G
Gandalf Grey
Guest
More Stock Market Mayhem
By Mike Whitney
Created Nov 7 2007 - 8:05pm
Last Wednesday, the Federal Reserve dropped its benchmark interest rate by
25 basis points to 4.5 per cent citing ongoing weakness in the housing
sector. As expected, the stock market rallied and the Dow Jones Industrial
Average went up137 points. Unfortunately, Bernanke's "low interest" stardust
wasn't enough to buoy the markets through the rest of the week.
On Thursday, the hammer fell. The Dow plunged 362 points in one afternoon on
increasing fears of inflation, a slowdown in consumer spending, a steadily
weakening dollar and persistent problems in the credit markets. By day's
end, the Fed was forced to dump another $41 billion into the banking system
to forestall a major breakdown. This is the most money the Fed has pumped
into the financial system since 9/11/2001 and it shows how dire the
situation really is.
Why do the banks need such a huge infusion of credit if they are as "rock
solid" as Bernanke says?
As most people now realize, the mortgage industry is on life-support. Many
of the ways that the banks were generating profits have vanished overnight.
The "securitization" of debt (mortgages, car loans, credit card debt etc)
has ground to a halt. What had been a booming multi-billion dollar per-year
business is now a dwindling part of the banks' revenues. Investors are
steering clear of anything even remotely associated to real estate.
Additionally, the banks are holding an estimated $200 billion in
mortgage-backed securities and derivatives for which there is currently no
market. This is compounded by $350 billion in "off balance sheets"
operations -- which are collateralized with dodgy long-term mortgage-backed
securities -- that provide funding for "short-term" asset-backed commercial
paper. ASCP has shriveled by $275 billion in the last 10 weeks leaving the
banks with gargantuan liabilities. Bernanke was forced to add $41 billion to
keep the banking system from slipping beneath the waves. But that's just a
short-term fix. In the long run, the Fed has less chance of stopping the
market from correcting than it does of stopping a runaway truck by standing
in its path. Besides, the Fed cannot purchase the banks' bad investments
(CDOs, MBSs, or CP) nor can it reflate the multi-trillion dollar the housing
bubble. All it can do is provide more cheap credit and hope the problems go
away.
So far, the lower rates haven't even decreased the price of the 30-year
mortgage or made refinancing any cheaper. In truth, they're just a desperate
attempt to perpetuate consumer borrowing while the banks figure out how to
offload their enormous debts. That's what Paulson's $80 billion "Banker's
Bankruptcy Fund" is really all about; it's just the repackaging of subprime
junk so it can be passed off to credulous investors. Fortunately, the public
has wised up and isn't buying into this latest fraud. As a result, the banks
have taken another blow to their already-flagging credibility.
In the last two months, the pool of qualified mortgage applicants has
contracted, as has the market for merger and acquisition deals (private
equity). So the banks are probably doing more with the Fed's $41 billion
injection than just beefing up their reserves and issuing new loans. The
market analysts at Minyanville.com summed it up like this:
"Banks are taking the liquidity the Fed is forcing out there through the
discount window and repos. After using it to shore up the declining value of
their assets, they have excess to lend out. Finding no traditional borrowers
that want to buy a house or build a factory, the new rules the Fed has set
forth allows the banks to pass this liquidity onto their broker dealer
subsidiaries in much greater quantities. These broker dealers are lending
thus to hedge funds and margin buyers who are speculating in stocks.
Remember, the Fed is powerless unless it can find people to borrow the
credit it wants them to spend. By definition, the last ones willing to take
that credit are the most speculative."
This is a likely scenario given the fact that the stock market continues to
fly high despite the surge of bad news on everything from the falling dollar
to the geopolitical rumblings in the Middle East. Last month, the Fed
modified its rules so that the banks could provide resources to their
off-balance sheets operations (SIVs and conduits). If the Fed is willing to
rubber-stamp that type of monkey-business; then why would they mind if the
money was stealthily "back-doored" into the stock market via the hedge
funds?
This might explain why the hedge funds account for as much as 40 to 50 per
cent of all trading on an average day. It also explains why the stock market
is overheating.
The charade cannot go on forever. And it won't. Rate cuts do not address the
underlying problem which is bad investments. The debts must be accounted for
and written off. Nothing else will do. That doesn't mean that Bernanke will
suddenly decide to stop savaging the dollar or flushing hundreds of billions
of dollars down the investment bank toilet. He probably will. But,
eventually, the blow-ups in the housing market will destabilize the
financial system and send the banks and over-leveraged hedge funds
sprawling. Bernanke's low interest "giveaway" will amount to nothing.
