[papabear]

The Idiots Who Rule America
http://www.truthdig.com/report/item/200810...o_rule_america/
Posted on Oct 20, 2008

By Chris Hedges

Our oligarchic class is incompetent at governing, managing the economy, coping with natural disasters, educating our young, handling foreign affairs, providing basic services like health care and safeguarding individual rights. That it is still in power, and will remain in power after this election, is a testament to our inability to separate illusion from reality. We still believe in “the experts.” They still believe in themselves. They are clustered like flies swarming around John McCain and Barack Obama. It is only when these elites are exposed as incompetent parasites and dethroned that we will have any hope of restoring social, economic and political order.

“Their inability to see the human as anything more than interest driven made it impossible for them to imagine an actively organized pool of disinterest called the public good,” said the Canadian philosopher John Ralston Saul, whose books “The Unconscious Civilization” and “Voltaire’s Bastards” excoriates our oligarchic elites. “It is as if the Industrial Revolution had caused a severe mental trauma, one that still reaches out and extinguishes the memory of certain people. For them, modern history begins from a big explosion—the Industrial Revolution. This is a standard ideological approach: a star crosses the sky, a meteor explodes, and history begins anew.”

Our elites—the ones in Congress, the ones on Wall Street and the ones being produced at prestigious universities and business schools—do not have the capacity to fix our financial mess. Indeed, they will make it worse. They have no concept, thanks to the educations they have received, of the common good. They are stunted, timid and uncreative bureaucrats who are trained to carry out systems management. They see only piecemeal solutions which will satisfy the corporate structure. They are about numbers, profits and personal advancement. They are as able to deny gravely ill people medical coverage to increase company profits as they are able to use taxpayer dollars to peddle costly weapons systems to blood-soaked dictatorships. The human consequences never figure into their balance sheets. The democratic system, they think, is a secondary product of the free market. And they slavishly serve the market.

Andrew Lahde, the Santa Monica, Calif., hedge fund manager who made an 870 percent gain last year by betting on the subprime mortgage collapse, has abruptly shut down his fund, citing the risk of trading with faltering banks. In his farewell letter to his investors he excoriated the elites who run our investment houses, banks and government.

“The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking,” he said of our oligarchic class. “These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”

“On the issue of the U.S. Government, I would like to make a modest proposal,” he went on. “First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have [reined] in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government.”

Democracy is not an outgrowth of free markets. Democracy and capitalism are antagonistic entities. Democracy, like individualism, is not based on personal gain but on self-sacrifice. A functioning democracy must defy the economic interests of elites on behalf of citizens. This is not happening. The corporate managers and government officials trying to fix the economic meltdown are pouring money and resources into the financial sector because they only know how to manage and sustain established systems, not change them. Financial systems, however, are not pure scientific and numerical abstractions that exist independently from human beings.

“When the elite begin to think that money is real, the crash is coming,” Saul said in a telephone interview. “That is just a given in history. Because what they’ve done is pull themselves out of the possibility of looking in the mirror and thinking, this is inflation, speculation, this is fluff. They can’t do it. And when you say to them, gosh, this is not real. And they say, oh, you don’t understand, you’re so old-fashioned, you still think this is about manufacturing. And of course, it’s basic economics. And that’s what happens every single time.

“The difficulty is you have a collapse, you have a loss of face by the people who are there, and it’s not just George Bush, it’s very, very deep,” Saul said. “What we’re talking about is the need to rethink the departments of economics, of political science. Then you have to rethink the whole analytic method of the World Bank. If I’m the secretary of the treasury, and not a guy like [Henry] Paulson, but I mean a sort of normal secretary of the treasury or minister of finance, and I say, OK, we’ve got a real problem, let’s get the senior civil servants in here. Gentlemen, ladies, OK, clearly we have to go in another direction, give me some ideas. Well, those people don’t have any other ideas because at this point they’re about the fourth generation of what you might call neoconservative globalist managers, unfairly summarized. So they then go to the people who work for them, and you work down; there’s no one in there with an alternate approach. I mean they’ll have little alternatives, but no basic differences in opinion. And so it’s very difficult to turn anything around because they’ve eliminated all opposing ideas inside. I mean it’s the problem of the Soviet Union, right?”

Saul pointed out that the first three aims of the corporatist movement in Germany, Italy and France during the 1920s, those that went on to become part of the Fascist experience, were “to shift power directly to economic and social interest groups, to push entrepreneurial initiative in areas normally reserved for public bodies” and to “obliterate the boundaries between public and private interest—that is, challenge the idea of the public interest.”

Sound familiar?

“There are a handful of people who haven’t been published in mainstream journals, who haven’t been listened to, who have been marginalized in every way,” Saul said. “There are a couple of them and you could turn to them. But then who do you give the orders to? And the people you give the orders to, they are not going to understand the orders because it hasn’t been a part of their education. So it’s a real problem of a good general who suddenly finds that his junior generals and brigadiers and corporals, you want them to do irregular warfare and they only know how to do trenches. And so how the hell do you get them to do this thing which they’ve never been trained to do? And so you get this kind of disorder, confusion inside, and the danger of what rises up there is populism; we’ve already had populism in a way, but we could get more populism, more fear and anger.”

We may elect representatives to Congress to end the war in Iraq, but the war goes on. We may plead with these representatives to halt Bush’s illegal wiretapping but the telecommunications lobbyists make sure it remains in place. We may beg them not to pass the bailout but 850 billion taxpayer dollars are funneled upward to the elites on Wall Street. We may want single-payer, not-for-profit health care but it is not even discussed as a possibility in presidential debates. We, as individuals in this system, are irrelevant.

“I’ve talked to several Supreme Court justices, several times in several countries,” Saul told me, “and I say, look, in your rulings, can you differentiate easily in cases between the social contract and the commercial contract, and to which the answer is, we can no longer differentiate. And that lies at the heart of the problem. You don’t have the concept of the other, and of obligation of the individual leading to individualism. You can’t have that if the whole legal system has slipped over the last, really, 50 years, increasingly, to a confusion between the social contract and the commercial contract. Because they are two completely different things. The social contract is about the public good, responsible individualism, imagining the other. The commercial contract is a commercial contract. They’re not supposed to be confused. They don’t actually fit together. The commercial contract only works properly when the social contract works in a democracy.”

The working class, which has desperately borrowed money to stay afloat as real wages have dropped, now face years, maybe decades, of stagnant or declining incomes without access to new credit. The national treasury meanwhile is being drained on behalf of speculative commercial interests. The government—the only institution citizens have that is big enough and powerful enough to protect their rights—is becoming weaker, more anemic and less able to help the mass of Americans who are embarking on a period of deprivation and suffering unseen in this country since the 1930s. Consumption, the profligate engine of the U.S. economy, is withering. September retail sales across the U.S. fell 1.2 percent. The decline was almost double the 0.7 percent drop analysts expected from consumers, whose spending represents two-thirds of U.S. economic activity. There were 160,000 jobs lost last month and three-quarters of a million jobs lost this year. The reverberations of the economic meltdown are only beginning.

I do not think George W. Bush or Barack Obama or John McCain or Henry Paulson are fascists. Rather, they are part of a cabal of naive, mediocre and self-deluded capitalists who are steadily weakening political and economic structures to a point where our democracy will become so impotent that it can be blown aside, probably with broad popular support. The only question is how this will happen. Will there be a steady and slow decline as in the late Roman Empire when the Senate ended as a farce? Will we see a powerful right-wing backlash from those outside the mainstream political system, as we did in Yugoslavia, and the rise of a militant Christian fascism? Will there be a national crisis that allows those in power to instantly sweep away all constitutional rights in the name of national security?

I do not know. But I do know that what is coming, as long as our oligarchy remains in charge, will not be good. We will either recover the concept of the public good, and this means a revolt against our bankrupt elite and the dynamiting of the corporatist structure, or we will extinguish our democracy.

[papabear]

http://www.counterpunch.org/whitney10242008.html
"The Whole System is Contracting"
Down for the Count

By MIKE WHITNEY

"The great inter-war slumps were not acts of God or of blind forces. They were the sure and certain result of the concentration of too much economic power in the hands of too few men (who) felt no responsibility to the nation."

From the 1945 UK Labour manifesto Let Us Face The Future

There are signs that the credit crunch is easing. Interbank lending in dollars has fallen for a ninth straight day. The various indicators of stress in the market--Libor, the TED spread, and the Libor-OIS spread--are all gradually returning to normal, but the damage to the broader economy has been substantial. Major corporations have had to stretch their credit lines just to get the money they need to cover routine operating expenses and a lot of retailers have not been able to get funding for their inventories for the holiday season, so they'll either have to hire fewer workers or simply shut their doors for Christmas. Also, corporate defaults have increased as businesses have been unable to turn over their short-term debt. According to Fitch Ratings, the "crisis will cut growth in credit this year by 50 percent as financial firms reduce leverage, investors' appetite for risk declines, and the worldwide economy slows." When credit is less available, there's less business activity and the economy slows. Unemployment goes up and quarterly earnings go down. It's a vicious circle that starts with speculation and ends in panic. The financial system has to reestablish its equilibrium by purging the excessive credit that developed through low interest rates and lax lending standards. Financial institutions everywhere are in the process of deleveraging which is putting downward pressure on the main stock indexes and creating turmoil in the currency markets.

The US Treasury and Federal Reserve are now underwriting the entire financial system. The free market has been abandoned altogether. Everything from commercial paper to money markets is now backed by the "full faith and credit of the United States". Without that explicit government guarantee, the credit markets would still be frozen and the system would crash. But government guarantees do not address the real problem, which is toxic assets that must be accounted for and written down. All it does is take hundreds of billions of dollars in mortgage-backed garbage onto the nation's balance sheet and undermine the creditworthiness of the United States. Eventually, foreign central banks will see the folly of this maneuver and refuse to buy more US debt. When that happens, there will be a run on the dollar and a major dislocation in the bond market. Then, the financial system will grind to a standstill once again.

Secretary of the Treasury Henry Paulson's $125 billion capital "giveaway" to nine of the country's largest banks has helped to calm the credit markets, but it won't last. The "real economy" is beginning to stumble and the stock market is gyrating more wildly than anytime in history. Wall Street is consumed with fear and investors are ducking out the exits as fast as their feet will carry them. According to the New York Times, the banks probably won't even use Paulson's money to extend loans to consumers and businesses (as intended), but will hoard it to make sure they are sufficiently capitalized when their mortgage-backed assets are downgraded. Even worse, the banks may use the money to gobble up smaller local and regional banks. On Tuesday's Jim Lerher News Hour, New York Times journalist Andrew Ross Sorkin put it like this: "The other thing that some of them may do with that money is go out and make acquisitions and buy other banks, (which) means that you will not be getting this money into your pocket anytime soon....I think the larger issue is the economy and these banks, in terms of lending, are not going to start lending real money until the economy turns."

Paulson knows what the banks are up to; after all, these are his friends. The truth is, the $125 billion was not given to the banks to soften the effects of the recession or increase lending. It was given to make the strong banks even stronger so they could monopolize the industry. Paulson's real plan is "more consolidation" and less competition, or as economist Michael Hudson says, "Big fish eat little fish". The Treasury Secretary is using his authority to reward his friends rather than doing what is best for the country.

In the last few weeks, the broader economy has deteriorated faster than anytime in the last 70 years. That's why Fed chief Ben Bernanke has given the nod to another stimulus package of $150 to $300 billion dollars. The gears are rusting in place and the desperation in Washington is palpable. Calculated Risk web site provided a transcript of a conference call by MSC Industrial Supply (MSC) which summed up the prevailing mood in today's business world:

MSC: “In the last several weeks, customers' sentiment has turned dramatically downwards. Here are a few of the things we have recently heard and I'll quote a few of them. One quote is our new orders are down substantially in the last few weeks. Another is that corporate has told us to reduce inventory. What we have also heard is make due with what you have. And finally, another quote is capital expenditures are on hold. Customers are concerned about the economy and the lack of available credit. They're reducing inventories, orders, and order size and there has been a trend toward deferring capital expenditures..."

MSC: "David, we view this time as unprecedented in history. The economy is undergoing a huge change, how that is going to shake out all remains to be seen, but I think what is important to know is it's a huge change that, frankly, no one had a chance to see coming, so we than specifically in our customer base there is a tremendous amount of fear that is gripping customers and evidenced by what we have seen the last couple of weeks in October, almost buying paralysis, that is really the way that we think about it, and frankly, in speaking with so many customers what we see happening.... What is has happened here with the credit crisis is while the economy was by no means booming, it was kind of rolling along and we almost think that what typically would have taken six, seven, eight, 9, 12 months to start to come down happened almost literally overnight." (Calculated Risk)

Events are now unfolding so quickly, they're impossible to follow. But this much is clear, the wheels have fallen off the cart. The Fed has lost control of the system. On Monday, Bernanke announced the creation of the Money Market Investor Funding Facility (MMIFF), which will provide $550 billion in liquidity to U.S. money market investors. It is another in a long list of steps to try to provide liquidity to a system that is burning through trillions of dollars of credit via the deleveraging hedge funds and asset downgrades. Of course, the Fed does not really have the money it has committed. It will have to expand its balance sheet, issue more Treasurys, and hope that foreign central banks do not see that the US financial system is headed for the rocks.

