- The myth has quickly taken hold that the global financial
crash was caused by bad mortgages. This has allowed rightwing hatemongers
to blame the meltdown on the "liberal" programs that encouraged
home ownership among a small percentage of lower-income people (a poisonous
canard that parts of the mainstream media have actually done a fairly
good job of knocking down), while "progressives" of
various stripes have denounced banks and other financial institutions for
pushing over-easy credit on people who couldn't really afford it.
-
- Unsustainable mortgages are a key factor in
the global crash, of course. And many people (most of them white, by the
way) did take out mortgages they would not be able to afford if the housing
bubble ever burst, which it has, most spectacularly. And yes, it is undeniable
that the financial services industry has been tempting people with easy
credit like schoolyard pushers flashing reefers.
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- All of this was bound to end badly, and did. But this
alone would not have been enough to threaten the destruction of the entire
global financial system, nor cause the blind, screaming panic that has
strangulated the financial markets, seized up the vital flow of money between
banks, and caused the "free" market-worshipping governments of
the Western world to carry out nationalizations and interventions that,
in sheer numbers, dwarf anything ever seen following a Communist revolution.
(As John Lancaster notes in the London Review of Books, the Bush Administration's
takeover of Fannie Mae and Fannie Mac alone was "was, by cash value,
the biggest nationalisation in the history of the world." And that
was just the beginning.)
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- What has struck mortal fear in the heart of markets and
governments is not bad mortgages, but the almost incomprehensibly huge
and complex market for "derivatives," based in part on mortgage
debt -- but also on a vast array of other sources that were "securitized,"
turned into tradable if ghostly commodities then sold off in a bewildering
variety of increasingly arcane forms. This was accompanied by the expansion
of yet another vast market in insurance mechanisms designed to protect
these derivatives -- mechanisms which themselves became "securitized."
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- At the same time, the financial services industry used
its paid bagmen in governments around the world to loosen almost all restrictions
not only on securitization and the trading of derivatives, but also on
the amount of debt that institutions could take on in order to play around
in these vastly expanded and deregulated markets. For example, as Lancaster points
out, UK's Barclays Bank had a debt-to-equity ratio of 63 to 1:
- Imagine that for a moment translated to your own finances,
so that you could stretch what you actually, unequivocally own to borrow
more than sixty times the amount. (I'd have an island. What about you?)
-
- The result of all this has been the construction of a
gargantuan house of cards, based on next to nothing, and left alone in
the shadow of building "perfect storm" of greed, deregulation
and political corruption.
-
- That storm has now struck. The house of cards has fallen
down, and revealed a hole of derivatives-based debt that could not be filled,
literally, by all the money in the world, much less by the mere trillions
that national governments are frantically throwing at it today.
-
- Yes, "mere" trillions. As Will Hutton
explains in the Observer:
-
- ...the dark heart of the global financial system [is]
the $55 trillion market in credit derivatives and, in particular, credit
default swaps, the mechanisms routinely used to insure banks against losses
on risky investments. This is a market more than twice the size of the
combined GDP of the US, Japan and the EU. Until it is cleaned
up and the toxic threat it poses is removed, the pandemic will continue.
Even nationalised banks, and the countries standing behind them, could
be overwhelmed by the scale of the losses now emerging.
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-
- Try to imagine that: a $55 trillion market now
at risk of complete destruction. Even the derivative debt owed by individual institutions
stands at nation-wrecking levels. For example, a single bank in Britain,
Barclays again, holds more than $2.4 trillion in credit default swaps,
the tradable "insurance" mechanism against securities default.
This is more than the entire GDP of Great Britain. If all this paper goes
bad, there are not enough assets in the entire country to pay it off. And
that's just one bank, in one country.
-
- Hutton gives the details:
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- This market in credit derivatives has grown explosively
over the last decade largely in response to the $10 trillion market in
securitised assets - the packaging up of income from a huge variety of
sources (office rents, port charges, mortgage payments, sport stadiums)
and its subsequent sale as a 'security' to be traded between banks.
