(October 19) bloodbath on Wall Street proved that the troubles
in the credit markets have not been relieved by the Fed's rate
cuts. The Dow Jones slipped 367 points on the 20th anniversary
of Black Monday, the stock market's biggest one-day loss in history.
Since Friday, Asian markets have plunged; stocks are down sharply
in Japan, Australia, Hong Kong, Indonesia, the Philippines, Taiwan
and South Korea. The global sell-off is a reaction to ongoing
problems in the subprime market and deeper-rooted systemic issues
related to the US's structured-debt model.
sudden downturn in the stock market provided a fitting backdrop
for US Treasury Secretary Henry M Paulson's appearance at the
G-7 meetings in Washington DC. Paulson has largely shrugged off
the decline in housing and the growing volatility in the equities
markets. As the representative for the world's biggest economy,
Paulson instructed the other nations on how best to adjust their
currencies and on the dangers of "sovereign wealth funds". No
one was listening. Foreign ministers and central bankers are less
receptive to the scolding of US officials. America needs to put
its own house in order before it gives advice to anyone else.
everyone at the meetings really wanted to know was why the United
States destabilized the global economic system by selling hundreds
of billions of dollars of worthless mortgage-backed securities
to banks and pension funds around the world? Aren't there any
regulators in the US anymore?
how Paulson was going to make amends to the institutions and investors
who lost their shirts in this massive mortgage-scheme?
everyone at the G-7 meetings really wanted to know was
why the United States destabilized the global economic
system by selling hundreds of billions of dollars of worthless
mortgage-backed securities to banks and pension funds
around the world?
the Treasury Secretary didn't address any of these questions.
He offered no recommendations for fixing the problems in the
credit markets and he refused to explain what he would do to
shore up the faltering dollar. Instead, he reiterated the same
lame mantra that the US follows a "strong dollar policy".
The Federal Reserve has been trashing the greenback for the last
seven years without pause. Paulson needs to rethink his approach
and start telling the truth. Markets thrive on credibility and
transparency; that's what strengthens investor confidence. If
Paulson thinks that the people are dupes; he's in for a shock.
net foreign inflows show how quickly capital can evaporate when
confidence is lost. Foreign investors pulled US$163 billion out
of US securities and Treasuries in August alone. Net capital inflows
have turned negative and that money won't be returning until the
United States shows that it's "got its act together".
Are you listening,
dollar subprime swindle was the greatest financial fraud in history.
Investors are looking for accountability. They want to hear someone
in the Bush administration and at the Central Bank stand up, take
responsibility, and offer concrete regulatory changes to fix the
Are you listening,
No one is
interested in another scam like the new US$100 billion "Bankers
Bankruptcy Fund". All that does is provide the over-extended and
under-capitalized investment banks another chance to dump their
poisonous Mortgage-backed slop on the gullible public. Forget
about it. That plan needs to be tossed in the circular receptacle.
If Paulson really wants to know what people think about his new
Mega-fund he should listen to Nick Parsons, the head of markets
strategy at National Australia Bank. Parsons summed up the fund's
the junk from the sellers of junk, the holders of junk should
be spared the problems of junk. The one flaw in this cunning plan,
however, would be if investors took fright at being reminded just
how much junk is still in the system.''
rest of the world is already fuming at the US for creating
the problems that threaten to send the global economy
into a prolonged tailspin.
is right. Junk bonds are still junk whether they're logged on
an SIV's debit-sheet or wrapped in Treasury Dept red-ribbon.
What difference does it make? It's still garbage. Write down
the losses and get on with it.
noting that Paulson - who felt vindicated in reproaching China
for currency manipulation - also blasted Iran saying, "We
discussed ways to deal with Iran's pursuit of a nuclear capability
and ballistic missiles, its vast financial support to lethal terrorist
groups, and the deceptive financial tactics employed by Iran to
evade sanctions and mask illicit transactions."
Give it a
from the fact that the United Nations nuclear-watchdog agency
(IAEA) has found "no evidence" that Iran is conducting a nuclear
weapons program; it's none of Paulson's business anyway. He needs
to devote more time to cleaning up his own mess and less time
criticizing others for their fabricated offenses.
rest of the world is already fuming at the US for creating the
problems that threaten to send the global economy into a prolonged
countries that joined the G-7 meetings lambasted the US for generating
"serious problems of financial fragility" which are endangering
the "prosperity of the world economy". (Bloomberg)
G-24 is demanding "increased surveillance of advanced economies,
putting as much focus in evaluating their vulnerabilities as it
does in emerging-market economies.''
And yet Paulson and his colleagues at the Fed continue to blame
everyone else. No one in China or Iran cooked up this "structured
finance" rip-off which sent millions of homeowners into foreclosure,
shuttered 160 mortgage lenders, and undermined the global banking
system. That was the work of the Wall Street con-artists and their
accomplices at the Fed.
one in China or Iran cooked up this "structured finance"
rip-off which sent millions of homeowners into foreclosure,
shuttered 160 mortgage lenders, and undermined the global
this article in Sunday's UK Telegraph:
and Royal Bank of Scotland have lined up emergency funds of up
to $30 billion from the US Federal Reserve to bail out American
clients caught up in the global credit crunch.
board of governors wrote to both banks 10 days ago, granting them
access to funds for customers "in need of short-term liquidity."
to RBS made particular reference to investors holding mortgage-backed
securities - which have been at the centre of the sub-prime crisis.
