Dr. Michael Hudson update . .Hilliary Joins the Vast, Rightwing Financial Conspiracy

Resurrecting Greenspan

Hillary Joins the Vast, Rightwing Financial Conspiracy

By MICHAEL HUDSON

On Monday, March 24, presumably representing Wall Street--as any New York senator must do in view of its dominant financial role in the state's political campaigns--Hillary Clinton proposed that Congress show its bipartisan spirit by appointing an "emergency working group on foreclosures," to be led by none other than Alan Greenspan and earlier Federal Reserve Chairman Paul Volcker, and Clinton Treasury Secretary Robert Rubin. Her idea was for them to come up with a plan to alleviate the subprime and financial crisis. This seems like calling in arsonists to help put out the fire that they and their own constituency had set in the first place. Their lifelong interest, after all, had been to promote deregulation and special tax favoritism for their Wall Street constituency, highlighted by repeal of Glass-Steagall in 1999 under Pres. Clinton. Representing the banking sector and Wall Street (and hence being essentially Republicans in spirit), they were precisely the lobbyists most in favor of anti-labor, pro-creditor policies.

Even the Wall Street Journal expressed surprise. Jon Hilsenrath noted the seeming irony: "In August 1999, as the tech-stock bubble was worsening, Alan Greenspan stood before central-banking colleagues in Jackson Hole, Wyo., and argued it wasn't the central bank's job to prevent asset bubbles. All it could do was clean up the mess after the bubble had burst." On the contrary, the commentator noted, the Fed could have slowed the bubble by raising interest rates and boosting margin requirements on stock trading during the tech bubble. Mr. Greenspan could have heeded the advice of Fed Governor Ed Gramlich to slow and regulate subprime mortgage lending. Instead, Mr. Greenspan's--and Mr. Paulson's--idea was simply to clean up the bubble's debt aftermath by bailing out Wall Street.

Mrs. Clinton's logic, she explained on March 24, was simply that Mr. Greenspan had a "calming influence." Republican Presidential nominee John McCain certainly seemed glad to propose him to head a commission to overhaul the tax code. Barack Obama's spokesman Bill Burton said that her selection of Mr. Greenspan to head her working group featured "the same people who helped to create these problems or have a direct financial industry stake in the outcome." Sen. Obama himself said that her crypto-Republican plan lacked credibility in view of the heavy campaign donations she received from Wall Street financial lobbyists. (As of mid-April he had raised an almost identical sum from this source.)

Elaborating her views three days later, Sen. Clinton made it seem as if it were the job of the financial victims--the mortgage debtors--to solve the mortgage crisis. "In today's economy, trouble that starts on Wall Street often ends up on Main Street ... When there's a run on mortgage-backed securities and the bottom falls out for investment banks, the bottom falls out for families who see the value of their homes--their greatest source of wealth--decline." To cure the problem, she endorsed the spirit of Mr. Paulson's Wall Street bailout, including having the Federal Housing Administration, Fannie Mae and Freddie Mac "buy, restructure and resell these underwater mortgages." This is a far cry from debt forgiveness.

In her debate with Barack Obama on April 16, Senator Clinton once again heaped praise on Mr. Greenspan's "bipartisan" commission that nearly doubled the tax rates that workers had to give up out of their paychecks. A token income-tax cut was offset by F.I.C.A. withholding that, for many workers, now exceeds their income-tax liability. And what certainly must be the most unmitigated gall rivaling even her notorious Yugoslavia-under-sniper-fire gaffe, Mrs. Clinton rejected Senator Obama's policy of raising the F.I.C.A. Withholding rate above the present $97,000 level, all the way up to hedge fund managers making billions of dollars per year. Mrs. Clinton said explicitly that there were more progressive ways to resolve the Social Security and Medicare tax problem. The exchange has to be read to be believed.

OBAMA: "One of the centerpieces of my economic plan would be to say that we are going to offset the payroll tax, the most regressive of our taxes, so that families who are earning--who are middle-income individuals making $75,000 a year or less, that they would get a tax break so that families would see up to a thousand dollars worth of relief. the rules in Washington--the tax code has been written on behalf of the well connected. And that's been a central focus of our campaign.

MODERATOR : You have however said you would favor an increase in the capital gains tax." It's now 15 percent, compared to 28 percent under Bill Clinton.] "It's now 15 percent. That's almost a doubling if you went to 28 percent. But actually Bill Clinton in 1997 signed legislation that dropped the capital gains tax to 20 percent.

OBAMA: Right.

MODERATOR: And George Bush has taken it down to 15 percent.

OBAMA: Right.

In an argumentative mode, the moderator pointed out the long-discredited "supply side" Republican rationale for tax cuts. Is it not true, he asked, that each time the capital gains tax was cut, receipts increased? He did NOT explain that asset-price inflation had gone hand in hand with tax cuts. Nor did he note the fact that some 80% of the tax is in land-price gains--gains that speculators made "in their sleep" while Mr. Greenspan at the Federal Reserve was flooding the real estate bubble with credit.