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- Plainly, these securities are risky, so the markets invented
a system of insurance. A buyer of a securitised bond can purchase what
is in effect an insurance contract that will protect him or her against
default - a credit default swap (CDS). But unlike the comprehensive insurance
contract on your car which you have with one insurance company, these credit
default contracts can be freely bought and sold. Complex mathematical models
are continually assessing the risk and comparing it to market prices. If
the risk falls, the CDSs are cheap; if the risk rises - because, say, a
credit rating agency declares the issuing company is less solid - the price
rises. Hedge funds speculate in them wildly.
-
- Their purpose was a market solution to make securitisation
less risky; in fact, they make it more risky, as we are now witnessing.
The collapse of Lehman Brothers - the refusal to bail it out has had cataclysmic
consequences - means that it can no longer honour $110bn of bonds, nor
$440bn of CDSs it had written. On Friday, the dud contracts were auctioned,
with buyers paying a paltry eight cents for every dollar. Put another way,
there is now a $414bn hole which somebody holding these contracts has to
honour. And if your head is spinning now, add the three bust Icelandic
banks. They can no longer honour more than $50bn of bonds, nor a mind-boggling
$200bn of CDSs....
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- While every bank tries to pass the toxic parcel on to
somebody else, the system has to find the money. So will compensation for
the near valueless contracts and thus now uninsured debt ultimately be
made - and by whom? And because nobody knows - not the regulators, banks
or governments - who owns the swaps and whether they are credit-worthy,
nobody can answer the question. Maybe holders of insurance policies will
get the cash due to them, but will that weaken somebody else? The result
- panic.
-
- This is the ultra-dangerous downward vortex in which
the system is locked. It is why share prices are plummeting. As recession
deepens, there will be defaults on securitised bonds and the potential
collapse of more banks outside the G7 ring-fence. Nobody knows what proportion
of the $55 trillion of credit default contracts that have actually been
written will be honoured and who might bear losses running into trillions
of dollars.
-
- This is the beast in the dark that is haunting the feckless
leaders of the developed world: $55 trillion of unaccountable debt, and
no way of knowing how much of it is even now being flushed down the toilet,
taking the global economy with it.
-
- The massive interventions we are seeing might stabilize
the markets temporarily, or at least arrest their free fall long enough
to come up with some kind of massive restructuring of the global financial
system. Or they might not. For it is by no means certain that the wisdom,
and the political courage, to come up with a more viable system can be
found among the world's political leaders -- all of whom, as we noted
here the other day, have risen within the present system and, to one degree
or another, owe their own power and privilege to the "malefactors
of great wealth" and the extremist cult of market fundamentalism.
There is no indication anywhere that the circle of collusion and corruption
between governments and Big Money has even lessened, much less been broken,
by the economic catastrophe. All of the various bailout plans and "coordinated
actions" still have as their chief aim the preservation of the malefactors
in their current state of wealth, privilege and domination. As Jonathan
Schwarz notes:
-
- Still, U.S. elites will try to impose as much
of a structural adjustment as they can get away with, in order to make
the bottom 80% of America pay the price for the elites' spectacular
screw-ups. The Washington Post has already started writing about how the
current crisis demonstrates that we must cut Social Security. Look for
much more of this to come.
-
- The only slim hope we have for any genuine reform --
even an imperfect, conflicted, compromised reform, which is the only kind
we will ever have in this world, until the lion lies down with the lamb
-- is that the sheer scale of the real problem -- the $55 trillion
beast, the very real potential for the complete destruction of the global
economy, and the state power that depends upon it -- might force some politicians
to turn apostate, renounce the market cult, and bite the hands that have
fed them for so long.
-
- Absent this near-miraculous possibility, we will be left
with yet another rickety house of cards, slapped together on the fly --
largely at the malefactors' direction and for their benefit -- while the
beast gapes wide his ponderous jaws, and prepares to swallow us whole.
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- http://www.chris-floyd.com/component/content/article/3/1628-not-enough
- -money-in-the-world-the-real-monster-in-the-meltdown-closet.html
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