concern among economists and market-savvy pundits that the global financial
system is hanging by a few well-worn threads that could snap at any time.
The $10.4 trillion
real estate �bubble� has attracted the most attention, but the shaky
derivatives market, hedge funds, and falling dollar are equally worrisome.
Twenty years of deregulation has created an economic monster which is increasingly
unmanageable and threatens to bring down the whole system in a heap.
As Gabriel Kolko
said in a recent CounterPunch article (�Why a Global Economic
Deluge Looms�), �The entire global financial structure is becoming
uncontrollable in crucial ways its nominal leaders never expected. Instability
is increasingly its hallmark. . . . Contradictions now wrack the world�s
financial system, and if we are to believe the institutions and personalities
who have been in the forefront of the defense of capitalism, it may very well
be on the verge of serious crisis.�
reduced market transparency and created a plethora of financial instruments
which are relatively untested and extraordinarily volatile. By eliminating the
�rules of the game,� the market big shots have raked in hefty profits but
reshaped the economic landscape in a way that no one can predict what the
ultimate outcome will be. The new investment-regime includes such opaque
standards as credit derivatives, credit derivative futures, and collateralized
debt obligations. Hedge funds are now loaded with these over-leveraged
debt-instruments that promise a generous return in an �up-tempo� market, but
certain doom in an economic downturn. Now, that the indicators are all pointing
toward a slowdown or recession, the potentially devastating effects of this new
�liberalized� system will soon be felt throughout the global economy.
Kolko�s article is
a �must-read� for anyone who wants to get a better idea of the fragility of the
present system. Americans have dumped trillions of their hard-earned savings
into risky hedge funds which have only been in existence for a short period of
time. No one knows what the future holds for these �flash-in-the-pan�
investments. As Kolko says, �The credit derivative market was almost
nonexistent in 2001, grew fairly slowly until 2004 and went into the
stratosphere, reaching $17.3 trillion by the end of 2005.�
That�s right; a
whopping $17.3 trillion, enough to sink the entire economy if the market takes
This whole idea of
reselling debt is a relatively new phenomenon and fraught with peril. Hedge
funds can bundle together a slew of adjustable rate mortgages (ARMs) and make a
handsome profit, but when the housing market starts listing, the investor is
trapped on a sinking ship with little hope of recouping his losses.
characterized in the business-friendly media as a way of lifting the burdensome
restrictions on the free flow of capital. This is nonsense. Deregulation is, in
fact, the removal of the laws which traditionally protect the public from the
hucksters and scam artists who create lofty-sounding investments which are
nothing more than Ponzi-schemes. (The purchase of �credit derivative futures�
definitely falls within this category of dicey investments) Deregulation has
gravely undermined the long-term prospects for western capitalism to succeed.
By removing the safeguards to investment, the business and banking communities
have created what many call �casino capitalism,� an anarchic structure with few
protections that is hurling the markets toward a system-wide meltdown.
plague the sagging real estate market. In recent years, a buyer could pick up a
house with no down payment, an �interest-only� loan, a low ARM, and be
reasonably certain that the next year it would increase 20 to 30 percent in
value. This allows the buyer to refinance his home, use his �presto-equity� as
discretionary income, and begin the cycle all over again next year.
stagnating since the 1970s, the increase in home equity has been the preferred
method for most Americans to �get ahead.� Housing prices have steadily
increased since the 1980s and skyrocketed in the last five years. This has
created a feeding-frenzy for low interest loans and attracted millions of
speculators and (traditionally) unqualified applicants to the real estate gold
It�s been a great
deal for the banks, too. Mortgages make up the bulk of the banks' loans in
America, more than $400 billion last year alone. If it weren�t for the steady
steam of mortgages, many banks would have seen negative growth in the last
decade. Now that housing prices are flattening out and expected to fall
(precipitously), the easy money has dried up and many over-leveraged homeowners
are facing the dismal prospect of having to pay off an asset that is quickly
losing its value. Economist Michael Hudson calls this phenomenon �negative
equity,� that is, when the current value of the house falls beneath the amount
that one has to pay on his mortgage. It is a predicament which now faces an
estimated 30 million Americans who are drowning in red ink and skittering
towards a life of indentured servitude.
The magnitude of
the housing bubble is shocking and unprecedented. According to the Federal
Reserve's own figures, �The total amount of residential housing wealth in the
US just about doubled between 1999 and 2006, up from $10.4 trillion to $20.4
trillion.�(Times Online) This tells us that the Fed had a clear idea of
the size of the equity balloon their low interest policies were creating, but
decided not to take corrective action. It also tells us that there will be no
�soft landing.� When the market begins to fall, no one knows when it will hit
bottom. Ten trillion dollars are more than a �little froth,� as Greenspan
opined; it is an earth-shaking, economy-busting catastrophe that will put
millions at risk of foreclosure, bankruptcy and ruin.
