- On October 28, the Financial Times' columnist Martin
Wolf wrote: "Preventing a global slump must be the priority."
He cited Nouriel Roubini back in February listing "twelve steps to
financial disaster," all of which the US took and dragged the whole
world down with it.
- Priority one is to rescue it and avoid a possible depression.
"Given the near-disintegration of the western world's banking system,
the flight to safe assets, the tightening of credit to the real economy,
collapsing equity prices, turmoil on currency markets, continued steep
declines in house prices, rapid withdrawal of funds from hedge funds and
ongoing collapse of the so-called "shadow banking system." More
worrisome is that "next year could be far worse" so what does
Wolf think should be done?
- Nothing to purge past excesses or everything possible
to prevent the worst of all possible outcomes. Wolf calls the former path
"a recipe for xenophobia, nationalism and revolution" and in
combination like "let(ting) a city burn in order to punish someone
who smoked in bed." In short, madness at a time world economies
need huge amounts of proactive remedies:
- -- to prevent deflation;
- -- help the private sector delever with liberal amounts
of government debt;
- -- sustain lending inside and among economies; if banks
won't do it, central banks must;
- -- aid hard-hit emerging economies and keep them afloat;
- -- rebuild domestic demand with substantial fiscal measures.
- At risk is the "legitimacy of the open market economy
itself." It's wobbly and on life support because of what Roubini
spotted early on. All having occurred or now happening. His 12-stage "systemic
financial meltdown" scenario:
- (1) the worst ever US housing recession with prices falling
up to 30% from their peak and matching their Great Depression decline;
most recently Roubini thinks a 40% drop is likely with a market bottom
still way off;
- (2) the subprime disaster causing hundreds of billions
in losses and throwing millions of homeowners into foreclosure;
- (3) a sharp increase in other defaults - credit cards,
auto and student loans, and other borrowing; add bank losses to the mix
(including from their securitized assets), and we've got a severe credit
- (4) monoline losses will mount more severely than expected
and other writedowns will follow;
- (5) commercial real estate will be impacted; the housing
crisis will cause a bust in non-residential construction;
- (6) large regional or national banks may go bankrupt
and worsen the already severe credit crunch;
- (7) losses from large leveraged loans will impair banks'
ability to syndicate and securitize them; today the market is dead; earlier
losses froze it up; these assets were then stuck on bank balance sheets
at well below par values and are headed lower; they're still there at
undisclosed valuations most likely scraping bottom because no buyer will
touch them above fire sale prices and most often not even those;
- (8) a massive wave of corporate defaults will accompany
a severe recession;
- (9) the shadow banking system (hedge funds and the like)
is heading for serious trouble;
- (10) world stock markets will price in a severe recession;
at the time, Roubini saw the S & P 500 falling about 28% or around
the average decline for US recessions; it fared much worse, and he now
sees a far lower valuation ahead;
- (11) the worsening credit crunch will cause liquidity
to dry up; it will require massive central bank intervention; and
- (12) "a vicious circle of losses, capital reduction,
credit contraction, forced liquidation and fire sales of assets at below
fundamental prices will ensue leading to a cascading cycle of losses
and further credit contraction." The massive credit crunch will spread
around the world. Monetary and fiscal measures won't prevent a systemic
financial meltdown "as credit and insolvency problems trump illiquidity"
ones. As a result, US and global financials will experience their most
severe crisis in the last quarter of a century."
- Roubini now sees the greatest one since the 1930s. Grudgingly,
only small numbers of economists agree with him, and the majority think
the worst is past and 2009 will bring recovery. Barrons economics editor,
Gene Epstein, for one. He asks: "How long will the slump linger?
(It's) already under way. But hopefully, it won't extend into 2009."
An astonishing assessment at a time virtually all macro data point to
hard times in the new year, and the big unknown is how hard and protracted.