"It is essential we preserve the foundations of democratic capitalism,'' Bush bellowed on Monday.

All that's left of the free market is the threadbare rhetoric of our lame duck President. The world's biggest creditor is now the most ardent defender of market fundamentalism.

Last week, banks borrowed a record $437 billion per day, topping the previous week's $420 billion per day a week earlier. Hundreds of banks cannot meet their capital requirements without regular low interest loans from the Federal Reserve. The banking system is in shambles. The FDIC needs to determine which banks can be saved and which need to be shut down, otherwise the insolvent banks will use the money they get from the Treasury on risky bets to dig their way out of bankruptcy. Without restrictions on how they can issue credit, many of the banks will engage in the same reckless behavior and speculation that brought on the current calamity.


92 year old Anna Schwartz, who co-authored "A Monetary History of the United States" with Milton Friedman, said in a recent Wall Street Journal interview that Paulson and Bernanke "should not be recapitalizing firms that should be shut down." Rather, "firms that made wrong decisions should fail.... By keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis." At the same time, they have not alleviated the uncertainty among lenders "that would-be borrowers have the resources to repay them." This is the very heart of the matter; the distrust will remain until the bankrupt institutions are shut down and confidence is restored. The good banks have to be strengthened, the bad banks have to be closed, deposits have to be insured, foreclosures have to be reduced (to stabilize home prices), and consumers need immediate stimulus (including food stamps, extended unemployment insurance, infrastructure spending and aid to states) to rev up the economy. All of these have to be done as quickly as possible to avoid further damage to the economy and greater personal suffering. According to an estimate by the UNs International Labour Organisation (ILO) "Twenty million jobs will disappear by the end of next year as a result of the impact of the financial crisis on the global economy...Construction, real estate, financial services, and the auto sector are most likely to be hit, according to the ILO's estimate which is based on International Monetary Fund projections for the world economy." It could be worse if the Bernanke and Paulson botch the rescue.

The FDIC's Sheila Bair has been the one "bright light" in the present financial train-wreck. She has done a first-rate job of closing "sick" banks and renegotiating mortgages. Last week, Bair blasted Paulson for focusing all his attention on the banks and financial institutions instead of homeowners, many of who are now facing foreclosure. In an article in the Wall Street Journal, she said: "We're attacking it (the crisis) at the institution level as opposed to the borrower level, and it's the borrowers that are defaulting. That is what's causing the distress at the institution level...So why not tackle the borrower problem?"

Unlike Paulson, Bair seems to grasp that the hemorrhaging in the financial sector cannot be stopped unless the rate of foreclosures is slowed and housing prices stabilize. The FDIC chief has taken a sensible approach to the crisis by writing down the face-value of mortgages and putting homeowners in conventional 30-year fixed rate loans that make it possible for them to avoid foreclosure. According to Bloomberg, "(Bair) now has the authority to offer loan guarantees that could encourage modifications by mortgage-servicing companies in an effort to avert foreclosures. The new financial rescue plan "allows the government to set standards for mortgage changes and offer guarantees for loans that meet the standards." This gets to the root of the larger problem which is stopping the slide in housing prices so that the mortgage-backed securities market can normalize.

The actions of the Fed, the Treasury and the FDIC are likely to cost in excess of $2 trillion. That does not include the trillions in market capitalization that are wiped out by plummeting home and stock prices. Nor does it include the incalculable suffering from rising unemployment, falling living standards, or personal hardship. Eventually, the Fed's emergency measures will result in higher taxes, soaring deficits and slower growth. As America's "consumer-based" economy flags and the recession deepens, capital will flee US Treasurys and securities and create a funding crisis. This may be hard to imagine, now that the dollar is strengthening and US Treasurys appear to be in great demand, but the handwriting is already on the wall.

Brad Setser explains the dollar's surprising reversal in his latest blog-entry: "The dollar’s rise since July is part of a reversal in longstanding investment trends that prevailed during years of plentiful borrowing, strong growth and low financial-market volatility. “Essentially, every large trade that built up a head of steam in the go-go years has blown up or is in the process of blowing up,” wrote Alan Ruskin, chief international strategist at RBS Greenwich Capital, in a report to clients. “That goes for almost every asset class.”(Brad Setsers Blog)

The recent surge in US Treasurys is also misleading, much of it having to do with terrified investors that are dumping their shares in stocks, mutual funds and hedge funds for the percieved safety of US debt. Foreign investors, however, seem to be losing their enthusiasm for Treasurys as America's future continues to darken.

The net foreign purchases of long term securities in August was a mere $14 billion following an even more dismal $8.6 billion in July; not nearly enough to meet $55 billion per month the US needs to balance its consumption of foreign goods. Even worse, the purchases of long-term US securities "went negative" by for foreign private investors (by $8.8 billion) which means that the dollar is being artificially propped up by foreign central banks to avert a disorderly unwinding of the currency.

Foreign investors and central banks are no longer providing the capital to support the US $700 billion current account deficit. They have lost confidence in America's ability to bounce back from the credit crisis which has swept through the financial system and is now hammering away at the broader economy. That means the demand for US debt will fall and the prospect of hyperinflation will grow. Even if the dollar is able to weather the storm ahead (and the nation can avoid a funding crisis) the massive deficits brought on by Bernanke's "emergency" spending spree will force interest rates upwards and tighten credit even more. As Michael Panzer, author of "Financial Armageddon" says:

"While the U.S. may not suffer from a funding crisis in the immediate future, the voracious money-raising appetite will make life much more difficult for the private sector, in the sense that, they will be 'crowding out' increasingly desperate borrowers who will find their options are more and more limited."

The Fed now faces the daunting task of trying to maintain America's dominant place in the global system while the economy contracts, deficits skyrocket and the pillars of US-style capitalism come crashing to earth.

[papabear]

http://www.bloomberg.com/apps/news?pid=206...&refer=home
Roubini Says `Panic' May Force Market Shutdown (Update2)

By Alexis Xydias and Camilla Hall

Oct. 23 (Bloomberg) -- Hundreds of hedge funds will fail and policy makers may need to shut financial markets for a week or more as the crisis forces investors to dump assets, New York University Professor Nouriel Roubini said.

``We've reached a situation of sheer panic,'' Roubini, who predicted the financial crisis in 2006, told a conference of hedge-fund managers in London today. ``There will be massive dumping of assets'' and ``hundreds of hedge funds are going to go bust,'' he said.

Group of Seven policy makers have stopped short of market suspensions to stem the crisis after the U.S. pledged on Oct. 14 to invest about $125 billion in nine banks and the Federal Reserve led a global coordinated move to cut interest rates on Oct. 8. Emmanuel Roman, co-chief executive officer at GLG Partners Inc., said today that as many as 30 percent of hedge funds will close.

``Systemic risk has become bigger and bigger,'' Roubini said at the Hedge 2008 conference. ``We're seeing the beginning of a run on a big chunk of the hedge funds,'' and ``don't be surprised if policy makers need to close down markets for a week or two in coming days,'' he said.

Roubini predicted in July 2006 that the U.S. would enter an economic recession. In February this year, he forecast a ``catastrophic'' financial meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks exposed to mortgages and a ``sharp drop'' in equities.

Bear, Lehman

The comments preceded the collapse of Bear Stearns & Cos. and Lehman Brothers Holdings Inc. as well as the government seizure of Freddie Mac and Fannie Mae. The Dow Jones Industrial Average, a benchmark for American equities, has lost 37 percent this year, including its biggest daily drop in more than twenty years on Oct. 15.

The Dow average rose 2.5 percent to 8728.73 as of 10:55 a.m. today in New York.

Italian Prime Minister Silvio Berlusconi roiled international markets on Oct. 10, first saying world leaders were discussing shutting down global financial exchanges, and then saying he didn't mean it.

``In a fairly Darwinian manner, many hedge funds will simply disappear,'' Roman said, speaking at the same event as Roubini.

The hedge fund industry is stumbling through its worst year in two decades and posted its biggest monthly drop for a decade in September. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

`Very Ugly'

``Things are getting very ugly also in the emerging markets,'' Roubini said. ``The usual saying is when the U.S. sneezes, the rest of the world catches a cold. Unfortunately, this time around the U.S. is not just sneezing, it has a severe case of chronic and persistent pneumonia. It's becoming a mess in emerging markets.''

Developing nations' borrowing costs jumped to the highest in six years today as Belarus joined Hungary, Ukraine and Pakistan in seeking a bailout from the International Monetary Fund to help weather frozen money markets and a slump in commodities. Argentina risks defaulting for the second time this decade.

``There are about a dozen emerging markets that are now in severe financial trouble,'' Roubini said. ``Even a small country can have a systemic effect on the global economy,'' he added. ``There is not going to be enough IMF money to support them.''

Roubini, a former senior adviser to the U.S. Treasury Department, earlier this month said that the world's biggest economy will suffer its worst recession in 40 years.

``This is the worst financial crisis in the U.S., Europe and now emerging markets that we've seen in a long time,'' Roubini said. ``Things will get much worse before they get better. I fear the worst is ahead of us.''

[papabear]

http://www.blogger.com/posts.g?blogID=26624744
Europe, Asia pledge major reform of global financial system
by Karl Malakunas Karl Malakunas – Fri Oct 24, 3:41 pm ET

BEIJING (AFP) – European and Asian leaders pledged at a summit here Friday to comprehensively and quickly reform the global financial system, as they vowed united action in tackling the unprecedented economic challenges.

The more than 40 leaders spent the first day of the Asia-Europe Meeting (ASEM) in talks on how to end the worst financial turmoil since the Great Depression of the 1930s, as stock markets around the world once again tumbled.

"Leaders pledged to undertake effective and comprehensive reform of the international monetary and financial systems," said a statement posted by host China on the ASEM website's home page at the end of the day's meetings.

"They agreed to take quickly appropriate initiatives in this respect, in consultation with all stakeholders and the relevant international financial institutions."

While no specifics were given, the leaders said supervision and regulation of all those involved in the financial system needed to be stepped up.

And they called for the International Monetary Fund to "play a critical role" in helping countries most in trouble, should they ask for assistance.

Before the meeting began, China, South Korea, Japan and 10 Southeast Asian Nations also pledged to create an 80-billion-dollar fund that those countries could draw upon to fight off currency speculators.

The announcement of the Asian fund, which had been in the pipeline for months, was the first major co-ordinated action by Asian countries in tackling the financial crisis since the worst of the turmoil began last month.

At the opening of the two-day ASEM gathering, Chinese Premier Wen Jiabao made it clear Asia had heard the repeated calls in recent days from Europe for the two regions to work together.

"Overcoming the crisis requires global action and a joint response," Wen told the leaders.

"Asia and Europe are important forces in maintaining financial stability and promoting economic growth. We should join hands to show the world our confidence."

In his opening remarks to the summit, French President Nicolas Sarkozy called on Asia to support Europe at a crucial economic meeting next month in the United States where leaders will discuss ways to end the turmoil.

"When it comes to the Washington summit on November 15, Europe is going to present a united front and we will submit well-considered proposals developed together," Sarkozy said.

"Europe would like Asia to support that effort, so that together on November 15 we can tell the whole world that the causes of this unprecedented crisis will never happen again."

Sarkozy, whose country currently holds the rotating presidency of the European Union, is seeking to overhaul the Bretton Woods system that has governed international finance since the end of World War II.

But the United States has been more cautious in its approach, stressing the importance of preserving the commitment to free markets, free enterprise and free trade.

The statement released by China at the end of Friday's talks backed the Washington summit, but gave no specifics on whether Asia would side with Europe on all issues.

"Leaders supported the convening of an international summit... to address the current crisis and principles of reform of the international financial system as well as long-term stability and development of the world economy," it said.

The most concrete development of the day -- the 80-billion-dollar Asian war chest -- aims to save those nations' currencies if need be, allowing them to dip into the pool of funds to fend off speculators.

"We plan with our East Asia dialogue partners to launch (the fund) as soon as possible," said Sultan Hassanal Bolkiah, leader of ASEAN member Brunei.

The fund would be created by the end of June next year, and be accompanied by an independent regional financial market surveillance organisation, according to South Korean President Lee Myung-Bak's spokesman.

However, no other party involved gave a firm timeline for when the fund would definitely be created.

[papabear]

http://www.asianews.it/index.php?l=en&...3575&size=A
10/24/2008 16:54
ASIA – EUROPE
Much hope but few certainties at the 7th Asia-Europe summit
Europe calls on Asia, especially China, to pump liquidity into world markets to deal with the current crisis. But Beijing is opposed to any major initiative. Summit is also venue for many bilateral meetings between the leaders of the 45 countries present.

