By MIKE WHITNEY -
One major player, Bear Stearns, has already gone under, and from the
looks of it, another investment giant may be on the way down. It's
getting ugly out there. The so-called TED spread*, which measures the
reluctance of banks to lend to each other, has begun to widen
ominously suggesting that the money markets think another dead body
will be floating to the surface any day now.
The ongoing deleveraging of financial institutions and the persistent
downgrading of assets has the Fed in a tizzy. Bernanke has backed
himself into a corner by stretching the Fed's mandate to include
everyone on Wall Street with a mailing address and a begging bowl. Now
he's taken on the even larger task of fixing the plumbing that keeps
credit flowing between the various investment banks. Good luck.
There's plenty of more pain ahead. The IMF expects the final tally
will be $945 billion, that means $3 trillion in lost loans for the
banks. Bernanke better pace himself; this mess could last for years.
The US subprime fiasco has spiraled into what the IMF is calling "the
largest financial shock since the Great Depression." America's capital
markets are on the fritz. The cor****ate bond market is frozen, the
banks are buckling from their losses, and the housing market is in a
shambles. No one is buying and no one is lending. Private equity deals
are off 75 per cent from last year and no one will touch a mortgage-
backed security (MBS) with a ten foot pole. The mighty wheel of modern
finance is grinding to a standstill and no one's quite sure how to rev
it up again.
The US consumers are feeling the pinch, too. Credit cards are maxed
out, student loans overdue, car payments in arrears, and mortgages
entering foreclosure. Also, wages haven't kept pace with production
and and the home-equity ATM has been shut down. Now that the credit
tap has been turned off; the American worker is hurting, but no one is
offering a bailout or a even helping hand; just a few table-scraps
from Bush's "surplus package". 500 bucks will just about fill the tank
of a normal-sized SUV. A new survey from the Pew research Center
"Inside the Middle Class-Bad Times Hit the Good Life", shows that
working families are in debt up to their ears and that fewer Americans
"believe they are moving forward" than anytime in the last half
century. The study also shows that most people believe "it's harder to
maintain a middle class life style" and that "since 1999, they have
not made economic gains." Average families are struggling just to make
ends meet.
That's why so many people bought homes when they should have opened
savings accounts. They were duped into speculating on housing so they
could get a chunk of money. It looked like a good way to overcome
stagnant wages and crappy hours. The cheer-leading TV pundits offered
assurances that "housing prices never go down". It was all baloney.
Now 15 million homeowners are upside-down on their mortgages and the
very same experts are scolding workers for fudging the facts on their
income disclosure forms. It's all backwards.
No wonder consumer confidence has dropped to record lows. Working
people don't need lectures on saving money; they need a raise. The big-
wigs at Bear Stearns are still dining on crab-cakes at the Four
Seasons while the working folk are just trying to make their way
through Greenspan's nuclear winter living on beef jerky and Big Gulps.
Where's the justice?
Volumes have been written about the current crisis; subprime-this,
subprime that. Everything that can be said about collateralized debt
obligations (CDOs) credit default swaps(CDS) and mortgage-backed
securities (MBS) has already been said. Yes, they are exotic
"financial innovations" and, no, they are not regulated. But what
difference does that make? There's always been s**** oil and there
have always been s**** oil salesmen. Greenspan simply raised the bar a
notch, but he's not the first huckster and he won't be the last. What
really matters is underlying ideology; that's the root from which this
economy-busting hydra sprung. 30 years of trickle down, supply-side
gibberish; 30 years of idol wor****p for the waxy-haired reactionary,
Ronald Reagun; 30 years of unrelenting anti-labor, free market,
deregulated orthodoxy which inflated the biggest equity-Zeppelin in
history.
Now the bubble is hissing out of the blimp and the escaping gas is
wreaking havoc across the planet. There are food riots in Haiti,
Egypt, and Kuwait. Wherever the local currency is pegged to the
falling dollar, inflation is soaring and trouble is brewing. Also,
European banks are listing from the mortgage-backed garbage they
bought from brokerages in the US and need central bank bailouts to
stay afloat. It's just more fallout from the subprime swindle. Finance
ministers in every capital in every country are getting ready for a
1930's-type typhoon that could send equities cra****ng and food and
energy prices rocketing into the stratosphere. And it can all be
traced back to the wacko doctrines of neoliberalism. These are the
theories that guide America's "screw-thy-neighbor" monetary policies
and spread financial turmoil to every city and hamlet around the
world.
