[Marxism] Early notes on the present financial crisis

[Shane Hopkinson <chen9692000@xxxxxxxxx>]

The 
Tumbrils Roll at Dawn 
By MIKE WHITNEY 

Bank 
of America is buying Merrill Lynch for $45 billion, AIG needs an emergencyÂ$40 
billion bail-out from Uncle Sam to stay afloat, and Lehman Bros is kaput. Whew! 
The financial world has been turned upside-down overnight. It'll be a rough day 
of trading ahead." 
The news of Wall 
Street's Sunday night massacre sent foreign stock markets into a deep swoon. 
Shares tumbled in Asia and dropped more than 4 per cent in Europe. The dollar 
is 
steadily losing ground to the euro and gold is on the rise. The question is not 
whether the Dow will fall, butÂ"how far"Âand what affect that will have on 
increasingly fragile financial institutions.Â
Lehman Brothers, 
the 158 year old Wall Street warhorse, announced SundayÂthat it will file for 
bankruptcy after weekend rescue plans broke down without finding a buyer. Fears 
of credit contagion and a global recession have resurfaced and become more 
widespread. Lehman's failure suggests that that theÂother Wall Street giants 
will soonÂbe followingÂthe same path to extinction. Economist Nouriel Roubini 
put it like this: 

"All of the 
independent broker dealers are going to disappear. In March it was Bear 
Stearns. 
Tonight it was Lehman and Merrill Lynch. Morgan Stanley and Goldman Sachs 
should 
go find a buyer tomorrow. The business model of broker dealers is fundamentally 
flawed. They cannot survive." 
Roubini may be 
right. The funny thing about capitalism is that you need capital to play. When 
the bank-vault is full of nothing but worthless mortgage-backed securities 
(MBS) 
and overvalued junk bonds; the whole thing goes belly-up fast. That appears to 
be the case with Lehman Bros, the century-old Wall Street warhorse that has 
joined the long procession of underwater banking establishments now hurtling 
towards the cliff. Lehman had a great go of it during the boom times when all 
it 
took to make oodles of money was a predictable flood of low interest credit 
from 
the Fed and a compliant ratings agency that would stamp every crappy 
securitized 
pool of mortgages with a big Triple A before hawking it to some gullible 
investor in Shanghai or Heidelberg.
Lehman travails 
are not much different from anyone else in the banking fraternity. The problem 
is that the entire system is under-capitalized and over-leveraged. When Bear 
Stearns went down last year, it was levered at a ratio of 26 to 1. When Hedgie 
Carlyle Capital blew up, it was levered at 32 to 1. And when Fannie and Freddie 
were finally taken over by the US Treasury; the two behemoths were levered at 
80 to 1, which is to say that they had a one dollar capital cushion for every 
$80 they had loaned out. They would have continued on the same erratic path 
--buying up toxic mortgages and MBS from people who had no chance of ever 
repaying their loans -- had they not been taken into federal "conservatorship", 
which is a fancy way of saying they were insolvent. Treasury Secretary Henry 
Paulson unwisely attached a 6 inch-wide money-hose from the bowels of the 
Treasury to Fannieâs front office so the two mortgage giants could continue 
to 
teeter-along at taxpayer expense regardless of the fact that the securitization 
business model has completely broken down and foreign investors--including 
China--have already started cutting back on their purchases of GSE debt. This 
is 
no laughing matter. The $700 billion US current account deficit is financed 
through foreign investors who are getting increasingly jittery about sinking 
money into a system that looks more like casino-poker all the time. Here's a 
clip from China daily on Friday: 

"China, which 
holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may 
cut the portion held in US dollars, according to China International Capital 
Corp (CICC), one of the nation's biggest investment banks.
"The crisis has 
made Chinese officials realize it's a bad idea to put all their eggs in one 
basket,âwrote CICC Chief Economist Ha Jiming. âThis will likely lead to 
greater 
diversification of foreign exchange reserve investments.â China held $447.5 
billion of US agency bonds as of June 2008, according to the CICC calculations 
using disclosures by the US Treasury. It is likely to reduce the portion of 
reserves in dollar assets from the current 60 percent by purchasing more 
non-dollar assets with new reserves, he said.â(China 
Daily)
Naturally, foreign 
investors and central banks will curtail their purchases of US securities and 
Treasuries until there's some indication that US markets have stabilized and 
will be able to withstand the ferocious headwinds of the biggest housing crash 
in history, a frozen corporate bond market, a paralyzed banking system, and 
steadily waning consumer demand. But Americans still seem breezily unaware of 
what all this means for the country's future. They'd rather savor every new bit 
of gossip about the Bible beating, Grizzly-hunting Alaska governor who wants to 
lead the country back to Frontierland lips rather than learn about the about 
the 
firestorm raging through the financial markets.Â
When the net 
foreign purchases of US financial assets begin to slow; the game is over. The 
Fed will be forced to raise interest rates to attract foreign capital which 
will 
put downward pressure on the economy and accelerate the housing crash. 
Paulson's 
decision to provide unlimited capital to Fannie and Freddie, will stack more 
and 
more debt atop the faltering dollar and US Treasuries. It is the equivalent of 
lashing the greenback to an anvil and tossing it overboard. Paulson's attempts 
to stave off a systemic banking crisis ensures that the federal government will 
undergo an unprecedented funding crisis sometime in the near future. There will 
be higher taxes for the battered middle class and higher interest rates for 
businesses and consumers. This will trigger a protracted economic slowdown 
and 
weaker growth. Credit will get tighter, banks will default, unemployment will 
soar and GDP will shrivel. A negative feedback loop will develop from the 
faltering financial system to the real economy; a vicious circle ending in 
massive layoffs, weakening demand, falling stock prices, and withering consumer 
confidence. Welcome to Soup kitchen USA.
Â
Continues at http://www.counterpunch.org/whitney09152008.html


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