OBAMA: Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness. We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year--$29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That's not fair. I want businesses to thrive and I want people to be rewarded for their success. But what I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don't have it and that we're able to invest it in our infrastructure and invest in our schools.

In response, Sen. Clinton said:

CLINTON: I don't want to take one more penny of tax money from anybody."

MODERATOR: Would you say, 'No, I'm not going to raise capital gains taxes'?

CLINTON: I wouldn't raise it above the 20 percent if I raised it at all. I would not raise it above what it was during the Clinton administration. I don't want to raise taxes on anybody. I'm certainly against one of Senator Obama's ideas, which is to lift the cap on the payroll tax, because that would impose additional taxes on people who are, you know, educators here in the Philadelphia area or in the suburbs, police officers, firefighters and the like. So I think we have to be very careful about how we navigate this. So the $250,000 mark is where I am sure we're going. But beyond that, we're going to have to look and see where we are.

OBAMA: What I have proposed is that we raise the cap on the payroll tax, because right now millionaire and billionaires don't have to pay beyond $97,000 a year. That's where it's kept. Now most firefighters, most teachers, you know, they're not making over $100,000 a year. In fact, only 6 percent of the population does. And I've also said that I'd be willing to look at exempting people who are making slightly above that.

MODERATOR: But Senator, that's a tax.

OBAMA: Well, no because the alternatives, like raising the retirement age, or cutting benefits, or raising the payroll tax on everybody, including people who make less than $97,000 a year -- those are not good policy options.

Senator Clinton responded with more wishy-washy defense of her position. Sounding like an old-time Republican, she gave the old mantra of America's fiscal class war:

"When it comes to Social Security, fiscal responsibility is the first and more important step. . . . And with all due respect, the last time we had a crisis in Social Security was 1983. President Reagan and Speaker Tip O'Neill came up with a commission. That was the best and smartest way, because you've got to get Republicans and Democrats together. That's what I will do."

She promised not to "impose additional burdens on middle-class families--that is, implicitly defining the middle class as those who earn from $97,000 to $3,000,000,000 per year. This remarkable definition of "middle class" has yet to make it into the sociological textbooks, but I'm sure the University of Chicago will soon make the requisite adjustment.

Senator Obama was quick to respond: "That commission raised the retirement age, Charlie, and also raised the payroll tax." He said that she was proposing a "magic solution." (This was the equivalent of "voodoo economics" of which President Bush I accused Ronald Reagan of practicing.)

Then came Sen. Clinton's most remarkable claim of the evening--but one that the papers have not picked up:

CLINTON: "But there are more progressive ways of doing it than, you know, lifting the cap."

But what could be more progressive than raising the cap on F.I.C.A. withholding? What on earth could be more progressive than starting to reverse the tax shift onto labor that has been occurring ever since the Reagan and Greenspan regimes?

For that matter, how can deregulation of the financial markets be deemed fair?

In an earlier presidential primary debate Mrs. Clinton also cited the Democrats' acquiescence in the Greenspan Commission's 1983 tax shift off the high income brackets onto wage-earners--by increasing F.I.C.A. wage withholding for Social Security as a personal user fee rather than funding it out of the general budget--as a model of the bipartisan spirit she hoped to emulate if elected. She thus reflected the attitude of her husband, when as President, Bill Clinton appointed Mr. Greenspan to a new term as Fed Chairman, saying: "This chairman's leadership has been good, not just for the American economy and the mavens of finance on Wall Street. It has been good for ordinary Americans."

Yet it was Greenspan that acted as a kind of economic Karl Rove in crafting anti-labor policies favoring the very rich, above all the Social Security tax-shift onto labor's shoulders to which Mrs. Clinton pointed. He welcomed recession as an excuse to cut taxes, ostensibly to "jump-start" economic growth but actually producing a benefit mainly for wealthy investors and property owners.

Packaging deregulation as new, more efficient regulation

The Bush Administration's enormous commitment of public funds to support Wall Street prompted columnist Martin Wolf of the Financial Times to announce that the free market was dead. "Remember Friday March 14, 2008," he wrote; "it was the day the dream of global free-market capitalism died. Deregulation has reached its limits." The price for Treasury support would have to be an end to the deregulation that had permitted the debt crisis to reach such unprecedented proportions. As evidence of the new attitude Wolf cited "the remark by Joseph Ackermann, chief executive of Deutsche Bank, that 'I no longer believe in the market's self-healing power.'"

Although more extensive public regulation was the traditional aftermath of financial crisis, the debt bubble has provided the financial sector with unprecedented wealth to translate into political law-making policy to dismantle regulation. Financial lobbyists accordingly anticipate that "the coming fight will rival the storm leading up to the 1999 passage of the Gramm-Leach-Bliley Act [which repealed Glass-Steagall]. That law made it easier for securities firms and banks to be owned by the same company, dropping regulatory barriers in place since the Great Depression. In 1998 and 1999, when Congress was finalizing passage of that law, the financial-services industry spent a combined $417 million on lobbying, according to the Center for Responsive Politics. In 2007, financial-services companies spent more than $402 million on lobbying, led by $138 million from the insurance industry."

