Is this the Big One?
By Mike Whitney
Online Journal Contributing Writer
Jan 23, 2008, 00:45
"This is going to be a rough week.
Fastening your seat belts may not be enough for this ride. Better superglue
yourselves to the floorboards and pray for God's mercy." James Howard
Kunstler, "Fullblown Panic"
On Monday, fears of a US recession spilled over into Asian
markets, sending stocks tumbling. Indexes were hammered across the board in
what turned out to be the worst day of trading since 2001.
In India, the Bombay Sensitive Index plunged 1,408 points,
to 17,605. In China, the Shanghai Composite dropped 266 points (or 5.5 percent)
to 23,818, while in Japan, the Nikkei fell 535 points, to 13,325 points. The
bloodletting stretched across the continent and into Europe where shares
nosedived by more than 4 percent by mid-morning �putting them on track for
their biggest one-day fall in more than four and a half years.�
The huge sell-off is a sign that global investors do not
believe that the Fed's rate cuts or President Bush's $150 billion �stimulus
package� can revive the flagging economy or breathe new life into the
overextended US consumer. After Monday's sharp downturn, the prospects for
averting a deep and protracted recession are slim to none.
Economics Professor Nouriel Roubini summed it up like this
nearly a month ago: �The United States has now effectively entered into a
serious and painful recession. The debate is not anymore on whether the economy
will experience a soft landing or a hard landing; it is rather on how hard the
hard landing recession will be. The factors that make the recession inevitable
include the nation's worst-ever housing recession, which is still getting
worse; a severe liquidity and credit crunch in financial markets that is
getting worse than when it started last summer, high oil and gasoline prices,
falling capital spending by the corporate sector, a slackening labor market
where few jobs are being created and the unemployment rate is sharply up, and
shopped-out, savings-less and debt-burdened American consumers who -- thanks to
falling home prices -- can no longer use their homes as ATM machines to allow
them to spend more than their incomes. As private consumption in the US is over
70 percent of GDP, the US consumer now retrenching and cutting spending ensures
that a recession is now underway.
"On top of this recession there are now serious risks
of a systemic financial crisis in the US as the financial losses are spreading
from subprime to near prime and prime mortgages, consumer debt (credit cards,
auto loans, student loans), commercial real estate loans, leveraged loans and
postponed/restructured/canceled LBO and, soon enough, sharply rising default
rates on corporate bonds that will lead to a second round of large losses in
credit default swaps. The total of all of these financial losses could be above
$1 trillion thus triggering a massive credit crunch and a systemic financial
sector crisis.� [Nouriel Roubini Global EconoMonitor]
Decades of stagnant wages have left the American worker hamstrung
and unable to continue to account for 25 percent of global consumption.
Tightening credit and lack of personal savings have only added to his problems.
The American consumer is overworked, underpaid, and tapped-out. That means that
aggregate demand will fall dramatically across the world triggering increases
in unemployment, decreases in capital expansion, and widespread slowdown in
business activity. These are the beginnings of a deflationary spiral that will
wipe out trillions of dollars of market capitalization in the real estate,
equities and bond markets. Even gold and oil will retreat significantly (as we
saw in Monday's results).
The present crisis is not the result of normal market
forces, but price fixing at the Federal Reserve and the financial engineering
of the main investment banks. If there had been sufficient regulation of the
Fed's activities -- so that interest rates had not been kept below the rate of
inflation for over 31 months straight -- than the trillions of dollars in low-interest
credit would not have flooded into the real estate market inflating the biggest
housing bubble in US history. Despite his feeble excuses, Greenspan's role in
destroying the US economy is no longer in doubt.
Even the far-right op-ed
page of the Wall Street Journal conceded Greenspan's culpability in Saturday's
edition. Here's what it said: �Amid the daily market turmoil, and to help
prevent a crash, it helps to step back and remember how we got here. With the
benefit of hindsight, everyone can see that the U.S. economy built up an
enormous credit bubble that has now popped. Our own view -- which we warned
about going back to 2003 -- is that this bubble was created principally by a
Federal Reserve that kept real interest rates too low for too long. In doing so
the Fed created a subsidy for debt and a commodity price spike.�
Greenspan's low interest rates ignited a speculative frenzy
that resulted in humongous equity bubbles. The Fed's �cheap money� policy
created artificial demand for housing which drove prices to unsustainable
levels. Now the real estate market is crashing; foreclosures are skyrocketing,
inventory is at historic highs, construction-related jobs are drying up, and
housing prices "across the country" are plummeting for the first time
since the Great Depression. These are the real results of Greenspan's "low
interest" fake prosperity.
