(2 pm. – promoted by ek hornbeck)
If you follow the financial news you will find it using temporary excuses for every set-back.
For instance, every year there will be several bad economics reports blamed on the weather. As if every winter storm is “unprecedented”.
Likewise, all efforts by the government and Federal Reserve at fixing an economy are temporary as well. Which is all fine and dandy when the economy is suffering from something that is indeed temporary. Remember how 9/11 got blamed for a recession that was already 7 months old?
But what if the problems with the economy are not temporary? What if they are structural?
How many years of extremely expensive “temporary fixes” must we endure before we take a good, hard look at the basic assumptions of the current economy? Two years? Three years?
We are currently approaching the four years mark for “temporary” fixes in the credit markets with no end in sight.
The first falsehood you must dispose of if the idea of the “Lehman Moment”, a term the financial media likes to use. It implies that everything was working until the government let Lehman Brothers go under.
In fact, the financial markets seized up more than a year before Lehman Brothers went under. In fact, the financial media should instead be using the “Bear Stearns Moment”, when its two major hedge funds (High-Grade Structured Credit Fund and High-Grade Structured Credit Enhanced Leveraged Fund) filed for bankruptcy. Thus forcing the mortgage-backed securities market to expose their over-priced assets to fair market value.
A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market…
“Nobody wants to look at the truth right now because the truth is pretty ugly,” Castillo said. “Where people are willing to bid and where people have them marked are two different places.”
With the ugly truth of real prices suddenly exposed, the credit markets froze up in the first week of August, 2007…and more than four years later they are still frozen.
Things got steadily worse in the credit markets until the Federal Reserve finally stepped in on December 12, 2007. It’s first program was designed to make certain that foreign banks had dollars to loan.
Right from the start the Fed approached the problem as a matter of liquidity, not solvency. In other words, the only problem was that assets weren’t being sold, not that the asset holders were bankrupt.
The Fed rolled out other liquidity programs in early 2008, such as PDCR and TSLF.
Hundreds of billions of dollars were funnelled to Wall Street banks through these programs months before Lehman went under. All in the name of liquidity.
So now, nearly four years after the first “temporary” fix to the global “liquidity” problem, what do we see in the financial news?
Sept. 28 (Bloomberg) — The Federal Reserve, chastised by Congress for lending money to foreign institutions including a Libyan-owned bank, is once again the lender of last resort for banks around the world it knows little about.
Nearly four years later and the global banking system is still leaning on the Fed for funding. Nothing has been fixed. However, trillions of dollars have been thrown down the black hole of global finance.
If four years of “liquidity” problems can’t be fixed with enormous and unprecedented mountains of taxpayer money, then it is time to admit the obvious – the problem isn’t liquidity.
The real interesting part of this article is a few paragraphs down.
The Fed facility provides a critical “ceiling” on funding squeezes that allows investors to avoid panic and distinguish between healthy and troubled banks, said Jerome Schneider, head of the short-term strategies and money-markets desk at Pacific Investment Management Co. in Newport Beach, California.
“What you don’t want to have is liquidity risk become intertwined with solvency risk,” Schneider said.
Schneider actually has it 100% backwards. The Fed facility is designed to prevent investors from distinguishing a healthy bank from a troubled bank, and confusing a solvency risk for a liquidity risk.
How is it possible to hide a bank’s insolvency?
To answer that you must look at the other “temporary” fix. Late in 2008 the financial sector made a major push to get rid of mark-to-market accounting.
Last week in London, Federal Reserve Chairman Ben Bernanke said, “the presence of these [toxic] assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new and private investment and new lending.”
To paraphrase: As long as these assets have the potential to be marked down, bank capital is at risk. And as long as bank capital is at risk, private investors will remain skeptical and banks will remain conservative, which impinges their willingness to lend.
Forbes makes several false assumptions here:
First, that suspending mark-to-market accounting (which was done in April 2009) would allow the banks to resume lending to the public.
That has not happened.