The focal point of this lobbying effort has been Mr. Paulson's Treasury working group to draw up a Blueprint for Financial Regulatory Reform. As he explained in his speech on March 31, the Treasury Department's Blueprint for Financial Regulatory Reform had been moving earnestly since June 2007 to "reform" the nation's regulatory structure. He concluded his speech with a paean to the repeal of Glass-Steagall under President Clinton: "We recognize that these ideas will generate some controversy and healthy debate. This is not unlike the circumstances surrounding the 1991 "Green Book," which after a period of constructive discussion resulted in the passage of the Gramm-Leach-Bliley Act, modernizing our financial services industry some eight years later."

Repeal of Glass-Steagall gave the subprime debacle its jump start by removing the Depression-era roadblock from bank merging with brokers. This permitted financial conglomerates to be formed and gave them the ability to securitize (that is package), loans as investments. Vertical financial conglomerates were formed, starting with Citibank's merger with Travelers Insurance, and leading up to the recent intention of Bank of America to acquire the troubled Countrywide Financial, the nation's leading subprime lender.

Rather than seeing this as the source of the subsequent subprime problems as Senators Paul Wellstone and Byron Dorgan did at the time, Mr. Paulson explained, "I am not suggesting that more regulation is the answer." Just the opposite. "A state-based regulatory system is quite burdensome. It allows price controls to create market distortions. It can hinder development of national products and can directly impact the competitiveness of US insurers." The aim is to dismantle what remains of public regulation.

Reflecting the financial interests behind him, Mr. Paulson's solution is to assign overall regulatory authority to the Federal Reserve. The Fed works for its owners, the commercial banking system, and its chairman is appointed by a government that believes in "central bank independence." The result is a financial sector regulated by its own leaders and lobbyists, not by elected officials--seemingly a clear conflict of interest. The lobbyists evidently have decided that the best public relations wrapping is to present deregulation as "simplification," and to claim that "streamlining" it will lower costs to investors and help prevent a loss of "competitiveness" to Europe, especially London. Especially annoying to Wall Street are the Sarbanes rules requiring full disclosure of information, passed in the aftermath of the Enron fraud. Upon taking office, Mr. Paulson claimed that these rules handicapped U.S. financial firms relative to their foreign counterparts. "In November 2006, the Committee on Capital Markets Regulation released a report concluding, 'It is the committee's view that in the shift of regulatory intensity balance has been lost to the competitive disadvantage of U.S. financial markets.'"

The implication is that anything that lowers costs to Wall Street--by rolling back regulatory bureaucracies and reporting requirements such as are called for by the Sarbanes-Oxley legislation--will be passed on to customers. Such presumptions ignore the fact that Wall Street prefers to pay out its profits as bonuses or dividends rather than pass on cost savings. What is passed onto its customers instead is runaway CEO compensation. "Market discipline" has not kept financial markets honest or low-priced. Deceptive subprime practices have made dollar investments a pariah in global financial markets. Investors have lost faith in the nation's investment bankers, mortgage brokers and credit-rating firms, drying up the market for U.S. mortgage-backed securities and leading to their being dumped across the board.

In sum, the mid-March crisis provided an opportunity for Mr. Paulson to pull out the deregulatory plan he proposed when he became Secretary of the Treasury in summer 2006, and paste a "regulatory" cover story on it. Mr. Paulson plan for deregulation anticipates "consolidating banking and insurance regulators and potentially merging the Securities and Exchange Commission with the Commodity Futures Trading Commission, then stripping the combined entity of much of its regulatory authority." A major aim is to prevent any repeat of state attorneys general or other regulators emulating Eliot Spitzer's $1.4 billion in fines against Wall Street companies for their improper behavior and close-down of Arthur Andersen.

Calling the federal power to annul state regulation or that of other agencies "regulation" is dependent on voters not understanding the bait-and-switch act going on. It needs the compliance of New York's Wall Street Democrats, senators, congressmen and presidential candidates, whose campaign funding after all comes mainly from the state's financial sector.

So where are the Democrats on this? Above all, Hillary would seem to be on the hot seat. Where was she at 3 o'clock in the morning on the day that Bill annulled Glass-Steagall?

What seems most remarkable in Mr. Paulson's and Dr. Bernanke's comments is the absence of quantitative discussion of just what the "systemic risk" is. The bailout is to be paid by the non-financial sector, above all labor ("consumers") to "save the system." But just what is the system? It certainly is not industrial production. It is more a faith that compound interest can keep on expanding ad infinitum. The reality is that the exponentially soaring debt overhead threatens to plunge the economy into chronic depression as interest and other financial charges eat further and further into the economy's ability to spend on consumption and tangible capital investment. To ignore this financial dynamic is to turn economics into a junk science.

