Did you see what happened last week? I mean did you really see what happened?
What happened was the US economy, and much of the world economy entangled with it, was forced to go cold turkey.
But first a look at how they got hooked on junk in the first place.
For the last five or six years America's alleged free marketeers took a page from Barry Bonds' personal play book. America and Americans were already heavy hitters on the world economic stage. But why be satisfied with being just good. Why not leverage our economic strength by pumping it up with artificial wealth – cheap, easy credit.
And so it came to pass. Debt became the enhancing drug of choice for heavy hitters and wannbe heavy hitters.
And it worked, at least for a while. Even after cutting taxes and increasing spending, a seemingly endless supply of cheap, easy credit flowed in to fund government spending from pushers in Asia.
Corporations took notice and began doing the it too, borrowing, buying other companies, borrowing against those assets, buying more companies, building entire corporate empires upon mountains of debt.
Joe Sixpacks down on Main Street figured they'd like to be heavy hitters too. So they beat a path to credit pushers, their own banks, credit card companies, DiTech and such. Consumers loaded up on the stuff.
And it worked for them too, for a while. They bought all kinds of crap they would otherwise not been able to afford -- SUVs, flat panel televisions and, most importantly, houses. If they already owned a house they used it as collateral for more of the stuff, more credit, more debt.
By August 1, 2007 nearly everyone from Washington to K-Mart shoppers were hooked on cheap, easy credit.
Wall Street analysts and government economists downplayed the problem with the standard junkies refrain, “We can stop any time we want.”
Of course they never tried to prove it. They never did stop.
Then suddenly last week their drug of choice dried up. From San Francisco to New York City, from Dog Patch, Idaho to Sacramento, California, from Washington to Hong Kong, London, Germany, France, not a cheap, easy credit pusher in sight.
For three, painfully long days, cheap, easy credit disappeared. And by day-two world markets went into what can only be described as “withdrawals.” Cut off from their picker-upper of choice, banks, mortgage lenders, hedge funds, bonds, mutual funds, home builders and foreign banks began going through the DT's. By Thursday things had become so unruly, the whines and cries for “spare change,” gotten so shrill, that the Federal Reserve Bank, the pusher of last resort for credit junkies, finally stepped forward and provided the markets the only thing that would calm them – a booster shot of cheap, easy credit.
What happened next should erase any remaining doubt that America's free market big talkers have become nothing more than credit addicted phonies. Because, as you may have noticed, their DT's eased within a hour after the Fed injected their drug of choice – billions of dollars of bargain basement priced credit.
And the Fed did not even try to get these junkies into treatment. On the contrary. The Fed actually sweetened the deal, allowing already debt weakened institutions to get all the credit they say they need to remain afloat at wholesale prices.
But wait, there's more. The Fed's fixes are being handed out through what it calls its “overnight discount window.” Discount window Fed loans have traditionally been overnight loans given to banks to smooth the flow of capital between institutions. The loans the Fed approved in the wee hours of Thursday night are 30-day loans.
But wait, there's more. If, at the end of that 30-day period a bank claims it can't pay the money back, the Fed says the banks can roll them (renew) them for another 30-days.. and then another and another. And, like the sub-prime rules that allowed unqualified borrowers to get those loans without documentation or other proof of worthiness, the banks endlessly renewing these Fed “loans,” are not required to prove they really need to in order to remain solvent. (A 'if you can't beat them, join them,” tactic by the Fed.) But wait, there's more. Since there was suddenly no market for the billions in mortgages and mortgage backed securities these banks were saddled with, the Fed, for the first time, allowed the banks to use those now nearly worthless assets as collateral against which troubled institutions can borrow even more cheap, easy terms money.
Well! Nothing quite perks up a junkie like a fresh fix! The DOW index soared the moment markets opened Friday morning.
And our Euopean co-dependents felt the rush too:
Paris shares soar on news of Fed discount rate cut; banks lead charge
PARIS (Thomson Financial) - Share prices rebounded in spectacular fashion in afternoon trading following the Federal Reserve's decision to cut its discount on loans to banks to 5.75 pct from 6.25 pct, citing increasing risks to economic growth, market sources said.Announcing the rate cut, the Fed stated: 'Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward.' (Full)
Of course, all the Fed accomplished Thursday was to temporarily stabilize all those twitching credit addicts. They also managed to reinforce the irresponsible behavior that has created a world economy all hopped up on credit-juice. In the weeks ahead expect the Fed to pump more of the stuff into the body-economic by lowering interest rates.
What's really needed is a tough-love intervention. But, with a national election just over a year away don't expect anyone, in either party, to tell credit junkies, from Countrywide Mortgage to CitiBank to Uncle Sam himself, they need to get off the junk and back to basics.
Of course, anyone who knows a junkie or an alcoholic understands that sooner of later such matters take care of themselves. Rock bottom looms in the future of every untreated junkie. It's not a matter of if, but when. It's an ugly way to get the message. But for the worst of the worst, it's often the only way.
Unfortunately, when this mega-addict plummets into that pit the rest of us are going to be sucked along by the downdraft.
http://www.newsforreal.com
Stephen Pizzo has been published everywhere from The New York Times to Mother Jones magazine. His book, Inside Job: The Looting of America's Savings and Loans, was nominated for a Pulitzer.
