Temporary problems and capitalism’s demise

(2 pm. – promoted by ek hornbeck)

  If you follow the financial news you will find it using temporary excuses for every set-back.

For instance, every year there will be several bad economics reports blamed on the weather. As if every winter storm is “unprecedented”.

 Likewise, all efforts by the government and Federal Reserve at fixing an economy are temporary as well. Which is all fine and dandy when the economy is suffering from something that is indeed temporary. Remember how 9/11 got blamed for a recession that was already 7 months old?

 But what if the problems with the economy are not temporary? What if they are structural?

How many years of extremely expensive “temporary fixes” must we endure before we take a good, hard look at the basic assumptions of the current economy? Two years? Three years?

 We are currently approaching the four years mark for “temporary” fixes in the credit markets with no end in sight.  

 The first falsehood you must dispose of if the idea of the “Lehman Moment”, a term the financial media likes to use. It implies that everything was working until the government let Lehman Brothers go under.

 In fact, the financial markets seized up more than a year before Lehman Brothers went under. In fact, the financial media should instead be using the “Bear Stearns Moment”, when its two major hedge funds (High-Grade Structured Credit Fund and High-Grade Structured Credit Enhanced Leveraged Fund) filed for bankruptcy. Thus forcing the mortgage-backed securities market to expose their over-priced assets to fair market value.

 A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market…

  “Nobody wants to look at the truth right now because the truth is pretty ugly,” Castillo said. “Where people are willing to bid and where people have them marked are two different places.”

  With the ugly truth of real prices suddenly exposed, the credit markets froze up in the first week of August, 2007…and more than four years later they are still frozen.

  Things got steadily worse in the credit markets until the Federal Reserve finally stepped in on December 12, 2007. It’s first program was designed to make certain that foreign banks had dollars to loan.

  Right from the start the Fed approached the problem as a matter of liquidity, not solvency. In other words, the only problem was that assets weren’t being sold, not that the asset holders were bankrupt.

 The Fed rolled out other liquidity programs in early 2008, such as PDCR and TSLF.

   Hundreds of billions of dollars were funnelled to Wall Street banks through these programs months before Lehman went under. All in the name of liquidity.

 So now, nearly four years after the first “temporary” fix to the global “liquidity” problem, what do we see in the financial news?

 Sept. 28 (Bloomberg) — The Federal Reserve, chastised by Congress for lending money to foreign institutions including a Libyan-owned bank, is once again the lender of last resort for banks around the world it knows little about.

 Nearly four years later and the global banking system is still leaning on the Fed for funding. Nothing has been fixed. However, trillions of dollars have been thrown down the black hole of global finance.

  If four years of “liquidity” problems can’t be fixed with enormous and unprecedented mountains of taxpayer money, then it is time to admit the obvious – the problem isn’t liquidity.

  The real interesting part of this article is a few paragraphs down.

 The Fed facility provides a critical “ceiling” on funding squeezes that allows investors to avoid panic and distinguish between healthy and troubled banks, said Jerome Schneider, head of the short-term strategies and money-markets desk at Pacific Investment Management Co. in Newport Beach, California.

  “What you don’t want to have is liquidity risk become intertwined with solvency risk,” Schneider said.

 Schneider actually has it 100% backwards. The Fed facility is designed to prevent investors from distinguishing a healthy bank from a troubled bank, and confusing a solvency risk for a liquidity risk.

  How is it possible to hide a bank’s insolvency?

To answer that you must look at the other “temporary” fix. Late in 2008 the financial sector made a major push to get rid of mark-to-market accounting.

 Last week in London, Federal Reserve Chairman Ben Bernanke said, “the presence of these [toxic] assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new and private investment and new lending.”

   To paraphrase: As long as these assets have the potential to be marked down, bank capital is at risk. And as long as bank capital is at risk, private investors will remain skeptical and banks will remain conservative, which impinges their willingness to lend.

 Forbes makes several false assumptions here:

  First, that suspending mark-to-market accounting (which was done in April 2009) would allow the banks to resume lending to the public.

 That has not happened.



Bank Lending

 Secondly, that allowing the banks to mark the assets to whatever they like will get investors to start pouring money back into the banks.

  This has not happened.

 Finally, and most importantly, that the problem with the assets is that they aren’t selling. Thus, all that is needed is for the assets to be priced at what the banks say “they are worth” rather than what the markets are currently saying they are worth.

  In fact, the housing market has continued to plunge year after year (despite the federal government throwing trillions of dollars at it), and the value of those toxic assets are falling even further despite the banks no longer having to price in the losses. What we have instead are zombie banks, still walking around and feeding off the living, but dead nonetheless..