- It's the reason for unprecedented global amounts of monetary
stimulus with limited effect so far. It's also why Congress may add hundreds
of billions more in fiscal medicine on top of an orgy of past and upcoming
- The Treasury already announced $550 billion more in Q
4. An amount greater than the announced FY 2008 $455 billion fiscal deficit.
In addition, Goldman Sachs now believes Washington will have to borrow
$2 trillion to finance an $850 billion federal deficit, buy $500 billion
in toxic assets, and roll over $561 billion in maturing Treasury securities.
Add to it unknown factors and another trillion may be needed.
- For loans, investments and commitments, Washington already
- -- $700 billion for TARP;
- -- another $150 billion tacked on to EESA funding for
pork barrel spending;
- -- $200 billion in the Fannie and Freddie takeover, and
Fannie now says the amount is inadequate after reporting a record $29
billion loss and its difficulty in issuing and refinancing debt; in a
November 10 SEC filing it stated: "This commitment may not be sufficient
to keep us in solvent condition or from being placed into (effective bankruptcy)
receivership" if further "substantial" losses occur or
if the company can't sell unsecured debt;
- -- $25 billion to the auto companies and another $50
billion more they may get; the industry is effectively insolvent; on November
11, General Motors stock hit a 65 year low and is down over 90% this
year; the nation's once largest company is a mere shadow of its former
self and won't survive without a bailout; the same holds for Ford and
- -- $29 billion for Bear Stearns;
- -- $85 billion to AIG; upped to $129 billion and again
to $150 billion after the company reported a $25 billion Q 3 loss; add
$15 billion more for its commercial paper with no end of this looting
in sight - to a single company, albeit a big one;
- -- $144 billion to buy mortgage-backed securities, in
part included above;
- -- $300 billion for the Federal Housing Administration
Rescue Bill for FHA to insure up to that amount in new 30-year fixed-rate
mortgages for at-risk borrowers in owner-occupied homes if their lenders
agree to write down loan balances to 90% of the homes' current appraised
- -- $87 billion to JP Morgan Chase for financing bad Lehman
- -- $200 billion in loans to banks under the Fed's Term
Auction Facility (TAF);
- -- $50 billion to support commercial paper held in money
market funds; $1.3 trillion worth qualifies so a far greater liability
may be incurred;
- -- $620 billion in currency swaps with developed nations
- central banks in Western Europe (the ECB, UK, Denmark, and Switzerland),
Japan, Canada, and Australia;
- -- another $120 billion for emerging markets - to Brazil,
Mexico, South Korea and Singapore; and
- -- potential great liabilities to cover the FDIC's expanded
bank deposit insurance up to $250,000 per account.
- These numbers are staggering in size and may go much
higher. A trillion here, a trillion there, and pretty soon we're talking
about real money, but if enough of it swirls around, today's deflation
may one day become severe inflation.
- Two Views on Potential Depression
- The dreaded "D" word. Unmentioned and unconsidered
in the mainstream but not off the table given the severity of today's
crisis. What Michel Chossudovsky isn't alone calling "the most serious
(one) in World history." He says the Treasury "bailout"
isn't a solution. Just the opposite - "it is the cause of further
collapse. It triggers an unprecedented concentration of wealth, which
in turn contributes to widening economic and social inequities both within
and between nations" - on top of how inequitable they are already.
- President of the London-based Independent Strategy consultancy
group, David Roche, disagrees in a November 8 Wall Street Journal article
headlined "How Far Will Deleveraging Go?" He acknowledges the
severity of the crisis and asks: "Will this lead to depression? And,
if not, how long and deep will the recession be?" He examines the
extent of deleveraging for the answer in the following analysis.