Bloomberg News ran a story last week which sheds more light on the jam the
banks now find themselves in:
"Banks shut out of the market for short-term loans are finding salvation in
a government lending program set up to revive housing during the Great
Depression. Countrywide Financial Corp., Washington Mutual Inc., Hudson City
Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion
from the 12 Federal Home Loan Banks in August and September as interest
rates on asset-backed commercial paper rose as high as 5.6 percent. The
government-sponsored companies were able to make loans at about 4.9 percent,
saving the private banks about $1 billion in annual interest."
Whoa. So, now that the credit markets have frozen over, the banks are going
to the government with begging bowl in hand? So much for "moral hazard".
Commercial paper is short-term notes that businesses use for daily
operations. Because much of this CP is backed by mortgage-backed securities
the banks have been having trouble rolling it over. (Refinancing) So --
unbeknownst to the public -- various banks have been borrowing from the
government-sponsored Federal Home Loan Banks (FHLB) so they can cut their
losses (or stay afloat?) The FHLB has extended $163 billion of loans to
them, which means that the risks that are inherent in supporting "dodgy
banks that make bad bets" has been transferred to FHLB's investors. The
danger, of course, is that-when investors find out that FHLB is mixed up
with these shaky banks, they are liable to sell their shares and trigger a
collapse of the system.
CITI'S WOES
Over the weekend, Citigroup's CEO Chuck Prince got the axe. Citigroup, which
boasts more than 300,000 staff worldwide, has lost more than 20 per cent of
its market value from bad bets in sub-prime mortgages. According to the
Times Online: "The Securities and Exchange Commission may investigate
whether it improperly juggled its books to hide the full extent of the
problem."
"Juggled" is not a word that is taken lightly on Wall Street where traders
are now bracing for another sell-off of financial stocks. Mr. Prince is not
alone in the unemployment line either. He's be accompanied by Merrill
Lynch's former boss, Stanley O' Neal who got the boot last week when his
firm reported $8.4 billion in write-downs. Deutsche Bank analysts now
predict that Merrill may write off another $10 billion of losses related to
its portfolio of sub-prime debts. That would wipe out 8 full quarters of
earnings and represent the largest loss in Wall Street history.
The news is bleak. The systemic rot is appearing everywhere presaging
ongoing losses for the financial giants and a long-downward spiral for the
markets. The banks are currently under-regulated, over-leveraged and under
capitalized.
Former Fed chief Paul Volcker summarized the overall economic situation last
week at the second annual summit of the Stanford Institute for Economic
Policy Research. In his speech he said:
"Altogether, the circumstances seem as dangerous and intractable as I can
remember.Boomers are spending like there is no tomorrow. Homeownership has
become a vehicle for borrowing and leveraging as much as a source of
financial security.. As a Nation we are consumingabout 6 per cent more than
we are producing. What holds it all together? - High consumption - high
leverage - government deficits - What holds it all together is a really
massive and growing flow of capital from abroad. A flow of capital that
today runs to more than $2 billion per day." The nation is facing "huge
imbalances and risks."
Volcker is right. The country is in a bigger pickle than any time in its 230
year history. The credit storm that was engineered at the Federal Reserve
has swept across the planet and is now descending on commercial real estate,
credit card debt, and the plummeting bond insurers industry. These are the
next shoes to drop and the tremors will be felt throughout the broader
economy.
As this article is being written, Reuters is reporting that Citigroup may be
forced to write-down as much as $11 billion in subprime mortgage-related
losses!
Reuters: "Citigroup announced today significant declines since September 30,
2007 in the fair value of the approximately $55 billion in U.S. sub-prime
related direct exposures in its Securities and Banking (S&B) business. Citi
estimates that, at the present time, the reduction in revenues attributable
to these declines ranges from approximately $8 billion to $11 billion
(representing a decline of approximately $5 billion to $7 billion in net
income on an after-tax basis)."