 The lack of fair-value accounting in Japan and the resulting scourge of zombie companies were often cited, in fact, as key causes of the country’s economic stagnation in the 1990s.

 

What has happened is that we are bankrupting ourselves in an attempt to deny reality – that the financial assets of the world are overvalued. The wealth is fictional. The “temporary” liquidity programs are just throwing good money after bad.

 The losses need to be written off as bad loans and bad investments.

 Of course there are two problems with that: 1) that would involve immediate and short-term pain, and that is something that politicians avoid, and 2) it would involve the top 1% (which owns a vast majority of this fictional wealth) to take very large losses.

  So instead, the wealthy buy the politicians, to make policies, which socialise the losses that were once private. However, the losses keep increasing because the middle class is being gutted, and now it is busting the budgets of nations all over the western world.

  The losses are too great. Austerity just guts the middle class even more, depressing consumption that much more, making the government budgets that much worse.

Meanwhile, we are headed for a double-dip recession, that’ll make tax revenue fall off a cliff.

What’s more, almost every effort from both the Federal government, and the Federal Reserve, has been to entice the consumer to borrow so he/she can spend more money. This is having potentially disastrous consequences.

 Americans dipped into their savings to spend in August as their incomes fell for the first time in almost two years, the Commerce Department estimated Friday.

  This pushed the nation’s savings rate down to the lowest level since November 2009, the government said.

  Income fell a seasonally adjusted 0.1% in August, marking the first monthly decline since October 2009.

 A falling savings rate, while incomes are also falling, is a sign of a consumer that is completely tapped out. Trying to get that consumer to spend more is a waste of time and money.

  The problem is income, or to be more specific, the problem is lack of good-paying jobs, not consumption. Household income has declined by 6.8% since the Depression started.

  The number of those living in poverty has grown by 2.6 million in just the last 12 months. The number of people on food stamps has grown 74% since the Depression started.

 Yet the government and Fed still seem to be fighting the last war. They are still in denial about what the economy actually needs.

So what now?

  What is needed is to finally admit that the problem isn’t a lack of liquidity. The problem is that major banks are insolvent, and the effort to bail out these insolvent banks have made several European nations insolvent.

  The can can’t be kicked down the road any further.

 We arrived at the Minsky Moment over four years ago. But instead of acknowledging this fact and learning from it, our leaders have instead been bankrupting us by trying to keep a dead system alive.

  We need a banking system, but there is no reason why we need these banks.

 The system needs to be flushed out. The old and incompetent need to swept aside for the system to regenerate.

  To not do so risks the entire system itself.

 “Karl Marx had it right,” Roubini said in an interview with wsj.com. “At some point capitalism can self-destroy itself. That’s because you can not keep on shifting income from labor to capital without not having an excess capacity and a lack of aggregate demand. We thought that markets work. They are not working. What’s individually rational … is a self-destructive process.”

  The thing to remember is that Marx was a political historian first, and a economist second. Capitalism by itself would eventually fix the situation. To truly bring down the whole structure by Marx’s forecast requires inaction and/or reaction by the politicians to prop up the unstable status quo.

   Unfortunately that is exactly what is happening today. The capitalist leaders, in there efforts to prevent any positive, progressive change, are risking the entire world’s economic structure.

 Capitalism has led to a revolution but not the one that Marx expected. The fiery German thinker hated the bourgeois life and looked to communism to destroy it. And just as he predicted, the bourgeois world has been destroyed.

  But it wasn’t communism that did the deed. It’s capitalism that has killed off the bourgeoisie.

 

29 comments

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    • gjohnsit on October 1, 2011 at 3:45 am
      Author
  1. had a misinterpretation of Darwinism, where they thought that there would be a social progression from feudalism to capitalism to communism to eventual utopian anarchy.

    Instead we saw Russia (and later China) go straight from feudalism to communism, then both became capitalist with fascistic tendencies.    

    Marx was historically responsible for injecting the top down dictatorship style of governing into the communist lexicon and directly into the CP, by ejecting socialists, anarchists, anarcho-syndicalists, etc. from the CP, since he believed that their sort of freedom could only happen after the time of various sorts of dictatorship. In a sense, he was directly responsible for the self serving thinking of Lenin and Stalin becoming prevalent.

    Today, we see something else he never would have predicted- the once staunch capitalist nations like the US (and some others border line or fairly socialist even) have become or are becoming feudal.

    The answer to the puzzle, I think, is that we need to look again at the philosophies he rejected– the syndicalists, the anarcho-socialists, etc.  Emma Goldman, Bakunin, etc have much to say still.  Democratic Socialism too.