Beijing (AsiaNews/Agencies) – The 7th Asia-Europe Meeting (ASEM) began today in Beijing. During the two-day summit the leaders of 45 countries will discuss how to address the world financial crisis and other issues like climate change. It is also the first major international gathering since the implosion of financial markets.

European Commission President José Manuel Barroso said that “[n]o-one in Europe or Asia can seriously pretend to be immune [from the crisis]. We are living in unprecedented times, and we need unprecedented levels of global co-ordination.”

“It's a great opportunity for China to show a sense of responsibility,” he added, explaining that the world needs for Asia (especially China, India and Japan) “to be on board.”

“It's very simple. We swim together or we sink together,” he said.

“In 1998 ASEM in London, the European side offered to set up a joint trust fund to help Asian countries get through the financial crisis back then. This time round, perhaps Asian countries could offer assistance, in the form of money or the sharing of experience, to Europe and show that they are not only `good friends' on paper,” said Paul Lim, a scholar with the Brussels-based European Institute for Asian Studies. “And China is in the best position to do so.”

"We need to explore the possibilities for reform of the international financial structure so that we can make joint efforts to stabilise markets,” said a prudent Liu Jianchao, Chinese foreign ministry spokesman, without going into any details.

For some experts Europe is likely to ask Asian nations, China first among them, to pump much-needed liquidity into financial markets.

Asian economies have not been as badly affected by the crisis and Beijing is still reluctant to take any major decision, even it does not rule it out.

“Sustainable development requires financial stability. All these topics affect one another,” said Zhu Liqun, director of the Institute of International Relations at China Foreign Affairs University, adding that “only with mutual understanding will there be trust. And only with trust will there be long-term co-operation.”

“We shouldn't think this is going to be over soon. The key issue for Asian countries [at the moment] is to prevent the banking crisis from turning into a currency crisis. This is going to be a long and cold winter,” said Bank of China Vice-President Zhu Min yesterday.

Foreign Ministry spokesman Qing Gang insisted on the difficulties developing countries face in the current financial crisis. But what is certain is that all Asian economies are affected by the drop in exports induced by the crisis. For this reason Asian governments have introduced measures to protect small companies (which are more vulnerable to the credit crunch) and offered additional support for infrastructure investments.

Indeed, as Joerg Wuttke, president of the European Chamber of Commerce in China, pointed out, “China can only save itself and thus be a certain stabilizing factor in Asia.”

At the summit a string of bilateral meetings will also be held on the sidelines, including the first meeting between new Japanese Prime Minister Taro Aso and President Hu Jintao.

Yesterday the two countries announced they were setting up a ‘hotline’ for frequent and timely exchange of opinions on relevant topics.

In addition to financial and economic issues the summit will also address climate change, trade, energy, food security as well as intellectual property, currency and human rights (following yesterday’s award by the European parliament of a prize to jailed Chinese dissident Hu Jia against Beijing’s objections), but experts do not expect any major decision to be taken. (PB)

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http://news.yahoo.com/s/ap/20081025/ap_on_...Q0GW8HK0lkDW7oF
Asia, Europe reach consensus on financial crisis

By CHRISTOPHER BODEEN, Associated Press Writer Christopher Bodeen, Associated Press Writer – Sat Oct 25, 7:07 am ET



BEIJING – Asian and European leaders said Saturday they have reached a broad consensus on ways to deal with the global financial meltdown and will present their views at a crisis summit next month in Washington.

Speaking at the close of a two-day Asia-Europe Meeting in China's capital, the leaders called for new rules for guiding the global economy and a leading role for the International Monetary Fund in aiding crisis-stricken countries.

The biennial forum, known as ASEM, generally does not make decisions, and a statement issued by the leaders indicated how much the crisis in global markets has driven world opinion and institutions.

"I'm pleased to confirm a shared determination and commitment of Europe and Asia to work together," EU Commission President Jose Barroso said at a closing news conference.

He said participants would use the statement as the basis of their approach at the Nov. 15 Washington summit of the 20 largest economies.

Although short on details, the statement, adopted Friday, calls on the IMF and similar institutions to help stabilize struggling banks and shore up flagging share prices.

"Leaders agreed that the IMF should play a critical role in assisting countries seriously affected by the crisis, upon their request," it said.

Participants also agreed to "undertake effective and comprehensive reform of the international monetary and financial systems," the statement said.

The document is one of the strongest endorsements yet for a leading role in the crisis for the Washington-based IMF, long known as the international lender of last resort.

Responses to the crisis among participants have been varied thus far. The 15 euro countries and Britain reacted in dramatic fashion, agreeing to put up a total of US$2.3 trillion in guarantees and emergency aid to help banks. In contrast, South Korea, China, Japan and the 10-country Association of Southeast Asian Nations have merely recommitted themselves to an US$80 billion emergency fund to help those facing liquidity problems — to be established by next June — even while their stock markets tumble and export markets dry up.

Speaking for the hosts, Chinese Premier Wen Jiabao said financial innovation needed to be balanced with regulation, and called for measures to reduce the impact of the meltdown on jobs, growth and trade.

"We need to use every means to prevent the financial crisis from having an impact on the growth of the real economy," Wen said.

He said that the direct impact of the crisis on China had been relatively light, but the accompanying slowdown in the world economy and export demand would "inevitably have an impact on China's economy."

China will seek to do its part by maintaining "fairly fast and stable economic growth," Wen said. Although growth in the third quarter slowed to 9 percent — down from 11.9 percent for all of 2007 — China's economy continues to grow at the fastest rate among the largest economies.

French President Nicolas Sarkozy said the Beijing summit had raised expectations for solid results when the leaders meet in Washington.

"They have all expressed their willingness for the Washington summit to be a place where we make some decisions, and we have all understood that it would not be possible to simply meet and have a discussion, we need to turn it into a decision-making forum," Sarkozy said.

German Chancellor Angela Merkel called for the IMF to become a "guard for the stability of the international finance system," and said there was unanimous agreement that it needed to take on a supervisory role.

She also called for the step-by-step integration of the IMF into the Financial Stability Forum, founded in 1999 by the Group of Seven leading industrialized countries and aimed at bolstering the international financial system.

The IMF, whose loans normally include strict provisions, is discussing loan packages with close to a dozen countries from Iceland to Pakistan, and is examining ways to speed up the process.

___

Associated Press writers Henry Sanderson in Beijing and Kwang-tae Kim in Seoul, South Korea, and researcher Bonnie Cao in Beijing contributed to this report.

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http://www.counterpunch.org/hudson10272008.html
Scrawny Geese; No More Golden Egg
Scenes From the Global Class War

By MICHAEL HUDSON

On Friday, October 24, the pound sterling dropped to just $1.58 (down from $1.73 earlier in the week, an enormous plunge by foreign-exchange standards), and the euro sunk to just $1.26, while Japan’s yen soared by 10 per cent. These shifts threatened to disrupt export markets and hence industrial sales patterns. Global stock markets plunged from 5 to 9 per cent abroad, and there was talk of closing the New York market if stocks fell more than 1,000 points. Pre-opening trading saw the Dow Jones Industrial Average down the maximum limit of 550 points (largely on foreign selling) before bounding back to lose “only” 312 points as the dollar soared against European currencies.

Friday’s currency turmoil and stock market plunge was a case of the chickens coming home to roost from the class-war policies being waged by European and Asian industry and banking squeezing their domestic consumer markets – that is, labor’s living standards – in favor of export production to the United States. The internal contradiction in this industrial and financial class warfare is now clear: To the extent that it succeeds in depressing labor’s income, it stifles the domestic consumer-goods market. This disrupts Say’s Law – the principle that “production creates its own demand,” based on the assumption that employees will (or must) be paid enough to buy what they produce.

This has not been true for many years in Europe and Asia. But production has been able to continue without faltering because of an international deus ex machina: consumer demand in the United States.

This is not to say that no class warfare is being fought in the United States. Indeed, living standards for most wage earners today are down from the “golden age” of the late 1970s. But the U.S. economy had its own financial deus ex machina to soften the blow: Alan Greenspan’s asset-price inflation that flooded the banks with credit, which was lent out to homebuyers and stock market raiders. Rising home prices were applauded as “wealth creation” as if they were a pure asset, much like dividends suddenly being awarded to one’s savings account. Homebuyers were encouraged to “cash out” on the rising “equity” margin, the (temporarily) rising market price of their homes over and above their (permanent) mortgage debt. So while most mortgage money was used to bid up the price of home ownership, about a quarter of new lending was reported to be spent on consumption goods. Credit card debt also soared. In the face of a paycheck squeeze, U.S. consumers were maintaining their living standards by running further and further into debt.

This could not go on for very long. It never has. Debt-financed bubbles can’t last for more than a few years, even when fueled by a self-feeding inflation of asset prices in which households and corporate industry borrow more and more against the rising price of their collateral. But once the housing bubble burst the game was up.

The game was up was up not only for the U.S. economy, but also for foreign economies that had geared their industrial production to serve the U.S. market rather than their own home markets. A global industrial slowdown is now threatened, and must continue until foreign domestic markets are nurtured – just the opposite trend from the recent generation of neoliberal anti-labor policies.

To understand the dynamics at work, one needs to look at the balance of payments – not so much the balance of trade itself, but the currency speculation, international lending and arbitrage that has dominated exchange rates over the past two decades. Exchange rates no longer reflect relative wage levels, “purchasing power parity” or living costs as in times past. Today, they reflect the flow of international borrowing where interest rates are low and lending at a markup where credit is tight – and then hedging this arbitrage, and jumping on the bandwagon to speculate on which way currencies will go.

In this way the balance of payments and currency values have been “post-industrialized” just as domestic economies themselves have been. Instead of promoting industrial growth based on a thriving home market, governments throughout the world have pursued a “post-industrial” financial strategy of “wealth creation.”
Japan’s yen crisis – payback for the “carry trade”

Nowhere has this been more the case in Japan, whose economy has remained in the doldrums ever since its bubble burst in 1990. For seventeen years straight, quarter after quarter, Japanese land prices fell, and so did stock market prices – and hence, the collateral pledged as backing for loans. This quickly left Japan’s banks with negative equity. The Bank of Japan’s response was to devise a way for them to rebuild their balance sheets – to “earn their way” out of the bad loans they had made.

The policy was not to revive the faltering domestic market in Japan or its industrial corporations. From 1945 through 1985, Japanese had a model industrial banking system. But in 1985, U.S. diplomats asked Japan to please commit economic suicide. Angered by the striking success of Japanese industry, U.S. officials asked their compliant Japanese counterparts to raise the yen’s exchange rate so as to make its industrial exporters less competitive, and in due course to flood its own economy with credit so as to lower interest rates, thereby enabling the Federal Reserve to flood the U.S. market with enough cheap credit to give a patina of prosperity to the Reagan Administration. This policy – announced in the Plaza Accord of 1985 – led economist David Hale to joke that the Bank of Japan was acting as the Thirteenth Federal Reserve District and the Japanese government as the Republican Re-election Committee.

Japan flooded its economy with credit, lowering interest rates and fueling the world’s largest real estate bubble of the 1980s. The stock market also soared to reflect the rise in Japanese industrial sales and earnings. But after the bubble burst on December 31, 1989, the mortgage debts and stock that that Japanese banks held in their capital reserves fell short of the valuation needed to back their deposit liabilities. To help bail out the banks, Japan’s government urged them to engage in what has become known as the “carry trade”: lending freely created yen credits to foreign financial institutions at remarkably low rates, for these borrowers to convert into other currencies to buy bonds or other assets yielding a higher rate. If the domestic Japanese market lacked credit-worthy borrowers, let them lend to foreigners. As a new source of revenue for the banks in place of loans to domestic real estate and industry, low interest rates enabled them to flood the global economy with credit. This served global finance by providing speculators and “financial intermediaries” with an opportunity to get a free arbitrage ride.

Borrowing rates remained high within Japan itself. As veteran Japan watcher Richard Werner (author of Princes of the Yen) recently described the situation to me, “while Japanese small firms were killed by the continued refusal of banks to expand credit (and many a small firm president was killed by having to sell a kidney to the loan sharks he was forced to resort to), foreign speculators received ample yen funds for a pittance.” The silver lining to this credit creation was that Japanese exporters were aided as the conversion of yen into foreign currencies drove down the exchange rate. (Yen credit was “supplied” to global currency markets, and was spent to buy and hence bid up the price of euros, dollars, sterling and other currencies.)

So the yen remained depressed, helping Japanese sales of consumer goods, while foreign borrowers were enabled to ride their own wave of asset-price inflation. Speculators could borrow at only a few percentage points interest in Japan, and convert their debt into foreign currency and lend to equally desperate countries such as Iceland at up to 15 per cent.

