[News] The Point of No Return

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Fri Sep 19 13:28:44 EDT 2008


http://www.counterpunch.org/whitney09192008.html

September 19, 2008


Harry Reid: "No One Knows What to Do"


The Point of No Return

By MIKE WHITNEY

Following another erratic day of trading on the stock market, 
Treasury Secretary Henry Paulson and Federal Reserve chairman Ben 
Bernanke convened an emergency meeting of the Senate Banking 
Committee and other congressional leaders to request fast-track 
authority for a sweeping plan to buy back illiquid assets and other 
complex securities from distressed and under-capitalized banks. The 
turbulence in the financial markets has intensified and there is 
every indication that the situation will get worse before it gets better.

There are a number of signs that the financial system is at the brink 
of collapse and that Wall Street is headed for a 1929-type crash. 
Depositors have begun to withdrawal their savings from money market 
funds alarmed by the gyrations in the market and the daily deluge of 
bad economic news. According to the Washington Post, funds dropped 
"by at least $79 billion, or about 2.6 per cent" on Wednesday alone. 
The withdrawals are the equivalent of a slow bank run just at the 
time when stressed commercial banks need access to cheap capital to 
finance daily operations and provide loans for a steadily weakening 
economy. There's also been a surge of panic-buying of US Treasurys 
which is considered the safest of investments. According to the Wall 
Street Journal, during Wednesday's market-rout, "investors were 
willing to pay more for one-month Treasurys than they could expect to 
get back when the bonds matured. Some investors, in essence, had 
decided that a small but known loss was better than the uncertainty 
connected to any other type of investment. That's never happened 
before." (Wall Street Journal) Also, the VIX, or "fear gauge", has 
soared to levels not seen since the crisis began in August just over 
a year ago.

On Tuesday, interbank lending rates spiked upwards causing banks to 
abruptly stop lending to each other. When banks stop lending to each 
other, they cannot perform their primary function of transmitting 
credit to consumers and businesses, and the economy shuts down. That 
is why the Fed and other members of the western banking cartel made a 
surprise announcement at 3 AM (EST) Wednesday morning.

 From the Fed:

"Today, the Bank of Canada, the Bank of England, the European Central 
Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss 
National Bank are announcing coordinated measures designed to address 
the continued elevated pressures in U.S. dollar short-term funding 
markets. These measures, together with other actions taken in the 
last few days by individual central banks, are designed to improve 
the liquidity conditions in global financial markets....The Federal 
Open Market Committee has authorized a $180 billion expansion of its 
temporary reciprocal currency arrangements (swap lines). This 
increased capacity will be available to provide dollar funding for 
both term and overnight liquidity operations by the other central banks."

Before the end of the day, the Fed had quadrupled the amount of 
dollars (to $247 billion) that central banks around the world could 
access in an effort to loosen up trading between the banks and resume 
lending to loan applicants and businesses. According to Bloomberg: 
"The Fed will spray dollars around the world via swap lines with 
other central banks. They can then auction them in their own 
markets." At first, the stock market reacted positively to the Fed's 
announcement, but by noon the market was 200 points down and losing 
altitude fast. It took another surprise announcement by the Treasury 
Dept -- of a massive government intervention to remove the bad loans 
and withering mortgage-backed securities from banks' balance sheets 
-- of to jolt the market out of its funk and send it climbing 410 
points higher on the day.

Paulson's emergency session with Congress last night was 
characterized by lawmakers who attended as "chilling". The situation 
is much worse than government officials have let on so far. The 
resurrecting of the Resolution Trust Corporation (RTC) is a desperate 
attempt to address the banking systems troubles head-on by providing 
a taxpayer-funded clearinghouse for illiquid assets and toxic 
mortgage-related securities for which there is presently no market. 
The taxpayer is being asked to pay up to $1 trillion for the 
speculative excesses of Wall Street investment banks and their 
fraudulent securities scam. Homeowners who are likely to lose their 
homes through foreclosure will not benefit from Paulson's RTC. Both 
presidential candidates have already declared their support for the plan.