Citigroup's statement indicates a willingness on its part to come clean with
its investors but, in fact, they know that the situation is fluid and
there'll be hefty losses in the future. Mortgage-backed securities (MBSs)
and collateralized debt obligations (CDOs) will continue to be downgraded as
time goes by. According to the Financial Times, one banker was having so
much difficulty getting a bid on subprime securities; he found the only way
he could get rid of them was through "barter. He resorted to using a tactic
more normally associated with third world markets than the supposedly
sophisticated arena of high finance. 'Barter is the only thing that works,'
he chuckled, 'It's like the Dark Ages'" The article continues:
"Never mind the fact that the risky tranches of subprime-linked debt have
fallen 80 per cent since the start of the year; in a sense, such declines
are only natural for risky assets in a credit storm. Instead, what is really
alarming is that the assets which were supposed to be ultra-safe - namely
AAA and AA rated tranches of debt - have collapsed in value by 20 per cent
and 50 per cent odd respectively. This is dangerous, given that financial
institutions of all stripes have been merrily leveraging up AAA and AA paper
in recent years, precisely because it was supposed to be ultra-safe and
thus, er, never lose value." (Financial Times; Gillian Tett)
AAA and AA assets---the top-graded tranches--- have already been downgraded
by 20 per cent to 50 per cent! And the prices are bound to fall even more
because there is no market for mortgage-backed securities. This is a bank's
worst nightmare; an asset that loses value and requires greater capital
reserves every day. In fact, AAA rated MBSs have dropped 14 per cent in one
month. It is truly, death by a thousand cuts.
The US financial system is now buckling beneath the weight of its own
excesses. The subprime contagion---which can trace its origins to the
expansion of credit at the Federal Reserve -- has devastated the housing
market generating an unprecedented number of foreclosures, record inventory,
and a multi-trillion dollar equity bubble which is now deflating and wiping
out much of the mortgage industry in its path. Its effects on the secondary
market have been even more devastating where pension funds, insurance
companies, hedge funds and foreign banks are left holding hundreds of
billions of dollars of complex, mortgage-backed securities and
subprime-related derivatives which are now destined to be downgraded to
pennies on the dollar ravaging once-robust portfolios. The subprime meltdown
has been equally damaging to myriad European investment banks and brokerage
houses. We've seen a wave of bank closings in France, Germany and England
which has left investors shell-shocked, triggering capital flight from
American markets and supplanting confidence in the US financial system with
growing suspicion and rage. Where are the regulators?
According to Bloomberg News, "European and Asian investors will avoid most
US mortgage-backed securities for years without guarantees from
government-linked entities creating an enormous drag on the US housing
market". Foreign investors believe they were hoodwinked by bonds that were
deliberately mis-rated to maximize profits for the investment banks. This
may explain why $882 billion has been diverted into Chinese and Indian stock
markets in the last month alone.
The biggest losers of all, however, are the financial giants that created
most of the abstruse, debt-instruments that are now devouring the system
from within. The productive and "wealth creating" components of the economy
have been subordinated to a finance-driven model which suddenly derailed due
to the abusive expansion of debt. Inevitably, some of the banks that took
the greatest risks will be shuttered and trillions of dollars in market
capitalization will disappear.
Is it possible that anyone with a pulse and a minimal ability to reason
couldn't see the inherent problems of building a financial edifice on the
prospect that millions of first-time homeowners with bad credit history and
no collateral would pay off there mortgages in a timely and responsible
manner?
No. It is not possible. The real reason that the subprime swindle mushroomed
into an economy-busting monster is that the markets are no longer policed by
any agency that believes in intervention. The pervasive "free market"
ideology rejects the notion of supervision or oversight, and as a result,
the markets have become increasingly opaque and unresponsive to rules that
may assure their continued credibility or even their ability to function
properly.
The "supply side" avatars of deregulation have transformed the world's most
vital and prosperous markets into a huckster's shell-game. All regulatory
accountability has vanished along with trillions of dollars in foreign
investment. What's left is a flea-market for dodgy loans, dubious
over-leveraged equities and "securitized" Triple A-rated garbage.
Let's hear it for the Reagan Revolution.
What is striking is how the new "structured finance" paradigm replicates a
political system which is no longer guided by principle or integrity. It is
not coincidental that the same flag that flies over Guantanamo and Abu
Ghraib flutters over Wall Street as well. Nor is it accidental that the same
system that peddles bogus, subprime tripe to gullible investors also
elevates a "waterboarding advocate" to the highest position in the Justice
Department. Both phenomena emerge from the same fetid swamp.