    It doesn’t much matter what you call it, but some form of socialism, with a bent towards respect of life and liberty is what we need. That’s what the notion of communism was before Marx re-styled it as a top down dictatorship of the proletariat.

    I think we can see the structure of #occupywallstreet, and the Icelandic general referendum vote on their bank bailouts, as examples of the kind of structure needed.    

    • banger on October 2, 2011 at 12:03 am

    I just don’t see it. Some kind of market economy is required and it can only be based on capital until our culture changes and that will take some time.

    What I do see is a major restructuring of the global financial system. My hunch, backed up by recent events in Europe, is that the finance oligarchs are well aware that this is “the” crisis of our time. They have to deliver and deliver within the next six months or so before the U.S. elections. What are thy trying to deliver? A global financial system that is largely fictional without underlying values. In my view large institutions TBF banks and so on plus the international elites, the IMF various central banks and sovereign funds are all trying to join forces to manipulate markets in concert to a) insure no major change in the status-quo, limit economic growth to zero for an indefinite period within which we will all live in austerity featuring a permanent class of uneployed, a permanent class of people on the edge of starving to death, and the gradual elimination of any national sovereignty especially in weak states. I think it will, in some areas, literally mean that there would be no effective state structures in place as in Somalia and, in fact, in Afghanistan which is still a land of warlords where the Karazai government is sustained only by U.S. and Indian force–if and when NATO pulls out Afghanistan will fragment. I think this process will increase and the process is already ongoing even here in the U.S. The real power will lie in local power centers and the international directorate of rather anonymous oligarchical community ruling through international organizations both evident and secret. This group will be sustained by a highly technological system of oppression based in the U.S. using drones, robots, spying and so on to preempt any kind of revolt. My guess though is that this oligarchical imperial structure will leave us plenty of room to form alternative arrangements–I don’t think it will be something in the order of the Emperor and Darth Vader–power will be broadly distributed among the emergent nobility and their motivations will be moderated by the practical need to maintain a structure.

    What is over is the model that has existed up until now. No more dynamic economic growth except in certain constrained areas. I believe this emergent structure could very well work as long as the finance oligarchs cull some of the more criminal elements in their midst. I think those elements served a purpose in establishing the system through force and criminality but cannot be maintained by those same attitudes.

    We can in our small circles and between the cracks establish more anarchic systems that’s where the hope lies. As long as we understand that we have to offer something better and more fulfilling than consumer culture–which will have to wane by necessity.  

    • Xanthe on October 2, 2011 at 12:23 pm

    I didn’t read blogs and writers like yourself.

    Sometimes I have to read 2, 3 times to really get it –

    We are truly screwed.  I am going to cash but really what the heck is going to happen to the dollar.

    I guess if possible we should pay off whatever debts we can and live even more frugally.

    also – if possible, get in smaller digs.

    Also – support Wall Street protesters now there or in your city.

    thank you so much.  

  2. as was Coke vs Pepsi’s corporate lust to enter the billion man Chinese market.  In short to maintain their spot at the top of the food chain these sociopathic people have to get rid of the most consumeristic society on the planet just to free up resources.  Six billion world, a measly 300 million suburbanites.  No contest who looses.

  3. The essential problem is that Goldman Sachs owns Washington.

    The banks are insolvent, exactly as said.  In a true capitalist society (which has never existed, incidentally) the banks would be allowed to go broke, and solvent institutions would take their place.  But “going broke” would mean that the banksters would lose their money.

    They don’t want to lose their money. They want to take ours.  So they put into office the likes of Obama, who subverted the moment when a real progressive majority seemed to be coalescing, and kept us on the path of neofeudalism so ably started by Reagan/Bush/Clinton/Bushfool.  Then when things started to go bad, they simply had their slaves, aka We the People, pay up and bail their corrupt asses out.

    And they’ll keep doing it until the nation is bled dry.  Then the deluge, the blind jump into the chasm, and where we’ll end up after that is anybody’s guess.  –And that moment is coming soon, possibly even before Obama is run out of office in 2012.

    The fairy in Pandora’s Box is Occupy Wall Street, which may be the nexus of a real people’s movement which will bypass the gatekeepers in the corporatist media and corrupt political establishment and restore some semblance of a functioning social democracy. But I ain’t counting on it; neofeudalism or anarchy are better bets.

  4. One thing immediately comes to mind and that is the statement of Mayer Rothschild who said that he did not care what kind of government existed as long as private bankers got to print the money.

    So until we take the printing of sovereign currency out of the hands of private bankers, I don’t think it makes much difference.

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