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January 6, 2009 at 06:59:07
Promoted to Headline (H3) on 1/6/09: by Nafeez Mosaddeq Ahmed Page 1 of 2 page(s) |
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The Crash of 2008 In the summer of 2008, the Bank for International Settlements (BIS) warned of the danger of another Great Depression rivaling the economic crash of the 1930s. The problem supposedly began with the US sub-prime mortgage crisis, whereby American banks increasingly granted mortgages on less stringent conditions to consumers who could not prove their ability to make repayments. This wasn’t an idle mistake due to insufficient regulation. Governments knew what was happening, and had ample opportunity to stop it. But financial institutions lobbied successfully for the power to lend at whatever multiples they wanted, without restriction. According to former Governor of New York Elliot Spitzer, when states realized the vast extent of corrupt lending practices by banks and tried to intervene to regulate them around 2003, the US Treasury Department unilaterally blocked their efforts. On the basis of the proliferation of sub-prime mortgages, banks innovated new ‘financial products’ such as derivatives, valued against projected mortgage repayments. These are essentially contracts that gamble on the future prices of assets, thus deriving their value from primary assets, such as currency, commodities, stocks, and bonds. As more people with lower incomes obtained subprime mortgages, increasing volumes of bad debt were repackaged and re-sold globally, on the basis of which even larger amounts of credit and thus new loans were flooded into worldwide markets. “Risk?... What Risk?” 
Veteran derivatives trader Nassim Nicholas Taleb, Distinguished Professor of Risk-Engineering at New York University’s Polytechnic Institute, confirms that banks routinely certified such transactions as solid and risk-free using quantitative models which, in reality, simply concealed the actual scope for risk and its potential consequences. This allowed them to create extremely risky financial instruments, slap a certification of safety over them, and sell them on for stupendous profits. In turn, these products were fraudulently insured by other financial companies, which used the opportunity to charge exorbitant fees. But these ‘insurance’ firms simply did not have the assets to cover losses in the event of a real default.
Consumers increased their spending on the basis of the security of their houses, while financial institutions accelerated their lending on the basis of rapidly proliferating mortgages, together contributing to rising prices and a mounting inflationary property and consumer bubble. This frenzy of spending and lending created a veritable bonanza of debt-based ‘virtual growth’. It had nothing to do with a real surplus derived from increases in productivity, but rather from a monetary system based on the ability to continually borrow (and effectively create out of nothing) cash that in real terms did not yet exist, except as the expectation of repayments on loans.
Worldwide sales worth trillions of dollars of these dodgy financial instruments distributed risks across multiple financial markets. Moreover, the hierarchical structure of the global financial system, dominated by New York and London, meant that debt-based profiteering at the core of the system radiated outwards and downwards to more peripheral countries tied into the system through their receipt of loans from the core and/or purchases of derivatives.
Indeed, thanks to the monumental profits and concomitant phenomenal growth accrued through this process, US and British financial institutions jubilantly accelerated lending to Europe, Asia, and countries in the South, creating an entrenched global web of debt, credit and financial profits. Thus, when the defaults started in the US, the crisis radiated outwards and downwards, and is still doing so.
US economy for sale?
Was ‘Structured Finance’ Structurally Sound?
So the Crash of 2008 had multiple interwoven causes – but it’s important to understand how these were related. One major background cause is the nature of the monetary system and the very existence of interest. All money is created through governments borrowing from banks on interest. This means that repayments of the debt are larger than the original size of the loan. For the loan to be repaid, more money needs to be created which means more lending on interest. The result is that over the long-term, as the money supply increases, the value of the currency depreciates and thus costs of living rise. There is therefore a long-term structural tendency toward rising inflation. This contributes to the devastating nature of capitalism’s boom and bust crises - at some point the debt-bubble is patently unrepayable and has to collapse.
Yet pre-Crash inflation also had another specific cause in the 21st century, namely, rocketing fuel prices; fuel prices rose from 2001 through to 2008 primarily due to supply-demand issues (not purely due to financial speculation although this played a role), most likely as a consequence of peak oil. According to an October 2007 oil market report by the Energy Watch Group in Berlin, world oil production peaked in 2006. The excessive energy costs fed directly into the entire system, raising cost of transport, food, living and basically everything, which thus also placed structural pressure on banks to increase interest rates to cover their own costs. Experts like petroleum geologist Colin Campbell, who worked for companies like Shell, BP, Esso and Texaco, confirm we are probably now on what is known as the “undulating plateau”.
The plateau begins when peak oil induces massive price shocks contributing to economic recession. The recession in turn reduces consumption, lessening the strain on resources and precipitating a collapse in fuel prices. Lower prices create new space for renewed consumption and economic recovery. This “undulating plateau” is a period of major price fluctuation, which could last from 5 to 10 years before oil capacity limits are permanently breached and we arrive at the era of irreversibly scarce oil supplies and high prices.