_______
Mike Whitney
About author Mike Whitney lives in Washington state. He can be reached at
fergiewhitney@msn.com
--
NOTICE: This post contains copyrighted material the use of which has not
always been authorized by the copyright owner. I am making such material
available to advance understanding of
political, human rights, democracy, scientific, and social justice issues. I
believe this constitutes a 'fair use' of such copyrighted material as
provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson
By Mike Whitney
Created Nov 7 2007 - 8:05pm
Last Wednesday, the Federal Reserve dropped its benchmark interest rate by
25 basis points to 4.5 per cent citing ongoing weakness in the housing
sector. As expected, the stock market rallied and the Dow Jones Industrial
Average went up137 points. Unfortunately, Bernanke's "low interest" stardust
wasn't enough to buoy the markets through the rest of the week.
On Thursday, the hammer fell. The Dow plunged 362 points in one afternoon on
increasing fears of inflation, a slowdown in consumer spending, a steadily
weakening dollar and persistent problems in the credit markets. By day's
end, the Fed was forced to dump another $41 billion into the banking system
to forestall a major breakdown. This is the most money the Fed has pumped
into the financial system since 9/11/2001 and it shows how dire the
situation really is.
Why do the banks need such a huge infusion of credit if they are as "rock
solid" as Bernanke says?
As most people now realize, the mortgage industry is on life-support. Many
of the ways that the banks were generating profits have vanished overnight.
The "securitization" of debt (mortgages, car loans, credit card debt etc)
has ground to a halt. What had been a booming multi-billion dollar per-year
business is now a dwindling part of the banks' revenues. Investors are
steering clear of anything even remotely associated to real estate.
Additionally, the banks are holding an estimated $200 billion in
mortgage-backed securities and derivatives for which there is currently no
market. This is compounded by $350 billion in "off balance sheets"
operations -- which are collateralized with dodgy long-term mortgage-backed
securities -- that provide funding for "short-term" asset-backed commercial
paper. ASCP has shriveled by $275 billion in the last 10 weeks leaving the
banks with gargantuan liabilities. Bernanke was forced to add $41 billion to
keep the banking system from slipping beneath the waves. But that's just a
short-term fix. In the long run, the Fed has less chance of stopping the
market from correcting than it does of stopping a runaway truck by standing
in its path. Besides, the Fed cannot purchase the banks' bad investments
(CDOs, MBSs, or CP) nor can it reflate the multi-trillion dollar the housing
bubble. All it can do is provide more cheap credit and hope the problems go
away.
So far, the lower rates haven't even decreased the price of the 30-year
mortgage or made refinancing any cheaper. In truth, they're just a desperate
attempt to perpetuate consumer borrowing while the banks figure out how to
offload their enormous debts. That's what Paulson's $80 billion "Banker's
Bankruptcy Fund" is really all about; it's just the repackaging of subprime
junk so it can be passed off to credulous investors. Fortunately, the public
has wised up and isn't buying into this latest fraud. As a result, the banks
have taken another blow to their already-flagging credibility.
In the last two months, the pool of qualified mortgage applicants has
contracted, as has the market for merger and acquisition deals (private
equity). So the banks are probably doing more with the Fed's $41 billion
injection than just beefing up their reserves and issuing new loans. The
market analysts at Minyanville.com summed it up like this:
"Banks are taking the liquidity the Fed is forcing out there through the
discount window and repos. After using it to shore up the declining value of
their assets, they have excess to lend out. Finding no traditional borrowers
that want to buy a house or build a factory, the new rules the Fed has set
forth allows the banks to pass this liquidity onto their broker dealer
subsidiaries in much greater quantities. These broker dealers are lending
thus to hedge funds and margin buyers who are speculating in stocks.
Remember, the Fed is powerless unless it can find people to borrow the
credit it wants them to spend. By definition, the last ones willing to take
that credit are the most speculative."
This is a likely scenario given the fact that the stock market continues to
fly high despite the surge of bad news on everything from the falling dollar
to the geopolitical rumblings in the Middle East. Last month, the Fed
modified its rules so that the banks could provide resources to their
off-balance sheets operations (SIVs and conduits). If the Fed is willing to
rubber-stamp that type of monkey-business; then why would they mind if the
money was stealthily "back-doored" into the stock market via the hedge
funds?
This might explain why the hedge funds account for as much as 40 to 50 per
cent of all trading on an average day. It also explains why the stock market
is overheating.
The charade cannot go on forever. And it won't. Rate cuts do not address the
underlying problem which is bad investments. The debts must be accounted for
and written off. Nothing else will do. That doesn't mean that Bernanke will
suddenly decide to stop savaging the dollar or flushing hundreds of billions
of dollars down the investment bank toilet. He probably will. But,
eventually, the blow-ups in the housing market will destabilize the
financial system and send the banks and over-leveraged hedge funds
sprawling. Bernanke's low interest "giveaway" will amount to nothing.
