn’t: I was quoting Ellen Brown. Sorry. Next time I’ll identify quotes more clearly.
The point of my three arguments, though, as reflected in my diary for DailyKos.com, was that whereas a “stimulus” might have worked in 1932, it won’t work in 2008 because the growth which would (according to Keynes) justify a further increase in the money supply caused by the “stimulus” will not be forthcoming. It won’t be forthcoming for ecosystem reasons, and it won’t be forthcoming because the structure of finance capital is, today, RADICALLY different from what it was in 1932. Finance capital THEN was unable to prevent the deflation which ensued when it withdrew from the economy after 1929; finance capital TODAY may not prevent the inflation which would occur if all those trillions which the US government will spend to bail out the economy were to spill beyond the safe confines of investor asset inflation.
However, I don’t see dollar hegemony as being “over.” Regardless of the dollar holders’ (eg the Bank of China) present-day eagerness to dump dollars and dollar-denominated assets onto the market, at the end of every day SOMEONE will be holding trillions of dollars, and that someone is going to want something of value for those dollars.
I will go halfway with “Craig” on that one, though. Dollar hegemony is likely to suffer some serious devaluations in the near future, as the value of the dollar sinks further. It never made sense to buy Treasuries for the yield; Treasuries are what they bought, and buy, to prop up the value of the dollars they hold. I do think there’s a point, though, at which they will be unable to do more than cut losses with this strategy.
As for Chossudovsky’s assertion that the new war (in Pakistan?) and the financial crisis are related, I don’t see it. Was there a financial crisis of anything close to this scope in 2003 when Iraq was invaded?
21 September 2008, 11:17 amY.K.:
I agree with Craig’s suggestion to post on economy and finance blogs. You certainly don’t need to be an “advertisement” for the left but most of these people lack serious political categories and historical awareness, even if they are informed about economics or geopolitics. Simply by defining the terms and the tone, by providing the links to more radical perspectives, you can advance the discussion especially among those who are reading about these topics for the first time.
This is like the period after 9/11 when there was some openness to new ideas because of the shock and surprise. Eventually it closed and consolidated, lead in a different direction by the power that be. This will probably happen again. But there was a moment to introduce new perspectives.
The audience is expanding tremendously and people are intensely angry. Even their fears are overwhelmed by anger. Eventually people will become exhausted and a new moment will arise but we can put a dent in the discourse for a while.
The biggest single theme that I can suggest is that poverty is political.
21 September 2008, 2:00 pmLisa:
China threatens ‘nuclear option’ of dollar sales
By Ambrose Evans-Pritchard
Last Updated: 8:39pm BST 10/08/2007
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.
Two officials at leading Communist Party bodies have given interviews in recent days warning – for the first time – that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml
————————————
China accuses US of financial WMD
Thu, 18 Sep 2008 09:22:02 GMT
Markets across Asia tumbled as a result of the Wall Street crisis.
Chinese state media has blamed the US for unleashing financial “weapons of mass destruction” and sparking a global market “tsunami”.
China’s official People’s Daily warned on Wednesday that the US had set off a “financial tsunami” by allowing Wall Street lenders to trade in subprime debts and unstable financial derivatives.
http://www.presstv.ir/detail.aspx?id=69805§ionid=351020404
21 September 2008, 2:18 pmLisa:
Financial Crisis on Wall Street Will Have Minimal Direct Impact on China’s Banking Industry, But Policy Adjustments and Economic Transformation Will Affect Profitability and Future Business Models
…Xinhua Finance believes that the direct risks, including risks related to bond investments and loans, faced by China’s banking system are still manageable, and credit risk exposure to export-driven enterprises is still limited. However, as market confidence declines, risks to banks posed by real estate development loans cannot be ignored, and retail banking will also suffer. Banking industry profits will be hindered by macro-economic policy adjustments the Chinese Government may adopt to prevent a possible economic slowdown. The ability of China’s economy to continue to grow in the long run will depend on economic restructuring and transformation into an economy driven by domestic demand. Banks will play an important role in guiding the direction of capital flows. During this process, banks will need to find new areas for profit growth, and optimize loan and revenue structures. As China’s banking regulators reconsider systemic risk implications, they may be more cautious in deciding whether to move forward with the suggested universal banking model…
http://www.marketwatch.com/news/story/financial-crisis-wall-street-have/story.aspx?guid={FD0863E8-DED5-4E07-839C-171F45CD8411}&dist=hppr
21 September 2008, 2:29 pmLisa:
Fallout Over Mainstream
Mushroom Clouds Over Wall Street
By MIKE WHITNEY
“One bank to rule them all;
One bank to bind them…”
These are dark times. While you were sleeping the cockroaches were busy about their work, rummaging through the US Constitution, and putting the finishing touches on a scheme to assert absolute power over the nation’s financial markets and the country’s economic future. Industry representative Henry Paulson has submitted legislation to Congress that will finally end the pretense that Bush controls anything more than reading the lines from a 4′ by 6′ teleprompter situated just inches from his lifeless pupils. Paulson is in charge now, and the coronation is set for sometime early next week. He rose to power in a stealthily-executed Banksters’ Coup in which he, and his coterie of dodgy friends, declared martial law on the US economy while elevating himself to supreme leader.
