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Fritz
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Re:We're Fucked - The Coming Economic Crisis
« Reply #15 on: 2008-08-22 00:10:12 »
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[Fritz]And again to keep the meme going ....


Worst of financial crisis is still to come, ex-IMF chief Ken Rogoff warns

Source:
Author: Malcolm Moore in Shanghai
Date: 19/08/2008

Banking shares across the world were hit after a stark warning from the IMF's former chief economist Kenneth Rogoff that the worst of the credit crisis is yet to come.
   
Kenneth Rogoff, former chief economist to the IMF
Rogoff on banks: 'We're going to see a whopper go under'

Kenneth Rogoff, chief economist to the International Monetary Fund between 2001 and 2004, told an audience in Singapore that "the financial crisis is at the halfway point, perhaps."

Now an economics professor at Harvard University, Mr Rogoff said. "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks."

He added that efforts by Asian sovereign wealth funds to bail out US banks were not the solution. "The financial system has become very bloated in size and needed to shrink," he said.
# Japan's Nikkei dragged down by banks

Mr Rogoff also touched on the spectre of global inflation, warning that the need to cut interest rates and stimulate the US economy is "going to lead to a lot of inflation in the next few years".

Shares in Barclays were down 4pc in early afternoon trading as were shares in Societe Generale, France's second-biggest bank. The weak performance of bank shares earlier dragged down markets across Asia.
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Mr Rogoff's comments came as fears that the global economic slowdown and persistent inflation has infected Asia increased, sending stock markets in Japan and Hong Kong tumbling.

His outlook was echoed by Masaaki Shirakawa, the governor of the Bank of Japan, who said he would be watching inflation "closely". Mindful of the threat, the central bank today left interest rates unchanged at 0.5pc, despite a set of data which showed last week that the Japanese economy had contracted by 0.6pc in the second quarter.

Tehmina Khan, an economist at Capital Economics, said the current economic downturn in Japan would be "relatively short-lived" and that many people believe high food prices will push inflation upwards.

Japan's consumer confidence survey showed that nearly 44pc of the country's households, a record number, believe inflation will rise from its current rate of 1.9pc in June to over 5pc during the coming year.

The worries about the American economy and looming inflation sent the Hong Kong Hang Seng index down by 446.30 points or 2.1pc to close at 20,484.37, a 12-month low. The Nikkei index in Japan slumped by 300.40, or 2.3pc, to close at 12,865.05. "At the moment cash is king.

Nobody wants to invest in the stock market," said Tony Tong, an analyst at China Everbright Securities.

However, the Shanghai market bucked the trend, making back some ground after a more-than-5pc plunge on Monday. The benchmark Shanghai Composite Index closed up 24.6pts, or 1.06pc, at 2,344.47.

Chinese investors were buoyed by the latest statement from China's central bank, which stopped referring to monetary policy as "tight". The new report toned down the need to "curb inflation and implement a tight monetary policy" and instead said economic growth should be "stable and relatively fast".

Recent inflation data has shown China is edging away from serious inflation.

China's Ministry of Finance also revealed that it had allocated 66.75 billion RMB (£5.3bn) for the rebuilding effort in the wake of the Sichuan earthquake. Over a million temporary homes have already been built.
 rogoff.jpg
« Last Edit: 2008-09-16 14:24:49 by Fritz »
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Re:We're Fucked - The Coming Economic Crisis
« Reply #16 on: 2008-09-08 22:12:39 »
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A little out of date but good read I thought ... this is the stuff floating around the office these days I guess now the Meme (We're Fucked) is spreading finally.

Still when I talk to the real estate and banking folks "minor blip no problem" there "all dooms day wackos" .... sigh

Cheers

Fritz

PS: Lots of links in the source



Meet the Economist Who Thinks We're Doomed

Source: AlterNET
Author: Stephen Mihm, The New York Times
Date: August 18, 2008, Printed on September 8, 2008

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, "I think perhaps we will need a stiff drink after that." People laughed -- and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a "permabear." When the economist Anirvan Banerji delivered his response to Roubini's talk, he noted that Roubini's predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.

But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. "He sounded like a madman in 2006," recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. "He was a prophet when he returned in 2007."

Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go "belly up" -- and six weeks later, Bear Stearns collapsed. Following the Fed's further extraordinary actions in the spring -- including making lines of credit available to selected investment banks and brokerage houses -- many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini, who dismissed the rally as nothing more than a "delusional complacency" encouraged by a "bunch of self-serving spinmasters," stuck to his script of "nightmare" events: waves of corporate bankrupticies, collapses in markets like commercial real estate and municipal bonds and, most alarming, the possible bankruptcy of a large regional or national bank that would trigger a panic by depositors. Not all of these developments have come to pass (and perhaps never will), but the demise last month of the California bank IndyMac -- one of the largest such failures in U.S. history -- drew only more attention to Roubini's seeming prescience.

As a result, Roubini, a respected but formerly obscure academic, has become a major figure in the public debate about the economy: the seer who saw it coming. He has been summoned to speak before Congress, the Council on Foreign Relations and the World Economic Forum at Davos. He is now a sought-after adviser, spending much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Though he continues to issue colorful doomsday prophecies of a decidedly nonmainstream sort -- especially on his popular and polemical blog, where he offers visions of "equity market slaughter" and the "Coming Systemic Bust of the U.S. Banking System" -- the mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things. "I have in the last few months become more pessimistic than the consensus," the former Treasury secretary Lawrence Summers told me earlier this year. "Certainly, Nouriel's writings have been a contributor to that."

On a cold and dreary day last winter, I met Roubini over lunch in the TriBeCa neighborhood of New York City. "I'm not a pessimist by nature," he insisted. "I'm not someone who sees things in a bleak way." Just looking at him, I found the assertion hard to credit. With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. He rarely smiles, and when he does, his face, topped by an unruly mop of brown hair, contorts into something more closely resembling a grimace.

When I pressed him on his claim that he wasn't pessimistic, he paused for a moment and then relented a little. "I have more concerns about potential risks and vulnerabilities than most people," he said, with glum understatement. But these concerns, he argued, make him more of a realist than a pessimist and put him in the role of the cleareyed outsider -- unsettling complacency and puncturing pieties.

Roubini, who is 50, has been an outsider his entire life. He was born in Istanbul, the child of Iranian Jews, and his family moved to Tehran when he was 2, then to Tel Aviv and finally to Italy, where he grew up and attended college. He moved to the United States to pursue his doctorate in international economics at Harvard. Along the way he became fluent in Farsi, Hebrew, Italian and English. His accent, an inimitable polyglot growl, radiates a weariness that comes with being what he calls a "global nomad."

As a graduate student at Harvard, Roubini was an unusual talent, according to his adviser, the Columbia economist Jeffrey Sachs. He was as comfortable in the world of arcane mathematics as he was studying political and economic institutions. "It's a mix of skills that rarely comes packaged in one person," Sachs told me. After completing his Ph.D. in 1988, Roubini joined the economics department at Yale, where he first met and began sharing ideas with Robert Shiller, the economist now known for his prescient warnings about the 1990s tech bubble.

