Last Friday's bloodbath on Wall Street proved that the
troubles in the credit markets have not been relieved by the Fed's rate cuts.
The Dow Jones slipped 367 points on the 20th anniversary of Black Monday, the
stock market's biggest one-day loss in history.
Since Friday, Asian markets have plunged; stocks are down
sharply in Japan, Australia, Hong Kong, Indonesia, the Philippines, Taiwan and
South Korea. The global sell-off is a reaction to ongoing problems in the
subprime market and deeper-rooted systemic issues related to the US's
The sudden downturn in the stock market provided a fitting
backdrop for Treasury Secretary Paulson's appearance at the G-7 meetings in
Washington, DC. Paulson has largely shrugged off the decline in housing and the
growing volatility in the equities markets. As the representative for the
world's biggest economy, Paulson instructed the other nations on how best to
adjust their currencies and on the dangers of "sovereign wealth
funds." No one was listening. Foreign ministers and central bankers are
less receptive to the scolding of US officials. America needs to put its own
house in order before it gives advice to anyone else.
What everyone at the meetings really wanted to know was why
the United States destabilized the global economic system by selling hundreds
of billions of dollars of worthless mortgage-backed securities to banks and
pension funds around the world? Aren't there any regulators in the US anymore?
And how is Paulson going to make amends to the institutions
and investors who lost their shirts in this massive mortgage scheme?
Unfortunately, the Treasury secretary didn't address any of
these questions. He offered no recommendations for fixing the problems in the
credit markets and he refused to explain what he would do to shore up the
faltering dollar. Instead, he reiterated the same lame mantra that the US
follows a "strong dollar policy."
Baloney. The Federal Reserve has been trashing the greenback
for the last seven years without pause. Paulson needs to rethink his approach
and start telling the truth. Markets thrive on credibility and transparency;
that's what strengthens investor confidence. If Paulson thinks that the people
are dupes; he's in for a shock.
Last month's net foreign inflows show how quickly capital
can evaporate when confidence is lost. Foreign investors pulled $163 billion
out of US securities and Treasuries in August alone. Net capital inflows have
turned negative and that money won't be returning until the United States shows
that it's "got its act together."
Are you listening, Henry?
The multi-trillion dollar subprime swindle was the greatest
financial fraud in history. Investors are looking for accountability. They want
to hear someone in the Bush administration and at the Federal Reserve stand up,
take responsibility, and offer concrete regulatory changes to fix the system.
Are you listening, Henry?
No one is interested in another scam like the new $100
billion "Bankers Bankruptcy Fund." All that does is provide the
overextended and undercapitalized investment banks another chance to dump their
poisonous mortgage-backed slop on the gullible public. Forget about it. That
plan needs to be tossed in the circular receptacle. If Paulson really wants to
know what people think about his new Mega-fund he should listen to Nick
Parsons, the head of markets strategy at National Australia Bank.
Parsons summed up the
fund's goals saying: "By insulating the junk from the sellers of junk, the
holders of junk should be spared the problems of junk. The one flaw in this
cunning plan, however, would be if investors took fright at being reminded just
how much junk is still in the system.''
Parsons is right.
Junk bonds are still junk whether they're logged on an SIV's debit sheet or
wrapped in Treasury Dept. red ribbon. What difference does it make? It's still
garbage. Write down the losses and get on with it.
It's worth noting
that Paulson, who felt vindicated in reproaching China for currency
manipulation, also blasted Iran saying, "We discussed ways to deal with
Iran's pursuit of a nuclear capability and ballistic missiles, its vast
financial support to lethal terrorist groups, and the deceptive financial
tactics employed by Iran to evade sanctions and mask illicit
Give it a rest, Hank.
Apart from the fact that the United Nations nuclear watchdog
agency (IAEA) has found "no evidence" that Iran is conducting a
nuclear weapons program, it's none of Paulson's business anyway. He needs to
devote more time to cleaning up his own mess and less time criticizing others
for their fabricated offenses.
The rest of the world is already fuming at the US for
creating the problems that threaten to send the global economy into a prolonged
Developing countries that joined the G-7 meetings lambasted
the US for generating "serious problems of financial fragility" which
are endangering the "prosperity of the world economy." [Bloomberg]
The G-24 is demanding "increased surveillance of
advanced economies, putting as much focus in evaluating their vulnerabilities
as it does in emerging-market economies.''
Indeed. And yet Paulson and his colleagues at the Fed
continue to blame everyone else. No one in China or Iran cooked up this
"structured finance" rip-off which sent millions of homeowners into
foreclosure, shuttered 160 mortgage lenders, and undermined the global banking
system. That was the work of the Wall Street con artists and their accomplices
at the Fed.
