09-15-2009, 09:46 PM
HAPPY ANNIVERSARY FINANCIAL CRISIS:
IT’S NOT OVER YET
Danny Schechter
http://www.globalresearch.ca/index.php?context=va&aid=15211
The market meltdown that began in September 2007 was a 'slow-motion catastrophe', says finance journalist and author Danny Schechter.
New York, New York: Get out your party hats and strike up the band. We are about to celebrate the second anniversary of the GFC - the Global Financial Crisis.
No doubt the event will be marked by event-driven television programming and on the world's op-ed pages, even though this is a crisis that began long before most of the world found out about it.
Special report
The market meltdowns began in September 2007, but this has been a slow-motion catastrophe that started with the euphoria of financial bubbles that seemed to defy the laws of gravity by only rising.
When the markets were up, there were few naysayers.
Economist Brad Delong was one of the few reminding us that:
"Institutions and human psychology lead financial markets to bounce back and forth between exuberant greed and catatonic fear."
The housing bubble created in 2001 by a combination of low interest rates set by the Federal Reserve's Alan Greenspan, massive, predatory sub-prime lending by shadow lenders and financial institutions, and so-called market "innovation" in the form of exotic derivatives, securitization and deregulation all pushed profits in the financial services industry to new highs.
'Financial monster'
The consequences were largely ignored, as a process called financialization put more and more power in the hands of the economic architects on Wall Street.
New York University's Dr Nouriel Roubini was called "Dr Doom" for predicting the emergence of a "financial monster" that could not be sustained.
Roubini reasoned: "Combine an opaque and unregulated global financial system where moderate levels of leverage by individual investors pile up into leverage ratios of 100 plus; add to this toxic mix investments in the most uncertain, obscure, misrated, mispriced, complex, esoteric credit derivatives that no investor can properly price; then you have created a financial monster that eventually leads to uncertainty, panic, market seizure, liquidity crunch, credit crunch, systemic risk and economic hard landing."
What he and many others did not draw adequate attention to were the underlying structural problems in the US economy that led it to collapse.
Stephen Lendman of Gobal Research enumerated some of them:
- Soaring consumer debt;
- Record high federal budget and current account deficits;
- An off-the-chart national debt, far higher than the reported level;
- High and rising level of personal bankruptcies and mortgage loan defaults;
- An enormous government debt service obligation we are taxed to pay for;
- Loss of manufacturing and other high-paying jobs to low-wage countries;
- A secular declining economy, 84 per cent service-based and mostly composed of low-wage, low or no-benefit, non-unionised jobs;
- An unprecedented wealth gap disparity;
- Growing rates of poverty in the richest country in the world;
- A decline of essential social services
As the financial markets became more volatile, credit began to freeze, and an event outside the US signaled the deeper global crisis; customers were queuing outside London's Northern Rock bank demanding their money back.
Bank runs
Soon the Bank of England was pumping money in just one day after warning others, in the name of "moral hazard" rules, not to bail out lenders who had engaged in irresponsible practices.
A Wall Street insider told me: "A century ago, the depth of a banking crisis was measured by the length of the queue outside banks. These days, financial panics are more likely to be played out through heavy selling in share, bond or currency markets than old-fashioned bank runs."
The UK government was forced to rescue Northern Rock after it collapsed [AFP]
The bankers knew how bad it was. Here is Jim Glassman of JP Morgan: "The credit-market storm is a far more dangerous thing that anything we've seen in memory."
More and more news reports were glum. Here is the Sydney Morning Herald in Australia reporting on "How Bad Debt Infected the World": "The foreclosure butterfly flapped its wings in small town USA and the hurricane built and tore through world banking."
In many countries, angry critics blamed the US for exporting a form of "financial Aids" worldwide.
Luiz Inacio Lula da Silva, the Brazilian president, blamed "white men with blue eyes on Wall Street".
"I believe there is a systemic debt problem and it will take years to work out - and the Federal Reserve cannot resolve the issues," said Richard Bove, a bank analyst at Punk Ziege.
Michael Bloomberg, the mayor of New York City and a financial guru, also said the causes went deeper.
He believed the global credit crunch had as much to do with public debt as the US sub-prime meltdown. The billionaire media and business mogul talked about the "lunacy" of debt levels in the US and the UK at the Conservative Party conference in Britain.
"This is not a mortgage crisis," Bloomberg insisted, "It's a crisis in confidence and we're all in it together."
Bail outs
Washington responded with interest rate cuts and the injection of billions into banks, along with similar stimulus efforts by central banks in other countries.
Despite this, the credit markets remained locked and the problem remained unsolved. Businesses closed, some went bankrupt and jobs were cut.
In March 2008, Bear Stearns became the first of the big banks to go down. Others followed and many, like insurance giant AIG, had to be bailed out.
"As recession was officially recognized in the US, American consumers stopped trekking to the malls, sinking our consumption-based economy even further"
Mortgage giants Fannie Mae and Freddie Mac were next to implode.
Suddenly the world was fixated on the fall of Wall Street. Lehman Brothers was not bailed out - creating a ripple worldwide with its many "counter parties" - and was soon driven into bankruptcy.
The Bank of America bought Merill Lynch in a transaction that is still being challenged.
On September 19, the Bush administration announced a $700bn bail-out plan to confront the crisis.
Ben Bernanke, the chairman of the Federal Reserve, would later privately say they acted to head off an imminent collapse - a new depression.
Publicly he was more restrained, saying: "If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse."
Initially, this was seen as simply a financial problem but it quickly became a social crisis too. States and cities began cutting back essential services as their tax bases contracted.
Markets plunge
Then the Dow fell 777.68 points, the largest one-day point drop in history.
The index experienced its largest one-day point loss ever after the House of Representatives voted down the government's proposed rescue plan.
By April 2008, the IMF projected a $945bn loss from the financial crisis. G7 ministers agreed to a new wave of financial regulation to combat a protracted downturn.
As a recession was officially recogized in the US, American consumers stopped trekking to the malls, sinking our consumption-based economy even further.
There was a ricochet effect worldwide - declines in growth were dramatic.
Banks in many countries which had bought into US real estate and asset-less sub-prime mortgages reported vast losses too.
It was like a deck of cards collapsing.
For the first quarter of 2009, the annualized rate of decline in GDP was 14.4 per cent in Germany, 15.2 per cent in Japan, 7.4 per cent in the UK, 9.8 per cent in the Euro area and 21.5 per cent for Mexico.
The World Bank reported that by March 2009, the Arab world had lost $3 trillion because of the crisis.
In April 2009, unemployment in the Arab world was said to be a "time-bomb" and, according to the Arab Labor Organization, it was among the hardest hit regions in the world.
One month later, the United Nations reported a drop in foreign investment in Middle East economies because of a slower than expected rise in demand for oil.
In June, the World Bank predicted a tough year for Arab states.
Economic turnaround?
Yet in August 2009, the world's finance ministers were beginning to declare victory, seeing signs of a slowing in the economic decline.
Some even cautiously projected signs of a recovery.
The amount of money lost is subject to much debate, largely because those in the know have failed to agree on what should be included in the final tally.
One estimate focusing on infusions of capital by central banks around the world, so-called stimulus plans, and monies at risk in debt swaps and shaky derivative products put the number at $196.7 trillion - but that could be low.
In the US, unemployment continues to rise, foreclosures mount, as do bankruptcies.
Many journalists, politicians and economists appear to bemoan the fact that adequate financial reforms and new regulations have yet to be put in place.
Of the fact only a few executives have gone to jail despite evidence of massive fraud in the housing market, Peter Schiff, a conservative financier, noted: "No one has been held accountable for a financial crisis that the professors, pundits and politicians told us would not come.
"All the same players are running the game, [they] always change the rules so they stay on top."
"Washington has done nothing to protect us from a new crisis and, in fact, has made a new crisis likely"
Paul Krugman, the liberal New York Times economist, seemed to agree: "Washington has done nothing to protect us from a new crisis and, in fact, has made a new crisis likely.
"There have been many reports on what Wall Street firms did, and continue to do to transfer wealth to their own coffers, but little in the way of a criminal investigation, as if it is all above rigorous scrutiny."
Many of the biggest banks are back in the business of handing out giant bonuses and record compensation packages. Even as a lot has changed, a great deal remains the same.
President Obama warned on September 22: "If we don't pass financial regulatory reform, the banks are going to go back to the same things they were doing before.
"In some ways it could be worse, because now they know that the federal government may think they're too big to fail. And so, if they're unconstrained [by stricter regulations] they could take even more risks."
There is very little to celebrate on this "anniversary", the people most in the know about finance are now wrestling with both hope and despair - hope that a turnaround will spread and fear that another, more serious downturn is possible.
They are all, however, acutely aware that there has been no structural change or new regulation.
As Americans often say: "We're not out of the woods yet."
Danny Schechter, the "News Dissector", writes about the economy at: Mediachannel.org and made the film In Debt We Trust warning of the crisis in 2006. He is now completing a book, The Crime Of Our Time and film treating the financial crisis as a crime story. Comments to dissector@mediachannel.
?
WE CAN'T BREAK UP THE GIANT BANKS, CAN WE? YES WE CAN!
Washington's Blog - 2009-09-13
Top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion. In response, defenders of the too-big-to-fails make one or more of the following arguments:
(1) The government does not have the authority to break up the big boys
(2) To break up the banks, the government would have to nationalize them, which would be socialism
(3) The giant banks have now recovered and are no longer insolvent, so it would be counter-productive to break them up
(4) We need the giant banks to restore credit to the economy
None of these arguments are persuasive.
The Government Does Have Authority to Break Up the Big Boys
One of the world's leading economic historians - Niall Ferguson - argues in a current article in Newsweek:
[Geithner is proposing that] there should be a new "resolution authority" for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.
Indeed, even the FDIC mentions Continental Illinois in the same breadth as "too big to fail" banks.
And William K. Black - the senior regulator during the S&L crisis, and an Associate Professor of both Economics and Law at the University of Missouri - says that the Prompt Corrective Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.
Others argue that the PCA does not apply to bank holding companies, and so the government really does not have the power to break up the big boys (see this, for example; but compare this).
Whether or not the financial giants can be broken up using the PCA, no one can doubt that the government could find a way to break them up if it wanted.
FDR seized gold during the Great Depression under the Trading With The Enemies Act.
Geithner and Bernanke have been using one loophole and "creative" legal interpretation after another to rationalize their various multi-trillion dollar programs in the face of opposition from the public and Congress (see this, for example).
So don't give me any of this "our hands are tied" malarkey. The Obama administration could break the "too bigs" up in a heartbeat if it wanted to, and then justify it after the fact using PCA or another legal argument.
Temporarily Nationalizing a Bank is Not Socialism
Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.
That may be true. But government regulators in the U.S., Sweden and other countries which have broken up insolvent banks say that the government only has to take over banks for around 6 months before breaking them up.
In contrast, the Bush and Obama administrations' actions mean that the government is becoming the majority shareholder in the financial giants more or less permanently. That is - truly - socialism.
Breaking them up and selling off the parts to the highest bidder efficiently and in an orderly fashion would get us back to a semblance of free market capitalism much quicker.
The Giant Banks Have Not Recovered
The giant banks have still not put the toxic assets hidden in their SIVs back on their books.
The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.
The overhang of derivatives is still looming out there, and still dwarfs the size of the rest of the global economy. Credit default swaps still have not been tamed (see this).
Indeed, Nobel prize winning economist Joseph Stiglitz said today:
The U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”
Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama's administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”
While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to "creative accounting", such as Goldman "skipping" December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.
Some very smart people say that the big banks - even after many billions in bailouts and other government help - have still not repaired their balance sheets. Reggie Middleton, Mish, Zero Hedge and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.
But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can't prove they are solvent, they should be broken up.
We Don't Need the Giant Banks
Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks' current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven't been able to expand and thrive is that the too-big-to-fails have decreased competition:
Growth for the nation's smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under...
As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.
BusinessWeek noted in January:
As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners...
At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks...
Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. "Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks," says Christine Barry, Aite's research director. "They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers."
And Fed Governor Daniel K. Tarullo said in June:
The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks...
For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.
Indeed, some very smart people say that the big banks aren't really focusing as much on the lending business as smaller banks.
Specifically since Glass-Steagall was repealed in 1999, the giant banks have made much of their money in trading assets, securities, derivatives and other speculative bets, the banks' own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.
Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still have trillions in bad derivatives gambling debts to pay off, and so they are only loaning to the biggest players and those who don't really need credit in the first place. See this and this.
So we don't really need these giant gamblers. We don't really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.
The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:
The largest banks often don't show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.
"They actually experience diseconomies of scale," Narter wrote of the biggest banks. "There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size."
And Governor Tarullo points out some of the benefits of small community banks over the giant banks:
Many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms. Their business model is based on an important economic explanation of the role of financial intermediaries--to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers.
A small, but growing, body of research suggests that the financial services provided by large banks are less-than-perfect substitutes for those provided by community banks.
It is simply not true that we need the mega-banks. In fact, as many top economists and financial analysts have said, the "too big to fails" are actually stifling competition from smaller lenders and credit unions, and dragging the entire economy down into a black hole.
But don't believe me.
The Bank of International Settlements - the "Central Banks' Central Bank" - has slammed too big to fail. As summarized by the Financial Times:
The report was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail. This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future. Given that BIS is the ultimate insider, this is quite a criticism.
WALL STREET UNDER OBAMA : BIGGER AND RISKIER
Shamus Cooke
http://www.globalresearch.ca/index.php?context=va&aid=15202
After the financial levees broke and the crumbling banks ushered in the economic crisis, angry people clamored for drastic change in the financial system. Obama reflected these feelings well, at times using radical rhetoric to denounce the banking titans. What he promised was deep regulatory change so that such a crisis “would never happen again.”
Like every other promise of substance, Obama’s pledge to “rein in” the banks has fallen by the wayside; the well-timed rhetoric smoothed over public tensions and now business is back to usual. The New York Times remarks:
“Backstopped by huge federal guarantees [the bank bailouts], the biggest banks have restructured only around the edges…pay is already returning to pre-crash levels, topped by the 30,000 employees of Goldman Sachs, who are on track to earn an average of $700,000 this year… Executives at most big banks have kept their jobs.” (September 11, 2009).
Not only are the same people who helped destroy the economy still in their immensely powerful positions, but their power has increased. The Economist explains:
“Far from ceding ground, the big banks have grown even bigger, aided by government-brokered mergers. Rules have been bent or broken … nearly half of American mortgages made in the first half of the year came from Wells Fargo, which took over Wachovia, or BofA, which swallowed Countrywide.”
And: “America’s leading banks were too big to fail before the crisis. Now they are bigger still.” (September 10, 2009).
The super banks that emerged from the wreckage are still participating in the same ultra-risky financial gambling that ruined the lives of countless people. In fact, the banks’ bad behavior has been incredibly reinforced, since the profit-induced gambling that led to their failure resulted in taxpayer bailouts that were equally profitable.
The economist, Nassim Taleb, warned “that the system has grown riskier since last fall. The extensive government support that began after Lehman collapsed will lead investors to assume that governments will always prevent major banks from collapsing.” (New York Times, September 11, 2009).
The same article concluded that “The banks will keep the profits when their bets pay off, while taxpayers will swallow the losses when the bets go bad and threaten the system.”
Obama is treating financial regulation in the same manner he confronted health care: radical language was used to please public opinion with little action attached. The financial system is similar to health care in another way as well, prompting Obama into minimal action: Just like skyrocketing health care costs cut into the profits of many corporations, the shoddy financial system is a threat to corporations in general. This is the reason that some kind of reform is being pursued by the White House.
The problem is that Obama crammed Wall Street executives into every crevice of his administration, while Congress, too, is inundated with lobbying (legal bribes) from the big banks. Any change, therefore, is difficult. The New York Times notes:
“The Obama administration has proposed regulatory changes, but even their backers say they face a difficult road in Congress. For now, banks still sell and trade unregulated derivatives, despite their role in last fall’s chaos. Radical changes like pay caps or restrictions on bank size face overwhelming resistance. Even minor changes, like requiring banks to disclose more about the derivatives they own, are far from certain.” (September 11, 2009; emphasis added).
Internationally, bank regulation is a hot-button issue. The junk stocks sold abroad by U.S. corporations amounted to tens of trillions of dollars, and infected the economies everywhere while making select corporations inside certain nations — the U.S. and England — immensely profitable.
The G-20 is set to meet in Pittsburgh this month to discuss the issue. Germany and France want drastic change, since their banks are far less powerful. These nations’ “leaders said they want the G-20 to limit the size of banks and tighten capital rules.” (Bloomberg, September 2, 2009). This measure will obviously be denied by England and the U.S., where banks have grown in size and continue to profit immensely from lax rules.
Although the world’s closely linked economies would benefit from cooperation over financial regulation, it is the conflicting interests of powerful corporations inside these countries that will make true reform impossible. Or, as the managing director of the Institute of International Finance put it, “We’re in a tug of war between national political pressures and the desire to coordinate” (Bloomberg, September 2, 2009).
The G-20, therefore, will likely publish a vague statement about cooperation around financial regulation, while behind the scenes conflicts will erupt between France and Germany vs. the U.S. and England.
Obama’s short time in office has taught a valuable lesson to millions of people: the Democrats rank equal with the Republicans when it comes to aiding and abetting the super wealthy, who feel equally comfortable aligning themselves with either party. To them, campaign donations and lobbying are foolproof, profitable investments.
The Democrats will continue to bail out banks when the occasion arises; indeed, the amount of money the Federal Reserve continues to lavish on them is secret information. Labor and community groups must organize a stop to the bailouts, while demanding that all the bailout money is to be paid back. Banks unable to pay back the money should be put into foreclosure and taken over as public utilities, to be used to rebuild the country’s infrastructure, providing jobs and reasonable loans to those who need them. Such ideas can help provide the impetus to finally break the corporate two-party system, so that the interests of workers can finally find an expression in politics. Withdrawing the union’s support of the Democrats is the first step toward making this a reality.
Shamus Cooke is a social service worker, trade unionist, and writer for Workers Action (www.workerscompass.org). He can be reached at shamuscook@yahoo.com
IT’S NOT OVER YET
Danny Schechter
http://www.globalresearch.ca/index.php?context=va&aid=15211
The market meltdown that began in September 2007 was a 'slow-motion catastrophe', says finance journalist and author Danny Schechter.
New York, New York: Get out your party hats and strike up the band. We are about to celebrate the second anniversary of the GFC - the Global Financial Crisis.
No doubt the event will be marked by event-driven television programming and on the world's op-ed pages, even though this is a crisis that began long before most of the world found out about it.
Special report
The market meltdowns began in September 2007, but this has been a slow-motion catastrophe that started with the euphoria of financial bubbles that seemed to defy the laws of gravity by only rising.
When the markets were up, there were few naysayers.
Economist Brad Delong was one of the few reminding us that:
"Institutions and human psychology lead financial markets to bounce back and forth between exuberant greed and catatonic fear."
The housing bubble created in 2001 by a combination of low interest rates set by the Federal Reserve's Alan Greenspan, massive, predatory sub-prime lending by shadow lenders and financial institutions, and so-called market "innovation" in the form of exotic derivatives, securitization and deregulation all pushed profits in the financial services industry to new highs.
'Financial monster'
The consequences were largely ignored, as a process called financialization put more and more power in the hands of the economic architects on Wall Street.
New York University's Dr Nouriel Roubini was called "Dr Doom" for predicting the emergence of a "financial monster" that could not be sustained.
Roubini reasoned: "Combine an opaque and unregulated global financial system where moderate levels of leverage by individual investors pile up into leverage ratios of 100 plus; add to this toxic mix investments in the most uncertain, obscure, misrated, mispriced, complex, esoteric credit derivatives that no investor can properly price; then you have created a financial monster that eventually leads to uncertainty, panic, market seizure, liquidity crunch, credit crunch, systemic risk and economic hard landing."
What he and many others did not draw adequate attention to were the underlying structural problems in the US economy that led it to collapse.
Stephen Lendman of Gobal Research enumerated some of them:
- Soaring consumer debt;
- Record high federal budget and current account deficits;
- An off-the-chart national debt, far higher than the reported level;
- High and rising level of personal bankruptcies and mortgage loan defaults;
- An enormous government debt service obligation we are taxed to pay for;
- Loss of manufacturing and other high-paying jobs to low-wage countries;
- A secular declining economy, 84 per cent service-based and mostly composed of low-wage, low or no-benefit, non-unionised jobs;
- An unprecedented wealth gap disparity;
- Growing rates of poverty in the richest country in the world;
- A decline of essential social services
As the financial markets became more volatile, credit began to freeze, and an event outside the US signaled the deeper global crisis; customers were queuing outside London's Northern Rock bank demanding their money back.
Bank runs
Soon the Bank of England was pumping money in just one day after warning others, in the name of "moral hazard" rules, not to bail out lenders who had engaged in irresponsible practices.
A Wall Street insider told me: "A century ago, the depth of a banking crisis was measured by the length of the queue outside banks. These days, financial panics are more likely to be played out through heavy selling in share, bond or currency markets than old-fashioned bank runs."
The UK government was forced to rescue Northern Rock after it collapsed [AFP]
The bankers knew how bad it was. Here is Jim Glassman of JP Morgan: "The credit-market storm is a far more dangerous thing that anything we've seen in memory."
More and more news reports were glum. Here is the Sydney Morning Herald in Australia reporting on "How Bad Debt Infected the World": "The foreclosure butterfly flapped its wings in small town USA and the hurricane built and tore through world banking."
In many countries, angry critics blamed the US for exporting a form of "financial Aids" worldwide.
Luiz Inacio Lula da Silva, the Brazilian president, blamed "white men with blue eyes on Wall Street".
"I believe there is a systemic debt problem and it will take years to work out - and the Federal Reserve cannot resolve the issues," said Richard Bove, a bank analyst at Punk Ziege.
Michael Bloomberg, the mayor of New York City and a financial guru, also said the causes went deeper.
He believed the global credit crunch had as much to do with public debt as the US sub-prime meltdown. The billionaire media and business mogul talked about the "lunacy" of debt levels in the US and the UK at the Conservative Party conference in Britain.
"This is not a mortgage crisis," Bloomberg insisted, "It's a crisis in confidence and we're all in it together."
Bail outs
Washington responded with interest rate cuts and the injection of billions into banks, along with similar stimulus efforts by central banks in other countries.
Despite this, the credit markets remained locked and the problem remained unsolved. Businesses closed, some went bankrupt and jobs were cut.
In March 2008, Bear Stearns became the first of the big banks to go down. Others followed and many, like insurance giant AIG, had to be bailed out.
"As recession was officially recognized in the US, American consumers stopped trekking to the malls, sinking our consumption-based economy even further"
Mortgage giants Fannie Mae and Freddie Mac were next to implode.
Suddenly the world was fixated on the fall of Wall Street. Lehman Brothers was not bailed out - creating a ripple worldwide with its many "counter parties" - and was soon driven into bankruptcy.
The Bank of America bought Merill Lynch in a transaction that is still being challenged.
On September 19, the Bush administration announced a $700bn bail-out plan to confront the crisis.
Ben Bernanke, the chairman of the Federal Reserve, would later privately say they acted to head off an imminent collapse - a new depression.
Publicly he was more restrained, saying: "If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse."
Initially, this was seen as simply a financial problem but it quickly became a social crisis too. States and cities began cutting back essential services as their tax bases contracted.
Markets plunge
Then the Dow fell 777.68 points, the largest one-day point drop in history.
The index experienced its largest one-day point loss ever after the House of Representatives voted down the government's proposed rescue plan.
By April 2008, the IMF projected a $945bn loss from the financial crisis. G7 ministers agreed to a new wave of financial regulation to combat a protracted downturn.
As a recession was officially recogized in the US, American consumers stopped trekking to the malls, sinking our consumption-based economy even further.
There was a ricochet effect worldwide - declines in growth were dramatic.
Banks in many countries which had bought into US real estate and asset-less sub-prime mortgages reported vast losses too.
It was like a deck of cards collapsing.
For the first quarter of 2009, the annualized rate of decline in GDP was 14.4 per cent in Germany, 15.2 per cent in Japan, 7.4 per cent in the UK, 9.8 per cent in the Euro area and 21.5 per cent for Mexico.
The World Bank reported that by March 2009, the Arab world had lost $3 trillion because of the crisis.
In April 2009, unemployment in the Arab world was said to be a "time-bomb" and, according to the Arab Labor Organization, it was among the hardest hit regions in the world.
One month later, the United Nations reported a drop in foreign investment in Middle East economies because of a slower than expected rise in demand for oil.
In June, the World Bank predicted a tough year for Arab states.
Economic turnaround?
Yet in August 2009, the world's finance ministers were beginning to declare victory, seeing signs of a slowing in the economic decline.
Some even cautiously projected signs of a recovery.
The amount of money lost is subject to much debate, largely because those in the know have failed to agree on what should be included in the final tally.
One estimate focusing on infusions of capital by central banks around the world, so-called stimulus plans, and monies at risk in debt swaps and shaky derivative products put the number at $196.7 trillion - but that could be low.
In the US, unemployment continues to rise, foreclosures mount, as do bankruptcies.
Many journalists, politicians and economists appear to bemoan the fact that adequate financial reforms and new regulations have yet to be put in place.
Of the fact only a few executives have gone to jail despite evidence of massive fraud in the housing market, Peter Schiff, a conservative financier, noted: "No one has been held accountable for a financial crisis that the professors, pundits and politicians told us would not come.
"All the same players are running the game, [they] always change the rules so they stay on top."
"Washington has done nothing to protect us from a new crisis and, in fact, has made a new crisis likely"
Paul Krugman, the liberal New York Times economist, seemed to agree: "Washington has done nothing to protect us from a new crisis and, in fact, has made a new crisis likely.
"There have been many reports on what Wall Street firms did, and continue to do to transfer wealth to their own coffers, but little in the way of a criminal investigation, as if it is all above rigorous scrutiny."
Many of the biggest banks are back in the business of handing out giant bonuses and record compensation packages. Even as a lot has changed, a great deal remains the same.
President Obama warned on September 22: "If we don't pass financial regulatory reform, the banks are going to go back to the same things they were doing before.
"In some ways it could be worse, because now they know that the federal government may think they're too big to fail. And so, if they're unconstrained [by stricter regulations] they could take even more risks."
There is very little to celebrate on this "anniversary", the people most in the know about finance are now wrestling with both hope and despair - hope that a turnaround will spread and fear that another, more serious downturn is possible.
They are all, however, acutely aware that there has been no structural change or new regulation.
As Americans often say: "We're not out of the woods yet."
Danny Schechter, the "News Dissector", writes about the economy at: Mediachannel.org and made the film In Debt We Trust warning of the crisis in 2006. He is now completing a book, The Crime Of Our Time and film treating the financial crisis as a crime story. Comments to dissector@mediachannel.
?
WE CAN'T BREAK UP THE GIANT BANKS, CAN WE? YES WE CAN!
Washington's Blog - 2009-09-13
Top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion. In response, defenders of the too-big-to-fails make one or more of the following arguments:
(1) The government does not have the authority to break up the big boys
(2) To break up the banks, the government would have to nationalize them, which would be socialism
(3) The giant banks have now recovered and are no longer insolvent, so it would be counter-productive to break them up
(4) We need the giant banks to restore credit to the economy
None of these arguments are persuasive.
The Government Does Have Authority to Break Up the Big Boys
One of the world's leading economic historians - Niall Ferguson - argues in a current article in Newsweek:
[Geithner is proposing that] there should be a new "resolution authority" for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.
Indeed, even the FDIC mentions Continental Illinois in the same breadth as "too big to fail" banks.
And William K. Black - the senior regulator during the S&L crisis, and an Associate Professor of both Economics and Law at the University of Missouri - says that the Prompt Corrective Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.
Others argue that the PCA does not apply to bank holding companies, and so the government really does not have the power to break up the big boys (see this, for example; but compare this).
Whether or not the financial giants can be broken up using the PCA, no one can doubt that the government could find a way to break them up if it wanted.
FDR seized gold during the Great Depression under the Trading With The Enemies Act.
Geithner and Bernanke have been using one loophole and "creative" legal interpretation after another to rationalize their various multi-trillion dollar programs in the face of opposition from the public and Congress (see this, for example).
So don't give me any of this "our hands are tied" malarkey. The Obama administration could break the "too bigs" up in a heartbeat if it wanted to, and then justify it after the fact using PCA or another legal argument.
Temporarily Nationalizing a Bank is Not Socialism
Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.
That may be true. But government regulators in the U.S., Sweden and other countries which have broken up insolvent banks say that the government only has to take over banks for around 6 months before breaking them up.
In contrast, the Bush and Obama administrations' actions mean that the government is becoming the majority shareholder in the financial giants more or less permanently. That is - truly - socialism.
Breaking them up and selling off the parts to the highest bidder efficiently and in an orderly fashion would get us back to a semblance of free market capitalism much quicker.
The Giant Banks Have Not Recovered
The giant banks have still not put the toxic assets hidden in their SIVs back on their books.
The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.
The overhang of derivatives is still looming out there, and still dwarfs the size of the rest of the global economy. Credit default swaps still have not been tamed (see this).
Indeed, Nobel prize winning economist Joseph Stiglitz said today:
The U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”
Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama's administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”
While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to "creative accounting", such as Goldman "skipping" December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.
Some very smart people say that the big banks - even after many billions in bailouts and other government help - have still not repaired their balance sheets. Reggie Middleton, Mish, Zero Hedge and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.
But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can't prove they are solvent, they should be broken up.
We Don't Need the Giant Banks
Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks' current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven't been able to expand and thrive is that the too-big-to-fails have decreased competition:
Growth for the nation's smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under...
As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.
BusinessWeek noted in January:
As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners...
At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks...
Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. "Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks," says Christine Barry, Aite's research director. "They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers."
And Fed Governor Daniel K. Tarullo said in June:
The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks...
For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.
Indeed, some very smart people say that the big banks aren't really focusing as much on the lending business as smaller banks.
Specifically since Glass-Steagall was repealed in 1999, the giant banks have made much of their money in trading assets, securities, derivatives and other speculative bets, the banks' own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.
Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still have trillions in bad derivatives gambling debts to pay off, and so they are only loaning to the biggest players and those who don't really need credit in the first place. See this and this.
So we don't really need these giant gamblers. We don't really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.
The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:
The largest banks often don't show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.
"They actually experience diseconomies of scale," Narter wrote of the biggest banks. "There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size."
And Governor Tarullo points out some of the benefits of small community banks over the giant banks:
Many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms. Their business model is based on an important economic explanation of the role of financial intermediaries--to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers.
A small, but growing, body of research suggests that the financial services provided by large banks are less-than-perfect substitutes for those provided by community banks.
It is simply not true that we need the mega-banks. In fact, as many top economists and financial analysts have said, the "too big to fails" are actually stifling competition from smaller lenders and credit unions, and dragging the entire economy down into a black hole.
But don't believe me.
The Bank of International Settlements - the "Central Banks' Central Bank" - has slammed too big to fail. As summarized by the Financial Times:
The report was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail. This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future. Given that BIS is the ultimate insider, this is quite a criticism.
WALL STREET UNDER OBAMA : BIGGER AND RISKIER
Shamus Cooke
http://www.globalresearch.ca/index.php?context=va&aid=15202
After the financial levees broke and the crumbling banks ushered in the economic crisis, angry people clamored for drastic change in the financial system. Obama reflected these feelings well, at times using radical rhetoric to denounce the banking titans. What he promised was deep regulatory change so that such a crisis “would never happen again.”
Like every other promise of substance, Obama’s pledge to “rein in” the banks has fallen by the wayside; the well-timed rhetoric smoothed over public tensions and now business is back to usual. The New York Times remarks:
“Backstopped by huge federal guarantees [the bank bailouts], the biggest banks have restructured only around the edges…pay is already returning to pre-crash levels, topped by the 30,000 employees of Goldman Sachs, who are on track to earn an average of $700,000 this year… Executives at most big banks have kept their jobs.” (September 11, 2009).
Not only are the same people who helped destroy the economy still in their immensely powerful positions, but their power has increased. The Economist explains:
“Far from ceding ground, the big banks have grown even bigger, aided by government-brokered mergers. Rules have been bent or broken … nearly half of American mortgages made in the first half of the year came from Wells Fargo, which took over Wachovia, or BofA, which swallowed Countrywide.”
And: “America’s leading banks were too big to fail before the crisis. Now they are bigger still.” (September 10, 2009).
The super banks that emerged from the wreckage are still participating in the same ultra-risky financial gambling that ruined the lives of countless people. In fact, the banks’ bad behavior has been incredibly reinforced, since the profit-induced gambling that led to their failure resulted in taxpayer bailouts that were equally profitable.
The economist, Nassim Taleb, warned “that the system has grown riskier since last fall. The extensive government support that began after Lehman collapsed will lead investors to assume that governments will always prevent major banks from collapsing.” (New York Times, September 11, 2009).
The same article concluded that “The banks will keep the profits when their bets pay off, while taxpayers will swallow the losses when the bets go bad and threaten the system.”
Obama is treating financial regulation in the same manner he confronted health care: radical language was used to please public opinion with little action attached. The financial system is similar to health care in another way as well, prompting Obama into minimal action: Just like skyrocketing health care costs cut into the profits of many corporations, the shoddy financial system is a threat to corporations in general. This is the reason that some kind of reform is being pursued by the White House.
The problem is that Obama crammed Wall Street executives into every crevice of his administration, while Congress, too, is inundated with lobbying (legal bribes) from the big banks. Any change, therefore, is difficult. The New York Times notes:
“The Obama administration has proposed regulatory changes, but even their backers say they face a difficult road in Congress. For now, banks still sell and trade unregulated derivatives, despite their role in last fall’s chaos. Radical changes like pay caps or restrictions on bank size face overwhelming resistance. Even minor changes, like requiring banks to disclose more about the derivatives they own, are far from certain.” (September 11, 2009; emphasis added).
Internationally, bank regulation is a hot-button issue. The junk stocks sold abroad by U.S. corporations amounted to tens of trillions of dollars, and infected the economies everywhere while making select corporations inside certain nations — the U.S. and England — immensely profitable.
The G-20 is set to meet in Pittsburgh this month to discuss the issue. Germany and France want drastic change, since their banks are far less powerful. These nations’ “leaders said they want the G-20 to limit the size of banks and tighten capital rules.” (Bloomberg, September 2, 2009). This measure will obviously be denied by England and the U.S., where banks have grown in size and continue to profit immensely from lax rules.
Although the world’s closely linked economies would benefit from cooperation over financial regulation, it is the conflicting interests of powerful corporations inside these countries that will make true reform impossible. Or, as the managing director of the Institute of International Finance put it, “We’re in a tug of war between national political pressures and the desire to coordinate” (Bloomberg, September 2, 2009).
The G-20, therefore, will likely publish a vague statement about cooperation around financial regulation, while behind the scenes conflicts will erupt between France and Germany vs. the U.S. and England.
Obama’s short time in office has taught a valuable lesson to millions of people: the Democrats rank equal with the Republicans when it comes to aiding and abetting the super wealthy, who feel equally comfortable aligning themselves with either party. To them, campaign donations and lobbying are foolproof, profitable investments.
The Democrats will continue to bail out banks when the occasion arises; indeed, the amount of money the Federal Reserve continues to lavish on them is secret information. Labor and community groups must organize a stop to the bailouts, while demanding that all the bailout money is to be paid back. Banks unable to pay back the money should be put into foreclosure and taken over as public utilities, to be used to rebuild the country’s infrastructure, providing jobs and reasonable loans to those who need them. Such ideas can help provide the impetus to finally break the corporate two-party system, so that the interests of workers can finally find an expression in politics. Withdrawing the union’s support of the Democrats is the first step toward making this a reality.
Shamus Cooke is a social service worker, trade unionist, and writer for Workers Action (www.workerscompass.org). He can be reached at shamuscook@yahoo.com