The '90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico's in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina's followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.

Roubini's work was distinguished not only by his conclusions but also by his approach. By making extensive use of transnational comparisons and historical analogies, he was employing a subjective, nontechnical framework, the sort embraced by popular economists like the Times Op-Ed columnist Paul Krugman and Joseph Stiglitz in order to reach a nonacademic audience. Roubini takes pains to note that he remains a rigorous scholarly economist -- "When I weigh evidence," he told me, "I'm drawing on 20 years of accumulated experience using models" -- but his approach is not the contemporary scholarly ideal in which an economist builds a model in order to constrain his subjective impressions and abide by a discrete set of data. As Shiller told me, "Nouriel has a different way of seeing things than most economists: he gets into everything."

Roubini likens his style to that of a policy maker like Alan Greenspan, the former Fed chairman who was said (perhaps apocryphally) to pore over vast quantities of technical economic data while sitting in the bathtub, looking to sniff out where the economy was headed. Roubini also cites, as a more ideologically congenial example, the sweeping, cosmopolitan approach of the legendary economist John Maynard Keynes, whom Roubini, with only slight exaggeration, calls "the most brilliant economist who never wrote down an equation." The book that Roubini ultimately wrote (with the economist Brad Setser) on the emerging market crises, "Bailouts or Bail-Ins?" contains not a single equation in its 400-plus pages.

After analyzing the markets that collapsed in the '90s, Roubini set out to determine which country's economy would be the next to succumb to the same pressures. His surprising answer: the United States'. "The United States," Roubini remembers thinking, "looked like the biggest emerging market of all." Of course, the United States wasn't an emerging market; it was (and still is) the largest economy in the world. But Roubini was unnerved by what he saw in the U.S. economy, in particular its 2004 current-account deficit of $600 billion. He began writing extensively about the dangers of that deficit and then branched out, researching the various effects of the credit boom -- including the biggest housing bubble in the nation's history -- that began after the Federal Reserve cut rates to close to zero in 2003. Roubini became convinced that the housing bubble was going to pop.

By late 2004 he had started to write about a "nightmare hard landing scenario for the United States." He predicted that foreign investors would stop financing the fiscal and current-account deficit and abandon the dollar, wreaking havoc on the economy. He said that these problems, which he called the "twin financial train wrecks," might manifest themselves in 2005 or, at the latest, 2006. "You have been warned here first," he wrote ominously on his blog. But by the end of 2006, the train wrecks hadn't occurred.

Recessions are signal events in any modern economy. And yet remarkably, the profession of economics is quite bad at predicting them. A recent study looked at "consensus forecasts" (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the '90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later.

The dismal science, it seems, is an optimistic profession. Many economists, Roubini among them, argue that some of the optimism is built into the very machinery, the mathematics, of modern economic theory. Econometric models typically rely on the assumption that the near future is likely to be similar to the recent past, and thus it is rare that the models anticipate breaks in the economy. And if the models can't foresee a relatively minor break like a recession, they have even more trouble modeling and predicting a major rupture like a full-blown financial crisis. Only a handful of 20th-century economists have even bothered to study financial panics. (The most notable example is probably the late economist Hyman Minksy, of whom Roubini is an avid reader.) "These are things most economists barely understand," Roubini told me. "We're in uncharted territory where standard economic theory isn't helpful."

True though this may be, Roubini's critics do not agree that his approach is any more accurate. Anirvan Banerji, the economist who challenged Roubini's first I.M.F. talk, points out that Roubini has been peddling pessimism for years; Banerji contends that Roubini's apparent foresight is nothing more than an unhappy coincidence of events. "Even a stopped clock is right twice a day," he told me. "The justification for his bearish call has evolved over the years," Banerji went on, ticking off the different reasons that Roubini has used to justify his predictions of recessions and crises: rising trade deficits, exploding current-account deficits, Hurricane Katrina, soaring oil prices. All of Roubini's predictions, Banerji observed, have been based on analogies with past experience. "This forecasting by analogy is a tempting thing to do," he said. "But you have to pick the right analogy. The danger of this more subjective approach is that instead of letting the objective facts shape your views, you will choose the facts that confirm your existing views."

Kenneth Rogoff, an economist at Harvard who has known Roubini for decades, told me that he sees great value in Roubini's willingness to entertain possible situations that are far outside the consensus view of most economists. "If you're sitting around at the European Central Bank," he said, "and you're asking what's the worst thing that could happen, the first thing people will say is, 'Let's see what Nouriel says.' " But Rogoff cautioned against equating that skill with forecasting. Roubini, in other words, might be the kind of economist you want to consult about the possibility of the collapse of the municipal-bond market, but he is not necessarily the kind you ask to predict, say, the rise in global demand for paper clips.

His defenders contend that Roubini is not unduly pessimistic. Jeffrey Sachs, his former adviser, told me that "if the underlying conditions call for optimism, Nouriel would be optimistic." And to be sure, Roubini is capable of being optimistic -- or at least of steering clear of absolute worst-case prognostications. He agrees, for example, with the conventional economic wisdom that oil will drop below $100 a barrel in the coming months as global demand weakens. "I'm not comfortable saying that we're going to end up in the Great Depression," he told me. "I'm a reasonable person."

What economic developments does Roubini see on the horizon? And what does he think we should do about them? The first step, he told me in a recent conversation, is to acknowledge the extent of the problem. "We are in a recession, and denying it is nonsense," he said. When Jim Nussle, the White House budget director, announced last month that the nation had "avoided a recession," Roubini was incredulous. For months, he has been predicting that the United States will suffer through an 18-month recession that will eventually rank as the "worst since the Great Depression." Though he is confident that the economy will enter a technical recovery toward the end of next year, he says that job losses, corporate bankruptcies and other drags on growth will continue to take a toll for years.

Roubini has counseled various policy makers, including Federal Reserve governors and senior Treasury Department officials, to mount an aggressive response to the crisis. He applauded when the Federal Reserve cut interest rates to 2 percent from 5.25 percent beginning last summer. He also supported the Fed's willingness to engineer a takeover of Bear Stearns. Roubini argues that the Fed's actions averted catastrophe, though he says he believes that future bailouts should focus on mortgage owners, not investors. Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars' worth of high-risk mortgages (in exchange for the lenders' agreement to reduce monthly mortgage payments), or the banks and other institutions holding those mortgages -- or the complex securities derived from them -- go under. "You either nationalize the banks or you nationalize the mortgages," he said. "Otherwise, they're all toast."

For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion -- the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd -- but something between a trillion and a trillion and a half dollars. But most important, in Roubini's opinion, is to realize that the problem is deeper than the housing crisis. "Reckless people have deluded themselves that this was a subprime crisis," he told me. "But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts." All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. "We have a subprime financial system," he said, "not a subprime mortgage market."

Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. "A good third of the regional banks won't make it," he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. "Our biggest financiers are China, Russia and the gulf states," Roubini noted. "These are rivals, not allies."

The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. "Once you run current-account deficits, you depend on the kindness of strangers," he said, pausing to let out a resigned sigh. "This might be the beginning of the end of the American empire."