- He says the amount of a bank's "risk-free"
or "tier-one" capital is a "good reverse indicator of how
leveraged it is." Financial institutions globally had about $5 trillion
of it at the credit crisis' onset. For America and the EU, it was $3.3
trillion "supporting a loan book of some $43 trillion. Then came
- He gives three answers to the amount they lost:
- -- using mark-to-market rules (what an asset would bring
if sold today), an estimated 85% of their tier-one capital was lost; but
this assumes selling today at fire-sale prices which largely isn't happening;
- -- using "economic value," or the present value
of future cash flows (assuming there are any), current losses are about
half their mark-to-market valuations; and
- -- if only so far recognized losses are considered, the
amount taken is around $700 billion.
- Despite these losses, loan portfolios have grown during
the crisis. Shrinkage has only occurred for investment banks, prime brokers
and hedge funds, Roche believes. All bank losses have been offset by
"$420 billion from private sources" and another "$250 billion
- At the onset of the crisis, US and EU leverage was about
13 times tier-one capital. Under mark-to-market rules, it's now more than
double that. "But using economic value or declared losses reveals
that leverage is now back to what it was before the crisis began"
because of capital injections. Nonetheless, conditions remain dire, and
growth isn't ready to resume. For three reasons, according to Roche:
- -- financial sector leverage was too high in the first
place, which is why the credit bubble collapsed;
- -- the world economy uses $4 to $5 of credit for every
$1 of GDP growth; a profligate amount; even at half that amount, between
a 10 - 15% rate of credit expansion is needed to achieve real GDP growth
of 2 - 3%; recapitalization amounts so far are only enough to maintain
existing credit assets, not expand them; so the crisis continues; and
- -- current bank-asset losses don't include allowances
for future ones - from recession and its fallout; Roche estimates they'll
be another $900 billion for a total $1.7 trillion during the whole crisis
period; others estimate a much higher figure; if Roche is right, these
losses will deplete new capital infusions and reduce US and EU tier-one
capital back to $2.3 trillion at a leverage ratio of over 18 times.
- Roche believes leverage and credit will shrink even with
further capital injections. They're "temporary, expensive, and impose
constraints on shareholders and management." It makes them unattractive.
- In addition, banks need to reduce their "customer
funding gap" and focus on "deposit rather than loan growth."
It's a slow process during recession and can only be achieved "by
reducing assets and liabilities" which means "cutting credit
on the asset side of the balance sheet." And do it during a risk
aversion period in wholesale and longer-term debt markets. It makes the
task a lot harder at a time regulation is coming that "will reduce
bank leverage to well below what it was before the crisis began."
- Bottom line: if further credit losses reduce US and EU
tier-one bank capital to where it was before crisis-induced infusions,
financial sector credit "would have to shrink 37% just to keep leverage
constant at pre-crisis levels," and it it happens we're talking about
- But governments are now "part of bank management
so may limit credit losses to less than 10%, Roche believes, but a a cost
- more capital injections, further longer-term liability guarantees,
tolerating higher leverage in "socialized banks," plus more than
a little "dirigisme," or directing banks to lend. Under this
scenario, Roche thinks global depression will be avoided - but "at
the high long-term cost of a socialized financial system. And it still
heralds a very long, gray, global recession as the world learns to use
less capital to meet its needs."
- Financial expert and investor safety advocate Martin
Weiss disagrees with Roche and sees depression coming. He's not alone,
and he's said it repeatedly, including in his latest commentary titled
"Why Washington Cannot Prevent Depression." He cites what he
calls "dire reality. Washington is not God. It cannot save the world.
It cannot prevent the next depression," and he gives five reasons
- (1) The Debt Crisis
- It's far too big to control. Based on Fed Flow of Funds
figures, "there are now $52 trillion in interest-bearing debts in
the US." According to US Government Accountability Office estimates,
add another $60 trillion in contingency debts and obligations - for Social
Security, Medicare, Medicaid, and other pensions. In addition, the Bank
of International Settlements (BIS) earlier cited a staggering global debt
total, including derivatives, of $1 quadrillion, or 1000 trillion. In
a separate report, it says $596 trillion, but even this number is unimaginable
- So far, reckless government outlays amount only to a
fraction of this amount - around $2.7 trillion. Weiss says the numbers
aren't directly comparable, but "to get a sense of the magnitude
of the problem, compare the size of the debts and (derivatives) bets
outstanding" to the tiny amount injected to combat it. It's miniscule
and may fall way short of being effective. Weiss is blunt in calling "the
debt build-up in the US today far greater than it was on the eve of Great
Depression I." Pre-1930, it was between 150 - 160% of GDP. Today,
excluding derivatives, it's nearly 350% or more than double the earlier.