For the past decade the banking system and its mortgage-broker affiliates have avoided the usual wave of defaults and insolvencies by lending debtors enough money to pay the interest charges. Adding the interest onto the debt in this way is known as a Ponzi scheme. It requires an exponentially growing influx of funds to pay investors and creditors, and hence cannot be sustained for long, because no economy in history has grown at the exponential rates needed to keep up with the debt overhead. This is the basic problem at the core of today's economic policy. It aims to save the "sanctity of debt," that is, the financial sector's claims on the rest of the economy. But this attempt only polarizes the economy between creditors at the top of the pyramid and an increasingly indebted base at the bottom.

A simple example may illustrate the debt treadmill. Consider a little brick home in a suburb of Cleveland, Ohio. There are two economic conditions under which you could own it. Choice One is to own the home free and clear of a mortgage, in an economy that values it at $100,000. Choice Two is to own it in a debt-fueled market that values it at $250,000, requiring the buyer to take on a $100,000 mortgage to afford it. This appears to maximize wealth creation inasmuch as the homeowner has $50,000 more net worth.

But the Choice Two homeowner owns only 60 percent of the property. At 6 percent interest the $100,000 mortgage absorbs $500 a month, not counting amortization payments. This $6,000 annual interest charge--plus $3,000 for self-amortization on the typical 30-year mortgage--absorbs 30 percent of gross income for a homeowner earning $30,000 per year. Net of about $10,000 in wage withholding for FICA and income tax, the homeowner must pay 45 percent of take-home pay even before property taxes, fuel and repairs.

So which homeowner is doing better: Choice Two with higher net worth on paper, or Choice One which is less debt-ridden and whose home therefore is more affordable?

The Federal Reserve's net worth statistics give the impression that all Choice Two has more wealth creation. But most families "own" less and less, and must pay heavier carrying charges that eat into their spending power. By the end of 2007, home equity fell below 50 percent for the U.S. economy on balance--down to 47.9 percent. This means that most Americans now have less of an ownership share in their most basic asset than their bankers. On top of this, they are obliged to place their retirement savings in the hands of money managers whose fees absorb most of the income. Many pension funds are now left with substantial losses on packaged mortgages such as Bear Stearns was selling.

Germany is an example of the Choice One economy. Housing absorbs only about 20 percent of its average household budget, less than half that of most American homebuyers today. Its lower debt and property overhead, along with national health care, helps explain its competitive power in international markets. America, by contrast, is burdened with the high proportion of the cost of labor reflecting the inflation of housing prices that has forced more and more buyers into debt, while the middle class has seen its stagnant wages exacerbated by wage withholding for Social Security and medical insurance. Many have been able to maintain their living standards only by borrowing against their home equity.

Making loans is how banks make their money. As long as the loans are used to bid up property, stock and bond prices, they can claim that they are "responding to the market" by getting homeowners, commercial real estate investors, corporate raiders and financial managers to pledge their assets as collateral for yet new loans in a process that seems to be self-sustaining. But at a point the carrying charges on this indebtedness absorb all the disposable income and corporate cash flow. All it takes to upset the applecart is a major default, embezzlement or fraud.

Real estate reached this state of affairs by summer 2006. Behind the property bubble was an increasing entry price to buying a home--an access price that had to be paid in extra years of the buyer's working life. Traditionally, economists have defined equilibrium pricing as the level at which the rental income just about covered an owner's carrying charges. But as real estate prices exceeded the rents that could be charged to cover debt service, speculators withdrew from the market. It became much less costly to rent than to own. New buyers had to pay for their operating deficits out of income earned elsewhere.

The magic was gone once carrying charges could not be lowered any further. Interest rates had been lowered as far as they could be, down payments had been lowered to near zero, amortization had been lowered to zero (so that the mortgage loan never would be paid off, but simply carried), and fraudulent property assessment had become commonplace. Adjustable-rate mortgages were resetting at higher levels. Fuel costs were rising, increasing operating expenses for electric power and gas. Local property taxes were catching up with soaring real estate prices.

The mortgage market thus was set for a downturn. Every mortgage banker with whom I spoke by 2006 saw it coming. But until the break came, Wall Street managers wanted to get every last added fraction of a percentage point in interest that could be squeezed out. So did fund managers, who are graded every three months against the norm. This short-termism obliges them to follow the herd. They hope to reverse course in a hurry when the break comes, but financial crashes occur much faster than it takes for prices to rise. The business cycle is basically a run-up of real estate mortgage debt growing slowly but ending in a fairly rapid crash.

Bank credit--that is, debt for mortgage borrowers--was created almost without cost as the Federal Reserve held short-term interest rates quite low. An increasingly large debt overhead fueled an asset-price inflation that Alan Greenspan celebrated as "wealth creation." Deregulated banks and other financial institutions packaged and sold mortgage loans to hedge funds, pension funds and other institutions. It seemed that a perpetual motion machine of financial wealth had been found. But it rested on the ability of the underlying "real" economy (production and consumption) to take on more and more debt and pay more and more interest.

