[News] The Point of No Return
news at freedomarchives.org
Fri Sep 19 13:28:44 EDT 2008
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
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
522 Valencia Street
San Francisco, CA 94110
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