The corrupt lending practices of banks interacted with the impact of rising inflation. While sheer greed partly explains this behaviour, it’s a bit more complicated than that. The structural fragility of the global financial system had been obvious since the dot com boom and bust in the late 1990s. The capitalist imperative to keep growing by continually generating profits is structural - i.e. capitalism systematizes human greed and makes it necessary for economic survival. If the financial sector didn’t find a new outlet for investment to continue growing the economy, the economy would contract. If the financial sector was to continue growing, it had to find a new previously untapped market for debt-credit creation and the associated milieu of ‘financial products’ - this new market consisted of ‘low-income’ people and even the struggling middle classes, namely, the majority of the population. The very imperative to grow - simply to avoid banks and corporations losing profits, contracting and then failing - pushed banks into even more corrupt lending practices, which combined with long-term structural energy and monetary constraints, creating a bubble of virtual growth that was bound to implode at some point.
How to Create a Quadrillion Dollars ‘Ex Nihilo’
So the housing markets were only the underbelly of a much larger beast. So-called “structured financial” products served as mechanisms to generate massive profits for elite investors by deepening levels of debt. This leads back to the structural issue of the monetary system, based on fractional reserve banking - that is, the creation of money from nothing, simply by entering numbers into a computer, as credit charged at interest. Traditionally, banks could create credit or debt-money up to 12 times what they held in reserve.
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The American Farce
Since the Family Farmer was endangered, small business owners, especially in American downtowns are under attack. Franchises and chain stores could out lobby elected officials and put Mom and Pops and specialty stores out of business. When I owned rental property in Stafford Springs, Connecticut, and began fixing up the houses from a boarded up condition, the selectman told me that his “more important friend” wanted my properties and I was to sell them to him at a loss “or else”. Police made my life a nightmare with refusing to protect and serve, and with their threats and stalking. If we don’t have real policing and courts, no one is safe, capitalism in America is already dead, we have corporatism. by Steven G. Erickson (8 articles, 0 quicklinks, 57 diaries, 218 comments [3 recommended, 0 rejected]) on Tuesday, Jan 6, 2009 at 7:23:28 AM  (0+)
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Nafeez, economics
are not my strong point but your book, War On Truth, is AMAZING!!! So well sourced, researched, presented......it has become like a bible to me. To understand where this phony war on terrorism came from, why....it is a must read. by CamusRebel (0 articles, 0 quicklinks, 0 diaries, 100 comments [29 recommended, 0 rejected]) on Tuesday, Jan 6, 2009 at 9:31:43 AM (0+)
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End exploitation, begin civilize-ation
Indeed, the question is not whether it's the end of capitalism, but what comes next. Capitalism was never intended to serve humanity, or at least not unless the capitalists were served more. Capitalism is a system of exploitation, not of civilization. The current trend is toward some form of global fascism or feudalism, nothing I'd call a civilized existence. Mr. Ahmed is correct to identify the nature of the monetary system and the very existence of interest as a fundamental cause of the economic crash, though I would argue that these constitute THE root cause of the crash. The element of "the nature of the monetary system" that makes this so is bankers' protected monopoly as sole legal arbiters of debt and credit. This is what gives them the power to enforce usury, the real engine of exploitation and concentration of wealth. [see www.perfecteconomy.com]. As I pointed out in a comment following Ellen Brown's article "Borrowing from Peter to Pay Paul: The Wall Street Ponzi Scheme Called Fractional Reserve Banking"*, the fundamental democratic principle violated by this protected monopoly is that of non-intervention, the principle which underlies the conception of civil liberties which seeks to guarantee for each individual all those freedoms which are consistent with the same guarantee for every other individual. What is needed is an economic corollary to this principle, recognized and institutionalized as a human right; namely, that "It is every prospective debtor's right to issue their promise to pay, free of extrinsic manipulation, adulteration, or exploitation of that promise, or the natural opportunity to make good on it." [Mike Montagne's definition of the essence of Mathematically Perfected Economy]. by Jim Eldon (0 articles, 0 quicklinks, 0 diaries, 253 comments [15 recommended, 0 rejected]) on Tuesday, Jan 6, 2009 at 11:48:14 AM (0+)
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A note about inflation
As per Mike Montagne's discussion of inflation*, note that the term confuses increases in the money supply (monetary inflation) with a general increase in prices (price inflation) and that a monetary system subject to interest makes both necessary. "Thus a circulation subject to interest requires both: 1- perpetual, escalating inflation of the circulation relative to the remaining value of related assets, merely to maintain sufficient circulation to sustain the commerce which must service the debt; and 2- perpetual price inflation, to maintain industrial solubility against the ever escalating sums of debt that commerce must service." This is why a monetary system subject to interest is inherently self-destructive. The very means of fighting the inflation that the system guarantees will occur actually hastens the system's collapse. To reduce inflation is to reduce the capacity for commerce to service an ever-accumulating debt. But to create adequate circulation to allow commerce to service the debt is to create more debt. The debt will advance regardless, until terminal debt occurs. From this we can more easily understand Ahmed's discussion of the causes of inflation in the section "Was 'Structured Finance' Structurally Sound?" The first paragraph pinpoints the nature of the monetary system (monetary inflation) as one cause while the second paragraph claims price inflation of fuels as another. Though I'm inclined to say that the price inflation of fuels far exceeded what was required by Big Oil to remain profitable. Just as the bankers' protected monopoly guarantees whatever level of income they desire via currency and monetary policy manipulation, so it is with Big Oil. The problem isn't so much "peak oil" as it is peak greed. *WHY INFLATION ITSELF IS A LIE; WHY IT IS IMPOSSIBLE TO SOLVE THE REAL CONSEQUENCES OF A CURRENCY SUBJECT TO INTEREST at by
Jim Eldon (0 articles, 0 quicklinks, 0 diaries, 253 comments [15 recommended, 0 rejected]) on Tuesday, Jan 6, 2009 at 4:41:22 PM
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On what grounds is their any hope??