The policies proposed by Republicans and Democrats alike treat strapped homeowners as deserving government aid only to the extent of enabling them to go pay the institutions that hold their mortgages. This fig leaf of humanitarian concern for debtors enables the government to provide public credit that ends up in the hands of the super-rich who own and manage the financial and property sector.

But one sees the dominant attitude in the vindictive rhetoric used by Sen. John McCain toward debtors he deems "undeserving" of government aid. He blames insolvent homebuyers for causing the problem for failing to calculate how deeply their adjustable-rate mortgages (ARMS) would eat into their stagnant disposable income or to anticipate how sharply property taxes, heating and electricity prices would rise as the dollar plunges in global markets.

Congress has proposed setting aside millions of dollars to provide mortgage counseling--a sanctimonious blame-the-victim re-education program to convince insolvent debtors at least that they should feel guilty if they walk away from properties worth less than the debts attached to them, as financial professionals do.

The kind of re-education program that really is needed would provide an understanding of the dynamic that threatens to lead to debt peonage. On paper, two thirds of Americans have seen their net worth grow mainly from the rising price of their homes--or more to the point, their land ("location, location, location," magnified by the failure of property taxes to keep up with market prices). As long as mortgage lending was pushing up prices more rapidly than debt was growing all was fine. At the Federal Reserve, Mr. Greenspan took credit for orchestrating this "wealth creation." It was a euphemism for asset-price inflation and debt creation.

It is a far cry from tangible capital formation. Instead of raising labor productivity and living standards, it is a purely mathematical dynamic that governments cannot rescue in the end. It is folly even to try to do so. Yet in March, Sec. Paulson mobilized the credit-creating power of the government's financial and housing agencies to support the price of mortgage securities--and the land valuations that back them. The aim was not to help strapped homeowners but to save creditors who imagined that they could get rich while most of the economy was being driven into debt peonage.

Given this perverse financial plan, it is irresistible not to finish with how Franklin Roosevelt addressed the spirit of today's proposed reforms:

These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power. In vain they seek to hide behind the flag and the Constitution. In their blindness they forget what the flag and the Constitution stand for. Now, as always, they stand for democracy, not tyranny; for freedom, not subjection; and against a dictatorship by mob rule and the over-privileged alike.

Today's financial sector would turn this rhetoric of economic democracy on its head. This raises the following question: If FDR were alive and running today, would Hillary and others denounce him as an off-the-wall radical? Would he be out of touch with today's voters? What would they say about his anger? How far would a presidential candidate get who announced at his Inauguration, as Roosevelt did on March 4, 1933, "The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit."

So let's start by discarding the inane propaganda about unmanaged (that is, deregulated) "free" economies, the faith-based belief that self-regulating economic systems exist that must not be "interfered with" by government bureaucrats, formerly known as regulatory agencies, attorneys general and state prosecutors, Congressional oversight committees and what remains of New Deal agencies. This anti-government, anti-regulatory propaganda has been pushed for decades so that public agencies and Congress, supposed to act as representatives of the people, remain only passive spectators to an economy left in private hands for financial profit.

The reality is that all economies are managed, either by the private sector or by government--usually by a combination of the two. Any successful economy engages in forward planning, and any well-balanced economy shapes how "the market" operates. Adam Smith's Wealth of Nations was all about how wise governments should shape--and tax--their markets. America's present-day economic system didn't evolve through natural forces, much less by divine intervention. Its industrial takeoff was subsidized by protective tariffs, internal improvements--that is, public infrastructure spending--and increasingly progressive taxation.

And conversely, the spate of tax laws, fiscal giveaways and Federal Reserve policies that helped inflate the real estate bubble since 2001 were man-made--and shaped specifically by real estate lobbyists and financial promoters. FDR fought the battle against high finance decades ago, explaining:

The royalists of the economic order have conceded that political freedom was the business of the government, but they have maintained that economic slavery was nobody's business. They granted that the government could protect the citizen in his right to vote, but they denied that the government could do anything to protect the citizen in his right to work and his right to live.

This is the dimension missing in today's election campaign. But is not democracy economic as well as political?

Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world's first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich's Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

Fed takes "rare path" to aid Bear Stearns

Assocated Press Mar 14, 2008
Editor CE- This story tells you the "FED" is lending billions to a giant stock broker that speculated and lost on the same sham mortgages it sold to others by the billions. Furthermore, the FED gets around its own rule (congress can not enforce it) by allowing a giant bank to act as a risk free front for the broker. Does this not sound like "money laundering?" But more important, no one bothers to ask where the FED gets all these billions it is loaning to banks and brokers in order to make Wall Street look healthy? The answer: you are paying every dime of it; there is no free dinner at the time-sharing pitch. Pharisee Watch is working on an explanation designed for your12-year old kids because they are the ones who will have to pay back this debt. "Senior Federal Reserve staffers said the arrangement allows JP Morgan Chase to borrow from the Fed's discount window and put up collateral from Bear Stearns to back up the loans. JP Morgan, a bank, has access to the discount window to obtain direct loans from the Fed, but Bear Stearns, an investment house, does not.... While JP Morgan is serving as a conduit for the loans, the Fed and not JP Morgan will bear the risk if the loans are not repaid, officials said.