Hundreds of billions of dollars, euros and sterling worth of yen were borrowed and duly converted into foreign currencies to lend out at a markup. Arbitrageurs made billions by acting as financial intermediaries making income on the margin between low yen-borrowing costs and high foreign-currency interest rates. As Ambrose Evans-Pritchard wrote over a year ago in the Financial Times, “the Bank of Japan held interest rates at zero for six years until July 2006 to stave off deflation. Even now, rates are still just 0.5 per cent. It also injected some $12bn liquidity every month by printing money to buy bonds. The net effect has been a massive leakage of money into the global economy. Faced with a pitiful yield at home, Japan's funds and thrifty grannies shoveled savings abroad. Banks, hedge funds, and the proverbial Mrs Watanabe, were all able to borrow for near nothing in Tokyo to snap up assets across the globe. BNP Paribas estimates this "carry trade" to be $1,200bn.”

All this was conditional on the ability of lenders to get a continued free ride. Now that the free lunch is over, Japan’s postindustrial mode of rescuing its banking sector is coming home to roost. It is doing so in a way that highlights the inherent conflict between finance capitalism and industrial capitalism. Whereas industrial expansion is supposed to keep going – and can continue to do so as long as markets keep pace with production – debt bubbles end, usually abruptly as we are seeing today. Now that Iceland has gone bust, Hungary looks like it is following suit.

As global currency markets no longer provide the easy pickings of the last decade, the yen carry trade is being wound down. This involves converting Icelandic currency, euros, sterling and other non-Japanese currencies back into yen to settle the debts owed to Japanese banks. This repayment – and hence re-conversion into yen – is pushing the yen’s price up. This threatens to make Japanese exports higher-priced in terms of dollars, euros and sterling. Last week, Sony forecast that its earnings will fall as a result, and other Japanese companies face a similar squeeze in sales, not only from rising yen/dollar prices but from the global slowdown resulting from two decades of pro-financial anti-labor economic policies.

Evans-Pritchard rightly accused the world’s central banks of having created this mess. “It was they – in effect governments – who intervened in countless complex ways to push down the price of global credit to levels that warped behavior, as the Bank for International Settlements (BIS) has repeatedly noted. By setting the price of money too low, they encouraged debt and punished savings. The markets have merely responded with their usual exuberance to this distorted signal. Private equity was tempted to launch a takeover blitz at a debt-to-cashflow ratio of 5.4 because debt was made so cheap. The US savings rate turned negative because interest rates were held below inflation.” He should better have said, asset-price inflation. Gains for wealth-holders at the top of the economic pyramid polarized economies. What was rising for the bottom 90 per cent was debt, not asset-price gains from easy money.

Financing the U.S. “trickle-down” economy from below

The soaring yen and plunging foreign currency rates are the result of unwinding the Japanese “carry trade” strategy to rescue its banks. Japanese industry will pay the bill. And despite the fall in sterling and the euro, Europe’s policy of emphasizing exports to the American market rather than to sell to its own domestic labor force looks pretty bad in view of the imminent economic slowdown in store. U.S. consumer spending and living standards will have to fall – and it seems, to fall sharply – in order to finance the “trickle down” economy at the top. Current Treasury policy is to bail out the creditors, not the debtors. The banks are being saved, but not U.S. industry, and certainly not the U.S. wage earner/consumer. Instead of pursuing a Keynesian type of deficit spending in a manner that will increase employment (government spending on goods and services, infrastructure spending and transfer payments), the Treasury and Federal Reserve are providing money to the banks to buy each other up, consolidating the U.S. financial system into a European-type system with only a few major banks. The financial system is to become monopolized and trustified, reversing two centuries of economic policy aimed at preventing financial dominance of the economy.

None of the money being given to the banks really will trickle down, of course. Instead, the largest upward transfer of property in over seventy years will occur. The policy of giving money to the wealthiest sectors – these days the financial sector – turns the trickle-down economy into a euphemism for the concentration of wealth. The pretense is that America’s economy needs the financial and property overhead in order for the “real” economy to “take off” again. But a stronger financial sector selling yet more debt to the economy at large threatens to deter recovery, not to speak of a new takeoff.

Seeing the imminent shrinkage of the U.S. market, lenders and investors are dumping their shares, not only those of U.S. firms but also stocks in European and Asian export sectors. This is the “inner contradiction” of today’s financial rescue operation. Finance itself cannot survive in the face of a stifled domestic “real” economy.

So the world ought to be at an ideological turning point. But the last thing that Europe’s oligarchy wants to see is higher labor standards. Nor does the U.S. financial class. Europe and Asia put their faith in a U.S. consumer-goods market rather than their own. The U.S. financial sector found this appealing as long as consumption was financed by running into debt, not by workers earning more money or paying lower taxes. Industrial and political leaders throughout the world have been so anti-labor that there is little thought of raising domestic living standards via higher wage levels and a tax shift off labor and industry back onto property where progressive tax policies used to be based.

Here’s why it is impossible to go back to the past, as if this were some kind of normal condition that can be recovered. When Alan Greenspan flooded the mortgage market with credit, homeowners borrowed against (“cashed out” on) the rise in housing prices as if their homes were a piggy bank. The difference, of course, is that when one draws down a bank account there is less money in it, but no debt is involved to absorb future income in repayment schedules. “Equity loans” have left a debt residue, which now has turned into negative equity with loans still needing to be repaid. This will leave less for consumption. So U.S. consumer spending will fall because of (1) no more easy mortgage or credit-card credit, (2) debt deflation as consumers repay past borrowing, “crowding out” other forms of spending, and (3) downsizing and job losses lead to falling wage income.

Lower consumer spending means less sales by U.S. and foreign manufacturers – especially those in countries whose currency is rising against the dollar (e.g., Japan). Lower sales mean lower earnings, which mean lower stock prices. And in the stock market itself, price/earnings ratios are falling as the credit that fueled stock-market speculation by hedge funds and other arbitrageurs is cut back. So the combination of falling price/earnings ratios and falling earnings mean less in the denominator (earnings) to be multiplied into prices (earnings capitalized at the going interest rate).

Declining stock market prices are reducing the coverage of corporate pension funds (as well as personal retirement accounts), requiring higher set-asides to fully fund these accounts. In the face of tightening bank credit, this will cut back new corporate spending on plant and equipment, further slowing the economy.

As foreign exporters are rudely awakened the dream of an American demand, when will the point come at which Europe and Asia seek to build up their own domestic consumer markets as an alternative? The first problem is to overcome the ideological bias in which central bankers are indoctrinated, in a world where politicians have relinquished economic policy to bankers trained in Chicago School financial warfare against labor and even against industry. It probably is too much to hope that today’s European central bankers and kindred economic managers will drop their neoliberal anti-labor ideology and see that without a thriving domestic market, their own industrial firms will languish. The solution must come from a revived political sector representing the interests of labor, and even of industry itself as it sees the need to revive domestic markets.

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http://www.counterpunch.org/whitney10282008.html
"We're All Linked"
Meet the World's New Currency: the Chinese Yuan

By MIKE WHITNEY

Things are getting worse. Since September, $16 trillion has been erased from global stock market value. Losses in the US--where the financial turmoil originated--have been much smaller than other, more vulnerable markets. The Dow is down less than 40 percent from its peak of 14,000, whereas Hong Kong, Poland and China have all tumbled more than 60 percent. Its a bloodbath.

The Chicago Board Options Exchange Volatility Index, "the Fear Index", surged to 79.13 on Friday, the highest in its 18-year history, The massive blow-off in stocks is mainly the result of ongoing deleveraging among the hedge funds which are dumping shares in at a record pace to cover the dwindling value of their asset base. According to the New York Times: "Hedge funds lost an estimated $180 billion during the last three months and some are near collapse. Investors are demanding their money back, and Wall Street is bracing for a shake-out in the $1.7 trillion industry." If a large fund, like Citadel, goes down, it will create a black hole in the financial system, similar to the loss of Lehman Bros. and, once again, the US Treasury will have to come to the rescue by providing a multi-billion dollar taxpayer bailout.

The dislocations caused by the unwinding of the hedge funds creates the possibility that US markets will have to be closed while assets are dumped on the market. New York University Professor Nouriel Roubini summed it up like this:

"Policy makers may soon be forced to close financial markets as the panic selling accelerates.

Indeed, we have now reached a point where fundamentals and long term valuation considerations do not matter any more for financial markets. There is a free fall as most investors are rapidly deleveraging and we are on the verge of a capitulation collapse. What matters now is only flows - rather than stocks and fundamentals - and flows are unidirectional as everyone is selling and no one is buying as trying to buy equities is like catching a falling knife. There are no buyers in these dysfunctional markets, only sellers and panic is the ugly state of this destabilizing game.

“We have reached the scary point where the dysfunctional behavior of financial markets has destructive effects on the financial system and - much worse - on the real economies. So it is time to think about more radical policy actions and government interventions."

(Nouriel Roubini's Global EconoMonitor)

The stock market rout has triggered gigantic swings in the currency markets, too. The dollar has surged 16 percent against the euro in a matter of weeks while every other currency in the world has steadily lost ground, excluding the yen. The sudden fall in commodities and the unwinding of dollar-based bets in foreign capitals has bolstered the dollar and made US Treasurys the preferred "flight to safety" investment.

The volatility is causing problems everywhere, particularly where foreign companies must pay back loans in dollars which have risen steeply in relation to their own currencies. Emerging "commodities based" markets are getting clobbered. The stronger dollar also threatens to make it harder on US exports which have been the one economic bright spot in recent months. If present trends continue, then foreign governments will have to allocate more of their reserves to prop up their own currencies which will make it even more difficult for the US to fund its current account deficit as well as the Treasury's expanding balance sheet. In other words, these violent and unprecedented currency swings foreshadow a funding crisis looming just ahead as credit is drained from the financial system and capital becomes even scarcer. For now the dollar is flying high, but the future is looking grimmer by the day.

The financial crisis is wringing credit from the system and pushing prices downward across the board. No asset class has been spared, including gold which posted its biggest one week loss in 28 years and has plummeted from $1,040 in March to $734 at Friday's market close.

Oil has also been hammered by speculative bets made by the hedge funds which are now forced to sell their positions to cover downgrades on their mortgage-backed assets. The erratic movement in oil prices makes it possible to see the real destructive power of the unregulated market, particularly the opaque buying and selling by the hedge funds. In just 14 months oil went from $70 to $145 and back to $67 again on Friday. Wall Street speculators drove up prices with money they borrowed from the investment banks and delivered a knockout blow to the US consumer. The Fed played a critical role in this "gaming the system" by providing the low interest credit that created burgeoning profits for the investment class and falling living standards for everyone else.

Now that the currency bubble has popped, its effects are being felt worldwide. Countries that benefited from the high commodities prices are now getting slammed everywhere from Russia to the Persian Gulf. Ethanol producers are facing bankruptcy if things do not turnaround in the next 12 months. As the Wall Street Journal notes:

"The tragedy of the second bubble is that it has left the economy in a weaker position to ride out the housing slump and credit panic. The American consumer has been whipsawed with $4 dollar gas and food inflation, while entire industries have been put on the edge of bankruptcy. Detroit's auto makers have spent the last year taking down their truck and SUV assembly lines while gearing up to make hybrids and electric cars, even as their cash flow has been ravaged. Their new investments are based on the expectation that oil will stay high permanently, but will the market for hybrids exist if oil is $50 a barrel?

“As Congress plumbs the causes of our current mess, the main one is hiding in plain sight: Reckless monetary policy that did so much to create the credit mania and then compounded the felony with a commodity bubble and run on the dollar whose damage is now becoming apparent."

The effects of low interest rates and credit contagion are not limited to "bottom line" considerations. As Marketwatch's Thomas Kostigen points out, monetary policy can be a death sentence for poor people across the planet who are invariably its biggest victims:

"The harsh reality of the economic fallout isn't that Joe the plumber can't buy his business or that people's retirement funds are being lost or that unemployment is rising; the harsh reality is that people will die.

“Already, since food prices began to rise 100 million more people have been pushed into poverty, according to the World Bank, with as many as two billion on the verge of disaster. Almost half the world's population, let's remember, live on less than $2.50 per day. Millions die annually of hunger and starvation, and more than a billion do not have access to fresh water.

“These numbers are poised to rise dramatically with population growth, dwindling natural resources and higher consumer prices across all goods and services. So as the stock market tumbles and the world economy falters, it's important to remember that it's more than financial losses we are talking about, it's the loss of life.

And increasingly it isn't just people in far-off places around the world who are succumbing to such extreme hardships. Note this: Job losses in the state of Indiana have caused the child poverty rate there to spike 29 per cent since 2000. The wealth gap in the United States and around the world is at record levels -- and it has serious consequences.

The Organization for Economic Cooperation and Development reported this week that the gap between the rich and the poor is getting bigger around the world, and that the U.S. is experiencing the biggest dichotomy.

We are experiencing the largest wealth gap in history. Further erosion of the economic floor will only send more people plunging into destitution.

This is why it's so important to fix the economic crisis -- now.

