This Sucker Could Go Down
Gandalf Grey
This Sucker Could Go Down
by Peter Costantini
Crises seem to awaken the inner poet of the commentariat, and the Crash of
2008 is no exception.
In the effort to wrap the mind around a phenomenon as expansive and
convoluted as this one, literal description falls short. And so the metaphor
mills have been grinding at full capacity.
'It's like living through an extended earthquake,' explained television
commentator David Brancaccio, 'only we don't know yet if it's the big one or
a foreshock of a big one to come.'
The New York Times offered 'a landslide changing the financial landscape'.
Others likened the events to Hurricane Katrina or an eruption of Mount
Vesuvius.
Even President George W. Bush reportedly chimed in at an emergency meeting
with what sounded vaguely like a haiku: 'If money isn't loosened up, this
sucker could go down.'
But perhaps the most popular, and most apt, comparison has been to a casino.
Commentators have identified the culprit as 'casino capitalism' or a 'casino
economy', and more than one has proposed a small tax on securities
transactions to slow down the betting.
The financial system, however, is an odd sort of casino. In most gambling
houses, management runs the gaming so that the house always makes a profit.
Card counters are thrown out by the bouncers.
In this casino, on the contrary, no one seems to be running the show.
Players get to make up their own games and chain them together in ways so
complicated even the creators don't always seem to understand them.
Normally, when a player loses the house takes his or her money. Here, if a
player loses a large enough sum, the house intervenes and assumes the
player's debts. Nobody knows exactly how much some clients have won or lost.
Apparently, the house has lost control.
'What happens in Vegas stays in Vegas' is the motto of the archetypical
gaming destination. In this case, however, what happened did not stay on
Wall Street: it spread to banks and real economies around the world.
A big part of the problem is that this house is a disjointed collection of
government and quasi-public agencies led by financial industry insiders.
Many have attenuated power and little will to trim the wings of high-fliers
like investment banks and hedge funds.
Nobel-laureate economist Joseph Stiglitz traced the roots of the breakdown
to 'the spirit of excessive deregulation that the [George W.] Bush
administration so promoted.'
In 2004, for example, the Securities and Exchange Commission, the fairy
godmother of financial markets, granted a wish heavily lobbied for by the
major investment banks: it loosened a key rule limiting the ratio of debt to
equity for these firms.
This freed up many billions of reserves for investment, the equivalent of
the casino offering unlimited free drinks to gamblers. At Bear Stearns, the
first of the big five to fail, the ratio reached 33 borrowed dollars for
every dollar of the firm's own money.
Some of that spirit, though, predates the Bush years.
During the previous administration, legislation demolished regulations on
investment banks and the New Deal-era firewall between commercial banks and
investment and insurance businesses. Senator Phil Gramm, John McCain's
economic adviser, was a lead Republican protagonist, but President Bill
Clinton and his Secretary of the Treasury, Robert Rubin, also supported the
laws. Rubin, like current Secretary Henry Paulson, was formerly CEO of
Goldman Sachs.
How does this metastasising Monte Carlo actually work?
If government regulators and Wall Street CEOs had known the answer, the
crisis might have been averted. Surveying the ruins, though, it appears that
the structure consisted of several floors offering a dazzling variety of
games for those with enough capital and nerve.
From higher levels, players can make bets on events lower down. And, like
Bear Stearns, they can borrow massive amounts of money to play with, which
is known as leveraging. When their bet wins, leverage multiplies their
winnings; likewise their losses when they lose.
The ground floor hosted a straightforward game played by millions of
homeowners: home-equity hold 'em. Through the 1990s and into this decade,
increases in U.S. home prices far outpaced overall inflation. Many families
took out loans against the equity in their homes or refinanced them to pay
for other needs: mainly things like medical emergencies and higher
education, but in some cases less essential purchases. Pressures to tap into
home equity were exacerbated by the DotCom crash and wage stagnation for
many U.S. workers.
The great majority of these mortgages were sound at the time. But when home
prices crashed, many homeowners were left holding loans larger than the
value of their houses. The Fed and Treasury failed to warn citizens or to
take action to deflate the bubble gradually before it popped.