An excellent compilation of the situation and its roots . . . easy to read and clear to understand. I would only have liked, further, a greater dwelling on the possible impact of what is supposedly being done and being contemplated. My take, from what is herein explained, is that we are only plowing the essential problem into deeper furrows, and thus deeper collapse! The very idea that we can spend our way out of this situation with unreal money just plain doesn't make sense to me. Just because that appears to have been the course of the 1930s Depression could very well be misleading. For one thing, we were using real money (gold bullion socked away) that time, and it no longer exists. For another, we are not factoring in the very real element of the only true worldwide war, which changed the entire dynamic of the situation. We are neither contemplating any such war at this time, nor could we possibly 'manufacture' one, for it would inevitably turn nuclear. My reasoning from the above is that we are simply not likely to emerge from what our mass stupidity has gotten us into . . . not without a whole-scale revising of the world's economic structure, and equivalently its fundamentals. I'd love to have someone persuade me otherwise. Or fault my reasoning. by Irvthom (7 articles, 2 quicklinks, 3 diaries, 91 comments) on Tuesday, Jan 6, 2009 at 4:51:10 PM (0+)
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Create a new model
As Buckminster Fuller said--you never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete. Everyone keeps trying to fight capitalism--an unlimited growth and consumption economy--backed by a financial system set up to make sure that only a few at the top can benefit (interest/debt slavery) Fine...that's the current reality--and we keep trying to make it a kinder, gentler, more fair system. But as Ahmed points out--when the resources (not just oil) become so tapped out--there will be no point to the system. And frankly, we're pretty much there now. So, if not an economy based on unlimited consumption--then what will the new economy be? What 'activities' will we measure/value when we finally realize that production/consumption/profits are not the only valuable activity to be measured? Eisler points out in Real Wealth of Nations...creating a caring economics that we've failed to 'measure' the most important of all productions--our children. For the future economy--high quality humans will be the most important need of a service/knowledge/caring economy where the primary driver of the economy is not on 'consumption' but on caring--for humans and the planet. There are massive numbers of people who work in this 'industry' of caring for our children/enabling them to become fully actualized (in home care by parents)--only there's no money or measurement in this--thus, it doesn't show up in our economy. But we could change this. Think about it--we pay a 'miner' to go into a gold mine and earn money to bring out gold--something necessary to 'fuel' the consumer economy. But we pay nothing to a 'human development expert' (educated parent) who produces the most important 'nugget' for the service/knowledge/caring economy. But what if we did--if we built a huge new industry around 'caring' and paid high wages to these 'employees' who did the most important work of all--enabling all children to reach their highest potential--knowing that this fully developed adult then walks into the 'economy' ready to participate fully? Widen the lens, create a new economic system--let the old drop by the wayside. by Ann Kramer (21 articles, 0 quicklinks, 1 diaries, 62 comments) on Tuesday, Jan 6, 2009 at 6:03:25 PM (0+)
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Reply: Driving parents into the ground.
You are correct Ann. In fact what we've done is to drive parents into the ground by placing such a large burden on them financially. All this materialism has literally driven the American family into the ground. My father lived through the Great Depression and warned me about all this. He used to say, "When the American home is strong, America will be strong." Raising the next generation is an important job too. by Joe Vignolo (1 articles, 0 quicklinks, 0 diaries, 55 comments [13 recommended, 0 rejected]) on Thursday, Jan 8, 2009 at 4:13:19 PM (0+)
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The End of Capitalism?
Professor Ahmed is a brilliant economist. Yet, optimism of any sort in the face of this debacle borders on delusion. When it's working really well, the U. S. Congress is a debating and compromising entity. The rescue of the planet, were it to be undertaken, must begin at once. We have possibly passed the environmental point of no return. Leadership, in this case, would have to come from an utterly dictatorial source with worldwide authority. We have already seen how the U. S. Congress handles serious issues. It refuses to seat a great gentleman, Roland Burris, to the Senate while planning a gala going away party for Bush as he goes away with everything we had. Obviously, they can't tell the foxes from the sheep. by Dick Hudson (0 articles, 0 quicklinks, 0 diaries, 13 comments [4 recommended, 0 rejected]) on Tuesday, Jan 6, 2009 at 6:20:05 PM (0+)
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