Include them, and debt levels go off the charts. Weiss concludes: "government
bailouts are too little, too late to end this crisis."
- (2) Bailout Costs Are Too Great to Be Financed
- Given the dire economy, higher taxes and expenditure
cuts are off the table. Going forward, "the government will try to
finance its folly largely by borrowing the money." The next tranche
- $550 billion in Q 4 and $2 trillion in total, or four times the size
of the entire official FY 2008 deficit. As a result, a tsunami of new
Treasury supply is coming. It will crowd out private borrowers and pressure
interest rates higher when lower ones are desperately needed.
- (3) Supply Can't Stimulate Lending and/or Borrowing
- Washington wants households to borrow and spend more,
but they're doing the opposite. Banks are also urged to lend, dispense
more access to credit cards, and provide capital for troubled businesses.
They refuse and are using their handouts for acquisitions, bonuses and
dividends. "No matter what the government says, it is the natural
survival instinct of billions of people and businesses around the world
that will determine the outcome" of today's crisis: "Depression
- (4) Powerful Debt and Deflation Cycles
- Debt can continue accumulating for years as long as borrowers
have enough income to repay it. Deflation (or disinflation) can increase
the affordability of homes and other major purchases. But when debt and
deflation converge, depression is inevitable. It happened in the 1930s,
and (in different form) it's happening today. "We are witnessing
powerful vicious cycles in which deflation brings down debts and debts
help accelerate the deflation."
- For example:
- -- widespread mortgage delinquencies and foreclosures
trigger massive real estate liquidations followed by severe price declines,
and more delinquencies and defaults;
- -- fear of bankruptcies causes equities, bonds, commodities
and virtually every type asset to fall; more bankruptcies result the
way today they threaten US auto makers; and
- -- the same downward spiral affects households, small
and mid-sized businesses, city and state governments, and entire countries;
spending is slashed; workers laid off; assets sold, and revenues lost
precipitating more of the same.
- "In every sector of the economy and every corner
of the globe, debt defaults are causing deflation; and deflation is causing
debt defaults. No government can stop this powerful vicious cycle. It
has to play itself out."
- (5) The Ultimate Power of Markets
- Why can't governments simply print enough money to buy
up excess debt and inflate? Because governments need buyers for their
bonds and to finance all new planned spending and deficits. "The
power of the market is stronger than any politician or government bureaucrat.
It is more powerful than any law. It is even more powerful than the gold
- Trust is needed to raise money. It's not built by "run(ning)
the printing presses or destroy(ing) your money." Instead, deflation
and depression must run its course. "It's preposterous to believe
that Washington can save every failing individual, company, country and
government on this planet."
- It can't stop investors from dumping their assets or
reverse decades of financial excesses. "It cannot win the battle
against depression. It cannot stop the Dow or S & P from losing half
their value from current levels, if not more. It cannot stop the collapse
in real estate, commodities, and corporate bonds." It can't convince
people to use their cash to invest or do anything they wish not to do.
It can only reap the whirlwind.
- Two Other Views on the Dire State of Things
- One from Russian economist Mikhail Khazin in a recent
(Russian web site) kp.ru/daily interview. He predicted the current crisis
early on, but his views were largely dismissed. No longer, and today
they're more dire than before.