© 2008 The New York Times

AlterNet is making this New York Times material available in accordance with Title 17 U.S.C. Section 107: This article is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

Stephen Mihm, an assistant professor of economic history at the University of Georgia, is the author of "A Nation of Counterfeiters: Capitalists, Con Men and the Making of the United States." His last feature article for the magazine was about North Korean counterfeiting.
© 2008 The New York Times All rights reserved.



[fritz]For anyone really ready to draw that tepid bath, pure a scotch and light that last cigarette:the_decline_of_the_american_empire

Nouriel Roubini | Aug 13, 2008

Recent economic, financial and geopolitical events suggest that the decline of the American Empire has started. After the collapse of the Soviet Union there was a brief period where the world switched from a bipolar balance of two superpowers to a unipolar world with one economic, financial, geostrategic superpower, or better, hyperpower, i.e the United States. But by now three factors suggest that the US has squandered its unipolar moment and that the decline of the American Empire – as the US was in effect a global empire – has started.

Let us explain how and why...
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Re:We're Fucked - The Coming Economic Crisis
« Reply #17 on: 2008-09-10 18:17:05 »
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PBS Monday September 8th Charlie Rose,

State of the economy Mac and Mae bailout
Morgenson
Roubini et al ...

Excellent show and sobering to see Mr Rose struggling on how to ask the questions without saying "why are we fuck'd".

PBS Charlie Rose

Cheers

Fritz

PS: the second half of the 8th is on Pakistan
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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Re:We're Fucked - The Coming Economic Crisis
« Reply #18 on: 2008-09-10 23:06:49 »
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Magnificent, substantive discussion. Very unusual. But as you observe, nobody is placing a floodlight on the probable (as in largely inescapable) consequences.Notice that a nasty Winter is a coming on. Near record low temperatures already - and record fuel costs. If you listen carefully you can hear horsemen riding.

Thank-you very much

Hermit

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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Re:We're Fucked - The Coming Economic Crisis
« Reply #19 on: 2008-09-14 16:37:48 »
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Well ... the 'Reptilian Overlords' are finally granting the media the will to let the financial Meme  that CoV has been posting for quite a while ooze out on the air waves. I noted CNN also ran similar stories today

Quote:
[Hermit] If you listen carefully you can hear horsemen riding.
and they're 'locked and loaded'

Cheers

Fritz


Source: CBC Sunday Morning
Date: 2008.09.14 9:00 pmt
Author :n/a

The Great Wall Street Swindle

In Canada's federal election campaign, economic concerns are the number-one issue. Today we investigate how out of control Wall Street practices are pushing Canada to the brink of recession. And with billions of dollars of losses, we find out if Canadian banks misled investors in this country. Could what happened to U.S. homeowners happen here?


Comments:(7)

I'm watching the program right now and it is fantastic. I hope this will be made available online.

This financial crisis is not just "one of those things" that happens - it was made to happen by some very bad people and could easily have been avoided with some judicious regulation and oversight.
Posted by: Daniel De Groot | Sep 14, 08 09:21 AM

Will this story be available online? I would like to make sure family and friends see it too.
Posted by: Dean | Sep 14, 08 10:39 AM

Shame on you for putting a criminal like George Soros on TV!!! Follow the money and you'll find out his involvement in the 9/11 Inside Job! But who am I kidding, you have no spine, guts or balls.
Posted by: CBC: Shame on you!! | Sep 14, 08 10:39 AM

Thank you for such an indepth report on the Canadian Banks and ABCP. We need to demand that governments and the big banks are held accountable for regulations and being open with their business practices. Average Canadians have been responsible in saving for their retirement but we can only trust those in the financial industry to be honest with us. It should not be "buyer beware" concept. No one can be expected to decipher the fine print that highly paid legal counsel have dreamed up for protection of the investment industry. This industry has been given the right to rob the poor and keep the gains for themselves.
Posted by: Pat Ager | Sep 14, 08 10:51 AM

This piece contributed to my better understanding of the financial mess that we all find ourselves in. It is unbelievable to find out that the little investor has so little protection. One wonders if that is one of the factors that precipitated Mr. Harper's decision to call the October 14th election. Call the election now before this mess gets the attention of the average person. The average responsible investor who is working hard to build a retirement nest, has been let down by many institutions and the government... Scary! Your piece has gone a long way in helping us be informed. Thanks!
Posted by: Joanne | Sep 14, 08 12:07 PM

From what I saw, The Fourth Estate, Blogs included, must now promulgate and ring the bell; with more facts and Government complicity to bear on profiteers - like Soros - vis–à–vis any political spin.
Posted by: Unlettered | Sep 14, 08 01:39 PM

Your feature today was the best reporting I have seen for a while, it made me undrstand for the first time the crisis that is going on in the US and in Canada, great job, keep it up. It was heartbreaking to see the faces of the real loosers in this mess, real live people. Good job CBC News Sunday!
Posted by: maynard | Sep 14, 08 02:56 PM
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Re:We're Fucked - The Coming Economic Crisis
« Reply #20 on: 2008-09-16 07:17:26 »
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[letheomaniac] I watched an interesting 'documantary' this weekend. I say 'documentary' because it was a doccie in the Micheal Moore style ie. propaganda for the other side, but to paraphrase Spider Jerusalem, objectivity is overrated, particularly when the opposition abandoned its use ages ago. The film was called 'Zeitgeist'. It did a couple of things that impressed me: 1. It gave Christianity a good smack down, and 2. It explained a lot of things about the way the US economy is structured that I didn't know before, particularly concerning the Federal Reserve Bank. As I understand it, the Fed is run by a bunch of bankers that work for the major investment banks of America. This seems peculiar to me as a resident of the hapless Banana Republic of South Africa where our Reserve bankers are employees of the government. The Fed loans money to banks at interest, a practice which, according to the doccie, was the main reason for the British colonies in the Americas rebelling against their colonial masters back in England - the English wanted to outlaw the interest-free currency (dollars) that the colonies were producing and using (I'm sure that all the American Virians present are already bored stiff by what they must teach you in primary school, but please bear with me). The English wanted the American colonies to borrow money from the Bank of England at interest and the colonies (sensibly) refused as this would immediately place them in debt which they could never get out of as their only means of paying it off would be to borrow more money from the Bank of England at yet more interest and so on in a vicious cycle of debt. Skip forward a few years and you have the Federal Reseve Bank doing exactly the same thing to the taxpayers of the land of the 'free' - a monopoly on the printing of money is in the hands of a small group of bankers who are in the employ of banks who then charge the banks of the nation interest to get dollars, knowing full well that the government and the people who pay for it are trapped in an endless spiral of ever increasing debt. This makes a handful of bankers obscenely wealthy and screws everyone that earns a paycheck. In conclusion I would like to say that I think that the American people should stop looking to the Fed to sort out their economic woes and start looking at the Fed as being the cause of their economic woes, and that the economy of the United States will only be put right once the people to whom the wealth of the nation actually belongs have removed these con artists (preferrably involving a little bloodshed for the purposes of catharsis) from power and set up a central bank that actually has the interests of the average citizen in mind. Death to the Federal Reseve = life to the US economy.
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Re:We're Fucked - The Coming Economic Crisis
« Reply #21 on: 2008-09-16 10:05:24 »
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Quote from: letheomaniac on 2008-09-16 07:17:26   
...a bunch of bankers...
[Blunderov] I believe the correct collective noun for bankers is a "wunch" eg "a wunch of bankers".