According to the New York Times: "Rumors about the Bush 
administration's new stance swept through the stock markets Thursday 
afternoon. By the end of trading, the Dow Jones industrial average 
shot up 617 points from its low point in mid afternoon, the biggest 
surge in six years, and ended the day with a gain of 410 points or 
3.9 percent."

If ever there was proof of Plunge Protection Team activity; 
Thursday's market is it. The market was sinking fast at midday even 
though the Fed just added nearly $250 billion in liquidity to the 
global system. Investors were buying short-term Treasurys in record 
numbers, the VIX "fear gauge" was soaring, money markets were 
collapsing, and the aftershocks from defaulting AIG and Lehman were 
still being felt around the world. Were investors really that eager 
to buy back battered investment bank stocks or was the PPT busy 
panic-buying up futures and forcing the market upwards 617 points?

Bloomberg News: "Options under consideration (by congress) include 
establishing an $800 billion fund to purchase so-called failed assets 
and a separate $400 billion pool at the Federal Deposit Insurance 
Corp. to insure investors in money-market funds, said two people 
briefed by congressional staff who spoke on condition of anonymity 
because the plans may change."

Not a dime of public money is provided for over-extended 
mortgage-owners trying to stay in their homes. Not one congressman or 
senator at Thursday's meeting rejected the bailout plan or called for 
a criminal investigation of to establish whether laws were broken in 
the sale of fraudulent securities which have clogged the global 
system; pushed banks, hedge funds, insurance companies and homeowners 
into default, and precipitated the greatest financial crisis in the 
nation's 230 year history.

Ironically, the very people who created this mess, are the ones who 
will decide how to resolve it; the Federal Reserve and the US 
Treasury. Where else, but Washington would such massive failure be 
rewarded with more power and authority.

The investment giants and the Federal Reserve are entirely 
responsible for the current meltdown. Currency deregulation brought 
foreign capital flooding into the equities and bond markets while the 
real economy suffered. Businesses were off-shored while good paying 
manufacturing jobs were moved overseas. Wall Street gorged itself on 
foreign capital while America was transformed into a nation of 
construction workers and service industry workers. Now those jobs are 
vanishing by the millions and unemployment lines are swelling.

The ratings agencies, prevaricating mortgage applicants, and 
appraisers all played a part, but it's Wall Street that's really to 
blame. They lobbied to deregulate the system so investment banks 
could merge with commercial banks and allow the world's biggest risk 
takers to have unrestricted access to the cheapest capital available; 
deposits. They even crafted a bogus ideology, "market 
fundamentalism"; touting trickle-down, free market, Voodoo economics 
that was entirely designed to further enrich the wealthy and savage 
the middle class. Earlier this week, former Senator Jack Kemp 
appeared at a whistle-stop with John McCain in Jacksonville, Florida. 
Kemp was one of the primary architects of "supply side" economics, 
the thoroughly discredited Reagan-era doctrine which has led us to 
our present economic catastrophe. Kemp's theories fit with Milton 
Friedman's "greed is good" Chicago School mumbo jumbo. Both Friedman 
and Kemp believe that what is good for the stock market is good for 
America, ignoring the shocking economic polarization that has divided 
the nation. Now, more and more people are beginning to see that 
Friedman was a charlatan who provided ideological cover for obscenely 
rich financiers and their dodgy investment scams.

Economist and author Henry Liu summed it up brilliantly in a recent 
article in the Asia Times:

"The collapse of market fundamentalism in economies everywhere is 
putting the Chicago School theology on trial. Its big lie has been 
exposed by facts on two levels. The Chicago Boys' claim that helping 
the rich will also help the poor is not only exposed as not true, it 
turns out that market fundamentalism hurts not only the poor and the 
powerless; it hurts everyone, rich and poor, albeit in different 
ways. When wages are kept low to fight inflation, the low-wage regime 
causes overcapacity through over investment from excess profit. And 
monetary easing under such conditions produces hyperinflation that 
hurts also the rich. The fruits of Friedman test are in - and they 
are all rotten."

Whatever headwinds the country now faces economically can be directly 
attributed to the inherently flawed ideology of market fundamentalism.