Perched precariously on top of the bubble, the second floor offered games
like refi roulette. Lenders thrust adjustable-rate mortgages and 'creative'
financing schemes on overstretched home buyers, some of whom didn't
understand the potential downside and borrowed beyond their means.
When low initial interest rates went up and home prices declined, mounting
numbers of borrowers both prime and sub-prime began to default on their
loans. Foreclosures, the U.S. procedure for dispossessing delinquent home
buyers, grew rapidly.
The third floor of the casino was a Wall Street theme park where
mathematicians, physicists and economists could act out their wildest
fantasies.
Mortgage lenders sold their loans to intermediaries, such as Fannie Mae and
Freddie Mac, who aggregated the mortgages into pools. These collections
obscured the identity and value of the sub-prime loans they contained.
Based on these camouflaged values, alchemists at investment banks and hedge
funds created byzantine unregulated securities like 'collateralised debt
obligations'. They also marketed derivatives that placed wagers and
counter-wagers on the risks lurking in the murky loan slurry.
Large volumes of these infected securities and derivatives found their way
into portfolios around the globe. As the extent of sub-prime loan defaults
became clear, the securities based on them began to putrefy. Widening
circles of financial institutions, often unaware how much they were exposed
to the contagion, began to rot from within, then suddenly bled from the
orifices and collapsed.
The fourth floor of the casino was a gigantic confidence game, but also in a
sense the foundation of the whole edifice: the interbank payment system.
Banks need to loan and borrow short-term money from each other constantly in
order to provide credit and cash to businesses and individuals. Without
liquidity -- accessible money and easily convertible assets -- to grease the
gears of commerce, the machine grinds to a halt, as in the Great Depression
of the 1930s.
Playing on this floor requires trust and cooperation between players. But
the plague of degraded mortgage-based securities and derivatives, and lack
of transparency into who owned how much of them, led to a breakdown of
confidence. Nobody knew whom they could trust.
As a result, banks began to raise the rate of interest they charged each
other for short-term loans. On Wednesday, Sep. 17, interbank credit seemed
on the verge of freezing. Had this happened, cash machine withdrawals,
credit card interactions, and short-term business loans might soon have been
imperiled.
Now the high rollers have headed to Washington to try to salvage the casino.
Meanwhile, the fear and greed that broke the house continue to reverberate
around the world.
Copyright � 2008 IPS North America
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NOTICE: This post contains copyrighted material the use of which has not
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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
john fernbach
questions unanswered.
This "casino capitalism" that Peter Constantini is attacking: it's
been the mainstay of US economic growth since the late 1980s, hasn't
it?
Nobel-prize-winning economist Joseph Stiglitz, who is quoted in
Constantini's article, has observed that "casino capitalism" already
was underway in the US -- under the Clinton administration -- when
some cabinet members pushed the White House and the nation to embrace
global free trade and global financial deregulation as part of a
"market" approach to restoring US prosperity.
Stiglitz, who served at one time as one of Clinton's economic
advisors, titles his book on the subject "The Roaring Nineties," with
the verbal comparison to the "Roaring 1920s" that preceded the 1929
stock market crash being completely intentional.
Yes, Stiglitz in his book indicates that GW Bush and his Republican
supporters pushed "free market" and "deregulatory" principles even
farther than Clinton & Co. had. But Clinton WAS a backer of this
"market-based" approach to economic policy, Stiglitz writes.
Why was this the case?
Obviously Bill Clinton is a supremely opportunistic and flexible
politician; he works to reflect the spirit of his times, whatever it
may be, and during the 1990s he was faced with a conservative GOP-
dominated Congress that held markets to be sacred.
Bill Clinton probably had to have a market-based economic policy by
the late 1990s, or he wouldn't have been able to follow any policy at
all.
In addition, though, "casino capitalism" has been popular in the US
and in many other advanced capitalist countries, too, largely because
we're losing our ability to find profitable investment outlets in
economic sectors other than finance.
Since the 1970s, when America's overwhelming industrial leadership
began to break down in the face of new competition from Western Europe
and Japan, this country has been losing the dominance of world markets
for manufactured goods that we enjoyed in the 1950s and 1960s.