Greenspan and the
privately-owned Fed played a major role in putting us in this mess by
rubber-stamping the new system of precarious loans (no down payments,
interest-only loans, ARMs) and perpetuating their �cheap money� policies.
Greenspan admitted this a few months ago when he said that current housing
increases were �unsustainable� and would have corrected long ago if not for the
�the dramatic increase in the prevalence of interest-only loans . . . and more
exotic forms of adjustable rate mortgages that enable marginally-qualified,
highly leveraged borrowers to purchase homes at inflated prices.�
circuitous comments are tantamount to an admission of guilt. The fallout from
the Fed�s policies are bound to be widespread and devastating. The country has
been buoyed along on $10 trillion of borrowed money which has created the
unfortunate sense of prosperity, which is not reflected in the general economy.
The increase in housing prices has not come from wages (which have actually
decreased under Bush) or from demand (inventory is now at a 10-year high). It
has merely been the availability of low interest loans and the promise of
getting rich quick. As the market cools, millions of Americans will either face
foreclosure or be shackled to a mortgage that is higher than the dwindling value
of their homes. It is a grim picture of 21st century debt-slavery.
groups now believe that the falling housing market will trigger �a softening of
capital spending which will cause a slowdown in US manufacturing next year�
�The housing market
has turned; it�s going to be down this year and even more sharply next year,�
said Dan Meckstroth, chief economist in an Arlington, Virginia-based trade
group. (Reuters) As the housing bubble deflates, economic growth will slump,
and the anticipated recession will steadily deepen.
deregulated �matchstick� markets and the housing bubble are just two of the
three worms which now infect the American economy. The last of the fiscal
demons is the falling dollar.
Since, Bush took
office the dollar has dropped a whopping 30 percent against the euro. At the
same time Bush has added another $3 trillion to the national debt and increased
the trade deficit to an astonishing $800 billion a year: 6.5 percent of GDP.
The US now needs $2.5 billion per day just to cover its trade deficit. No one
believes that this will go on forever, in fact, Greenspan sagely noted that it
administration seems to think that if they corner the global oil-trade by
integrating Iran and Iraq (60 percent of world oil will come from the Middle
East by 2020) into the US economic system, they can forestall the demise of the
greenback as the world�s �reserve currency.� As long as oil continues to be
denominated (mainly) in dollars, the dollar will remain the de facto
international currency and western elites will maintain their role as the
stewards of the global system. However, as America�s debts continue to
mushroom, the US produces fewer manufactured goods, and the oil-producing
countries become more hostile to Bush�s belligerent foreign policy, there�s a
real chance the dollar will be abandoned as the main unit of foreign exchange.
If this happens, then the $3 trillion that is currently held in central banks
overseas will flood the US, triggering hyper-inflation and economic disaster.
understand now that our involvement in Iraq had a lot to do with oil supplies,
but that is only part of the story. The administration is trying to maintain US
dollar-hegemony so they can preserve the system whereby fiat money is traded
for precious resources. That system is under growing strain and bound together
by the tattered webbing of military force. If the mission in Iraq fails, the
dollar-system, which has dominated the world since the Second World War, will
quickly unravel sending tremors through America�s economic heartland.
president of Casey Research, comments on the fate of the dollar in uniquely
apocalyptic terms in a recent article in �Review and Focus.�
He says, �Foreign
owners of the big green mountain of US dollars have become uneasy and are
generally looking to sell. There�s no dumping, at least not yet. When it comes,
the flight from the dollar will come slowly, and then gain momentum before
moving into a blow off. Like a glacier sliding toward a cliff, movement that
seems inevitable may take a puzzlingly long time to get underway. But once it
does, things speed up at a surprising rate. . . . Given the choice between (A)
a dead housing market and a scorched earth depression in the US or (B) a
collapsing currency, which at least has the virtue of reducing the real cost of
paying off all those Treasury bonds, I�m forced to believe the US government
will choose to sacrifice the dollar.�
Casey does not
mince words, but his sentiments are becoming more mainstream as the Bush
administration continues to increase its �dollar-savaging� deficits and
reckless economic policies.
Many of America�s
fiscal troubles could have been mitigated by prudent management or judicious
leadership, but that won�t change things now. The system is not in the control
of the elected representatives and the deeply rooted problems are likely to
persist until a calamitous event precipitates a fundamental change. The
imbalances are now so humongous that everyone agrees that something has to
give. The system is on its last legs as manifested by its increasing tendency
to express itself in terms of repression at home and militarism abroad; the
ominous signs of an injured beast in its death throes.
From the cratering
hedge funds, to the faltering dollar, to the fizzling housing bubble,
western-style capitalism is in the advanced stages of collapse. Deregulation
and liberalization have only hastened its decline.
locomotive of global growth is slowly grinding to a standstill, bogged down by
the accumulated weight of it own inconsistencies and inequities. Change is
coming, for good or bad.
Mike Whitney lives in Washington state. He can be reached at: firstname.lastname@example.org.