Mathew Maavak: We are in a Bad Fix

WE ARE IN A BAD FIX

By Mathew Maavak

This is a planet in denial. While the existential question gets a red hot "apocalypse now" for an answer, our stock markets seem to have regained paradise lost.

We are witnessing nothing less than history's first confluence of unsustainable "peaks."

Perhaps, we are incapable of piecing them all, for when crude oil reached an all-time intra-day high of $84.10 per barrel on Sept 20, its entitlement to a front pager screamer was conceded to the tale of a few thousand empty -- or emptying -- American homes.

It was like the Butterfly Effect, with a twist. The flapping rooftops of confiscated homes were now whipping up an economic tsunami worldwide.

Here is how it works.

US mortgage lenders, voracious as ever for "more," had extended loans to the default-income group, who, were in turn hit by bad economic management. Credit card issuers followed suit to bloat consumer fantasies, and banks tightened the noose with additional loans for cars, tuition and businesses.

In the world of finance, debt is ironically regarded as an "asset." Think of the rock-solid house that can be repossessed in the event of a default.

Debts, with the outward promise of a steady cash flow, are regularly pooled, "securitized" and converted into a bewildering array of financial products along an upward chain, where, they are hawked off by fund managers to the global market

This money buys up commodities, stocks, and yes, more "securities and derivatives," along with junk bonds and blue chips.

It was easy come, easy go, wherever the money takes you...a 24/7 electronic casino...a Las Vegas without borders.

London bankers were toasting to the dawn of "the haves and the have yachts" at cocktail parties where sauvé qui peut was the vintage.

One of the greatest scams in recent memory was unfolding, exposing a pyramid scheme of epic proportions.

When this reached the point of metastasis, stock markets began to collapse.

The bottom feeders could not pay up anymore. Even the middle class were finding it difficult to pass the buck upwards.

This is called a liquidity crisis, and it happens when the laws of gravity finally exert a pull on the cash flow.

Still the champagne flowed. Lip-smacking advertorials continued to gush over "securities," "derivatives," and "comprehensive financial suites," set in a Jacuzzi lilting to Ponzi's version of "money for nothing and chicks for free."

The pyramids may come crashing down, but the missing capstones are free to roam, investing in gold here, financial products there and junk bonds everywhere.

To avert a panic run though, central banks worldwide pumped $400 billion to maintain liquidity's equilibrium.

Stock markets were no longer in the bearish or bullish mode; rather they were cancroidal, allowing fund managers to sidewheel from one market to another in search of profits, suckers, and a subtle pullout before the big bang.

It was the dawn of the crab, of cancer in stock market terminology, if one was needed. Suspicions were mounting. European banks were facing insolvency.

For three days beginning Sept. 14, savers across the United Kingdom removed £2 billion ($4 billion) from Northern Rock, Britain's fifth largest lender. The Bank of England had to step in to guarantee all deposits in all banks – a move with little or no precedence.

However, the banks were not convinced either. Inter-bank lending, which profitably cycled cash from one bank to another as demand dictated, was now deemed an inter-bank debt trap. Available cash was hoarded up.

The Bank of England's cash auction of £10bn -- at a rate of 6.75% over three-months -- has been shunned for the third consecutive week.

Either the "have yachts" have sailed away, or banks may actually find it difficult to repay the Bank of England.

Worldwide, the full weight of the "asset-backed" collateralized debt obligations (CDOs) and structured investment vehicles (SIVs) may run into more than the $400 billion which central banks coughed up to keep the system afloat.

CDOs and SIVs are the sleek-sounding trillion-dollar apexes built on loans taken from simple homeowners.

Banks are still tallying what is real and redeemable, and what was created from, and whirling in thin air. Their best bet now is for a deux ex machina.

Bull in the China Shop

The biggest economic success story of our times was the product of Western consumerism. It created a real supply and demand situation, which forced the relocation of factories to the Third World of cheap labor.

China was the champion recipient. Demand for toys, screws, machinery, computers and cellphones could never ebb, whether it came leaded or unleaded. Beijing's policymakers decided that the perennial flow of greenbacks demanded a domestic infrastructural revolution dictated by the export market -- a first in history if there was one.

Factories, coal-fired plants, superhighways, skyscrapers were springing up at breakneck speed to fulfill the export craze. Excessive pollution and the plight of "unregistered" migrant workers from rural China mattered little.

What mattered were prestige, kickbacks and $1.2tr in hard currency-based reserves. It did not matter that China's domestic consumption vis a vis its GDP was actually decreasing; it was more a matter of consumer opiates, of who was boss in the center of the universe.

It did not matter that Chinese cities were shrouded in toxic gray, where "only 1 percent of the country's 560 million city dwellers breathe air considered safe by the European Union." [1]

The Chinese may cough but the "days when the world caught a cold whenever Uncle Sam sneezed was over." Or so it seemed.