We're all linked." (MarketWatch)

The Bush administration has called for an economic summit to be held by the 20 largest economies sometime after the presidential elections. US and EU officials are hoping to stitch together another Bretton Woods wherein control of the global economic system was delivered to those same nations. It's likely, however, that the outcome will turn out considerably different than anticipated. Already, under China's leadership, 12 Asian nations have agreed to set up an 80-billion-dollar fund to protect their economies from currency-runs, capital flight or other financial disruptions. China has the world's largest reserves at $1.9 trillion followed by Japan at more than $1 trillion. Clearly the two richest nations will set the agenda and play a central role in deciding how best to deal with the global recession.

The November summit in Washington could produce some unwelcome surprises which were hinted at by Thailand's Deputy Prime Minister, Olarn Chaipravat, who told Bloomberg News:

"The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, to be the rightful and anointed convertible currency of the world."

Surely, the present financial malaise which has its roots in Wall Street and at the Federal Reserve, has demonstrated that the dollar must be replaced as the world's "reserve currency" and that America must be deposed as the de facto steward of the global economic system. Leadership implies responsibility and the US must be held to account for its failings. It's time for a change.

[papabear]

ATimes: A nasty blizzard
Stock peddlers are back in full cry, urging folk still with cash on hand to "buy, buy, buy" as the recent blizzard of sell-offs appears to ease.They could be right. But as the northern nights close in, the nature of present circumstances requires careful appreciation. It could be a long, cold winter. - Julian Delasantellis

[papabear]

Henry Liu, US government throws oil on fire and Killer touch for market capitalism,

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http://www.counterpunch.org/roberts10302008.html
America's "Economic Egotism"
World Tires of Rule by Dollar

By PAUL CRAIG ROBERTS

What explains the paradox of the dollar’s sharp rise in value against other currencies (except the Japanese yen) despite disproportionate US exposure to the worst financial crisis since the Great Depression?

The answer does not lie in improved fundamentals for the US economy or better prospects for the dollar to retain its reserve currency role.

The rise in the dollar’s exchange value is due to two factors.

One factor is the traditional flight to the reserve currency that results from panic. People are simply doing what they have always done. Pam Martens predicted correctly that panic demand for US Treasury bills would boost the US dollar.

The other factor is the unwinding of the carry trade. The carry trade originated in extremely low Japanese interest rates. Investors and speculators borrowed Japanese yen at an interest rate of one-half of one percent, converted the yen to other currencies, and purchased debt instruments from other countries that pay much higher interest rates. In effect, they were getting practically free funds from Japan to lend to others paying higher interest.

The financial crisis has reversed this process. The toxic American derivatives were marketed worldwide by Wall Street. They have endangered the balance sheets and solvency of financial institutions throughout the world, including national governments, such as Iceland and Hungary. Banks and governments that invested in the troubled American financial instruments found their own debt instruments in jeopardy.

Those who used yen loans to purchase, for example, debt instruments from European banks or Icelandic bonds, faced potentially catastrophic losses. Investors and speculators sold their higher-yielding financial instruments in a scramble for dollars and yen in order to pay off their Japanese loans. This drove up the values of the yen and the US dollar, the reserve currency that can be used to repay debts, and drove down the values of other currencies.

The dollar’s rise is temporary, and its prospects are bleak. The US trade deficit will lessen due to less consumer spending during recession, but it will remain the largest in the world and one that the US cannot close by exporting more. The way the US trade deficit is financed is by foreigners acquiring more dollar assets, with which their portfolios are already heavily weighted.

The US government’s budget deficit is large and growing, adding hundreds of billions of dollars more to an already large national debt. As investors flee equities into US government bills, the market for US Treasuries will temporarily depend less on foreign governments. Nevertheless, the burden on foreigners and on world savings of having to finance American consumption, the US government’s wars and military budget, and the US financial bailout is increasingly resented.

This resentment, combined with the harm done to America’s reputation by the financial crisis, has led to numerous calls for a new financial order in which the US plays a substantially lesser role. “Overcoming the financial crisis” are code words for the rest of the world’s intent to overthrow US financial hegemony.

Brazil, Russia, India and China have formed a new group (BRIC) to coordinate their interests at the November financial summit in Washington, D.C.

On October 28, RIA Novosti reported that Russian prime minister Vladimir Putin suggested to China that the two countries use their own currencies in their bilateral trade, thus avoiding the use of the dollar. China’s prime Minister Wen Jiabao replied that strengthening bilateral relations is strategic.

Europe has also served notice that it intends to exert a new leadership role. Four members of the Group of Seven industrial nations, France, Britain, Germany and Italy, used the financial crisis to call for sweeping reforms of the world financial system. Jose Manual Barroso, president of the European Commission, said that a new world financial system is possible only “if Europe has a leadership role.”

Russian president Dmitry Medvedev said that the “economic egoism” of America’s “unipolar vision of the world” is a ”dead-end policy.”

China’s massive foreign exchange reserves and its strong position in manufacturing have given China the leadership role in Asia. The deputy prime minister of Thailand recently designated the Chinese yuan as “the rightful and anointed convertible currency of the world.”

Normally, the Chinese are very circumspect in what they say, but on October 24 Reuters reported that the People’s Daily, the official government newspaper, in a front-page commentary accused the US of plundering “global wealth by exploiting the dollar’s dominance.” To correct this unacceptable situation, the commentary called for Asian and European countries to “banish the US dollar from their direct trade relations, relying only on their own currencies.” And this step, said the commentary, is merely a starting step in overthrowing dollar dominance.

The Chinese are expressing other thoughts that would get the attention of a less deluded and arrogant American government. Zhou Jiangong, editor of the online publication, Chinastates.com, recently asked: “Why should China help the US to issue debt without end in the belief that the national credit of the US can expand without limit?”

Zhou Jiangong’s solution to American excesses is for China to take over Wall Street.

China has the money to do it, and the prudent Chinese would do a better job than the crowd of thieves who have destroyed America’s financial reputation while exploiting the world in pursuit of multi-million dollar bonuses.

[papabear]

Thread in Current Events on the Bailout.

[papabear]

http://www.asianews.it/index.php?l=en&...3659&size=A
11/04/2008 13:20
CHINA
International Monetary Fund: China will be "an oasis" of stability in the global crisis
Chinese leaders, on the contrary, are calling for drastic measures to avoid problems in employment and development that could cause social protests. The crisis already seems more severe than the official figures.

Beijing (AsiaNews/Agencies) - David Burton, head of the Asia-Pacific department of the International Monetary Fund (IMF), says that "with its robust reserves, I have no major worries about China, which will be a source of stability for the globe for the next year or two." But the optimistic forecast is not shared by Chinese leaders, who are now warning every day that Beijing will also be hit hard by this crisis.

Burton, on a visit to Hong Kong, said yesterday that the Chinese economy is slowing, and that in 2008 it could expand by less than the 9.3% projected by the FMI. Nonetheless, it still has about 2 trillion dollars in currency reserves, and a solid financial system. Burton therefore maintains that Beijing could redirect its economy, basing it not on trade with the United States, Europe, and Japan, but developing domestic consumption, reforming its finances, and allowing the appreciation of the yuan. He highlighted that China will spend hundreds of billions of yuan for infrastructure, like railways and urban services, and for reconstruction in Sichuan, destroyed by the earthquake in May. Beijing also wants to launch streamlined public building projects, with aid for low income people and rural areas.

Burton's optimism is not, however, shared by leading Chinese authorities. In an article that appeared yesterday in a state magazine, Prime Minister Wen Jiabao observed that the economy continues to slow, and that "without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development . . . and factors damaging social stability will grow." Chinese exports have declined particularly in sectors like manufacturing, which were strong for years but in October fell to their lowest point since 2004.

Zhu Min, deputy director of China's central bank, made comments along the same lines during a financial conference in Shanghai on November 1. He said that "the world's biggest economies, including the United States, Europe and Japan, are very likely to post negative growth and that will have a huge impact on China. China has already seen a sharp slowdown in industrial profit growth and fiscal income. The financial crisis will technically precede economic and political turmoil by eight to twelve months."

According to the national development and reform commission, economic growth will be at 9% in 2008, its lowest level for many years, but the fear is that it will slow down by even more. According to Stephen Roach, head of Morgan Stanley Asia, the recent declarations and measures by the authorities make it seem likely that growth will be below 8%, despite the official figures.

In order to stimulate the economy, the central bank has cut interest rates three times in two months, increasing tax rebates for exported products and cutting sales taxes.

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Subprime - an (im)morality tale
Confessions of a Subprime Lender by Richard Bitner
At one end, Wall Street's highest high-flyers; at the other end, low-income, or no-income, Americans with a contract to sign for a house beyond their financial dreams. Between them the salesperson with the smile, with the talk, with the pen that will seal the deal. And now with a morality tale fit for our bankrupt times. - Julian Delasantellis

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Five Things You Need to Know: Why Not Hyperinflation?
Kevin Depew Nov 07, 2008 2:35 pm

Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

Almost every day I get notes like the following wondering, "Why not hyperinflation?"

Kevin,

I am still struggling to reconcile the timing between your deflationary stance and others who see the possibility we wind up jumping the shark to hyperinflation. I see and understand both sides; but it seems that many are looking every day for the sign that we have hopped into a real inflationary period....while you see an extended deflationary period that will not soon end.

Is there any way that you can address what seems to be your differences in the timing of entering into a real inflationary period. You seem to agree on the major economic issues and undercurrents that will drive the market; but this big "timing" issue is a glaring difference.

Minyan DT

This is a good question. I'll try and explain why I believe a deflationary debt unwind is now underway, and why I believe it will be many years before we should start worrying about inflation again. In fact, by the time inflation becomes a legitimate concern, I expect the vast majority of people will find it as outrageous to worry about inflation then as found it outrageous last year when I made deflation one of my Five Themes for 2008.

The disconnect at work today that makes it difficult to envision a life without inflation is almost entirely grounded in a failure to see that credit expansion, by necessity, must have two sides; a credit production mechanism, and a debt acceptance recipient. We have as much of the former as the world has ever seen, but none of the latter.

Going back to 1934, whenever the Federal Reserve has made credit available the world has accepted it. While it is true, as those anticipating hyperinflation argue, the Fed and global central banks are making record amounts of credit available, that is only one side of the credit equation. The assumption is that this record-breaking credit expansion means risk assets (stocks, commodities, etc.) will all skyrocket and the U.S. dollar will get destroyed. But what hyperinflationists fail to realize is that for an inflation (of either the tame or hyper variety) to take place, one must have both the means (credit from the fed and banks) and the motive (the desire to take on more debt) for credit expansion. For over a year now we have had record amounts of the former, but none of the latter.

Additionally, in order for hyperinflation to even be a remote possibility here there would have to be at least one economy that is both, stronger than the weakest.S. economic downturn, and larger in size that the state of Ohio's or even California's economy.

Ironically, while smaller emerging markets could potentially find themselves facing a Zimbabwe-esque hyperinflation, that would only make the U.S. dollar and U.S. debt more attractive and secure. Emerging markets are at this point the only place where it seems a possibility that credit could find a willing home and debt an eager taker, but even that is not a certainty. It is more likely that the creeping protectionism that is developing, as countries begin to wake up to the fact that the global system is too big to save, results in a more severe credit contraction globally.

But so what? What if I am wrong about this? What, if anything, is at stake?

One the most remarkable things to me is how the American people have been sold on accepting, even preferring, inflation over deflation. It is truly amazing that government and central banking bureaucrats could successfully instill the belief that lower prices for assets are bad. The reality is that lower prices are only bad for artificially-constructed economies.

Deflation is necessary to restore market and economic stability. It is not without pain. But inflation, even mild inflation, is like an intoxicant that slowly destroys the body over time even as its narcotic properties mask the pain. By comparison, hyperinflation is ruinous. How ruinous? Consider this passage from Adam Fergusson's book, "When Money Dies: The nightmare of the Weimar collapse":

"In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom."

This is important to understand. The argument against deflation and inflation is both academic and political. Present economic elites benefit from inflation and suffer terribly in deflation. Therefore there is great incentive for the small minority, the 2-3% of wealthy who control the vast majority of assets in this country, to continue to press government and the Fed to maintain the present course of inflation over deflation.

But as Fergusson illustrates, hyperinflation is another matter.

Just as the Federal Reserve and Chairman Ben Bernanke maintain they will do everything in their power to prevent deflation, then the American people, as patriots, should be equally insistent on doing everything in their power to prevent hyperinflation.

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Who will finance America's deficit?
By David P Goldman

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A Very Short Obit
R.I.P.: the Experts, 1929-2008

By SASAN FAYAZMANESH

A recent invitation to speak on the “cause or causes of the current financial crisis” made me reflect on another topic: “the cause or causes of the Great Depression.” To this day there is no consensus among economists as to what caused the severe depression that lasted from 1929 to 1939. Was it the stock market crash in 1929 that brought about the Great Depression? Was it the subsequent banking panics and monetary contraction? Perhaps it was the reduction in international lending and protectionist policies pursued by the US—such as the Smoot-Hawley Tariff Act—that caused the Great Depression. Or perhaps the “great contraction,” as Milton Friedman used to call it [1], was caused by the actions of the Federal Reserve, which allowed a decline in the money supply partly to preserve the gold standard. All such explanations are, of course, ad hoc.