Bloomberg News ran a story last week which sheds more light on the jam the
banks now find themselves in:
"Banks shut out of the market for short-term loans are finding salvation in
a government lending program set up to revive housing during the Great
Depression. Countrywide Financial Corp., Washington Mutual Inc., Hudson City
Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion
from the 12 Federal Home Loan Banks in August and September as interest
rates on asset-backed commercial paper rose as high as 5.6 percent. The
government-sponsored companies were able to make loans at about 4.9 percent,
saving the private banks about $1 billion in annual interest."
Whoa. So, now that the credit markets have frozen over, the banks are going
to the government with begging bowl in hand? So much for "moral hazard".
Commercial paper is short-term notes that businesses use for daily
operations. Because much of this CP is backed by mortgage-backed securities
the banks have been having trouble rolling it over. (Refinancing) So --
unbeknownst to the public -- various banks have been borrowing from the
government-sponsored Federal Home Loan Banks (FHLB) so they can cut their
losses (or stay afloat?) The FHLB has extended $163 billion of loans to
them, which means that the risks that are inherent in supporting "dodgy
banks that make bad bets" has been transferred to FHLB's investors. The
danger, of course, is that-when investors find out that FHLB is mixed up
with these shaky banks, they are liable to sell their shares and trigger a
collapse of the system.
CITI'S WOES
Over the weekend, Citigroup's CEO Chuck Prince got the axe. Citigroup, which
boasts more than 300,000 staff worldwide, has lost more than 20 per cent of
its market value from bad bets in sub-prime mortgages. According to the
Times Online: "The Securities and Exchange Commission may investigate
whether it improperly juggled its books to hide the full extent of the
problem."
"Juggled" is not a word that is taken lightly on Wall Street where traders
are now bracing for another sell-off of financial stocks. Mr. Prince is not
alone in the unemployment line either. He's be accompanied by Merrill
Lynch's former boss, Stanley O' Neal who got the boot last week when his
firm reported $8.4 billion in write-downs. Deutsche Bank analysts now
predict that Merrill may write off another $10 billion of losses related to
its portfolio of sub-prime debts. That would wipe out 8 full quarters of
earnings and represent the largest loss in Wall Street history.
The news is bleak. The systemic rot is appearing everywhere presaging
ongoing losses for the financial giants and a long-downward spiral for the
markets. The banks are currently under-regulated, over-leveraged and under
capitalized.
Former Fed chief Paul Volcker summarized the overall economic situation last
week at the second annual summit of the Stanford Institute for Economic
Policy Research. In his speech he said:
"Altogether, the circumstances seem as dangerous and intractable as I can
remember.Boomers are spending like there is no tomorrow. Homeownership has
become a vehicle for borrowing and leveraging as much as a source of
financial security.. As a Nation we are consumingabout 6 per cent more than
we are producing. What holds it all together? - High consumption - high
leverage - government deficits - What holds it all together is a really
massive and growing flow of capital from abroad. A flow of capital that
today runs to more than $2 billion per day." The nation is facing "huge
imbalances and risks."
Volcker is right. The country is in a bigger pickle than any time in its 230
year history. The credit storm that was engineered at the Federal Reserve
has swept across the planet and is now descending on commercial real estate,
credit card debt, and the plummeting bond insurers industry. These are the
next shoes to drop and the tremors will be felt throughout the broader
economy.
As this article is being written, Reuters is reporting that Citigroup may be
forced to write-down as much as $11 billion in subprime mortgage-related
losses!
Reuters: "Citigroup announced today significant declines since September 30,
2007 in the fair value of the approximately $55 billion in U.S. sub-prime
related direct exposures in its Securities and Banking (S&B) business. Citi
estimates that, at the present time, the reduction in revenues attributable
to these declines ranges from approximately $8 billion to $11 billion
(representing a decline of approximately $5 billion to $7 billion in net
income on an after-tax basis)."