Uncle Sam sneezed.

Global finance began hemorrhaging, and it had to be resuscitated through an intravenous flow of taxpayer money.

Western consumers finally realized that girths had to be tightened, and what better way than to curb spending, and let a market correction take place in the import sector.

An entire supply chain leading to China's factories are in danger of folding up. Mineral resources from Africa, semiconductor plants in Malaysia, raw textile products elsewhere, now face acute market uncertainty.

China is in a bad fix. However, this is not deterring factories from coming online next year to meet the projected "global demand." If Western consumers are scaling down their purchases, Africans are not in a position to be the replacement buyers, and without a market, they will not be able to sell their raw products either.

In such circumstances, moods can shift. When

"Beijing rolled out the red carpet for more than 40 African heads of state last November, billboards depicting Africans clad in leopard skin underwear, and an indigenous man from Papua New Guinea, plastered the city." [2]

It is no wonder that China's list of "allies" is getting shorter by the day.

Events in Myanmar are not proving helpful. China enjoys a near monopoly over Myanmar's estimated 2.46 trillion cubic meters of gas and 3.2 billion barrels of crude oil. Beijing had plans to develop two parallel oil and gas pipelines stretching 2,380-km to link the deepwater port of Sittwe to Kunming, in the Chinese province of Yunnan. Upon completion, a good portion of Middle Eastern oil and gas is expected to bypass the Straits of Malacca.

The quid pro quo was arms supply and support at the UN for Myanmar's military junta. Any new government might negate all existing deals, and pull Yangon into the US orbit. This is a timely revolution from Washington's perspective.

North Korea too is seeking rapprochement. There is enough operational space now to tackle Tehran, Damascus and the Hezbollah.

China can of course play the spoiler by providing arms to these regimes via a proxy. It is still a bad idea as the Israelis are just itching for war.

The IAF recently destroyed a Syrian installation that was purportedly an embryonic nuclear facility, but may well turn out to be a Kolchuga-type passive radar system, ideal for downing B2 stealth bombers. Coincidentally, the Russians have pledged to upgrade Syrian radar defenses after the attack.

If a wider conflagration breaks out in the Middle East, there will be no oil flowing from the Straits of Hormuz to China, either through Sitte, or through the Straits of Malacca.

The best option for Beijing will be to lock its oil and gas grid to the Russian Far East at a breakneck speed, and clean up some level of air pollution in time for the 2008 Olympics.

If an all-out war in the Middle East is our worst nightmare, think of the following unfolding crises...

The Peak Crises and its plural

Peak Oil: Fossil fuels, compressed and formed over aeons in subterranean geological layers are now releasing the telltale sibilant whispers of a punctured gas tank –- low as it was on petrol in the first place. With crude oil hovering above $80 per barrel, the various subsidies built into national economies are bound to burst at the seams, and precipitate price increases for basic necessities.

There is however a unique solution -- falling consumer demand worldwide. That would crimp industrial demand for fossil fuel. It is no wonder oil majors were reluctant to build new refineries when profits seemed guaranteed in the era of "peak oil." This day would surely come!

Peak oil is also tied to the current dollar crises. With the US dollar dipping against other major currencies, crude oil should come cheaper for Washington.

Oil and other commodities are traded in dollars, and dollar-denominated assets outnumber assets weighed in other currencies. Beijing can dump its hundreds of billions in dollar reserves for euros, only to trade them back into dollars to buy crude oil, gold and other assets.

The dollar blackmail will not work, especially with the US Army entrenched in the oil-rich Middle East.

Doomsday theorists are however predicting another Great Depression ahead, where the value of the dollar may mean little in the event of a global financial meltdown.

If this occurs, a global depression will have to deal with the following phenomena that was absent in the 30s.

Peak Urbanization: More than half of the world's population will live in urban areas in just... a few months, according to a United Nations Population Fund report. That translates to 3.3 billion people in an urban concentration camp of shantytowns and high-rise pigeonholes.

Children are growing up in a peculiarly boxed-in environment, removed from the soil that births their identity. They do not wake up to the sound of a crowing rooster, which is nature's way of sowing repentance and a turning of mindsets outside the conventional thinking box.

They wake up to beastly clangor instead. It is either the alarm clock or the barking dog, installed as "pets" to yelp any perceived intruder during the morning rush hour. The urban jungle is an industrialized Ziggurat, which pecks out a hierarchy from childhood. The ones right at the bottom will be the ones shouldering more concrete, or the biggest debt burden.

Close human proximity also leads to petty competitiveness and conflict. That is why "civilization" is held at gunpoint; by the police, by the army and by "treaties."

The urban life is delicate and vulnerable to all sorts of hazards, from plagues to a breakdown in the utilities, communications and transportation services. And political upheavals. A disaster will grind down traffic to a gridlock, far from the escapist countryside.