The present stewards of the system are incapable of fixing the problem
because they represent the interests of the people who benefit most
from the disruptions. Paulson's latest "blueprint" for the financial
markets is a good example; a more pro-business, self-serving scheme
has never been put to paper. Gary North sums it up in his article
"Really Stupid Loans":
"With the Federal Reserve System's latest proposal, presented to the
public by Secretary of the Treasury Henry "Goldman Sachs" Paulson, the
Fed is asking the United States government to make it the Great
Protector of Capital....The new proposals will centralize power over
finance in the hands of an agency that is officially run by the
government but in fact is run by agents of the largest fractional
reserve banks. ...Regulation by tenured staff economists will not make
the system less fragile. It will make it more top-heavy and less
flexible..
"Some version of this plan will probably pass in the next Congress. No
matter whether it does or does not, the direction is the same: toward
an economy controlled by the federal government in conjunction with
titular private owner****p of the means of production, that is, toward
fascism."
(Gary North, "Really Stupid loans" lewrockwell.com)
The whole point is to put the markets in the Fed's control so that
when the next financial crisis arises (from the next swindle) the Fed
can bailout the bankers and hedge fund managers without consulting
Congress.
Paulson's plan is a power-play; nothing more. The investment Mafia
wants to take over the whole financial system lock, stock and barrel.
They want to liquidate the SEC and any other government watchdog and
put the investment banks, hedge funds and brokerages on the honor
system. It's the end of transparency and accountability which, of
course, are already in short supply.
Currently, Paulson and Bernanke are expanding the balance sheets of
the Government Sponsored Enterprises (GSEs) so that Fannie Mae and
Freddie Mac will underwrite 85 per cent of all mortgages while FHA
will cover 10 per cent more. The mortgage industry is being
nationalized to save banking fellow****p while the taxpayer is on the
hook for another $4.4 trillion of dodgy loans. Paulson doesn't care if
the taxpayer gets stuck with the bill. What bothers him is the
prospect that, somewhere along the line, workers will demand higher
wages to keep pace with inflation. Then all hell will break loose.
Paulson and Co. would rather see the economy perish in a deflationary
holocaust than add another farthing to a working person's salary. He
and his ilk take class warfare seriously; that's why they are winning.
But their strategy also creates problems. When wages don't keep pace
with production, demand decreases and the economy falters. That's
what's happening now and Paulson knows it. Workers are over-extended
and can't buy the things they make. They barely have enough to feed
the kids and fill the tank for work. Consumer spending (which is 72
per cent of GDP) is nose-diving at the very same time the Fed's equity
bubble is exploding.
Neoliberalism has a twenty-year record of producing the very same
economic calamities. Why is this crisis different? Why should the US
be spared the same predatory treatment as the many other victims of
the global cor****ate oligarchy? After the Fed's equity bubble bursts,
the cor****ate vultures will swoop down and buy up vital resources and
industries for pennies on the dollar.
Economist Michael Hudson anticipated many of the present-day
developments in the financial markets in an amazingly prescient
interview in CounterPunch in 2003 called "The Coming Financial
Reality":
Michael Hudson: "Free enterprise under today's financial conditions
threatens to bring about an unprecedented centralization of planning,
not in the hands of government but by the financial conglomerates and
money managers. Whatever government planning power is destroyed
becomes available for them to appropriate, with plenty of vigorish
left for the politicians whose campaigns they back and who will
"descend from heaven" into high-paying private-sector jobs, Japanese
style, after having performed their service for the new regime.
Question: The financial regime is nothing but parasites?
Michael Hudson: "The problem with parasites is not merely that they
siphon off the food and nourishment of their host, crippling its
reproductive power, but that they take over the host's brain as well.