Meanwhile, as I'm sure everybody has heard, the carnage on Wall St rages ever on with the taxpayer subsidizing the cost.



http://www.globalresearch.ca/index.php?context=va&aid=10228

Capital Punishment: Lehman on its way to the Financial Gallows?


by Mike Whitney


Global Research, September 15, 2008
Information Clearing House 

Bank of America is buying Merrill Lynch for $45 billion, AIG needs an emergency $40 billion bail-out from Uncle Sam to stay afloat, and Lehman Bros is kaput. Whew! The financial world has been turned upside-down overnight and the opening bell hasn't even rung at the NYSE. It'll be a rough day of trading ahead. Paul Krugman summed up the prevailing feeling of anxiety on Wall Street like this:

"Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next."

The news of Wall Street's Sunday night massacre has already send foreign stock markets into a deep swoon. Shares tumbled in Asia and dropped more than 4 per cent in Europe. The dollar is steadily losing ground to the euro and gold is on the rise. The question is not whether the Dow will fall, but "how far" and what affect that will have on increasingly fragile financial institutions.

Lehman Brothers, the 158 year old Wall Street warhorse, announced Sunday that it will file for bankruptcy after weekend rescue plans broke down without finding a buyer. Fears of credit contagion and a global recession have resurfaced and become more widespread. Lehman's failure suggests that that the other Wall Street giants will soon be following the same path to extinction. Economist Nouriel Roubini put it like this:

"All of the independent broker dealers are going to disappear. In March it was Bear Stearns. Tonight it was Lehman and Merrill Lynch. Morgan Stanley and Goldman Sachs should go find a buyer tomorrow. The business model of broker dealers is fundamentally flawed. They cannot survive."

Roubini may be right. The funny thing about capitalism is that you need capital to play. When the bank-vault is full of nothing but worthless mortgage-backed securities (MBS) and overvalued junk bonds; the whole thing goes belly-up fast. That appears to be the case with Lehman Bros, the century-old Wall Street warhorse that has joined the long procession of underwater banking establishments now ambling lemming-like towards the cliff. Lehman had a great go of it during the boom times when all it took to make oodles of money was a predictable flood of low interest credit from the Fed and a compliant ratings agency that would stamp every crappy securitized pool of mortgages with a big Triple A before hawking it to some gullible investor in Shanghai or Heidelberg. Lehman travails are not much different from anyone else in the banking fraternity. The problem is that the entire system is under-capitalized and over-leveraged. When Bear Stearns went down last year, it was levered at a ratio of 26 to 1. When Hedgie Carlyle Capital blew up, it was levered at 32 to 1. And when Fannie and Freddie were finally subsumed by the US Treasury; the two behemoths were levered at a whopping 80 to 1, which is to say that they had a paltry one dollar capital cushion for every $80 they had loaned out. That's no way to run a business. They would have continued on the same erratic path---buying up toxic mortgages and MBS from people who had no chance of ever repaying their loans--had they not been taken into federal "conservatorship", which is a fancy way of saying they were insolvent. Treasury Secretary Henry Paulson unwisely attached a 6 inch-wide money-hose from the bowels of the Treasury to Fannies front office so the two mortgage giants could continue to teeter-along at taxpayer expense regardless of the fact that the securitization business model has completely broken down and foreign investors--including China--have already started cutting back on their purchases of GSE debt. This is no laughing matter. The $700 billion US current account deficit is financed through the generosity of foreign investors who are getting increasingly jittery about sinking money into a system that looks more like casino-poker all the time. Here's a clip from China daily on Friday:

"China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation's biggest investment banks.

"The crisis has made Chinese officials realize it's a bad idea to put all their eggs in one basket," wrote CICC Chief Economist Ha Jiming. "This will likely lead to greater diversification of foreign exchange reserve investments." China held $447.5 billion of US agency bonds as of June 2008, according to the CICC calculations using disclosures by the US Treasury. It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, he said." (China Daily)

Naturally, foreign investors and central banks will curtail their purchases of US securities and Treasuries until there's some indication that US markets have stabilized and will be able to withstand the ferocious headwinds of the biggest housing crash in history, a frozen corporate bond market, a paralyzed banking system, and steadily waning consumer demand. But Americans still seem breezily unaware of what all this means for the country's future. They'd rather savor every new bit of gossip about some Bible beating, Grizzly-hunting prom queen who wants to lead the country back to the glory days of the 13th century than learn about the about the firestorm raging through the financial markets.

When the net foreign purchases of US financial assets begin to slow; the game is over. The Fed will be forced to raise interest rates to attract foreign capital which will put downward pressure on the economy and accelerate the housing crash. Paulson's decision to provide unlimited capital to Fannie and Freddie, will stack more and more debt atop the faltering dollar and US Treasuries. It is the equivalent of lashing the greenback to an anvil and tossing it overboard. Paulson's attempts to stave off a systemic banking crisis ensures that the federal government will undergo an unprecedented funding crisis sometime in the near future. There will be higher taxes for the battered middle class and higher interest rates for businesses and consumers. This will trigger a protracted economic slowdown and weaker growth. Credit will get tighter, banks will default, unemployment will soar and GDP will shrivel. A negative feedback loop will develop from the faltering financial system to the real economy; a vicious circle ending in massive layoffs, weakening demand, falling stock prices, and withering consumer confidence. Welcome to Soup kitchen USA.

Presently, Paulson and New York Fed chief Timothy Geithner are pressing Wall Street banking elites to pony-up enough money to buy up Lehman's devalued real estate assets. The Fed's proposal is similar to Greenspan's rescue of Long-Term Management LP (LTCM) which roiled financial markets in the late 1990s. Paulson has signaled that there be NO government bailout like Bear Stearns when the Fed bought up $29 billion in mortgage-related assets. The Fed is tapped-out having already committed half of its balance sheet--nearly $500 billion-- in repos through its "auction facilities" which have recently skyrocketed to record highs of $19 billion per week for the last 3 weeks. The crisis is deepening by the day. Similarly, the Treasury has hitched its wagon to Fannie and Freddie which expands the National Debt by another $5.2 trillion and seriously undermines the "full faith and credit" of the US in the process. Keep in mind, the biggest source of American power is its access to cheap capital via the US taxpayer. Paulson has now put that source of revenue at risk by nationalizing the housing industry and burdening the taxpayer with (potentially) astronomical future obligations, even though he knows full-well that the market could drop another 15 to 20% before the end of 2010. Paulson's recklessness has doomed the country to years of struggle.