("Barclay's, RBS prepare emergency credit with Fed", UK Telegraph)
humongous bail out for the victims of America's deregulated mortgage-laundering
racket. Is that China's fault?
appeared in yesterday's New York Times by economics reporter Gretchen
Morgenson, "Get Ready for the Big Squeeze":
who thinks that we have hit bottom in the increasingly scary lending
world is paying little mind to the remarkably low levels of reserves
that the big banks have set aside for loan losses. Indeed, loss
provisions as a percentage of total loans held for investment
plummeted to a historic low in the second quarter of 2007. Part
of the problem for banks is a result of an almost two-decade drop
in loan loss reserves... Now that a credit bust looms, banks have
far fewer reserves on their balance sheets than they might have
had in previous cycles."
to talk about China and Iran's problems?
gang of Wall Street warlords have transformed the world's most
transparent and resilient markets into an opaque galaxy of complex
debt-instruments and shady "off-balance sheets" operations. It's
no better than a carnival shell-game.
American consumer is more over-leveraged and economically
vulnerable than at any time in history. Simply put; he
owes money on everything.
As the banks
continue to get rocked from explosions in the housing industry;
the unwinding derivatives and carry trades will precipitate
a mass exodus from the equities markets. That rout will be matched
by a corresponding downward slide in the real estate market
which is expected to continue until 2010.
have returned to the credit markets. Surging oil and food prices
are bearing down on maxed-out consumers and slowing retail spending.
Discretionary income is vanishing from rising inflation and shrinking
home equity. Wages have remained stagnant for over a decade while
personal savings have dipped to minus digits. On top of it all,
consumer debt is at record-highs and the danger of default has
expanded beyond housing to every area of personal finance.
in Sunday's Financial Times sheds light on this new and worrisome
quarterly results from banks across the US over the past two weeks
suggest credit problems once confined to high-risk mortgage borrowers
are spreading across the consumer landscape, posing new risks
to the economy and weighing heavily on the markets.
have raised reserves for loan losses by at least $6bn over the
second quarter and by even larger amounts from last year, indicating
financial executives believe consumers will be increasingly unable
to make payments on a variety of loans.
are adding to reserves not just for defaults on mortgages, but
also on home equity loans, car loans and credit cards.
started out merely as a subprime problem has expanded more broadly
in the mortgage space and problems are getting worse at a faster
pace than many had expected,' said Michael Mayo, Deutsche Bank
analyst." ("US Loan Default problems Widen" Financial Times)
country has ever devalued its way to prosperity... Destroying
the dollar will destroy the country... Interest
rates cuts will do nothing to slow the inexorable deterioration
in the housing or stock markets.
aftershocks from Alan Greenspan's "cheap credit" policies will
be felt for decades. The American consumer is more over-leveraged
and economically vulnerable than at any time in history. Simply
put; he owes money on everything - cars, mortgages, electronics,
student loans, and credit cards. The path to indentured serfdom
is paved with the Fed's low interest green paper.
US trade imbalances coupled with a steadily-declining dollar,
is negatively impacting European industry as well as the Euro.
Further weakening is likely to trigger a stampede away from dollar-backed
assets and securities. The plan to strangle the dollar to reduce
US balance of payments is pure lunacy - an idea as zany as invading
Iraq. No country has ever devalued its way to prosperity... (Steven
Roach) Destroying the dollar will destroy the country.
credit markets are now facing unprecedented disruptions due to
the mortgage-derivatives fraud which originated in the United
States before spreading across the world. $400 billion in asset-backed
commercial paper (ABCP) has failed to roll over, the mortgage
securitization process has stalled, the colossal leveraged buyout
deals (LBOs) are DOA, and millions of bankrupt homeowners are
being driven from their houses. The big investment banks have
been forced to take $280 billion of new debt on their balance
sheets since the middle of August. This is limiting their ability
to issue new loans and generate profits. The banking system has
already smashed into the iceberg and the decks are quickly filling
rates cuts will do nothing to slow the inexorable deterioration
in the housing or stock markets. Cheap credit will not dispose
of the toxic debt clogging the system or slow the pace of defaults.
Trillions of dollars in market capitalization will be lost.
system is blinking red. These problems cannot be ignored or swept
under the rug any longer.
is critical in times of economic crisis. This isn't the time for
prevarication, obfuscation or public relations gimmicks. We need
leaders who will tell the truth, make remedial policy recommendations,
and forestall the growing probability of social disorder.
Mike Whitney is a well respected freelance writer living in Washington
state, interested in politics and economics from a libertarian
perspective. He can be reached at email@example.com.
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