Greenspan is not the only one responsible for the present
calamity. The financial markets have been reconfigured in a way that
accommodates all manner of corruption. The new model, �structured finance,�
allows worthless "subprime" loans to be dressed up as valuable assets
-- stamped with a triple A rating -- and sold to unsuspecting investors.
The Wall Street Journal explains how our $800 billion
current account deficit created a circular loop which channeled vast amounts of
borrowed money back into US markets: "That capital flow and debt subsidy,
in turn, became fuel for smart people in mortgage companies, investment banks
and elsewhere to exploit. In a sense they created a new financial system --
subprime loans, SIVs, CDOs, etc. -- that is enormously efficient and brought
capital to new places. But thanks to low interest rates and human enthusiasm,
this debt spree also got carried away. �
"Got carried away"? Now there's an understatement.
Stock markets across the world are crashing because of the insatiable greed of
a few market-heavyweights who gunked up the whole system with worthless
The Wall Street Journal admits that a new �structured debt�
market was created to package dubious subprime liabilities (from �no doc,� no
collateral , �bad credit� loan applicants) and sell them to hedge funds,
insurance companies and foreign banks as if they were precious jewels. The WSJ
avers that this is the way that �smart people exploit� the opportunities from
lavish �capital flows.�
But was it �smart� or criminal?
Fortunately, that question was answered this week in an
extraordinary outburst on cable TV by market insider and equities guru, Jim
Cramer. In Cramer's latest explosion, he details his own involvement in
creating and selling �structured products� which had never been stress-tested
in a slumping market. No one knew how badly they would perform. Cramer admits
that the motivation behind peddling this junk to gullible investors was simply
greed. Here's his statement:
"Its all about the commission�
(We used to say) �The commissions on structured products are
so huge let's JAM IT.� (note �jam it� means foist it on the customer) It's all
about the 'commish'. The commission on structured product is GIGANTIC. I could
make a fortune 'JAMMING THAT CRUMMY PAPER' but I had a degree of conscience --
what a shocker!--We used to regulate people but they decided during the Reagan
revolution that that was bad. So we don't regulate anyone anymore. But listen,
the commission in structured product is so gigantic. (pause) First of all the
customer has no idea what the product really is because it is invented. Second,
you assume the customer is really stupid; like we used to say about the German
bankers, 'The German banks are just Bozos. Throw them anything.' Or the
Australians 'M O R O N S' Or the Florida Fund (ha ha ) �They're so stupid let's
give them Triple B (junk grade) Then we'd just laugh and laugh at the customers
and Jam them with the commission . . . That's what happened; that's what
happened. . . . Remember, this is about commissions, about how much money you
can make by jamming stupid customers. I've seen it all my life; you jam stupid
customers.� [See the whole damning
Trillions of dollars in structured investments (CDOs, MBSs,
an ASCP) have now clogged up the global financial system and are dragging the
world headlong into recession/depression. Cramer's confession is a candid
admission of criminal intent to defraud the public by selling products which
people -- within the financial industry -- KNEW were falsely represented by
their ratings. They sold them simply to fatten their own paychecks and because
there is no longer any regulatory agency within the US government that curtails
Boycott US financial products?
As the stock market continues its inexorable downward
plunge, foreign central banks and investors need to determine whether they were
deliberately ripped off and aggressively pursue legal alternatives. They should
initiate a boycott of all US financial products until an appropriate settlement
for the hundreds of billions in losses due to the �structured finance� swindle
can be negotiated. That is the best way to serve their own national interests
and those of their people.
Deregulation has destroyed the credibility of US markets.
There is no oversight or policing agency. It's the Wild West. The assets are
falsely represented, the ratings are meaningless, and there's a clear intention
to deceive. That means that the stewardship of the global economic system is no
longer in good hands. There needs to be a fundamental change. As the nightmare
scenario of global recession continues to unfold; we need new leaders in Europe
and Asia to step up and fill the void.
Whitney lives in Washington state. He can be reached at firstname.lastname@example.org.
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