As of Sunday afternoon, no deal had been struck to buy Lehman Bros. and it looked like the bank was headed for bankruptcy. Wall Street is preparing for the worst. Many of the big players are busy working out the details on thorny derivatives contracts to avoid a sudden shock to the market. The fear is palpable and there's no way of knowing what will happen when the Asia markets open in just a few hours. It could be nothing more than a hiccup or it could be utter pandemonium ; nobody knows. Nouriel Roubini gave a particularly grim assessment of a Lehman default in his latest post on his blogsite Global EconoMonitor:

"It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday, you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers...Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer." (Nouriel Roubini's Global EconoMonitor)

Roubini may be right if the Big Boyz fail to intervene, but will they really risk everything just to force the Treasury's hand and get Uncle Sam to pick up the tab for Lehman's bad paper? After all, the giant investment banks are inescapably trapped in a net of complex, unregulated, over-the-counter derivatives contracts which--given the right conditions---could bring every skyscraper in lower Manhattan crashing to earth in one bloody afternoon of trading on the NYSE. But, that probably won't happen. It's more likely that cooler heads will prevail as the big-hand inches closer to midnight.

A sizable portion of Lehman's $128 billion in long-term debt will probably be ring-fenced in a "bad bank" which will hold its toxic mortgage-backed assets and be financed by either the Treasury or the other Wall Street banks. The good assets can then be separated and sold off to either Bank of America or Barclays, the two prospective buyers. That way, according to Forbes, "the bad bank would be kept afloat while its assets could be unwound over a period of time in a way that wouldn't disrupt the financial system more than it already has been."

Some variation of the "Forbes solution" will probably be enacted, but, let's be clear; this is really no solution at all. It's just a way of buying time by rolling-over debt to avoid the ugly consequences of accounting for the massive losses. In other words, it is cheaper to keep burning up capital to prop up moribund assets than take the loss and make a genuine effort to restructure the dysfunctional system. Here's how former Fed chief Paul Volcker summed it up just two weeks ago:

"This bright new system, this practice in the United States, this practice in the United Kingdom and elsewhere, has broken down. Growth in the economy in this decade will be the slowest of any decade since the Great Depression, right in the middle of all this financial innovation. The current financial system is dysfunctional. That is a polite way of saying it failed.''

Securitization has failed. The cuts to the Fed's Funds rate have failed. The auction facilities--TAF, PDCF, and TSLF---have all failed. The off-balance sheets operations, the debt-pyramiding asset-inflation, the Enron-style accounting, the SIVs, the CP, MBS, CDOs, have failed. The subprimes, the piggybacks, the option-ARMs, the Alt-As have all failed. Structured finance has failed. The system doesn't work; won't work; can't work. It's built on the misguided assumption that capitalism can thrive without capital; that one dollar can be infinitely magnified by complex debt-instruments and mega-leveraging to generate real wealth and keep the wheels of finance and industry humming along. It can't be done. The system is under-water. Economist and author Henry Liu put it like this:

"Yet this approach is preferred by those in authority, trapped in self deception about unregulated market capitalism being still fundamentally sound. They try to calm markets by asserting that the current turmoil is merely a minor liquidity bottleneck that can be handled by the central bank releasing more liquidity against the full face value of collateral of declining worth. (There are) No signs of any coherent grand strategy or plan to save the cancerous system from structural self-destruction."

Instead, the marauding of a handful of Wall Street "innovators"--drunk with hubris and blinded by their own bizarre sense of entitlement---have thrust the financial markets to the brink of catastrophe and pushed the the broader "real" economy towards a painful retrenchment. Now everyone will pay for the greed of the few.

So, what's next?

An article in the Financial Times spells it out, but government officials will undoubtedly deny it until after the November presidential election.

From the Financial Times:

“The debate over whether an RTC-style (Resolution Trust Corporation)vehicle is needed – perhaps just to ring-fence troubled mortgage assets – also gained traction among central bankers at the Jackson Hole symposium hosted by the Federal Reserve Bank of Kansas City in August....
The problem that an RTC vehicle could help to solve is that there are very few buyers for troubled mortgage assets, and few investors now willing to inject fresh capital into the tattered balance sheets of the banks left holding them. As a result, banks such as Lehman and Washington Mutual have struggled to sell their soured mortgage portfolios, and to broker deals for fresh capital. The takeover of Fannie and Freddie, which virtually wiped out preferred equity holders, has also made banks’ access to the preferred capital market increasingly difficult. Through a new RTC, the government could provide financial support if needed in return for a share in potential profits once the assets were liquidated. “

What the Feds are refusing to admit, is that there is already a plan in place to make the government an an active, "shareholding" partner in failing commercial banks. (There's no way the FDIC could pay for all the projected losses anyway) That will give the US Treasury the authority to provide insolvent banks with enough capital to muddle through while their impaired assets are liquidated via the RTC; a morgue for distressed mortgage-backed garbage.

How this will affect the already-anemic dollar is anyone's guess. But it won't be pretty.

It might be a good time to stock up on Krugerrands and buy a rosary.


Mike Whitney is a frequent contributor to Global Research.


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Re:We're Fucked - The Coming Economic Crisis
« Reply #22 on: 2008-09-16 14:21:32 »
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Quote:
[Blunderov]<snip>How this will affect the already-anemic dollar is anyone's guess. But it won't be pretty. It might be a good time to stock up on Krugerrands and buy a rosary.<snip>


[Fritz]Blunderov doesn't this represent a marketing opportunity for you ? You could take that drawer full of rosaries and wrap each around a blood stained Krugerrand, sell them to Americans looking for new investment vehicles, as hard earned money. .... or 'alms' for the poor.
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Re:We're Fucked - The Coming Economic Crisis
« Reply #23 on: 2008-09-16 15:10:01 »
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Quote from: letheomaniac on 2008-09-16 07:17:26   
[letheomaniac] I watched an interesting 'documantary' this weekend. I say 'documentary' because it was a doccie in the Micheal Moore style ie. propaganda for the other side, but to paraphrase Spider Jerusalem, objectivity is overrated, particularly when the opposition abandoned its use ages ago. The film was called 'Zeitgeist'. It did a couple of things that impressed me: 1. It gave Christianity a good smack down, and 2. It explained a lot of things about the way the US economy is structured that I didn't know before, particularly concerning the Federal Reserve Bank. As I understand it, the Fed is run by a bunch of bankers that work for the major investment banks of America. This seems peculiar to me as a resident of the hapless Banana Republic of South Africa where our Reserve bankers are employees of the government. The Fed loans money to banks at interest, a practice which, according to the doccie, was the main reason for the British colonies in the Americas rebelling against their colonial masters back in England - the English wanted to outlaw the interest-free currency (dollars) that the colonies were producing and using (I'm sure that all the American Virians present are already bored stiff by what they must teach you in primary school, but please bear with me). The English wanted the American colonies to borrow money from the Bank of England at interest and the colonies (sensibly) refused as this would immediately place them in debt which they could never get out of as their only means of paying it off would be to borrow more money from the Bank of England at yet more interest and so on in a vicious cycle of debt. Skip forward a few years and you have the Federal Reseve Bank doing exactly the same thing to the taxpayers of the land of the 'free' - a monopoly on the printing of money is in the hands of a small group of bankers who are in the employ of banks who then charge the banks of the nation interest to get dollars, knowing full well that the government and the people who pay for it are trapped in an endless spiral of ever increasing debt. This makes a handful of bankers obscenely wealthy and screws everyone that earns a paycheck. In conclusion I would like to say that I think that the American people should stop looking to the Fed to sort out their economic woes and start looking at the Fed as being the cause of their economic woes, and that the economy of the United States will only be put right once the people to whom the wealth of the nation actually belongs have removed these con artists (preferrably involving a little bloodshed for the purposes of catharsis) from power and set up a central bank that actually has the interests of the average citizen in mind. Death to the Federal Reseve = life to the US economy.


