Tag: Economics

In adding to the angst of the shocking capitalistic disaster otherwise known as “George Bush is our President”, last night the FDIC announced the twelfth bank failure of the year.  This time it was Ameribank, Inc of Norfolk, West Virginia. See failed bank list here.

As noted in this diary posted earlier this morning, Congress: “We have never heard language like this” by pfiore8, and in some of the comments therein, this weekend we will be witnessing the doctrine of the transfer of this nation’s wealth in ways that must be making Milton Friedman and Saint Ronnie grin in mummified, shocking glee.  

This diary will provide some links and source material for those who would like to follow this catastrofinancefuck a bit more closely.

Look at all the happy people on CNBC!  Don’t they look relieved?

Yeah.  So, here’s the thing.  The US Government does not have unlimited ability to backstop the financial markets.  And it just kinda did – essentially, the US Government just guaranteed about one trillion dollars of debt (while also banning shorting, which seems to me to be a decent way of ruining hedge funds to no recognizable purpose, unless the government has decided to ruin hedge funds).

But, as we all know, the US Government already has quite a bit of debt.  And this addition to its debt burden makes it five times the total annual federal revenues, from taxes and other sundries.

What this essentially means is that the AAA credit rating of the US government is now considerably imperiled.  The stock market might go up, and banks may stop failing every week.  But if the credit rating goes, then, well, the shit will really hit the fan.  The dollar will drop like a stone against other currencies.  Worse still, the interest rate of the Federal government’s debt, which already makes up over 9% of annual government expenditures, will skyrocket.

Unscientific poll time: will the US lose its AAA rating?  If so, how long before it is downgraded?

Buried in the sound and fury of the current financial storm, including the bankruptcy of Lehman Brothers, sale of Merrill Lynch to Bank of America, and the rumored imminent meltdown of insurance giant A.I.G. is something which I consider far more dangerous:

The alert have taken note that the failure of Washington Mutual, which looks increasingly likely, would consume the FDICs reserves and, as in the savings and loan crisis, force the agency to go hat in hand to Congress for more money.

But this is comparatively early in our burgeoning banking crisis for the bulwark of commercial banks to be tested. Worse, the concern is that uninsured depositors will flee weak banks, and in process, push more over the edge.

The scale of the problem?

Washington Mutual – the sixth largest bank in the US – has lost more than a third of its market value recently as investors fear it lacks liquidity and capital to survive the credit crisis…

The FDIC is respected for its operational effectiveness. But its $45bn deposit insurance fund is underfunded according to its own guidelines, at 1.01 per cent of insured deposits…

…analysts fear it may have to draw on its $70bn Treasury credit lines. Alan Avery, a partner at Arnold and Porter, said a single failure – if big enough – “would cause the FDIC to immediately draw on the Treasury credit”.

Washington Mutual had $143bn in insured deposits on June 30 – about three times the size of the deposit insurance fund, but less than half of its $307bn assets.

Emphasis added.

I don’t have time to even begin giving this a real analysis right now, but you need to be aware of what is happening today:

In one the most extraordinary days in Wall Street’s history, Merrill Lynch is near an 11th-hour deal with Bank of America to avert a deepening financial crisis while another storied securities firm, Lehman Brothers, hurtled toward liquidation, according to people briefed on the deal.

The moves came after a weekend of frantic negotiations between federal officials and Wall Street executives over how to avert a downward spiral in the markets. Questions still remain about how the market will react and whether other firms may still falter like A.I.G., the large insurer, and Washington Mutual, both of whose stocks fell precipitously last week.

Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry’s reshaping is staggering: two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear.

This is simply staggering.  In less than one year, Bear Stearns, Merrill Lynch, and Lehman Brothers will have simply disappeared.  To put that in some perspective, all three of these banks were founded before and survived the Great Depression.  The GSE nationalization is the largest nationalization since at least the Depression, and possibly in all of American history.  Another of Wall Street’s most venerable partnerships, Arthur Andersen, one of the five largest accounting firms in America also disappeared during the last eight years.

Someone ought to be making an attack ad right now – if this is how Republicans have governed with regards to the fortunes of Americas biggest financial firms, how can anyone in any small town or city in America believe that they will be able to make a living if they continue to govern in the future?

Original article by Jerry White, via World Socialist Web Site:

Corporations continue to slash tens of thousands of positions while workers still on the job are working harder for less money, according to reports on the US economy released this week.

Original Article, sub-headed After seven days of bloody war in the Caucasus and growing tension between the US and Russia, John Rees asks what is it about the new world order that has made it so prone to warfare?, via socialistworker.org.uk:

There is one fundamental thing that is common to capitalism in every age that makes it a uniquely violent system. It is not a marginal or accidental part of the system but something that is part of the very definition of capitalist society. That thing is competition.

Uh-oh!  Competition being bashed…must restrain from shouting ‘USA, USA, USA.’  After all, isn’t our competitive spirit what made us greater than everybody else?  Isn’t competition what makes our ‘free market’ system of capitalism work so well?

Some will argue that limiting financial institution leverage will render these businesses less profitable and less competitive with non-U.S. companies.  HCM’s response is – “so what?”  Perhaps less profitable investment banks will result in more of America’s talented students becoming scientists, engineers, doctors and teachers instead of investment bankers and mortgage traders. What would be so terrible about that?

~Michael E. Lewitt, Managing Member and President of Hegemony Capital Management, writing in the subscription-only Welling@Weeden newsletter for the clients of Weeden & Co. LP.  This excerpt of the article, which is not reproduced with permission but contains no advice or information that could be considered proprietary, is a long list of suggested regulations which Lewitt believes are needed in today’s financial markets.

The events which are taking place in today’s financial markets are bewildering to the uninitiated, and are only slightly less scary to those who are familiar with the concepts and terminology inherent to this world.  But it strikes me as significant to see so many people within the world of finance calling for drastic reform and desperately trying to demonstrate that the problems which are blooming now are the spawn of seeds planted in previous years and decades.  And one thing that a few such as Lewitt are saying is that perhaps it simply is unwise for us to pursue the sort of gains which have fueled Wall Street for the last quarter-century.