The fact of the matter is that the economic “brains” of the 1920s, the so-called experts, could neither foresee the coming disaster nor, once it was under way, could predict correctly its magnitude and duration. In their 1984 book, The Experts Speak: The Definitive Compendium of Authoritative Misinformation, Christopher Cerf and Victor Navasky mention many of the predictions and comments made by the economic “experts” during the Great Depression.[2] Among these are the following. On October 17, 1929, seven days before the stock market crash of “Black Thursday,” Irving Fisher, the Guru of mainstream economics and professor of economics at Yale University, wrote: “Stocks have reached what looks like a permanently high plateau.” Fisher, the “economic expert,” did not stop there. After the crash, on November 14, 1921, he wrote: “The end of the decline of the Stock Market will . . . probably not be long, only a few more days at most.” A year after the crash, and nine years before the end of the depression, Fisher was still predicting: “For the future, at least, the outlook is bright.” By 1933 the net investment had turned negative, output of goods and services had declined by one third, unemployment rate had risen to 24%, money wages and prices had fallen by one third, nearly 40% of all banks had collapsed and stocks had lost 90% of their value. This was the “bright” future that the eminent professor of economics had promised.

Fisher, however, was not the only “expert” providing authoritative misinformation. Presidential Advisor and stock market “expert” Bernard Baruch made the following prediction on November 15, 1929: “Financial storm has definitely passed.” Similarly, the Chairman of the Continental Illinois Bank of Chicago, Arthur Reynolds, predicted on October 24, 1929, that the “crash is not going to have much effect on business.” Not to be outdone by these “experts,” in the World Almanac of 1929, Thomas C. Shotwell wrote under the “Wall Street Analysis”: “The market is following natural laws of economics and there is no reason why both prosperity and the market should not continue for years at this high level or even higher.” The government experts were not far behind. The US Department of Labor predicted in December of 1929 that the following year will be “a splendid employment year.”

To be sure, there are always those who “predict seven of the past two recessions,” as the joke goes. The Great Depression was no exception. The New York Times of October 12, 2008, which reproduced many of the above quotations, added: “Of course, not everyone was so optimistic.” According to the Times, “Roger Babson, a well-known businessman and publisher of business and financial statistics,” offered this warning in a speech before a business conference on September 5, 1929: “More people are borrowing and speculating today than ever in our history. Sooner or later a crash is coming and it may be terrific. Wise are those investors who now get out of debt and reef their sails.” But as the Times also pointed out, a year earlier, the same Babson had said that “the election of Hoover and a Republican Congress should result in continued prosperity in 1929.”

Why were the experts so wrong? They were wrong mostly because economics is an underdeveloped discipline dominated by pure, unabashed ideology. The dominant school of economic thought during the Great Depression was, and remains to this day, the “neoclassical” or marginalist school. But in the “neoclassical” world there is no such thing as a crisis. This is not the real world in which we live. It is a classless world, consisting of “consumers” and “producers.” It is a harmonious world modeled mostly after mathematical physics. In such a world there is no history; there is no past, no present and no future. Nothing of consequence ever happens in this world, especially no catastrophic event. This unreal, insipid and a-historical marginalist world should have been abandoned a long time ago, particularly after the Great Depression. Yet, its seemingly mathematical elegance combined with its unadulterated and brazen defense of capitalism, or “free market” as its proponents prefer to call it, has kept it alive. Of course, since the Great Depression the “neoclassical” theory has been somewhat amended by a few ideas from the British aristocrat John Maynard Keynes, ideas that tried to add some elements of reality to the unreal theory. But the result, the so-called “neoclassical synthesis” or “neo-Keynesianism,” is no more than a hodgepodge of disjointed, unclear and incoherent ideas that are fed to the students of economic theory under the rubric of “micro” and “macroeconomics.”

This sad state of affairs does not allow much intelligent analysis of the past or present. It also does not allow one to forecast the future, particularly crises. As a 1988 article, written by some mainstream economists and published in the most dominant economic journal, contended: “Neither contemporary forecasters nor modern times-series analysts could have forecast the large declines in output following the Crash [of 1929].” [3] In other words, there was nothing in the toolkit of the Great Depression era economics, or today’s mainstream version of it, that allows us to understand severe economic downturns and forecast them. Yet, explanations of the “causes” of the current crises are widespread.

Among other things, the 2008 financial woes have been attributed to mortgaged backed securities, particularly those associated with subprime mortgages; the housing bubble, which was made worse by predatory, risky and careless lending; exotic financial instruments or derivatives that were allegedly devised by some wunderkind mathematician or physicist on Wall Street, for example, credit default swaps; the events of September 11, 2001, the subsequent US invasion of Iraq and increase in oil prices; irrational exuberance in the stock market followed by a bear market; the Federal Reserve’s repeated reduction in the discount rate and targeted fed funds rate in 2001-2003, the wrongheadedness of the chairman of the Federal Reserve, Mr. Alan Greespan, who recently found himself in a “state of shocked disbelief” to learn that “the self-interest of lending institutions” might not “protect shareholders’ equity” [4]; deregulation of the banking industry, particularly the Financial Services Modernization Act of 1999 or Gramm-Leach-Bliley Act; liquidity problems in general; lack of confidence in the financial system and the credit market, etc.

While each of these “causal” explanations, or a combination of them, might have some merit and need to be explored further, they are mostly after-the-fact explanations. None of the economists who are popping up in the media today explaining what caused the economic woes of 2008 was able to forecast the crisis a year or two earlier. To be sure, there is always a Roger Babson or a “Dr. Doom” that predicts seven of the last two recessions. But among thousands of economists, the odds are that one or two would be right in forecasting something once in a while. Let us, of course, not forget those who shamelessly forecasted such things as “The Great Depression of 1990.” They might make fame and fortune before 1990, but now the used copies of their books sell for $0.01on Amazon.com.

Financial panics and severe economic downturns are nothing new in a capitalist economy. The history of this economic system, since at least the age of classical political economy, shows that monetary crises and “gluts” occur relatively frequently. This is expected. An economy in which goods are produced not for use but for profit is bound to have gluts now and then. Moreover, in an economic system where acquisitive behavior is considered to be virtuous and greed is said to be good one should expect the relentless creation of new and exotic financial instruments by those on the Wall Street—and, prior to that, on Lombard Street—to swindle one another. One should also expect to see the persistent and ingenious attempts by the money-lenders and the industrialists to prevent new regulations and circumvent the existing ones. Furthermore, in an economy where the livelihood of the masses depends on the whims and wishes of captains of the industry or the financiers, one should expect the masses to be called upon to “bailout” the same tycoons when they are pinched. Such measures, as President Bush said in his October 14, 2008, discussion of the economy, are “not intended to take over the free market, but to preserve it.” These are all expected. What is not expected is our ability to predict exactly when this slumbering beast wakes up, shakes off and lashes out. We do not have the theoretical edifice to allow such forecasting. Those who with great confidence explain the causes of the current crises, as well as those who, post mortem, explained with remarkable certainty the causes of the Great Depression, are probably the ones who least understand the nature of the beast.

As for me, I am glad that my interview concerning the “cause or causes of the current financial crisis” was indefinitely postponed due to “technical difficulties.” My answers probably would not have been what the interviewer expected to hear.

Sasan Fayazmanesh is Professor of Economics at
California State University, Fresno. He can be reached at: sasan.fayazmanesh@gmail.com

Notes

[1] “The Role of Monetary Policy,” Milton Friedman, The American Economic Review, Vol. 58, No. 1 (March, 1968), pp. 1-17.

[2] An expanded and updated version of the book appeared in 1998.

[3] “Forecasting the Depression: Harvard versus Yale,” Kathryn M. Dominguez, Ray C. Fair and Matthew D. Shapiro, The American Economic Review, Vol. 78, No. 4 (September, 1988), pp. 595-612.

[4] “Greenspan Concedes Flaws In Deregulatory Approach,” The New York Times, October 24, 2008.

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http://www.asianews.it/index.php?l=en&...3759&size=A
11/14/2008 15:14
ASIA – UNITED STATES
Obama, world crisis and the new world order
by Maurizio d’Orlando
The depth of the current economic crisis is leading many people to favour a form of governance that would place economic and political life under the trusteeship of international organisations. Barack Obama’s new cabinet, which is made up of those responsible for the crisis, will ensure the ascendancy of financial interests. In the meantime no one is calling for the people to have power in the monetary sphere. The result is that democracy is being killed by financial power.

Milan (AsiaNews) – A new world order has been in the making for quite some time and is now becoming “inevitable”. Many a politician and economist are quick to say that great sacrifices are called for, and that any “reasonable” person will see that suffering and hardship are “necessary.”

The crisis that is currently affecting our lives is behind this global shift. The slow fire has moved from real estate, to banking and finances, and is now reaching industry, agriculture and the whole economy. From the heartland in the United States it is reverberating outward touching the entire world.

The fear of a domino effect and its potential for economic, political and social upheavals and the fear of widespread anarchy will provide the necessary tools to install this new order, which for most people will appear as the only possible outcome. The act of governing will change as a world body will be in charge the financial, economic and tax systems. Police, prisons and private relations inside and outside the family will come under its purview, so will national sovereignty of the peoples and the right to express opinions that are different from those of the single thought of relativism, which will be seen as the only solution that is available and desirable.

The G20 and the New World Order

Until a few decades ago such a new world order would have been anathema, a nightmare, a first step towards a worldwide dictatorship. Now world leaders will be praised when they show concern for the well-being of the earth’s peoples and social groups at a time of difficulties. Of course, this is what we will hear, and very soon too, in terms more unambiguous that we might think now. This said, new rules, a new Bretton Woods, are not anything new; discussions have been going on for some time. Perhaps the next G20 summit on 15 November will be a time when the “miracle” cure is found, one that will entail a world central bank that regulates a single currency of account and its relationship to local currencies.

After a short lesson and a quick diagnosis of the current problems, during which G20 participants will hear that “it was all the fault of Bush’s brainless laissez-faire advocates,” the same people responsible for the current crisis will supply the treatment for putting things right.

All we have to do is see who funded the most expensive presidential campaign in the former US superpower (more than a billion dollars at a time of great recession). As always some have bet on both horses just to be on the safe side. As we know Barack Obama pulled it off, money-wise too, almost twice as much as the Republican candidate. In addition to traditional sectors like show business, media, academe, education, information technology and the Internet, hedge funds, law firms (closely linked to the world of creative financial mediation) and private equity funds have bankrolled the new president’s campaign.”1

In order to change nothing, the appearance of everything has to change. In fact, only the surface had to change a bit; the new president’s darker skin. For everything else, it was business as usual. Indeed the cabinet of the new president is made up of the same, reckless people. Let’s see! We have Larry Summers, Tim Geithner and Robert Rubin who have been short-listed for the Treasury Department; all of whom are extreme laissez-faire advocates who believe in an unfettered financial system, enemies of the Glass-Steagall Act.2 They are same people who swapped jobs at the International Monetary Fund, World Bank, Clinton Administration; played sidekicks for Alan Greenspan and Ben Shalom Bernanke, or at the headquarters of Federal Reserve Bank of New York (Geithner); that is the same people who masterminded events before and after the current crisis.

Old faces in Obama’s new government

Obama picked Rahm Emanuel to be his chief of staff, a man whose career straddled politics and Wall Street’s great financial groups. But there is more to his case. Not only his father was a member of the Irgun3 but he holds Israeli citizenship, has fought for Israel and represents that country’s armed forces. He also endorsed Obama before the leadership of the AIPAC,4 a US Zionist organisation that is also funded by the State of Israel and which has recently been involved in espionage cases. In Israel many view Rahm as “our man in the White House.”

Based on this perhaps the choice between the two candidates was not really equal. See-sawing in the polls for quite a while after an apparent jump, buoyed by the war in Georgia, the Republican camp saw its fortunes nosedive after President Bush refused in late August to provide Israel’s air force refuelling aircrafts for a long range mission5, in effect vetoing an attack against Iran. Starting with oil, the prices of primary commodities began dropping a few days later, negatively affecting investment banks, which had bet on high prices to compensate for losses in the home mortgage market, thus throwing the world’s stock markets into a tailspin in early September.6

Democracy and money

From all of the above it is clear that an Obama presidency will not change how the financial crisis will be handled. On the contrary, it will strengthen the trend to protect large institutions and industries at the expense of small enterprises and the man and woman of the street who voted for him. It is quite obvious that the G20 summit in Washington will not affect the central issue of the present financial and economic crisis (and the many preceding crises of modernity and post-modernity), i.e. sovereignty and system legitimacy.

In today’s world the only political regime that is considered fully legitimate in political and economic terms is democracy. Many wars have been fought to spread democracy and in democracy, by definition, the people are sovereign. However, if a highly developed and complex democracy like that of the United States can be guided (in the sense that voters are left with the illusion that they can choose when in fact their choices like in a supermarket are shaped by marketing, political marketing that is) by those with deep pockets, the legitimacy of the system no longer lies in the consent of the people since the latter goes to the highest bidder. Hence money becomes the basis of consent and power in a democracy.