Since the 1990s, when China, India and some of the other rapidly
growing Asian economists began experiencing enormously rapid economic
growth, the problem of the US and other Western economies losing
global market dominance has grown ever worse.
In simple terms, the Chinese system of government-managed capitalism
-- lots of private investment, the growth of a whole new class of
Chinese capitalists, but with social stability guaranteed by the iron
hand of a "Communist" dictatorship -- has proven enormously successful
over the past 20 years.
That amazing Chinese economic success -- and ditto the economic
success of India, Vietnam, Indonesia, etc. -- has been dependent on
these Asian Tiger economies finding global markets for their exports.
And that means the US and Europe have been losing global markets.
That mostly leaves us with an ability to invest in "casino" capitalism
and financial speculation at home, doesn't it?
And that's not something to blame on either the Democrats or the
Republicans. It's a bad policy, a dangerous policy, but one that
flows almost inevitably from the bad situation that capitalist
American investors find themselves in.
Where else are we American going to put our money, if not in Casino
Capitalism? Or in Asia, of course ...
"In the final analysis, the worst enemy of capital is capital itself."
-- Karl Marx, Capital, Volume 3
*********************
> Copyright � 2008 IPS North America
Gandalf Grey
"republican" If you read Naomi Klein's "The Shock Doctrine: Disaster
Capitalism" you'll see that this all has been rolling along for a good deal
of time and that the Clinton years are definitely part of it. To me, the
Clinton years were a continuation of the third historical "monitary
royalist" regime in America. Personally, I saw very little that he ever did
to address the problems.
"john fernbach" <fernba...@yahoo.com> wrote in message
news:3cecc107-c9ca-46bd...@a70g2000hsh.googlegroups.com...
> Copyright � 2008 IPS North America
V for Vendicar
"Blackwater" <b...@barrk.net> wrote
> What's GONNA happen is that a lot of fools are gonna sell their
> stocks dirt cheap ... and the well-capitalized people who buy
> them will then engineer a market rebirth and be two or three
> times as rich as they were before.
The U.S. stock market has been a losing bet for well over a decade.
U.S. stocks market is now worth less than 35% of what it was when Bush took
office, as a result of the devaluation of the U.S. dollar (35% on world
markets), inflation 20%, in addition to the current decline (35%).
Mission Accomplished.
4787 Dead
>"Gandalf Grey" <vali...@gmail.com> wrote:
>
>>Published on Wednesday, October 8, 2008 by Inter Press Service
>>
>>This Sucker Could Go Down
>>
>>by Peter Costantini
>>
>>
>>
>>Crises seem to awaken the inner poet of the commentariat, and the Crash of
>>2008 is no exception.
>>
>>In the effort to wrap the mind around a phenomenon as expansive and
>>convoluted as this one, literal description falls short. And so the metaphor
>>mills have been grinding at full capacity.
>>
>>'It's like living through an extended earthquake,' explained television
>>commentator David Brancaccio, 'only we don't know yet if it's the big one or
>>a foreshock of a big one to come.'
>>
>>The New York Times offered 'a landslide changing the financial landscape'.
>>Others likened the events to Hurricane Katrina or an eruption of Mount
>>Vesuvius.
>
> The media types and pundits PROFIT from "diasters" and "crises".
> IMHO, they've been egging panic along as best they can without
> being super-obvious about it.
Well, let's see. You tried blaming the Democrats. That didn't work.
Then you tried blaming panic on main street, and that just got you
laughed at. So now you're blaming the media.
>
> Yea, the economic landscape is gonna change ... but it's done
> that several times over the past 30 years.
>
> What's GONNA happen is that a lot of fools are gonna sell their
> stocks dirt cheap ... and the well-capitalized people who buy
> them will then engineer a market rebirth and be two or three
> times as rich as they were before.
--
Opening up the health insurance market to more vigorous nationwide competition,
as we have done over the last decade in banking, would provide more choices of
innovative products less burdened by the worst excesses of state-based regulation.
-- John McCain, in the Sept/Oct 2008 issue of Contingencies, the magazine of the
American Academy of Actuaries.
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"4787 Dead" <zepp22...@finestplanet.com> wrote in message
news:a4lte4p4gvdenv8rv...@4ax.com...
Bush was on tv this morning blaming foreigners.