- In 2000, he wrote an Ekspert magazine article titled:
"Is the US Digging for an Apocalypse?" At the time, he saw declining
demand destroying 25% of the US economy. Today it's maybe one-third, he
believes. Why? Because of an early 1980s policy "to stimulate demand
through state support....(by) switch(ing) on the printing press"
and building debt at a rate way above GDP growth. He mentioned 8 - 10%
in an economy growing at around 2 - 3% or a maximum 4%.
- It let America "create a very high standard of living
by stimulating consumer demand....But it's impossible to live forever
in debt. Household debt has now surpassed the national economy - more
than $14 trillion. Now it's time to pay up. Of course, Wall Street tried
to postpone this collapse....but this was just a gasp for air before an
inevitable death....Whatever decision Wall Street takes right now, the
demand is going to fall."
- It points to "an uncontrollable increase in unemployment,
a horrible depression, a sharp increase in the effect of social services
on the budget....Now, the US is jumping all over the place doing everything
it can to rescue this fraction of the economy (the portion Khazin thinks
will evaporate). The government is stimulating banks and manufacturing....But
regardless, in 2 - 3 years, the US will face a crisis similar to the Great
- Harvard president Drew Faust is also alarmed in a recent
letter to alumni and friends. She cites the "current global financial
situation and its effect on the University." She mentions "extraordinary
turbulence, the most serious (uncertainty and financial distress) in decades
(as part of) our new economic reality."
- Despite over three and a half centuries of surviving
challenges, "Harvard is not invulnerable to the seismic financial
shocks in the larger world. Our own economic landscape has been significantly
altered. We will need to plan and act" accordingly.
- Her focus, of course, is on revenue and the school's
endowment. It provides income for over one-third of its operating budget,
now severely impacted by today's crisis. Despite past outperformance in
turbulent times, Harvard fared poorly in its current fiscal year ending
June 2008 (before the worst of today's crisis struck). In FY 2007, an
impressive 23% return was registered, and it lifted the total endowment
to $34.9 billion. In FY 2008, it fell an estimated 30% or a $10.5 billion
hit. Even mighty Harvard is impacted enough to "need to be prepared
to absorb unprecedented endowment losses" in the current environment.
Drew Faust wants help, of course, but clearly she's worried to the point
of alarm at the gravest financial time in our lives.
- Credit Normalization Is Stuck in a Debt Trap
- It affects Harvard and world economies everywhere. Even
mighty America isn't immune from its impact. From having lived way beyond
our means for years. The chickens are now home to roost - big time.
- In spite of extraordinary liquidity injections globally,
risk markets remain paralyzed. Frozen. Uncertainty and turbulence continue,
and economies are reeling in distress. They're like buckets leaking more
out their bottoms than whatever flows in at their tops. Fed credit creation
is counterbalanced by deleveraging and collapsing balance sheets, and
there's no end to this in sight.
- True enough, unclogging has occurred in inter-bank and
money markets, but it hasn't freed up credit or its price for the vast
majority of borrowers. In addition, junk and investment grade bond spreads
have widened. Municipal bond yields have soared as their prices fell.
Some offer tax-free returns topping 6% compared to taxable 10-year Treasuries
under 4%. According to some analysts, they're screaming buys, and so
are high-grade corporate bonds that are much more attractive (and safer
at a time no financial asset is safe) than equities in the same companies,
and a big reason why stock prices are falling. But by no means the only
- The world pre-mid-2007, no longer exists. Risk is a dirty
word. Leverage is out the window, and asset-backed securities (ABSs),
collateralized debt obligations (ABSs), and securitization markets are
closed and padlocked. All the king's horses and all the king's men can't
reconstitute them. No amount of liquidity injections, rate-cutting, or
high-minded rhetoric will reinflate that air that's now leaving the bubble.
- Today's debt overhang is unmatched by a factor of more
than three to one over any previous period without including derivatives.