The parasite tricks the host into thinking that it is feeding itself.
"Something like this is happening today as the financial sector is
devouring the industrial sector. Finance capital pretends that its
growth is that of industrial capital formation. That is why the
financial bubble is called 'wealth creation,' as if it were what
progressive economic reformers envisioned a century ago. They
condemned rent and monopoly profit, but never dreamed that the
financiers would end up devouring landlord and industrialist alike.
Emperors of Finance have trumped Barons of Property and Captains of
Industry." (Michael Hudson, "The Coming Financial Reality",
counterpunch, interviewed by Standard Schaefer.)
Bingo. Hudson not only explains how finance capitalism is inserting
itself into the governmental power structure but, also predicts that
"industrial capital formation" -- which is the production of things
that people can really use to improve their lives -- will be replaced
with complex debt-instruments and derivatives that add no tangible
value to people's lives and merely serve to expand the wealth of an
entrenched and increasingly powerful investor class.
Finance capitalism has "devoured landlord and industrialist alike" and
created a galaxy of seductive liabilities which masquerade as assets.
Derivatives contracts, for example, represent over $500 trillion of
unregulated counterparty transactions; a "shadow banking system"
completely disconnected from the underlying "real" economy, but large
enough to send the world into a agonizing depression for years to
come.
The goal should be to dismantle this corrupt Ponzi-system, which
merely wraps debt in a ribbon, and rebuild the economy on a solid
foundation of productive labor, worker solidarity and and above all
the redistribution of income and hence purchasing power away from the
system which now flow to the top two or three per cent.
Political power has to be taken from the financial mandarins or the
disparity of wealth will continue to grow and democracy will wither.
We've already seen our main institutions -- the courts, the congress,
the media, and the presidency -- polluted by the steady flow of
cor****ate contributions which only serve the narrow interests of
elites.
Henry Liu expands on this idea in his excellent article "A Panic-
stricken Federal Reserve":
"In the 1920s, the wide disparity of wealth between the rich and the
average wage earner increased the vulnerability of the economy. For an
economy to function with stability on a macro scale, total demand
needs to equal total supply. Disparity of income eventually will
result in demand deficiency, causing over-supply. The extension of
credit to consumers can extend the supply/demand imbalance but if
credit is extended beyond the ability of income to sustain, a debt
bubble will result that will inevitably burst with economic pain that
can only be relieved by inflation.....More investment normally
increases productivity. However, if the rewards of the increased
productivity are not distributed fairly to workers, production will
soon outpace demand. The search for high returns in a low demand
market will lead to consumer debt bubbles with wide-spread
speculation .... Today, outstanding consumer credit besides home
mortgages adds up to about $14 trillion, about the same as the annual
GDP. "
Voila. A strong economy requires a strong workforce and an equitable
distribution of wealth. When money is concentrated in too few hands,
the political system atrophies and becomes unresponsive to the needs
of its people. That's when the nation's laws and institutions are
reshaped to reflect the ambitions of rich and powerful.
The financial system is doing exactly what it was designed to do, it
is crumbling from the decades-long trickle-down experiment. Social
programs have been gutted, civil infrastructure is in tatters, legal
protections have been savaged, and workers rights have been trounced.
Is it any wonder why we're embroiled in an unwinnable war and the
financial system is on its last legs?
The only way to break the stranglehold of Wall Street's financial
Politburo is to level the playing field through greater wealth
distribution. That's the best way to rekindle democracy and make
America the land of op****tunity again. And it all starts with giving
America's workers a raise.
*Initially, the TED spread was the difference between the interest
rate for the three month U.S. Treasuries contract and three month
Eurodollars contract as represented by the London Inter Bank Offered
Rate (LIBOR). However, since the Chicago Mercantile Exchange dropped
the T-bill futures, the TED spread is now calculated as the difference
between the T-bill interest rate and LIBOR. The TED spread is a
measure of liquidity and shows the flow of dollars into and out of the
United States (Wikipedia).
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Mike Whitney lives in Wa****ngton state. He can be reached at:
fergiewhitney@[EMAIL PROTECTED]
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