Consider this article in Sunday's UK Telegraph: "Barclays and Royal Bank of Scotland
have lined up emergency funds of up to $30 billion from the US Federal Reserve
to bail out American clients caught up in the global credit crunch.
board of governors wrote to both banks 10 days ago, granting them access to
funds for customers 'in need of short-term liquidity.'
"The letter to
RBS made particular reference to investors holding mortgage-backed securities
-- which have been at the centre of the sub-prime crisis. (Barclay's, RBS
prepare emergency credit with Fed)."
humongous bail out for the victims of America's deregulated mortgage-laundering
racket. Is that China's fault?
"Get Ready for the Big Squeeze," appeared in Monday's New York Times
by economics reporter Gretchen Morgenson: "Anyone who thinks that we have
hit bottom in the increasingly scary lending world is paying little mind to the
remarkably low levels of reserves that the big banks have set aside for loan
losses. Indeed, loss provisions as a percentage of total loans held for
investment plummeted to a historic low in the second quarter of 2007. Part of
the problem for banks is a result of an almost two-decade drop in loan loss
reserves. Now that a credit bust looms, banks have far fewer reserves on their
balance sheets than they might have had in previous cycles."
Still want to talk about China and Iran's problems?
The present gang of Wall Street warlords have transformed
the world's most transparent and resilient markets into an opaque galaxy of
complex debt instruments and shady "off-balance sheets" operations.
It's no better than a carnival shell game. As the banks continue to get rocked
from explosions in the housing industry, the unwinding derivatives and carry
trades will precipitate a mass exodus from the equities markets. That rout will
be matched by a corresponding downward slide in the real estate market, which
is expected to continue until 2010.
Crisis dynamics have returned to the credit markets. Surging
oil and food prices are bearing down on maxed-out consumers and slowing retail
spending. Discretionary income is vanishing from rising inflation and shrinking
home equity. Wages have remained stagnant for over a decade while personal
savings have dipped to minus digits. On top of it all, consumer debt is at
record highs and the danger of default has expanded beyond housing to every
area of personal finance.
A report in Sunday's Financial Times sheds light on this new
and worrisome development: "Poor quarterly results from banks across the
US over the past two weeks suggest credit problems once confined to high-risk
mortgage borrowers are spreading across the consumer landscape, posing new risks
to the economy and weighing heavily on the markets.
"US banks have raised reserves for loan losses by at
least $6bn over the second quarter and by even larger amounts from last year,
indicating financial executives believe consumers will be increasingly unable
to make payments on a variety of loans.
"Banks are adding to reserves not just for defaults on
mortgages, but also on home equity loans, car loans and credit cards.
out merely as a subprime problem has expanded more broadly in the mortgage
space and problems are getting worse at a faster pace than many had
expected," said Michael Mayo, Deutsche Bank analyst." ["US Loan
Default problems Widen" Financial Times]
The aftershocks from
Alan Greenspan's "cheap credit" policies will be felt for decades.
The American consumer is more over-leveraged and economically vulnerable than
any time in history. Simply put; he owes money on everything -- cars,
mortgages, electronics, student loans, and credit cards. The path to indentured
serfdom is paved with the Fed's low interest green paper.
Record US trade imbalances coupled with a steadily declining
dollar, is negatively impacting European industry as well as the euro. Further
weakening is likely to trigger a stampede away from dollar-backed assets and securities.
The plan to strangle the dollar to reduce US balance of payments is pure lunacy
-- an idea as zany as invading Iraq. No country has ever devalued its way to
prosperity. Destroying the dollar will destroy the country.
Global credit markets are now facing unprecedented
disruptions due to the mortgage-derivatives fraud, which originated in the
United States before spreading across the world. Four-hundred billion dollars
in asset-backed commercial paper (ABCP) has failed to roll over, the mortgage securitization
process has stalled, the colossal leveraged buyout deals (LBOs) are DOA, and
millions of bankrupt homeowners are being driven from their houses. The big
investment banks have been forced to take $280 billion of new debt on their
balance sheets since the middle of August. This is limiting their ability to
issue new loans and generate profits. The banking system has already smashed
into the iceberg and the decks are quickly filling with water.
Interest rates cuts will do nothing to slow the inexorable
deterioration in the housing or stock markets. Cheap credit will not dispose of
the toxic debt clogging the system or slow the pace of defaults. Trillions of
dollars in market capitalization will be lost.
The system is blinking red. These problems cannot be ignored
or swept under the rug any longer.
Leadership is critical in times of economic crisis. This
isn't the time for prevarication, obfuscation or public relations gimmicks. We
need leaders who will tell the truth, make remedial policy recommendations, and
forestall the growing probability of social disorder.
Mike Whitney lives in
Washington state. He
can be reached at email@example.com.