Secondly, that allowing the banks to mark the assets to whatever they like will get investors to start pouring money back into the banks.
This has not happened.
Finally, and most importantly, that the problem with the assets is that they aren’t selling. Thus, all that is needed is for the assets to be priced at what the banks say “they are worth” rather than what the markets are currently saying they are worth.
In fact, the housing market has continued to plunge year after year (despite the federal government throwing trillions of dollars at it), and the value of those toxic assets are falling even further despite the banks no longer having to price in the losses. What we have instead are zombie banks, still walking around and feeding off the living, but dead nonetheless..
The lack of fair-value accounting in Japan and the resulting scourge of zombie companies were often cited, in fact, as key causes of the country’s economic stagnation in the 1990s.
What has happened is that we are bankrupting ourselves in an attempt to deny reality – that the financial assets of the world are overvalued. The wealth is fictional. The “temporary” liquidity programs are just throwing good money after bad.
The losses need to be written off as bad loans and bad investments.
Of course there are two problems with that: 1) that would involve immediate and short-term pain, and that is something that politicians avoid, and 2) it would involve the top 1% (which owns a vast majority of this fictional wealth) to take very large losses.
So instead, the wealthy buy the politicians, to make policies, which socialise the losses that were once private. However, the losses keep increasing because the middle class is being gutted, and now it is busting the budgets of nations all over the western world.
The losses are too great. Austerity just guts the middle class even more, depressing consumption that much more, making the government budgets that much worse.
Meanwhile, we are headed for a double-dip recession, that’ll make tax revenue fall off a cliff.
What’s more, almost every effort from both the Federal government, and the Federal Reserve, has been to entice the consumer to borrow so he/she can spend more money. This is having potentially disastrous consequences.
Americans dipped into their savings to spend in August as their incomes fell for the first time in almost two years, the Commerce Department estimated Friday.
This pushed the nation’s savings rate down to the lowest level since November 2009, the government said.
Income fell a seasonally adjusted 0.1% in August, marking the first monthly decline since October 2009.
A falling savings rate, while incomes are also falling, is a sign of a consumer that is completely tapped out. Trying to get that consumer to spend more is a waste of time and money.
The problem is income, or to be more specific, the problem is lack of good-paying jobs, not consumption. Household income has declined by 6.8% since the Depression started.
The number of those living in poverty has grown by 2.6 million in just the last 12 months. The number of people on food stamps has grown 74% since the Depression started.
Yet the government and Fed still seem to be fighting the last war. They are still in denial about what the economy actually needs.
So what now?
What is needed is to finally admit that the problem isn’t a lack of liquidity. The problem is that major banks are insolvent, and the effort to bail out these insolvent banks have made several European nations insolvent.
The can can’t be kicked down the road any further.
We arrived at the Minsky Moment over four years ago. But instead of acknowledging this fact and learning from it, our leaders have instead been bankrupting us by trying to keep a dead system alive.
We need a banking system, but there is no reason why we need these banks.
The system needs to be flushed out. The old and incompetent need to swept aside for the system to regenerate.
To not do so risks the entire system itself.
“Karl Marx had it right,” Roubini said in an interview with wsj.com. “At some point capitalism can self-destroy itself. That’s because you can not keep on shifting income from labor to capital without not having an excess capacity and a lack of aggregate demand. We thought that markets work. They are not working. What’s individually rational … is a self-destructive process.”
The thing to remember is that Marx was a political historian first, and a economist second. Capitalism by itself would eventually fix the situation. To truly bring down the whole structure by Marx’s forecast requires inaction and/or reaction by the politicians to prop up the unstable status quo.
Unfortunately that is exactly what is happening today. The capitalist leaders, in there efforts to prevent any positive, progressive change, are risking the entire world’s economic structure.
Capitalism has led to a revolution but not the one that Marx expected. The fiery German thinker hated the bourgeois life and looked to communism to destroy it. And just as he predicted, the bourgeois world has been destroyed.
But it wasn’t communism that did the deed. It’s capitalism that has killed off the bourgeoisie.