There is nothing new in all this but the crucial point is that printing money is a sovereign act and is governed by laws. A creditor cannot refuse payment in money that has legal tender and demand instead payment according to his or her wish (gold, silver or what not) if he or she has not negotiated it beforehand. Those who control the money supply through ad hoc rules can favour some over others.7

Thus the paradox of modern democracy is that a sovereign people (through its supposed representatives, parliaments, heads of state and government) have de facto no power or right over the US Federal reserve (or the European Central Bank) with regards to such an important sovereign act.

In order to protect the public and avoid political interference printing money has been privatised and placed beyond public control. Through its representatives the sovereign cannot be trusted and thus is not sovereign. Few know that the US Federal Reserve was established under private law; the same is true for the Bank of Italy and many other central banks. It has been so since the dawn of parliamentary government, right after the Glorious revolution if 1688.8



1. See for example “Hedge Funds: Long-Term Contribution Trends,” in OpenSecrets [vedi: http://www.opensecrets.org/industries/indus.php?ind=F2700], retrieved on 13 November 2008; “Lawyers / Law Firms: Long-Term Contribution Trends,” in OpenSecrets [http://www.opensecre...us.php?ind=K01], retrieved on 13 November 2008; and RENICK Mayer, Lindsay, “Obama's Pick for Chief of Staff Tops Recipients of Wall Street Money,” 5 November 2008, in OpenSecrets, [http://www.opensecre...-of-staff.html], retrieved on 13 November 2008.

2. The Glass-Steagall Act split deposit banking from investment banking. The law was adopted in 1933 to prevent a repeat of the stock market crash of 1929 which caused the Great depression of the Thirties. The law was repealed in 1999 by the Clinton Administration. Creative financing, which is the root cause of the current crisis, was thus the brainchild of a Democratic, not a Republican administration.

3. Zionist organisation that carried out a violent campaign against the British in order to end Britain’s mandate over Palestine and set up the State of Israel. The mandate iself was established by the League of Nations, the predecessor of the United Nations.

4. Jose, Katharine, “Obama's AIPAC Speech, Rahm's Endorsement,” in The New York Observer, 4 June 2008 [http://www.observer....r-aipac-speech], retrieved on 13 November 2008.

5. “ZOA Critical Of Bush Administration Decision To Deny Refueling Aircraft To Israel,” 22 August 2008, in Zionist Organization of America, [http://www.zoa.org/s...releaseID=1419], retrieved on 13 November 2008; KEINON, Herb and Hilary Leila KRIEGER, “Barak: US clearly opposes military action against Iran now,” 14 August 2008, in The Jerusalem Post, [http://www.jpost.com...cle%2FShowFull], retrieved on 13 November 2008.

6. “Futures chart - Oil price chart,” Live Charts, [http://www.livechart...rice_chart.php], retrieved on 13 November, 2008.

7. For example, only firms listed in the Primary Dealers list (historically no more than 20, those that have recently topped the financial pages) can take part in the transactions and auctions by the Federal Reserve for billion dollar securities. See “Primary Dealer List,” in Federal Reserve Bank of New York, [http://www.newyorkfe...s_current.html], retrieved on 13 November 2008.

8. Ties between finances and politics exist in modern parliamentary systems. Recent “orange revolutions” in Eastern Europe, backed by financier George Soros, were inspired by the historical precedent of the Glorious Revolution. Parliamentary rule prevailed in England at the time of the Glorious Revolution when James II (a Catholic) was ousted from power. But we should not confuse parliamentary government with constitutionalism. James II was the legitimate and constitutional sovereign because he had acknowledged the legislative powers of parliament. William of Orange, backed by an army of Dutch and German mercenaries and financed by Amsterdam bankers, invaded England and removed James II. In order to pay off his debts William, also known as the bankers’ king, granted private interests a monopoly over printing money with legal tender. He chartered the Bank of England and the Bank of Scotland. With capital worth two million pound sterling the Bank of England began loaning an equal amount for interest as well as issuing Gold certificates (paper money) for the same amount, thus doubling its capital. The Orangist army did not have to fight because William of Orange was backed by influential people who, instead of fighting the invader on the field, came to terms with him betraying their legitimate sovereign. The main character in the story founded the Churchill line.

[papabear]

http://www.counterpunch.org/hudson11212008.html
Locking in the Loot at the Reagan Library
Paulson's Cascade of Lies

By MICHAEL HUDSON

On Thursday, November 20, Treasury Secretary Henry Paulson presented, even by his own lamentably low standards, an amazingly deceptive speech at the Ronald Reagan Presidential Library in Simi Valley, California. In its false framing of Washington’s financial giveaway to Wall Street it rivaled some of the outstanding fables created by the Master Imagineer himself, for whom the library is named.

What prompted the speech seems have been Congressional criticism of Mr. Paulson’s bait-and-switch transfer of public funds to Wall Street, and the Federal Reserve’s transfer of an amount twice as high as Congress’s $700 billion. His most urgent aim was to ward off accusations that the Treasury and Federal Reserve have acted illegally. “Federal law, and in particular the Anti-Deficiency Act, prohibits Treasury from spending money, lending money, and guaranteeing or buying assets without Congressional approval. The Federal Reserve can and does lend on a secured basis, but only if it expects not to realize losses.” (Italics added.)

But Congress did not approve the Treasury’s $250 billion of “preferred” stock investments in Wall Street banks. The happy recipients, their stockholders and officers evidently worried precisely that this “investment” would end up taking losses. That is why the Treasury stands in back of bona fide creditors. That is why “preferred” stock was preferred by existing stockholders to loans and guarantees (which have priority in case of bankruptcy), not to mention the conditions that Congress thought it had laid down calling for these institutions to renegotiate mortgages to bring them in line with the debtor’s ability to pay.

The Fed has refused to let Congress know any details – any details at all – about its cash-for-trash swaps with these institutions. This is what concerns Congress, and what has prompted reporters at Bloomberg to bring a lawsuit in order to discover and publicize the details. It is not hard to see why this curiosity exists. The only reasonable explanation as to why investment banks, American International Group (A.I.G.) and commercial banks apparently headed by Citibank (whose shares plunged yet another 26 per cent on Thursday) have turned over a trillion dollars worth of illiquid mortgage securities, junk bonds and who knows what other junk to the Fed is to avoid taking a loss on these bad loans and investments. As Mr. Paulson explained matters, “the Federal Reserve has statutory authority to lend against a pool of mortgage loans on a fully secured basis. The Fed was able to assist the JPMorgan purchase because they believed that there was a reasonable prospect of avoiding losses.”

What time frame are we talking about here? Evidently one in which Mr. Paulson will have left the administration, sticking his successor with the losses and, presumably, the blame.

Everything seems to have been unexpected to Mr. Paulson – as if ignorance is a defense. “When I came to Washington in 2006,” he reminisced, “markets were benign.” We were still in Alan Greenspan’s idea that inflating asset prices on credit constitutes “wealth creation.” At that time I myself was only one of many who warned that the real estate market had come to rest on a foundation of junk mortgage lending. Every banker with whom I spoke at the time knew this. But most were still seeking to make hay while the making was good, and it was still quite good – for the banks, that is. Matters were not benign for the increasingly debt-ridden U.S. economy, but at least they were rosy for Wall Street. Bank executives were paying themselves enormous salaries and even larger stock options. Meanwhile, the smarter money managers were beginning to shift their funds out of the U.S. economy in a wave of capital flight of a magnitude not seen since Russia in the mid-1990s.

Acting as if all this could not have been foreseen, Mr. Paulson assured his mistake-friendly audience, “There was no playbook for responding to a once or twice in a hundred year event.” A kind of random historical earthquake seems to have been at work, a financial San Andreas fault. Mr. Paulson then trivialized this, however, with the euphemism “housing correction.”

The key is, what is to be corrected? Is it not the financial market itself?

Mr. Paulson then set about dissembling the character of the U.S. and global financial system. “Our financial system,” he claimed, “is built on the hard work of our citizens; it is built on the savings of our citizens.”

This is where he seeks to spread the disinformation about the explosion of debt that now burdens the U.S. economy, which is the result of autonomous credit-creation by the commercial banking system and has nothing to do with the savings habits of “our citizens”. The basic financial principle of modern banking is that “loans create deposits.” The bank loan comes first – then the deposit or “saving.”

Here’s how it works. A bank’s marketing department seeks to drum up customers for debt. A borrower will go into a bank and sign a promissory note, and the bank then creates a checking account in the amount that is stipulated. The note calls for a specific rate of interest to be paid – a rate much higher than that which the bank can borrow from the Federal Reserve or in the money market in general. One benchmark global rate to bankers is the London Interbank Borrowing Overnight Rate (LIBOR), and the other is the Federal Reserve’s discount rate to banks. (Japanese banks also provided loans to large financial institutions at under 1% per year, spurring the international “carry trade,” borrowing cheap in yen and then converting the funds into other currencies and lending at a higher rate.)

None of this involves saving. It involves credit creation in which banks have a legal monopoly, with funding monetized by the U.S, Japanese and other major foreign central banks. This free credit creation is at the root of the problem, not the natural growth of savings.

What have banks done with this credit-creating privilege? Nearly all their loans have been to enable buyers to purchase assets (real estate, stocks and bonds or entire companies) already in place, or to enable hedge funds to play the mathematical games that have come to characterize today’s casino capitalism. Mr. Paulson depicts the resulting financial system as being essential for the good functioning of “Main Street.” But surely he must know some lawyer who might explain to him that only very, very wealthy speculators are allowed to play the hedge fund game of financial derivatives that lies at the heart of today’s financial breakdown and negative equity for banks that have made bad gambles. The legal reality is that in order to invest in hedge funds and similar casino capitalism gambles (or in Broadway plays and other high-risk ventures, for that matter), prospective financiers must sign releases attesting to the fact that they can afford to lose their money.

“If the financial system were allowed to collapse,” Mr. Paulson warned, “it is the American people who would pay the price. This has never been just about the banks; it has always been about continued prosperity and opportunity for all Americans.” Not really. Wall Street is hardly so altruistic. It has increasingly made its money off Americans by engaging in increasingly predatory, extractive lending to the economy. That is what has caused the U.S. debt burden to soar so far ahead of the ability of debtors to pay. It also is what is now diverting spending away from consumption and (for companies) new capital investment to pay creditors.

Not content with misrepresenting how the U.S. economy works, Mr. Paulson then drew a picture of the global economy that also is a travesty. “The world was awash in money looking for higher return,” he explained, “and much of this money was invested in U.S. assets.”

Not exactly. The world economy has been awash in the U.S. payments deficit, which has swollen the reserves of central banks in the creditor nations from Asia to Western Europe. These central banks have recycled $4 trillion of their dollar inflows to the United States under dollar hegemony. Rather than seeking a “higher return,” central banks have found themselves obliged to invest in low-yielding U.S. Treasury securities, or somewhat higher Fannie Mae and Freddie Mac securities. These returns are much lower than U.S. investors have sought in buying up foreign companies and their stocks, whose price appreciation far exceeded the rate that foreign economies were able to recoup on their dollar recycling to the United States.

Mr. Paulson wants above all to deter foreign economies from breaking away from this dysfunctional system. “The second important priority,” he explained to his Reagan Library audience, “must be continued reform of the International Financial Institutions like the World Bank and the IMF to allow for greater participation of developing nations.” The aim here is to make the financial sector’s lobbying control over the world’s financial system global. “A final reform priority must be consistent liberalization of policies on trade and investment, with an emphasis on avoiding new protectionist measures and achieving a breakthrough in the Doha round of global trade talk.”

“New protectionist measures”! Even as U.S. auto companies are advocating special subsidies for the U.S. auto industry in Detroit and pursuing beggar-my-neighbor financial policies (let foreign banks and economies absorb the financial loss from playing in the Wall Street casino), foreign countries are not to develop a financial system more highly regulated, an agriculture more aimed at feeding their own people. They are not to block capital outflows from the United States based on “free” credit creation to buy out the commanding heights of their economies as the IMF imposes austerity plans and forced privatization sell-offs on Third World and post-Soviet countries, while cutting taxes at home in the face of an escalating U.S. trade deficit and rising foreign military spending.

Mr. Paulson’s speech looks like a major salvo in the Bush Administration’s attempt to make both the Wall Street bailout and the U.S. predatory finance irreversible, while the government replaces public debt (Treasury bonds) for Wall Street’s bad gambles. His errors are calculated to misinform, as are most lobbying efforts by the banking and financial sector. One can only hope that Congress will question his testimony that has repeatedly followed this line with more acumen than prompted its earlier acceptance of the Treasury’s bailout act. It’s time to clean up this act.