“All Hail Caesar!” The days of the republic are over.
Section 8 of the proposed legislation says it all:
“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
Right; “non-reviewable” supremacy.
Full article:
http://counterpunch.com/whitney09222008.html
22 September 2008, 11:33 amLisa:
September 22, 2008
Will the Cure be Worse Than the Crisis?
The Paulson-Bernacke Bank Bailout Plan
By MICHAEL HUDSON
Saturday’s $700 billion junk mortgage bailout is the largest and worst giveaway since a corrupt Congress gave land grants to the railroad barons a century and a half ago. If it goes through, it will shape the coming century by giving finance unprecedented power over debtors – homebuyers, industry, state and local government, and the federal government as well.
But what threatens to be even worse is the government’s move to let the financial sector make even higher, unprecedented gains by working its way out of negative equity to “make taxpayers whole” by repaying the government’s bailout by bleeding the economy at large. nticipating congressional capitulation in this license to engage in predatory credit, the latest Sunday evening surprise is that Treasury Secretary Henry Paulson’s own firm, Goldman Sachs, is to become bank holding company picking up the financial wreckage now that the government is covering the bad loans and investment gambles Wall Street has made.
Full article:
http://counterpunch.org/hudson09222008.html
22 September 2008, 11:35 amHenry:
Re: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
See Whitney article at Counterpunch:
http://counterpunch.org/whitney09222008.html
This is probably the most critical and dangerous moment in US history, as far as preservation of political and economic freedom is concerned.
Some on this order is probably waiting in the wings as a result of this if it it put into effect:
“…no one may buy or sell except one who has the mark or the name of the beast, or the number of his name.” Revelation 13:16-17
22 September 2008, 11:43 amLisa:
What the latest bailout plan means
Now that the details are out, we can safely state that the US political and financial leadership has completely sold out the taxpayers and has done so in a manner that is startling, both in its recklessness and its brazenness.
The reckless part I will spell out in the details below.
The brazen part is in how this is being spun out, as if the entire plan were hatched in a hurried rush, at the last minute, after events forced the issue. This is the spin, but it is completely false.
Because many financial commentators, ranging from Roubini to Roach to Calculated Risk to myself, foresaw these events, we can be completely confident that these events were both anticipated and planned for long in advance. The only question left was how they were going to be ‘sold’ to the public. What better way than in the midst of a “massive financial panic” that required urgent action?
And now that the details are out, the plan is even more insidious than I ever dreamed.
Full article: (includes LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS)
http://www.chrismartenson.com/blog/what-latest-bailout-plan-means/5149
22 September 2008, 12:36 pmLisa:
Treasury seeks to expand definition of “troubled assets” coverd by bailout
I know things are moving fast but I object to retroactive editing of on-line articles without any indication that this has been done.
I captured the quote (below) from this article in Bloomberg earlier, but it no longer exists in the linked article. You can still find this quote in the Google cache, but I don’t know how long it will remain there either.
Quote:
“The Treasury’s thinking is to make it as big and wide as possible so they have the flexibility to act if need be,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion. “There have been losses on a whole range of U.S. debts and as the economy deteriorates in response to the housing slump those losses could escalate.”
Treasury officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.
This quote caught my attention (and quick capture) because of it’s blunt honesty and potential implications. Let’s think of all the types of debt that could reasonably be considered as “troubled” the mortgage meltdown.
Auto loans. Certainly anybody who is losing money on a house might be at risk of not paying off their auto loans, so these are clearly linked.