Who rocked the boat? Everything seemed fine till a couple of weeks ago. Only six months back according to those in the know the sub-prime mortgage issue was a minor bump on the road to "a car in every pot and a chicken in every driveway". Now the sky is falling. What happened?
It seems strange that just as the US is moving to a crisis point in the Iraqi FOOBAR, along come something really close to home, i.e., the possibility of losing home.
Just to add to the mix, China who owns most of the US debt, is all of a sudden a humongous health and safety risk which with its shoddy record of safety regulation and enforcement can only be countered with "don't buy Chinese".
Is it all coincidence or what?
by
bird (0 articles, 0 quicklinks, 0 diaries, 11 comments)
on Monday, August 20, 2007 at 9:10:05 AM
Seems to me this International Herald Tribune article fits.
A debt culture gone awry By Hamid Varzi Friday, August 17, 2007
TEHRAN:
The U.S. economy, once the envy of the world, is now viewed across the globe with suspicion. America has become shackled by an immovable mountain of debt that endangers its prosperity and threatens to bring the rest of the world economy crashing down with it.
The ongoing sub-prime mortgage crisis, a result of irresponsible lending policies designed to generate commissions for unscrupulous brokers, presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the rest of the world.
This new reality has had unfortunate side effects that go beyond economics. As a banker working in the heart of the Muslim world, I have been amazed by the depth and breadth of anti-Americanism, even among U.S. allies, manifested in reactions ranging from fierce anger to stoic fatalism. Muslims outside the United States interpret America's policies in the Middle East not as an effort to spread democracy but as a blatant neocolonialist attempt to solve its economic problems by force. Arabs and Persians alike argue that America's fiscal irresponsibility has forced the nation to seek solutions through military aggression.
Many believe that America's misguided adventure in Iraq was a desperate attempt to capture both a reliable source of cheap oil and a major export market for the United States.
The United States borrows a whopping $2.5 billion daily from abroad to service its burgeoning debt. In order to continue borrowing at reasonable interest rates America needs to retain credibility with its overseas creditors, especially Far Eastern nations running huge trade surpluses. A cessation of foreign lending would force the Fed to raise interest rates to attract money, precipitating a collapse of the already weak housing market and pushing the economy into recession.
This is why the Chinese, in particular, have threatened to retaliate against proposed U.S. trade sanctions by reducing their $1.3 trillion in dollar holdings.
The U.S. debt situation is so grave that the Chinese would not even need to "dump dollars" to precipitate a meltdown but could simply refuse to extend further credit: They could cease purchasing additional Treasury Bonds and Treasury Bills, without selling any excess inventory. China has the far stronger hand, because a run on the dollar would merely reduce China's gigantic cash surplus while increasing America's debt burden to astronomical levels.
U.S. debt affects all nations, but in surprisingly different ways: Third world farmers suffer from the effects of gigantic U.S. farm subsidies aimed at reducing the trade deficit, while Russia has actually profited from America's lack of discipline.
Flush with funds generated from a decade of trade and account surpluses, Russia views U.S. sensitivity to its expansionist energy policy as a response to America's own failure to reduce energy waste and exploit alternative energy sources when it had the opportunity to do so. In sum, American economic decadence has become a source of Russian strength.
America's supply-side economists argue that there is nothing wrong with going into debt, but this is valid only as long as a nation and its consumers are gaining something in return.
What have Americans gained from their nation's mountain of debt? A crumbling infrastructure, a manufacturing base that has declined 60 percent since World War II, a rise in the wealth gap, the lowest consumer-savings rate since the depths of the Great Depression, 50 million Americans without health insurance, an educational system in decline and a shrinking dollar that makes foreign travel a luxury.
The best cars, the best bridges and highways, the fastest trains and the tallest buildings are all to be found outside America's borders. Supply-siders ignore the crucial distinction between, on the one hand, debt employed as an investment vehicle to enhance competitiveness and, on the other, debt used to pay off current expenses and to create even more debt.
The bottom line is that America is awash in red ink and seeks the wrong solutions to its debt problems. A return to fiscal responsibility would make America far stronger, both domestically and internationally, than would a continuation of current policies that falsely project strength through idle protectionist threats and failed military aggression.
Current tensions between the United States and the rest of the world will continue as long as America's military bark is louder than its economic bite.
A solution to the U.S. debt problem requires radical measures, including: the elimination of corporate tax loopholes, a reversal of tax breaks for the ultra-rich, a bipartisan campaign to eliminate budget "pork," imposition of stringent limits on corporate debt and speculative lending, a vast reduction in military expenditure and, finally, an additional 50 cent per gallon gasoline tax that would slash the federal deficit, curtail energy waste and spur technological breakthroughs.
Let us hope America heeds the warnings, dispenses with junk-food economics and embraces a crucial diet of fiscal discipline. It remains to be seen, however, whether America's political leaders have the courage to instigate such reforms, and whether Congress is finally willing to do something for the future of ordinary, hard-working Americans.
Hamid Varzi is an economist and banker based in Tehran.
Wall Street analysts and government economists downplayed the problem with the standard junkies refrain, “We can stop any time we want.”
