Re: Bank Crisis: We'll all drop together when we drop.

["schulte-baeuminghaus" <cresscourt@xxxxxxxxx>]

Henry,
Gary,


One perceptive analyst I have read recently, says that "economic
imbalances and financial excesses of unprecedented size have made the
U.S. economy and its financial system more vulnerable than ever
before. There are serious problems everywhere: in the credit markets,
in the banking system, in stock valuations, in credit availability, in
the profit performance, in the debt burdens of corporations and
consumers, in negative personal savings, and in the huge trade gap and
the grossly overvalued dollar. Confidence in the dollar has been the
one linchpin that has held this disintegrating system together....For
too long have too many people believed that the new information
technology offers a free lunch by delivering huge gains in equity
prices. In reality, this paper wealth creates the exact opposite:
financial claims on existing resources."
He makes the general point with which I find it difficult to disagree:
"Representing the surplus of production over consumption, [capital
formation] is the one and only source of macroeconomic wealth
creation...capital formation is strategic for generating general
prosperity."
There has been "unfettered credit creation by the financial system for
consumption and speculation" so that we now have "degenerate
capitalism in the sense that saving and capital accumulation , the key
features of a capitalistic economy, have fallen into complete
oblivion. Worse, still, it is a capitalism which any educated nation
should be ashamed of because the corporate strategies that result from
the single-minded microeconomic logic of maximising present
shareholder value inherently impart increasingly negative long-term
macroeconomic consequences to economic growth, income and profit
creation. What really happens is rampant over-consumption at the
expense of future generations who are to inherit depleted domestic
capital formation, a mountain of foreign indebtedness and lots of
worthless paper assets (stock and bonds). It might be called
'beggar-thy-children capitalism.' The motto of this capitalism is
'After us the deluge.'"
I'd like to be able to say that this is a lot of pessimistic moaning
in a uniquely favourable economic situation for the United States and
the world economy; but I think we may already have gone over the cliff
into what I called some years ago a "multiple abyss" and we can only
wonder how long the suspension of Newton's law of gravity will last.
What we need now is not so much conviction that we have a grave crisis
on our hands as some consensus on the nature and component
characteristics of the crisis, so that we can agree on the measures to
moderate it.
What can we do to moderate it?
This financial and economic crisis has been gathering for so many
years, its dimensions are so massive and its consequences so
widespread that it is difficult to see that the instruments in the
hands of governments and regulatory institutions, including central
banks, are anything like adequate.
Governments have abdicated most of their responsibility to "the
market" for many years past. Much of what remains of their
responsibility they have abdicated to central banks whose performance
has been in keeping with the current capitalist philosophy of letting
things run. The new Bush Administration-to-be is talking of an
"economic downturn."
A downturn?
Is it no more than that?
Can Alan Greenspan simply and confidently press downward on the lever
of the interest rate - and keep on talking smart - and all will be
well?
It would be nice to think he can and that's all that's needed.
But does the sheer range, complexity and dimensions of our predicament
suggest that it is? If the crisis hits as some of us fear, will the
consequences be of the catastrophic dimensions that we anticipate?
Will it then take six years or ten to drag ourselves back to something
like stable prosperity?
Will it take a whole generation?
He'd be a brave man who'd put any term to the recovery if we're right
in our assessment of the nature and dimensions of the prospective
collapse.
In all this, of course, we must bear in mind that there are elements
that are not just baldly economic. They seldom are. The "bottom line"
will write in consequences that are very heavily social, politicial
and strategic.
The abyss could well be multiple.


James Cumes



----------
>From: Gary Dymski <gdymski@xxxxxxxxxxxxx>
>To: pkt@xxxxxxxxxxxxxxxx
>Subject: Re: Bank Crisis
>Date: Fri, Dec 15, 2000, 6:59 pm
>

> Thanks to Henry for bringing up the new news of the data --
> the megabanks are in trouble. The WSJ reported this AM,
> of Chase, "this is a great bank in a bad environment."
> Didn't we get that "what's a nice bank like you doing in a
> place like this?" during the Latin debt crisis, the Asian financial
> crisis, the ...
>
> My 1999 ME Sharpe book on the US bank merger wave
> argued that there wasn't the profits in core financial activities
> to justify the high expectations that Wall Street was putting
> on the then raging megamergers. Stock prices for banks turned
> down viciously after the Asian crisis and haven't recovered much,
> with a couple of exceptions. So Wall Street has backed off, and
> the banks are all dressed up with their venture-capital funds
> and investment-banking operations -- with nowhere to go.
> A close reading of earnings reports shows that they are making
> money on consumer banking operations, but losing it on every-
> thing else -- and have been for about six months or more.
> This leaves us with megabanks with quasi-monopoly positions
> in local banking markets, extracting economic rents the old-
> fashioned way, while trying to find those megacorps that need
> their services. Six years, thought Henry. Maybe; the US today
> has some parallels with Japan a decade ago. So, it could be 10.
> Thank heavens for that reserve currency status!
>
> Gary D.
> _________________________________________
> Gary Dymski, Associate Professor, Dept of Economics
> University of California, Riverside CA 92521-0427
> ph: 909-787-5037 x1570 fax 760-480-8607
> email: dymski@xxxxxxxxxxxx
>
>