Citigroup's statement indicates a willingness on its part to come clean with
its investors but, in fact, they know that the situation is fluid and
there'll be hefty losses in the future. Mortgage-backed securities (MBSs)
and collateralized debt obligations (CDOs) will continue to be downgraded as
time goes by. According to the Financial Times, one banker was having so
much difficulty getting a bid on subprime securities; he found the only way
he could get rid of them was through "barter. He resorted to using a tactic
more normally associated with third world markets than the supposedly
sophisticated arena of high finance. 'Barter is the only thing that works,'
he chuckled, 'It's like the Dark Ages'" The article continues:
"Never mind the fact that the risky tranches of subprime-linked debt have
fallen 80 per cent since the start of the year; in a sense, such declines
are only natural for risky assets in a credit storm. Instead, what is really
alarming is that the assets which were supposed to be ultra-safe - namely
AAA and AA rated tranches of debt - have collapsed in value by 20 per cent
and 50 per cent odd respectively. This is dangerous, given that financial
institutions of all stripes have been merrily leveraging up AAA and AA paper
in recent years, precisely because it was supposed to be ultra-safe and
thus, er, never lose value." (Financial Times; Gillian Tett)
AAA and AA assets---the top-graded tranches--- have already been downgraded
by 20 per cent to 50 per cent! And the prices are bound to fall even more
because there is no market for mortgage-backed securities. This is a bank's
worst nightmare; an asset that loses value and requires greater capital
reserves every day. In fact, AAA rated MBSs have dropped 14 per cent in one
month. It is truly, death by a thousand cuts.
The US financial system is now buckling beneath the weight of its own
excesses. The subprime contagion---which can trace its origins to the
expansion of credit at the Federal Reserve -- has devastated the housing
market generating an unprecedented number of foreclosures, record inventory,
and a multi-trillion dollar equity bubble which is now deflating and wiping
out much of the mortgage industry in its path. Its effects on the secondary
market have been even more devastating where pension funds, insurance
companies, hedge funds and foreign banks are left holding hundreds of
billions of dollars of complex, mortgage-backed securities and
subprime-related derivatives which are now destined to be downgraded to
pennies on the dollar ravaging once-robust portfolios. The subprime meltdown
has been equally damaging to myriad European investment banks and brokerage
houses. We've seen a wave of bank closings in France, Germany and England
which has left investors shell-shocked, triggering capital flight from
American markets and supplanting confidence in the US financial system with
growing suspicion and rage. Where are the regulators?
According to Bloomberg News, "European and Asian investors will avoid most
US mortgage-backed securities for years without guarantees from
government-linked entities creating an enormous drag on the US housing
market". Foreign investors believe they were hoodwinked by bonds that were
deliberately mis-rated to maximize profits for the investment banks. This
may explain why $882 billion has been diverted into Chinese and Indian stock
markets in the last month alone.
The biggest losers of all, however, are the financial giants that created
most of the abstruse, debt-instruments that are now devouring the system
from within. The productive and "wealth creating" components of the economy
have been subordinated to a finance-driven model which suddenly derailed due
to the abusive expansion of debt. Inevitably, some of the banks that took
the greatest risks will be shuttered and trillions of dollars in market
capitalization will disappear.
Is it possible that anyone with a pulse and a minimal ability to reason
couldn't see the inherent problems of building a financial edifice on the
prospect that millions of first-time homeowners with bad credit history and
no collateral would pay off there mortgages in a timely and responsible
manner?
No. It is not possible. The real reason that the subprime swindle mushroomed
into an economy-busting monster is that the markets are no longer policed by
any agency that believes in intervention. The pervasive "free market"
ideology rejects the notion of supervision or oversight, and as a result,
the markets have become increasingly opaque and unresponsive to rules that
may assure their continued credibility or even their ability to function
properly.
The "supply side" avatars of deregulation have transformed the world's most
vital and prosperous markets into a huckster's shell-game. All regulatory
accountability has vanished along with trillions of dollars in foreign
investment. What's left is a flea-market for dodgy loans, dubious
over-leveraged equities and "securitized" Triple A-rated garbage.
Let's hear it for the Reagan Revolution.
What is striking is how the new "structured finance" paradigm replicates a
political system which is no longer guided by principle or integrity. It is
not coincidental that the same flag that flies over Guantanamo and Abu
Ghraib flutters over Wall Street as well. Nor is it accidental that the same
system that peddles bogus, subprime tripe to gullible investors also
elevates a "waterboarding advocate" to the highest position in the Justice
Department. Both phenomena emerge from the same fetid swamp.
_______
Mike Whitney
About author Mike Whitney lives in Washington state. He can be reached at
fergiewhitney@msn.com
--
NOTICE: This post contains copyrighted material the use of which has not
always been authorized by the copyright owner. I am making such material
available to advance understanding of
political, human rights, democracy, scientific, and social justice issues. I
believe this constitutes a 'fair use' of such copyrighted material as
provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson