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Is this the Big One?
Mike Whitney
Online
Journal
Wednesday January 23, 2008
"This is going to be a rough week. Fastening your seat
belts may not be enough for this ride. Better superglue yourselves
to the floorboards and pray for God's mercy." James Howard
Kunstler, "Fullblown Panic"
On Monday, fears of a US recession spilled over into Asian markets,
sending stocks tumbling. Indexes were hammered across the board
in what turned out to be the worst day of trading since 2001.
In India, the Bombay Sensitive Index plunged 1,408 points, to
17,605. In China, the Shanghai Composite dropped 266 points (or
5.5 percent) to 23,818, while in Japan, the Nikkei fell 535 points,
to 13,325 points. The bloodletting stretched across the continent
and into Europe where shares nosedived by more than 4 percent
by mid-morning “putting them on track for their biggest
one-day fall in more than four and a half years.”
The huge sell-off is a sign that global investors do not believe
that the Fed's rate cuts or President Bush's $150 billion “stimulus
package” can revive the flagging economy or breathe new
life into the overextended US consumer. After Monday's sharp downturn,
the prospects for averting a deep and protracted recession are
slim to none.
(Article continues below)
Economics Professor Nouriel Roubini summed it up like this nearly
a month ago: “The United States has now effectively entered
into a serious and painful recession. The debate is not anymore
on whether the economy will experience a soft landing or a hard
landing; it is rather on how hard the hard landing recession will
be. The factors that make the recession inevitable include the
nation's worst-ever housing recession, which is still getting
worse; a severe liquidity and credit crunch in financial markets
that is getting worse than when it started last summer, high oil
and gasoline prices, falling capital spending by the corporate
sector, a slackening labor market where few jobs are being created
and the unemployment rate is sharply up, and shopped-out, savings-less
and debt-burdened American consumers who -- thanks to falling
home prices -- can no longer use their homes as ATM machines to
allow them to spend more than their incomes. As private consumption
in the US is over 70 percent of GDP, the US consumer now retrenching
and cutting spending ensures that a recession is now underway.
"On top of this recession there are now serious risks of
a systemic financial crisis in the US as the financial losses
are spreading from subprime to near prime and prime mortgages,
consumer debt (credit cards, auto loans, student loans), commercial
real estate loans, leveraged loans and postponed/restructured/canceled
LBO and, soon enough, sharply rising default rates on corporate
bonds that will lead to a second round of large losses in credit
default swaps. The total of all of these financial losses could
be above $1 trillion thus triggering a massive credit crunch and
a systemic financial sector crisis.” [Nouriel Roubini Global
EconoMonitor]
Decades of stagnant wages have left the American worker hamstrung
and unable to continue to account for 25 percent of global consumption.
Tightening credit and lack of personal savings have only added
to his problems. The American consumer is overworked, underpaid,
and tapped-out. That means that aggregate demand will fall dramatically
across the world triggering increases in unemployment, decreases
in capital expansion, and widespread slowdown in business activity.
These are the beginnings of a deflationary spiral that will wipe
out trillions of dollars of market capitalization in the real
estate, equities and bond markets. Even gold and oil will retreat
significantly (as we saw in Monday's results).
The present crisis is not the result of normal market forces,
but price fixing at the Federal Reserve and the financial engineering
of the main investment banks. If there had been sufficient regulation
of the Fed's activities -- so that interest rates had not been
kept below the rate of inflation for over 31 months straight --
than the trillions of dollars in low-interest credit would not
have flooded into the real estate market inflating the biggest
housing bubble in US history. Despite his feeble excuses, Greenspan's
role in destroying the US economy is no longer in doubt.
Even the far-right op-ed page of the Wall Street Journal conceded
Greenspan's culpability in Saturday's edition. Here's what it
said: “Amid the daily market turmoil, and to help prevent
a crash, it helps to step back and remember how we got here. With
the benefit of hindsight, everyone can see that the U.S. economy
built up an enormous credit bubble that has now popped. Our own
view -- which we warned about going back to 2003 -- is that this
bubble was created principally by a Federal Reserve that kept
real interest rates too low for too long. In doing so the Fed
created a subsidy for debt and a commodity price spike.”
Greenspan's low interest rates ignited a speculative frenzy that
resulted in humongous equity bubbles. The Fed's “cheap money”
policy created artificial demand for housing which drove prices
to unsustainable levels. Now the real estate market is crashing;
foreclosures are skyrocketing, inventory is at historic highs,
construction-related jobs are drying up, and housing prices "across
the country" are plummeting for the first time since the
Great Depression. These are the real results of Greenspan's "low
interest" fake prosperity.
Greenspan is not the only one responsible for the present calamity.
The financial markets have been reconfigured in a way that accommodates
all manner of corruption. The new model, “structured finance,”
allows worthless "subprime" loans to be dressed up as
valuable assets -- stamped with a triple A rating -- and sold
to unsuspecting investors.
The Wall Street Journal explains how our $800 billion current
account deficit created a circular loop which channeled vast amounts
of borrowed money back into US markets: "That capital flow
and debt subsidy, in turn, became fuel for smart people in mortgage
companies, investment banks and elsewhere to exploit. In a sense
they created a new financial system -- subprime loans, SIVs, CDOs,
etc. -- that is enormously efficient and brought capital to new
places. But thanks to low interest rates and human enthusiasm,
this debt spree also got carried away. ”
"Got carried away"? Now there's an understatement.
Stock markets across the world are crashing because of the insatiable
greed of a few market-heavyweights who gunked up the whole system
with worthless mortgage-backed slop.
The Wall Street Journal admits that a new “structured debt”
market was created to package dubious subprime liabilities (from
“no doc,” no collateral , “bad credit”
loan applicants) and sell them to hedge funds, insurance companies
and foreign banks as if they were precious jewels. The WSJ avers
that this is the way that “smart people exploit” the
opportunities from lavish “capital flows.”
But was it “smart” or criminal?
Fortunately, that question was answered this week in an extraordinary
outburst on cable TV by market insider and equities guru, Jim
Cramer. In Cramer's latest explosion, he details his own involvement
in creating and selling “structured products” which
had never been stress-tested in a slumping market. No one knew
how badly they would perform. Cramer admits that the motivation
behind peddling this junk to gullible investors was simply greed.
Here's his statement:
"Its all about the commission”
(We used to say) “The commissions on structured products
are so huge let's JAM IT.” (note “jam it” means
foist it on the customer) It's all about the 'commish'. The commission
on structured product is GIGANTIC. I could make a fortune 'JAMMING
THAT CRUMMY PAPER' but I had a degree of conscience -- what a
shocker!--We used to regulate people but they decided during the
Reagan revolution that that was bad. So we don't regulate anyone
anymore. But listen, the commission in structured product is so
gigantic. (pause) First of all the customer has no idea what the
product really is because it is invented. Second, you assume the
customer is really stupid; like we used to say about the German
bankers, 'The German banks are just Bozos. Throw them anything.'
Or the Australians 'M O R O N S' Or the Florida Fund (ha ha )
“They're so stupid let's give them Triple B (junk grade)
Then we'd just laugh and laugh at the customers and Jam them with
the commission . . . That's what happened; that's what happened.
. . . Remember, this is about commissions, about how much money
you can make by jamming stupid customers. I've seen it all my
life; you jam stupid customers.” [See the whole damning
confession.]
Trillions of dollars in structured investments (CDOs, MBSs, an
ASCP) have now clogged up the global financial system and are
dragging the world headlong into recession/depression. Cramer's
confession is a candid admission of criminal intent to defraud
the public by selling products which people -- within the financial
industry -- KNEW were falsely represented by their ratings. They
sold them simply to fatten their own paychecks and because there
is no longer any regulatory agency within the US government that
curtails illicit activity.
Boycott US financial products?
As the stock market continues its inexorable downward plunge,
foreign central banks and investors need to determine whether
they were deliberately ripped off and aggressively pursue legal
alternatives. They should initiate a boycott of all US financial
products until an appropriate settlement for the hundreds of billions
in losses due to the “structured finance” swindle
can be negotiated. That is the best way to serve their own national
interests and those of their people.
Deregulation has destroyed the credibility of US markets. There
is no oversight or policing agency. It's the Wild West. The assets
are falsely represented, the ratings are meaningless, and there's
a clear intention to deceive. That means that the stewardship
of the global economic system is no longer in good hands. There
needs to be a fundamental change. As the nightmare scenario of
global recession continues to unfold; we need new leaders in Europe
and Asia to step up and fill the void.
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INFOWARS:
BECAUSE THERE'S A WAR ON FOR YOUR MIND
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