Credit card loans. Ditto above.
Corporate bonds. Well, certainly it can be argued that if we weren’t in the midst of a gigantic housing bust corporations would be doing better. So these are ‘linked’ I guess.
Municipal bonds. Who could argue that municipalities are worse for the wear due to the housing bust?
Etc. and so forth.
I think that the fact that this sort of statement/speculation even snuck through provides enough “smoke” that we have to consider it likely that the behind-the-scenes situation is far more grave than has been let on.
Any expansion of the bailout to “troubled loans” will simply mean the end of the dollar as we know it. You can set an egg timer on it.
22 September 2008, 3:19 pmLisa:
Sorry, I forgot to include the URL to the above article, “Treasury seeks to expand definition of “troubled assets” coverd by bailout”:
http://www.chrismartenson.com/blog/treasury-seeks-expand-definition-troubled-assets-coverd-bailout/5222
22 September 2008, 3:20 pmLisa:
September 25, 2008
The Big Bank Job
The Insanity of the $700 Billion Giveaway
By MICHAEL HUDSON
The banksters’ plan now is for icing on the cake – to take Mr. Paulson’s $700 billion and run. It’s not a “bailout of the financial system.” It’s as giveaway – to insiders, to sell out all their bad bets. Companies across the board will get rid of their bad mortgages, and also their bad car loans, furniture time payments, credit-card loans, student loans – all the debts that any competent actuary could have told them never could have been paid in the first place.
This is not what Treasury Secretary Paulson is acknowledging, and shame on him for it. Last Friday, Sept., he was joined by Fed Chairman Ben Bernanke singing in unison an advertising jingle for America’s new kleptocracy that rings so false that Congress and the American public must hear the off-notes. London’s Financial Times, as well as a host of Europeans realize it. That is what has been driving the dollar’s exchange rate this week. It seems easier for foreigners to recognize the threat to turn American democracy into a rapacious kleptocracy.
This change always is sudden, arranged under emergency conditions. Those with a 12-year memory will see George Bush as playing the role of Boris Yeltsin in Russia in 1996, paying off his campaign contributors by giving them all the economic surplus that the government could expropriate in the notorious “loans for shares” plan applauded and supported by Clinton Treasury Secretary (and current Obama advisor) Robert Rubin. (The moral: do we have a Putin in our near future to lock in the anti-democratic coup?
Full article:
http://counterpunch.org/hudson09252008.html
A somewhat expanded version of the article, with some interesting historical observations is at:
http://globalresearch.ca/index.php?context=va&aid=10330
25 September 2008, 12:11 pmcharles:
(The moral: do we have a Putin in our near future to lock in the anti-democratic coup?
^^^^^
26 September 2008, 2:12 pmWith Putin, the top Russian capitalist oligarch went to prison. Hopefully, we do have a “Putin” in our future. Or else, we should send our financiers to Russia for prosecution.
Lisa:
Trouble in Banktopia
By Mike Whitney
27/09/08 “ICH” — – The financial system is blowing up. Don’t listen to the experts; just look at the numbers. Last week, according to Reuters, “U.S. banks borrowed a record amount from the Federal Reserve nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression.” The Fed opened the various “auction facilities” to create the appearance that insolvent banks were thriving businesses, but they are not. They’re dead; their liabilities exceed their assets. Now the Fed is desperate because the hundreds of billions of dollars of mortgage-backed securities (MBS) in the banks vaults have bankrupt the entire system and the Fed’s balance sheet is ballooning by the day. The market for MBS will not bounce back in the foreseeable future and the banks are unable to roll-over their short term debt. Game over. The Federal Reserve itself is in danger. So, it’s on to Plan B; which is to dump all the toxic sludge on the taxpayer before he realizes that the whole system is cratering and his life is about to change forever. It’s called the Paulson Plan, a $700 billion boondoggle which has already been disparaged by every economist of merit in the country…
Market Ticker has provided charts from the Federal Reserve that prove that Bernanke has withdrawn $125 billion from the banking system in the last 4 days alone to create a crisis situation that will incite credit market mayhem and increase the liklihood of passing the bill. This is coercion of the worst kind. http://market-ticker.denninger.net/archives/2008/09/24.html...
Full article:
http://www.informationclearinghouse.info/article20883.htm
28 September 2008, 12:53 am