PS: As I watched Citibank's stock (C ) take yet another plunge of 10 per cent in the firsthour of Thursday morning, my wife showed me something that a Citibank advertiser was handing out to students at New York University yesterday afternoon: A flyer begging them to put their money in at 3.10 per cent per year. (Vanguard's Treasury-money market fund offers under 1 per cent at present.) I told Grace that our net worth was higher than Citibank's, but I'm not able to draw down a $10 million a year salary like their jokers do.

The Citibank handout (when have you ever heard of street hawkers for banks says, "You'll have the safety of FDIC insurance and your CD's term is just 6 months. So you can keep your money secure at a great rate. ...Citi never sleeps."

Citi’s stock has fallen 84 per cent this year, and the company is on the rocks. I'd be sleepless too, if I were them!

[papabear]

http://www.counterpunch.org/whitney11212008.html
The Winter of Global Economic Discontent
Time to Move to Plan B ... If There is One

By MIKE WHITNEY

"The Winter of 2008-2009 will prove to be the winter of global economic discontent that marks the rejection of the flawed ideology that unregulated global financial markets promote financial innovation, market efficiency, unhampered growth and endless prosperity while mitigating risk by spreading it system wide."

--Economists Paul Davidson and Henry C.K. Liu: "Open Letter to World Leaders attending the November 15 White House Summit on Financial Markets and the World Economy"

The global economy is being sucked into a black hole and most Americans have no idea why. The whole problem can be narrowed down to two words; "structured finance".

Structured finance is a term that designates a sector of finance where risk is transferred via complex legal and corporate entities. It's not as confusing as it sounds. Take a mortgage-backed security (MBS), for example. The mortgage is issued by a bank (the loan originator) which then sells the mortgage to a brokerage where it is chopped up into tranches (pieces of the loan) and sold in a pool of mortgages to investors that are looking for a rate that is greater than Treasurys or similar investments. The process of transforming debt ("the mortgage") into a security is called securitization. At one time, the MBS was a reasonably safe investment because the housing market was stable and there were relatively few foreclosures. Thus, the chance of losing one's investment was quite small.

In the early years of the Bush administration, Wall Street took advantage of the gigantic flow of capital coming into the country ($700 billion per year via the current account deficit) by creating more and more MBSs and selling them to foreign banks, hedge funds and insurance companies. It was a real gold rush. Because the banks were merely the mortgage originators, they didn't believe their own money was at risk, so they gradually lowered lending standards and issued millions of loans to unqualified applicants who had no job, no collateral and a bad credit history. Securitization was such a hit, that by 2005 nearly 80 percent of all mortgages were securitized and the traditional criteria for getting a mortgage were abandoned altogether. Subprimes, Alt-As and ARMs flourished, while the "30 year fixed" went the way of the Dodo. Lenders were no longer constrained by "creditworthiness"; anyone with a pulse and a pen could get approved. The mortgages were then shipped off to Wall Street where they were sold to credulous investors.

The disaggregation of risk -- spreading the risk to many investors via securitization -- was as much of a factor in the creation of "the largest equity bubble in history", as the banks’ lax lending standards or Greenspan's low interest rates. By spreading risk throughout the system, securitization keeps interest rates artificially low because the real risks are not properly priced. The low interest rates, in turn, stimulate speculation which results in equity bubbles. Eventually, credit expansion leads to crisis when borrowers can no longer make the interest payments on their loans and defaults spiral out of control. This forces massive deleveraging and the fire-sale of assets in illiquid markets. As assets lose value, prices fall and the economy enters a deflationary cycle.

There are many types of of structured instruments including asset-backed securities (ABS), mortgage-backed securities (MBS), collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) all of which provide a revenue stream from loans that were chopped into tranches and turned into securities. There are many problems with these complex securities, the biggest of which is that there is no way to unravel the individual pools of loans to isolate the bad paper. That's why subprime mortgages had such a destructive affect on the secondary market, because -- even though subprimes only defaulted at a rate of roughly 5 percent -- MBS sales slumped nearly 90 percent. Why? Former Secretary of the Treasury Paul O'Neill explained it like this: "It's like you have 8 bottles of water and just one of them has arsenic in it. It becomes impossible to sell any of the other bottles because no one knows which one contains the poison."

Exactly right. So why weren't these structured debt-instruments "stress tested" before the markets were reworked and the financial system became so dependent on them?

Greed. Because the real purpose of these exotic investments is not to provide true value to the buyer, but to maximize profits for the seller by increasing leverage. That is the real purpose of MBS, CDOs and all the other bizarre-sounding derivatives; higher profits with less capital. It's a scam. Here's how it works: A mortgage applicant buys a house for $400,000 and puts 10 per cent down. His mortgage is sold to Wall Street, chopped into pieces, and stitched together in a pool of similar loans. Now the brokerage can use the debt as if it were an asset, borrowing at ratios of 20 or 30 to 1 to fatten the bottom line. When Fannie Mae and Freddie Mac were taken into conservatorship by the government, they were leveraged at an eye-popping 100 to 1. This shows that nearly an infinite amount of debt can be precariously balanced atop a paltry amount of capital. This explains why the $4 trillion aggregate value of the 5 big investment banks and the $1.7 trillion value of the hedge funds is now vanishing more quickly than it was created. Once the mighty gears of structured finance shift into reverse, deleveraging begins with a vengeance, pulling trillions into a credit vacuum.

It all started when two Bear Stearns hedge funds defaulted in July 2006 and there were no offers for their MBS and other structured investments. Panic quickly spread to every corner of Wall Street as the alchemists of modern finance began to see that their worst nightmare might be realized, that trillions of dollars of Frankenstein investments could be worth nothing at all.

Since the Bear Stearns funds fiasco, there have been huge explosions in the financial markets. Fannie Mae, Freddie Mac, Wachovia, Washington Mutual, Indybank, AIG, Lehman Bros and other industry giants have either gone under or been forced into shotgun weddings by the FDIC. The stock market has plunged over 40 per cent and suffered wild gyrations not seen since the 1930s. The entire Wall Street landscape has changed completely. Investment banking is no longer a viable business model; the Big 5 have either vanished or transformed themselves into holding companies to escape short sellers. The hedge funds have been deleveraging with a ferocity that has sent sent stocks and commodities crashing. In one day last week, the stock market plunged 300 points in the morning only to bounce back 550 points a few hours later; an 850 point-spread in one trading day! No one but a madman would dabble in this market. Cautious investors have pulled up stakes and moved to the safety of Treasurys. Meanwhile, the financial tsunami is roaring through the real economy where consumer confidence has plummeted, unemployment is soaring and retail sales have fallen to historic lows. The downdraft from the financial markets has flattened Main Street and set the stage for a $500 billion stimulus package to be delivered in the first few months of the Obama administration. The meltdown appears to be playing out much like Henry Paulson anticipated. According to Bloomberg News : "Shortly after leaving Wall Street as Goldman Sachs' CEO, Henry Paulson was at Camp David warning the president and his staff of "over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street's face and affect the whole economy." (Paul B. Farrell, "30 reasons for Great Depression 2 by 2011", MarketWatch)

So far, the Federal Reserve has provided nearly $2 trillion through its lending facilities just to keep the financial system afloat. The Treasury is currently distributing $700 billion to key banks and other financial institutions that are perceived to be "too big to fail". In truth, the "too big to fail" mantra is a just public relations hoax to conceal the web of counterparty deals that make it impossible for one institution to fail without dominoing through the rest of the system and wreaking havoc. That's why AIG is still on life-support with regular injections of taxpayer money it had ro;ughly $4 trillion of credit default swaps (structured "hedges" that are not traded on a regulated exchange) for which AIG does not have sufficient capital reserves. In other words, the taxpayer is now paying the debts of an insurance company that didn't set aside the money to pay its claims. (As yet, no SEC indictments for securities fraud.) In fact, the Fed and Treasury are now providing a backstop for the entire structured finance system which is frozen solid and shows no sign of thawing any time soon.

This is not a normal recession, which is a downturn in the business cycle and "a period of reduced economic activity" usually brought on by a mismatch between supply and demand( that ends in two quarters of negative growth) The present situation is much more grave; it is the utter destruction of a system that was developed fairly recently and has proven to be thoroughly dysfunctional. It cannot withstand the effects of tighter credit or adverse market conditions. This is not a cyclical downturn; the structured finance system has collapsed leaving behind a multi-trillion dollar capital hole that is bringing the broader economy to its knees.

One by one, we have seen the structured instruments fail; mortgage-backed securities (MBS), collateralized debt obligations (CDOs), credit default swaps (CDS), commercial paper (CP), auction rate securities. Now we are seeing investors boycott anything related to structured investments. This is from Mish's Global Economic Trend Analysis:

"There were NO sales of bonds backed by credit-card payments in October, the first time since 1993, when the asset-backed securities market was in its infancy. Yields on top-rated credit card bonds relative to benchmark interest rates reached a record high of 525 basis points more than the London interbank offered rate, or Libor, last week, according to Bank of America Corp. data."

Wall Street has turned off the faucet for securitized investments. That market is toast. The only reason that Libor and the other gauges of interbank lending have normalized is because the Fed guaranteed money markets and commercial paper. It has nothing to do with trust between the banks themselves. There is no trust. Even so, the banks are not capable of making up for the vast amount of credit which was produced by the now-defunct investment banks and hedge funds which are constrained by losses of nearly $3.5 trillion; half of their total value. In the best case scenario, bank credit will only shrink 15 or 20 percent, which will put the US on track for a deep "18 month to 2 year" recession rather than another Great Depression.

Paulson's attempt to divert $30 billion to non-bank financial institutions to revive loan securitization when there is no appetite among investors for such structured junk is pure folly. More troubling, is that neither Paulson nor Bernanke have a Plan B; an alternate scheme for rebuilding the financial markets on a solid, sustainable foundation rather than low interest rates and pools of debt. Everything they have done so far, suggests that they are focused on one thing alone; inflating another equity bubble. "Inflate or die", as the saying goes; and Bernanke intends to achieve this objective using the same tools that brought us to the brink of catastrophe. Here's a clip from a recent speech by Bernanke which shows his determination to prop up the broken system:

"The ability of financial intermediaries to sell the mortgages they originate into the broader capital market by means of the securitization process serves two important purposes: First, it provides originators much wider sources of funding than they could obtain through conventional sources, such as retail deposits; second, it substantially reduces the originator's exposure to interest rate, credit, prepayment, and other risks associated with holding mortgages to maturity, thereby reducing the overall costs of providing mortgage credit."

Sorry, Ben, the funding has dried up and the banks have shown no interest in going back to the days of conventional "30-year fixed" mortgages. It's a dead letter. The Fed and Treasury need to stop looking for ways to reflate the bubble and work to restore confidence in the markets by increasing regulation and reducing the amount of leverage that's allowable to 12 to 1. After all, it's no coincidence that AIG, Fannie and Freddie, Lehman Bros, General Motors, General Electric have all fallen off a cliff at the very same time. They are all victims of the same low interest, easy money finance swindle which allowed them to roll over huge amounts of short-term debt at artificially low cost. When Bear blew up, lending tightened, demand weakened, and credit was flushed from the system at an unprecedented pace. Borrowing short for long-term investments is not feasible when credit becomes scarce, but it's not because the banks aren't lending. That's just another myth that keeps the public from seeing what's really going on. As Jon Hilsenrath points out in his Wall Street Journal article, "Banks Keep Lending, but that isn't easing the crisis", that is not the case:

"Banks actually are lending at record levels. Their commercial and industrial loans, at $1.6 trillion in early November, were up 15 per cent from a year earlier and grew at a 25 per cent annual rate during the past three months, according to weekly Federal Reserve data. Home-equity loans, at $578 billion, were up 21 per cent from a year ago and grew at a 48 per cent annual rate in three months....The numbers point to one of the great challenges of the crisis. The credit crunch is surely real, but it is complex and not easily managed. Banks are lending, but they're also under serious strain as they act as backstops to a larger problem -- the breakdown of securities markets..The worst of the credit crisis is being felt not in banks but in financial markets..."

The banks are not to blame. There is a generalized contraction of credit in the non-bank financial system where structured finance has blown up and taken half of Wall Street with it. It's the end of an era. Here's how economist Henry C. K. Liu sums it up in his "Open Letter to World Leaders attending the November 15 White House Summit on Financial Markets and the World Economy":

"Neoliberal economists in the last three decades have denied the possibility of a replay of the worldwide destructiveness of the Great Depression that followed the collapse of the speculative bubble created by unfettered US financial markets of the 'Roaring Twenties'. They fooled themselves into thinking that false prosperity built on debt could be sustainable with monetary indulgence. Now history is repeating itself, this time with a new, more lethal virus that has infested deregulated global financial markets with 'innovative' debt securitization, structured finance and maverick banking operations flooded with excess liquidity released by accommodative central banks. A massive structure of phantom wealth was built on the quicksand of debt manipulation. This debt bubble finally imploded in July 2007 and is now threatening to bring down the entire global financial system to cause an economic meltdown unless enlightened political leadership adopts coordinated corrective measures on a global scale."

Rome is burning. It's time to stop tinkering with a failed system and move on to "Plan B" before it's too late.