What if an energy warfare broke out? What if a global depression hits us? Can three billion people grow a patch of greens on their balconies?

When it comes to greens, the outlook is not at all verdant...

Peak Grain: Global grain stockpiles are down to their tightest levels in three decades after two years of unusual weather patterns. Heatwaves have wilted crops in the granaries of the world while floods and other environmental scourges have devastated some of the poorer "self-sustaining" regions.

Global wheat stockpiles will fall to a 34-year low by June 2008, according to the International Grains Council. U.S. stockpiles will fall to lowest level since 1951-52. Wheat futures in Chicago reached $9.3925 a bushel late September when major supplier Ukraine slashed exports.

The price of a bushel has more than doubled in the past year.

The bushel of woes includes rice, barley, soybeans, sorghum, oats and lentils as well, and they are all sagging under record prices. The grapes of wrath have gone on to stalk eggs, cheese, milk, meat and the a la carte menu.

There may come a point when the industrial food chain has little choice but to pass the rising costs to consumers in a dramatic fashion.

Creeping upticks in the price of milk and bread are turning Europeans livid. Milk is now dubbed as the "new white gold."

It is not just bad weather to blame. Rising demand from China is pushing up prices, despite the fact that only half of its urban population has basic health insurance. Tragically, processed food re-exported through Beijing's food chain is causing a global health nightmare.

But why pick on China? The current biodiesel craze is inducing farms to purpose-plant their crops for the profitable bioenergy industry, according to the Hamburg-based Oil World.

"It is high time to realise that the world community is approaching a food crisis in 2008 unless usage of agricultural products forwat biofuels is curbed or ideal weather conditions and sharply higher crop yields are achieved in 2008," it added

Bad news gets worse.

Peak Water: There is not enough freshwater around to sustain the planet's inland ecosystem and its human population. Rivers that help supply drinking water are laden with toxic industrial wastes. Population growth is already straining the capacities of water treatment plants worldwide while desalination plants remain the prerogative of wealthy nations.

According to the Pacific Institute: "Over 1 billion people don't have access to clean drinking water; more than 2 billion lack access to adequate sanitation; and millions die every year due to preventable water-related diseases. Water resources around the globe are threatened by climate change, misuse, and pollution." It estimates that "over 34 million people might perish in the next 20 years fromL water-related disease -- even if the United Nations 'Millennium Development Goals,' which aim to cut the proportion of those without safe access by half, are met." [3]

Lots of water will be diverted to industries and agriculture, or the highest bidder as privatization of water supply gains currency. In some regions, the situation is so acute that water diversion in one country may precipitate conflict with a neighbor. As early as 1974, Iraq reportedly mobilized its army to target Syria's al-Thawra dam on the Euphrates. Israel has cast its own eyes on Lebanon's Litani River.

According to Former UN Secretary General Boutros Boutros-Ghali, "The next war in the Near (Middle) East will not be about politics, but over water."

If this watery grave is not enough, think of the next one...

Peak Fish: There is some fishy business going on in our oceans. Like oil and water, we are trawling deeper and deeper for our fish supplies. Such piscatorial adventures have led to a global decline in fish stocks. "Ecologists worry that entire fisheries will collapse as... 'junk fish' are used up." Aquaculture, which substitutes marine catches to an extent, comes with its own environmental problems. [4]

The Times of London paints a similar gloomy scenario. According to some experts, 90% of fish around British waters "will disappear within 20 years" in the absence of an immediate intervention.

With 75% of fish stocks fully exploited, declining numbers across species worldwide hint at a collapse point by 2048, beyond which replenishment is not possible.

Peak Fish "comes at a time when their nutritional value is recognized more than ever."

"World Health Organisation officials recommend a weekly intake of 200 to 300 grams of fish each week but today's catches can only just meet this target. Since the 1950s an estimated 60 per cent of stocks in British waters have collapsed..."

The Times invokes the paradox that "measures proposed to limit fishing to a sustainable level will only place a cap on the nutritional flow for the coming decades." [5]

The full circle

What began as sub-prime woes in the US housing sector may ripple into something we cannot yet imagine. Will there be a severe global recession, or worse? If wars are yet contained, bidding wars will yet emerge over wheat, water, fish, medicines and oil. What will the future hold in this ecology of crises?

Here is a refrain from the book of Hosea (4:3):

Because of this the land mourns,
and all who live in it waste away;
the beasts of the field and the birds of the air
and the fish of the sea are dying.

Kuala Lumpur, Oct 9, 2007

Copyright 2007@Mathew Maavak

Reference:

[1] As China Roars, Pollution Reaches Deadly Extremes, NYT, Aug 26, 2007

[2] Beijing police round up and beat African expats Guardian, September 26, 2007

[3] Global Water Crisis Pacific Institute.

[4] Water shortages will leave world in dire straits USA Today, 26th Jan 2003

[5] Fish will vanish from British waters in 20 years, says author Times Online, Sept 15, 2007

Most of Mathew Maavak's commentaries can be read here or visit the Panoptic World homepage.