Tuesday's 449 point bloodbath on Wall Street is the beginning of an 
unavoidable market crash. Regardless of Paulson's plan, there's more 
pain on the way. According to Bloomberg:  "More than $19 trillion has 
been wiped off global stock market value since a high on Oct. 31 as 
the worst U.S. housing recession since the Great Depression and a 
resulting global credit crisis slowed the world economy."   All of 
the economic indicators point to greater losses. Once the system 
begins to deleverage, there's nothing anyone can do to stop it. 
Paulson can place himself in front of a market avalanche if he 
chooses, but it won't change the outcome.  Market corrections are as 
inexorable as the force of gravity. That's why equity bubbles cannot 
be allowed to develop without interest rate 
intervention.  Responsible action by the Central Bank could have 
prevented the present crisis.

On Wednesday, Forex.tv reported that the net long-term TIC flows came 
in below the consensus forecast, totaling $6.1 billion in July, while 
total TIC flows for the month fell to $74.8 billion, according to 
data released by the U.S. Treasury on Tuesday morning. Economists had 
been expecting net long-term flows to rise to $55.0 billion compared 
to the previous month's previously reported figure of $53.4 billion.

$6.1 billion does not meet the requirements of our current account 
deficit of $700 billion. The dollar is headed for a fall.

On Wednesday, New York Mayor Michael Bloomberg warned that the "next 
wave" of financial pain may come from overseas if foreign entities 
stop buying U.S. debt." It's not clear who's going to be buying our 
debt," said Bloomberg. "It may very well be that the next wave is 
going to come back and bite us."

The New York Times tells a similar story except this time about Asia:

"Asia's savings have, in essence, bankrolled American spending for 
decades (but) Asian interest in American assets is wilting, a trend 
that seems to have started over the summer...Little-noticed data 
released by the Treasury Department on Tuesday showed that a sharp 
shift in international capital movements began in July. Private 
investors pulled a net $92.9 billion out of the United States, after 
putting $46.8 billion into American securities in June. ("Asia 
rethinks American Investments Amid Market Upheaval", Keith Bradsher, 
New York Times)

Foreign central banks and investors have turned off the tap. They can 
see that the US financial system is teetering and that the dollar is 
weakening. "The perceived risk of U.S. government debt, long held to 
be absent of any default risk, also climbed to a record yesterday as 
the government's involvement in bailing out financial markets weighed 
on its own balance sheet." (Bloomberg News) The "full faith and 
credit" of the United States government is slipping. US debt will be 
downgraded. Triple A is no longer guaranteed. America's stock just 
moved to Level 3 assets. The US is now a subprime economy on life support.

Presently, "there is roughly $6.84 Trillion in bank deposits. $2.60 
Trillion of that is uninsured. There is only $53 billion in FDIC 
insurance to cover $6.84 Trillion in bank deposits. Of the $6.84 
Trillion in bank deposits, the total cash on hand at banks is a mere 
$273.7 Billion." (Mish's Global Economic Trend Analysis)

$273.7 Billion is a paltry sum, insufficient to meet the needs of 
even a minor run on the banking system. The storm hasn't even touched 
ground yet in middle America, and already the system is  buckling. 
2009 will be bleak, indeed.

The battered and over-leveraged US financial system is facing its 
greatest challenge in the months ahead. The frantic search for 
capital has already begun, but with predictably disappointing results.
Neither China nor the Saudi princes are buying any more failing 
investment banks. They'll leave that for the US taxpayer. What 
started off as a brilliant plan to pedal garbage mortgage-backed 
paper to gullible investors around the world has suddenly backfired 
and now threatens to bring the entire system crashing down and change 
the geopolitical power paradigm for the forseeable future.

On Monday night, Senate Majority Leader Harry Reid was briefed on the 
gravity of the situation in a secret meeting with the Treasury 
Secretary and Federal Reserve Chairman. Reid's remarks are the best 
summary yet of the events of the last 14 months. He said, ""We are in 
new territory, this is a different game...No one knows what to do."

Mike Whitney lives in Washington state. He can be reached at 
<mailto:fergiewhitney at msn.com%C2%A0>fergiewhitney at msn.com




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