Hear, hear letheomaniac!

Walter
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Re:We're Fucked - The Coming Economic Crisis
« Reply #24 on: 2008-09-16 16:01:44 »
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excerpted from NYT article below:
"There is therefore a substantial possibility that A.I.G. will be unable to meet its obligations and be forced into liquidation. A side effect: Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression."

"A.I.G. does business with virtually every financial institution in the world. Most important, it is a central player in the unregulated, Brobdingnagian credit default swap market that is reported to be at least $60 trillion in size."

[Walter]

Keep in mind that the $60 TRILLION credit default swap market is just a SUBSET of an equally opaque but much larger $600 TRILLION global derivatives market.
see http://en.wikipedia.org/wiki/Derivatives_market
"By the end of 2007 this figure had risen to $596 trillion (source: BIS: [4])"

$600 TRILLION U.S. BROTHERS & SISTERS!

What a fucking house of cards!

We are so screwed!


UPDATE
As of a few minutes ago:
The Federal Reserve is considering participating in a $75 billion emergency financing package for the American International Group, people briefed on the matter said, in an apparent reversal of its refusal to bail out the sickly insurance giant.

[Walter]
I don't think that is QUITE going to cover it fellows.....
--------------------------------------------------------------------------------------------------------
The New York Times
September 16, 2008
Op-Ed Contributor

Wall Street’s Next Big Problem

By MICHAEL LEWITT

Boca Raton, Fla.

WHEN I drove to the Beverly Hills offices of Drexel Burnham Lambert on Feb. 13, 1990, the last thing I expected to hear was that the investment bank where I worked was going under. Yet early that morning, we were told that the company was filing for bankruptcy. I was, to put it mildly, blown away. At the time, Drexel had $3.5 billion in assets and was the biggest underwriter of junk bonds.

It all seemed like a very big deal at the time. But what’s happening this week makes me pine for the good old days.

When Lehman Brothers filed for bankruptcy on Monday, it became the latest but surely not the last victim of the subprime mortgage collapse. Lehman owned more than $600 billion in assets. Financial institutions around the world have already reported more than half a trillion dollars of mortgage-related losses and that figure will most likely double or triple before the crisis exhausts itself.

But there is a bigger potential failure lurking: the American International Group, the insurance giant. It poses a much larger threat to the financial system than Lehman Brothers ever did because it plays an integral role in several key markets: credit derivatives, mortgages, corporate loans and hedge funds.

Late Monday, A.I.G. was downgraded by the major credit rating agencies (which inexplicably still retain an enormous amount of power in the marketplace despite having gutted their credibility with unreliable ratings for mortgage-backed securities during the housing boom). This credit downgrade could require A.I.G. to post billions of dollars of additional collateral for its mortgage derivative contracts.

Fat chance. That’s collateral A.I.G. does not have. There is therefore a substantial possibility that A.I.G. will be unable to meet its obligations and be forced into liquidation. A side effect: Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression.

A.I.G. does business with virtually every financial institution in the world. Most important, it is a central player in the unregulated, Brobdingnagian credit default swap market that is reported to be at least $60 trillion in size.

Nobody knows this market’s real size, or who owes what to whom, because there is no central clearinghouse or regulator for it. Credit default swaps are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss. The insurer (which could be a bank, an investment bank or a hedge fund) is required to post collateral to support its payment obligation, but in the insane credit environment that preceded the credit crisis, this collateral deposit was generally too small.

As a result, the credit default market is best described as an insurance market where many of the individual trades are undercapitalized. But even worse, many of the insurers are grossly undercapitalized. In one case in the New York courts, the Swiss banking giant UBS is suing a hedge fund that said it would insure nearly $1.5 billion in bonds but was unable to do so. No wonder — the hedge fund had only $200 million in assets.

If A.I.G. collapsed, its hundreds of billions of dollars of mortgage-related assets would be added to those being sold by other financial institutions. This would just depress values further. The counterparties around the world to A.I.G.’s credit default swaps may be unable to collect on their trades. As a large hedge-fund investor, A.I.G. would suddenly become a large redeemer from hedge funds, forcing fund managers to sell positions and probably driving down prices in the world’s financial markets. More failures, particularly of hedge funds, could follow.

Regulators knew that if Lehman went down, the world wouldn’t end. But Wall Street isn’t remotely prepared for the inestimable damage the financial system would suffer if A.I.G. collapsed.

While Gov. David A. Paterson of New York on Monday allowed A.I.G. to borrow $20 billion from its subsidiaries, that move will only postpone the day of reckoning. The Federal Reserve was also trying to arrange at least $70 billion in loans from investment banks, but it’s hard to see how Wall Street could come up with that much money.

More promisingly, A.I.G. asked the Federal Reserve for a bridge loan. True, there is no precedent for the central bank to extend assistance to an insurance company. But these are unprecedented times, and the Federal Reserve should provide A.I.G. with some form of financial support while the company liquidates its mortgage-related assets in an orderly manner.

The Fed cannot afford to stand on principle. The myth of free markets ended with the takeover of Fannie Mae and Freddie Mac. Actually, it ended with their creation.

Michael Lewitt is the president of a money management firm.


Copyright 2008 The New York Times Company


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Re:We're Fucked - The Coming Economic Crisis
« Reply #25 on: 2008-09-16 16:47:07 »
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This picture has absolutely NOTHING to do with ANYTHING.

I just liked it for some reason......
--Walter

-----------------------------------------------------------------------
A broker rested during a trading session inside the trading hall at the Karachi Stock Exchange. Pakistani stocks fell and dealers said share prices have been propped up artificially by market authorities.

Photo: Athar Hussain/Reuters


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Re:We're Fucked - The Coming Economic Crisis
« Reply #26 on: 2008-09-16 17:13:33 »
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Quote from: Blunderov on 2008-09-16 10:05:24   

... the carnage on Wall St rages ever on with the taxpayer subsidizing the cost...