Add them, and it's unquantifiable in unchartered waters. Issue one for
policy makers is how to keep economies from crashing. How to create enough
new credit and get it flowing at a time lenders won't lend and borrowers
are so indebted they can't assume more if they could get it.
- Viable or not, the Fed will keep expanding its balance
sheet to never before imagined amounts, and the government will run even
greater multi-trillion dollar deficits. Amounts impossible to repay so
they never will be with dark forebodings of how that problem will be resolved.
It portends a very unpleasant future far worse than most now imagine.
It also suggests another vicious downward spiral as recession deepens,
and potential depression looms. The likes of which no one has experienced
in our lifetimes or wishes to. Today's bubble economy is unlike anything
ever in the past. Worse than all post-war excesses and what led to the
- Can the worst of all possible outcomes be avoided? It's
beyond this writer's ability to imagine. It's for the Fed, Treasury, GSEs
(government sponsored enterprises like Fannie, Freddie, Sallie, Ginnie,
etc.) and banks, if they're able and willing, to try. To create money,
get it flowing, inflate or die, but it already may be too late. Things
that can't go on forever, won't, and as writer Ellen Brown observes: "The
parasite has run out of its food source." The engine is now out of
- A Secret Revival Plan for the November 15 G-20 Summit
- According to Webster Tarpley (on Rense.com, 11/10/08),
a "British (and, of course, Washington) steered....confidential strategy
paper (aims) to impose (an IMF) dictatorship on the entire planet, wiping
out all hope of economic recovery, the modernization of the developing
countries, and national sovereignty" as well.
- It proposes the usual form of IMF orthodoxy - "austerity,
sacrifice, deregulation, privatization, union busting, wage reductions,
free trade, the race to the bottom, and prohibitions on advanced technologies."
Quite literally an agenda from hell. So outlandish that BRIC countries
are reportedly objecting - Brazil, Russia, India and China. China wants
policies of the type it may pursue in its just announced $586 fiscal stimulus
plan - for various internal needs like infrastructure. The IMF plan is
mirror opposite in its five points. To:
- (1) "require the credit rating agencies to be registered
and monitored and submit to rules of governance;
- (2) halt the principle of a convergence of accounting
standards and re-examine the application of the fair market value rule
in the financial field, so as to improve its coherence with the rules
of prudence and conservatism;
- (3) resolve that no market segment, territory, or financial
institution shall escape from a proportionate and adequate regulation,
or at the least, surveillance;
- (4) set up a code of conduct to avoid excessive risk-taking
in the financial industry, including in the area of compensation. Supervisors
will have to follow this code in evaluating the risk profiles of financial
- (5) entrust to the IMF the primary responsibility, along
with the FSF (Financial Stability Forum - Basel), to recommend the necessary
measures to restore confidence and stability.
- The IMF must be equipped with the essential resources
and suitable instruments to support countries in difficulty, and to exert
its role of macroeconomic surveillance to the fullest."
- Translation: This is a Washington-UK-IMF scheme to increase
their collective power at the expense of and to the detriment of the
civilized world. An attempt to suck more of its wealth to the top by extracting
it from all others.
- Economist Michael Hudson reports that 1% of the US population
owns 70% of its wealth, a huge increase over earlier periods. This plan
aims to increase it. To turn the US and world economies into banana republics.
To make its workers de facto serfs. To crush competition and empower corporate
giants. Mostly ones in America.
- To end any hope for progressive change at a time all
humanity craves it. To revive Chicago School fundamentalism when it's
totally discredited. To step back from a new direction that appears little
more than a pipe dream. To harden the old failed one and suck us deeper
into its quicksand.
- It's hoped enough nations will balk, render this scheme
dead on arrival, and consign it back to its hellish origins. The alternative
is a view of our future. One too disturbing to imagine. That no one should
tolerate and be willing to be disruptingly defiant enough to prevent.
- Stephen Lendman is a Research Associate of the Center
for Research on Globalization. He lives in Chicago and can be reached