[Blunderov] Socializing the losses and privatizing the profits. Nice work - if you can get it! Bring your own Vaseline, America. Or just get dry fucked. You choose. That's what Democracy USA style means... Ah da freedom

http://www.globalresearch.ca/index.php?context=viewArticle&code=TRE20080916&articleId=10232

The U.S. Financial System in Serious Trouble


by Prof. Rodrigue Tremblay


Global Research, September 16, 2008

“… a bailout of GSE (Fannie and Freddie) bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics.”Matt Kibbe, President of Freedom Works

"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists." Ernest Hemingway (1899-1961), (September 1932)

[After the Bear Stearns bailout] "As more firms lost access to funding, the vicious circle of forced selling, increased volatility, ... and margin calls that was already well advanced at the time would likely have intensified. The broader economy could hardly have remained immune from such severe financial disruptions." Ben Bernanke, Fed Chairman (March 2008)


In August 2007, at the very beginning of the subprime financial crisis in the U.S., and referring to the alchemy-like practice of creating artificial financial instruments, such as mortgage-backed securities (MBSs), here is what I wrote:

“Like all 'Ponzi schemes', such pyramidings of debts with no liquid assets behind them are bound to implode sooner or later.” I also wrote about the Fed's intervention in such cases, that “it alleviates the 'liquidity crisis', for sure, but this does nothing to cure the underlying 'solvency crisis' of institutions holding large chunks of non-performing mortgage-based assets. Sooner or later, such low-valued derivatives will have to be written off, and this will necessarily lead to an erosion of these institutions' capital base. Bankruptcies of the most leveraged and imprudent institutions are to be expected.”

In fact, such bankruptcies of over-leveraged financial institutions become unavoidable. For a while, forced mergers between banks, initiated by the Fed or the Treasury, can soften the blow. But after a while, outright bankruptcies cannot be avoided and balance sheets have to be balanced.

What is the cause of this financial mess?

Last month, I provided a short answer:

“At the center of current financial problems is the failure to adapt standard financial regulation to new financial institutions, such as broker-investment banks, off-shore based hedge funds and large derivatives markets that remain, for the most part, outside of the traditional authority of regulators. However, when things go wrong, as they did with Bear Stearns last March, their demise threatens to destabilize the entire financial system and handy government bailouts are quickly called in.”

Today I say that this major crisis has to be placed at the very feet of the Washington establishment. This is a politico-financial establishment that has pushed to the limits its ideology of deregulation of financial markets and stretched the working of unregulated corporate market capitalism to the breaking point. Now, the system is imploding under our very eyes and financial institutions are falling like dominos. As I wrote last August, and repeated in April of this year, the U.S. financial problem is not one of liquidity, (there is plenty of liquidity provided by the Fed when banks and brokers can borrow at will newly printed dollars from the Fed’s discount window) but one of solvency, weak balance sheets, risky assets and debt liquidation. That's a horse of a different color.

Over the last twenty-five years, beginning with the Reagan administration and culminating with the current Bush-Cheney administration, the Washington establishment dismantled piece by piece the system of protection that had been built since the 1930's economic depression and removed nearly all government regulations that could stand in the way of greed and gouging on the part of unscrupulous market operators.

And that's where the rubber hits the road. Short of bankruptcies is the nationalization of the over-leveraged banks by the government. And the Bush-Cheney administration took a big step in that direction when it came to the rescue of the two largest mortgage financing institutions, Fannie Mae (Federal National Mortgage Association: FNM) and Freddie Mac, (Federal Home Loan Mortgage Corporation: FRE) which were close to being insolvent. This step was initiated after foreign central banks (in China, Japan, Europe, the Middle East and Russia) threatened to stop buying U.S. bonds and debentures issued by the two shaky financial institutions.

But the Bush-Cheney administration, while providing public money to keep the two lenders in operation, stopped short of nationalizing them. Indeed, the U.S. government committed to invest as much as $200 billion in preferred stock and extend credit through 2009, to keep the two mortgage lenders solvent and operating.

But instead of taking them over by placing them into administrative receivership, in order to change their business model, as they should have done since the government is now guaranteeing their outstanding debts, (more than $5 trillion US) the U.S. government chose rather to keep the appearance that these were still two privately run banks and only appointed a legal conservator for Fannie Mae and Freddie Mac. Even when they bail out what can be called two Government sponsored enterprises (GSEs), their market ideology prevents them from doing the right thing.

After years of irresponsible public deregulation and private mismanagement and irresponsible, pyramiding risk taking, the American financial system is now in serious trouble, and it may draw the U.S. economy further down with it in the months and years to come.

In the coming weeks, however, as other American financial institutions teeter on the brink of bankruptcy, the U.S. government will have to consider creating a Bank Resolution Trust under the model of the 1989 Resolution Trust Corp. which took over the savings and loans banks that were then in financial difficulties. For example, as recently as February 16 of this year, the British government did not hesitate to nationalize the Northern Rock bank and rescued this large British bank with about £55 billion ($107 billion) in public loans and guarantees. Sooner or later, the American government will have to do the same, in order to stabilize the financial system, because the financial problems in the U.S. are systemic and much more serious than elsewhere.

By the same token, maybe the U.S. government should correct an anomaly of the 20th Century, that is the semi-private status of its central bank. Indeed, the American Federal Reserve, is a semi-public and semi-private central bank organization that is as much responsible to large private banks as it is to the U.S. government and the population. This creates an unhealthy conflict of interests that is not fair to the American public. Indeed, the American practice of privatizing profits and socializing losses would be considered unacceptable in most other democracies.

What we are witnessing these days in the U.S. is a massive wealth transfer from taxpayers, savers and retirees to banks, their creditors and their managers. On the one hand, the Fed has pushed real interest rates deep into negative territory to help troubled banks, and, on the other hand, the American taxpayers have foot the bill for bailing out very large financial institutions.

I wonder what the two presidential camps, the Obama and the McCain camps, have to say about that! They both want to increase the federal deficit and add significantly to the already high national debt.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and can be reached at rodrigue.tremblay@yahoo.com

He is the author of the book 'The New American Empire'

Visit his blog site at:
www.thenewamericanempire.com/blog.

Check Dr. Tremblay's forthcoming book "The Code for Global Ethics" at:
www.TheCodeForGlobalEthics.com/

En français:
http://www.LeCodePourUneEthiqueGlobale.com/


Rodrigue Tremblay is a frequent contributor to Global Research.




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Re:We're Fucked - The Coming Economic Crisis
« Reply #27 on: 2008-09-16 20:16:03 »
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The question for me is; do I have enough time to get into shape so I can bend over and kiss my ass goodbye.

Thank you Blunderov and Walter for the relentless look into oblivion, but as I look out the window from my kids home, I see this (attached) so till I'm back to Ontario from lotus land it just doesn't matter 

Cheers

Fritz
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« Last Edit: 2008-09-16 20:16:40 by Fritz »
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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Re:We're Fucked - The Coming Economic Crisis
« Reply #28 on: 2008-09-17 01:19:38 »
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This guys blog is HIGHLY recommended by yours truly.

And read the comments too.

Priceless.


Walter



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Re:We're Fucked - The Coming Economic Crisis
« Reply #29 on: 2008-09-17 08:28:51 »
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Quote:
[Blunderov] I believe the correct collective noun for bankers is a "wunch" eg "a wunch of bankers".
[letheomaniac] heh heh heh 


Quote:
This guys blog is HIGHLY recommended by yours truly.

And read the comments too.

Priceless.


Walter



http://jameshowardkunstler.typepad.com/clusterfuck_nation/2008/09/a-ripe-moment.html
[letheomaniac] I read this blog every week - truly excellent. Nothing like a good dose of vituperation in the morning!

[letheomaniac] I found this article that appears to confirm Blunderov and the Hermit's assertion that capitalist economics is a black art and not a science at all. It is somewhat long, but fascinating.

Source: Axis of Logic
Dated: 16/9/2008
Author: Jim Miles

The dismal science becomes gloomier.

Economics as the “dismal science” was greatly emphasized in a recent Scientific American article concerned about the  “unscientific assumptions in economic theory…undermining efforts to solve environmental problems.”[1] Economists are great at using wonderful looking graphs, making analysis from obscure esoteric mathematical formulas, finding correlations and calling them cause and effect, and generally trying to convince everyone else that they know what they are doing.

Common sense applied to their accomplishments denies all their self-aggrandized accomplishments.  Using mathematical formulas and correlating statistics does not make economics into a scientific theory.  If they are truly so much in control of the economic environment, why are they then so helpless to do anything about it?  Why after a half century of neoliberalism is the world economy falling apart, sitting on the brink of disaster – not so much a roller coaster “cycle” as argued by the economists but a lemming like drive over the nearest cliff? Why did the U.S. government just bail out Freddie Mac and Fannie Mae if the market is working as it should in a free market system? Why did Lehman Brothers collapse while Bear Stearns was rescued – some arcane economic formula? 

The article noted above outlines how it all started, a methodology that is so incompetent it leaves one aghast at the rationale for its use, at the same time reinforcing the knowledge that they really do not know what they are talking about.  As presented by the author, Robert Nadeau, the “theory [neoclassical economics] is based on unscientific assumptions that are hindering the implementation of viable economic solutions for global warming and other menacing environmental problems.”  The part about the environment is not news, as simple observation will tell an objective person that the environment is being seriously degraded in the pursuit of wealth.  The unscientific part is harder to recognize, made obtuse by the many mathematical formulas used as well as the oft times incomprehensible jargon created to explain the mysteries of the economy, all used to formulate a new religion of greed and selfishness in the pursuit of more wealth and the accumulation of that wealth into the hands of the elites.

How did the “science” part of economics begin?  According to Nadeau

"The strategy the economists used was as simple as it was absurd – they substituted economic variables for physical ones….A number of well-known mathematicians and physicists told the economists that there was absolutely no basis for making these substitutions.  But the economists ignored such criticisms and proceeded to claim that they had transformed their field of study into a rigorously mathematical scientific discipline."

Nadeau outlines the many reasons that the formulas do not work because of the unscientific assumptions that they are based on (for example, the idea of a perfect market within a closed system, no limits to growth), but even before that he states the formulas used were based on scientific formulas that in themselves failed to explain the concepts under examination (electromagnetism and thermodynamics). 

It seems beyond comprehension to base a whole field of study on borrowing formulas that are incorrect in the first place and then simply substitute vague economic jargon into those formulas and call it scientific.

The final argument from Nadeau indicates that economics needs to account for “the costs of environmental problems and the limits of economic growth,” and thus “it is imperative that economists devise new theories that will take all the realities of our global system into account.”  Environmental problems would – from an economists perspective – have to include the value of natural regions and there innate benefits to the environment, something that I think is ridiculous to try and establish a monetary value on, unless of course we will all be drinking bottled water and breathing canistered air before too long.  It is possible to have unlimited economic growth providing that remains in the realm of numbers and not the material world, a position I am sure the economists could conjure up with a variety of misleading statistics (thinking here of the great GDP success claimed throughout the world while billions are still living in poverty and the wealthy become wealthier in comparison to the masses of poor). 

There is no way that economics can account for the realities of our global system because as a truly global system one would have to include an infinite number of variables.  Economics is more psychology than anything, but that belittles psychology as its new basis in genetic structures and neurobiology is a true science of working experiments with controlled variables, something economists never do. 

The variables the economists would have to account for are huge, starting with the psychologies of the world’s 6 plus billion people.  All the ecological variables and their inter-relationships with humans would have to be accounted for.  How many extra add-ons to the formulas would be required to account for the effects of the current global resource wars (also known by most as the war on terror)?  How much does one dead Christian cost?  How much does one dead Muslim cost?  What wonderful mathematical formula did Hurricane Katrina and its consequences fall under, along with the current wrath of Gustav, Hannah and Ike?  Are not their main effects measured mainly in billions of dollars in damages with a small footnote for human deaths?

In responding to a later letter that argued economists were accounting for the many environmental variables[2], Nadeau reiterated his main point that substituting mostly undefined and not clearly measurable economic ‘variables’ into an incomplete and only partially correct physical model is “a wholesale abuse of scientific theory by non-scientists.”

At the end of it all, the reader should be able to conclude that I have absolutely no faith, no belief, and worse, no scientific respect or understanding that what economists do is really helpful to anyone.  From the macroeconomic jargon of the WTO, OECD, the World Bank, the International Monetary Fund, all the way down to the local financial advisor trying to tell everyone our current miseries are all part of a natural “cycle” and will work themselves out in a year or two – all amounts to nothing more than hucksterism to control the flow of wealth upwards towards the elite.

Our world cannot support 6 billion people living at the consumptive level of the United States.  The economy cannot be predicted by useless non-scientific formulas.  Growth cannot last forever.  Markets are neither closed nor perfect.  Humans do not always put self in front of others, the neoliberal consummate greedy individual, and quite in contrast, most humans will perform highly altruistic acts to help other people. 

The one thing the current global picture has that is in common with economics is the ‘dismal’ part.  The environment is changing, and if previous civilizations are any indication, we will either change and adapt with it…or go the way of the dinosaurs.  The global war on terror with its black and white “with us or against us” mantra ensures ongoing wars of some type somewhere.  Those wars are truly about resources creating the mess in the Middle East, from Israel/Palestine in the west, to the increasingly more troubled and dangerous borders of Pakistan/Afghanistan farther east, and will not abate any time soon, either with Obama or McCain at the helm.

Then there is the economy itself.  If the economists truly know what is going on, how did we arrive at the above conditions (as they obviously have many economic variables within themselves) globally?  Combine that with the enormous debt structures both within the United States and internationally, how are their magic formulas going to get us out of all this? 

What to do?  Think pessimistically globally, act positively locally, and continue to advocate and educate as best as possible.  Perhaps someday when the politicians and economists cannot deliver us from disaster, then maybe millions upon millions of little actions will eventually break through their narrowly defined self-centred focus on growth and wealth accumulation at the expense of other people and the environment.  In the meantime, don’t believe anything an economist might tell you.  It’s all magic. 

[1] Nadeau, Robert. “The Economist Has No Clothes – Unscientific assumptions in economic theory are undermining efforts to solve environmental problems,” Scientific American, March 25, 2008.  http://www.sciam.com/article.cfm?id=the-economist-has-no-clothes

[2] Nadeau, Robert.  “Environmental Economics?” Letters, Scientific American, August 2008. p. 10.

© Copyright 2008 by AxisofLogic.com
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