Troubling indeed is the size of the loans. Lehman Brothers had debts of $618 billion, which would make it the largest bankruptcy on record. Such a large default will impact many other financial companies and spill over into foreign markets. At the very least it will increase the risk premium associated with any loan. The higher interest rates will slow lending and economic activity, impacting industries unaffected by the initial default.
The more expensive it is to borrow, the less borrowing there is. If interest rates climb, the economy contracts. Therefore to continue economic growth, banks need to be able to loan and financial companies need access to credit. Through a discount window, the Fed has offered to exchange mortgage-backed securities of dubious value for AAA US Treasuries. Apparently that mechanism failed to provide Lehman with enough credit to forstave its bankruptcy. This means that the Fed has really lost control. Acccording to the Chicago Tribune, earlier this year economist David Hale heard Bernanke privately admit that "We have lost control...We cannot stabilize the dollar. We cannot control commodity prices."
Whether Bernanke blinked or not, it is clear that the recent depression in commodity prices may have been fleeting. Gold soared yesterday, along with oil. The Dow has been battered in two huge losses so far this week. The dollar sank against the Yen. These declines attest to the magnitude of the credit crisis, and the broadly held perception that the Fed can't do enough--that simply making more money available to lend and borrow won't head off the cascading consequences of the credit crisis.
An engineered crisis?
The current crisis seems to have its roots in systemic failure, rather than willful manipulations by company owners hell-bent on getting out before their companies self-destruct as a result of their mismanagement. Yet as we saw in the case of Enron, those at the top typically do escape comparatively less well damaged than the stockholders, who in this more recent crisis are the last to receive any compensation for their losses.
One consequence of the government providing bridge loans has been that shareholders of distressed financial service stocks sell their stock and instead choose to purchase bonds issued by the troubled company, as bondholders are typically farther up in line to receive the assets of a company as it liquidates. The share price then falls, which makes attracting capital that much harder.
Could this current financial crisis be engineered? Probably not. The impact to the superwealthy appears to be sufficiently bad as to disprove any hypothesis of a willfully contrived crisis--always an intriguing possibility to a conspiracy theorist like me. What is suggestive of a conspiracy is the amount of federal money being dispensed to protect wealthy individuals and corporations.
Unlike Naomi Klein's Shock Doctrine, private players aren't going to end up controlling financial companies--or are they? The Federal Reserve is a privately owned corporation. By providing the necessary capital for the bailout, the Fed has increased the amount of debt carried by the US government to unprecedented levels. As anyone who follows Ron Paul knows, public taxes that Americans pay go directly to the Federal Reserve. The Treasury is little more than a money-printing extension of the Fed who simply forwards our tax payments to the Fed to pay for the interest on our government's borrowings. What a system!
Unfortunately, our monetary system is based purely on IOUs, the promise to pay, and we measure wealth by how much of someone else's debt--be it the Federal Reserve's or someone else's--we own. The great Achilles Heel of such a system occurs when borrowers default, which happens because they aren't accumulating enough of someone else's debt fast enough.
Essential, fiat currencies are a constantly eroding store of value. It's just a question of cui bono, who profits, from the business cycle. After every economic calamity in the past century, the wealthy end up wealthier. Investment incomes increase quicker than do salaries. So as the working class buys less and less in times of inflation, wealthier types make more and more, their incomes exceeding the inflation rate. The poor end up making less in real terms while the rich accumulate more capital, although each dollar buys less.
Without investors willing to put capital in, and extend loans--this most definitely includes overseas sovereign wealth funds that prop up our dismal balance-of-payments, our debt-based capital system unwinds. Money lent which goes uncollected--bad debts--represent a massive destruction of capital. The good side is that inflation may be slowed--the bad side is that capital is not available to lend and the economy slows, perhaps quite quickly and radically.
Essentially the only thing propping up the industry is the addition of more money--liquidity. Sadly, in our commeditized financial markets, money has become debt and debt money. When we collect Federal Reserve Notes, we assemble someone else's debt, a promissary note. To assemble wealth, we assert a claim to being owed more. To create more wealth and money, we simply get our government to borrow more, through the Fed, and lend it out. If the interest the banks charge doesn't cover their defaults, they can't stay in business and lending slows or ends altogether. In such a crisis government becomes the lender of last resort, creating money from bonds it sells to the Fed. The Fed, in turn, absorbs interest from the loans they make to our government, which is making interest-only payments back to the Fed in the form of taxes. So more money lent out means more interest income for the banks. Now if interest rates make borrowing too expensive, the US government will find it harder and harder to bear the payment of interest alone.
Oops, we screwed up. Now bail us out
The more expensive it is to borrow, the less borrowing there is. If interest rates climb, the economy contracts. Therefore to continue economic growth, banks need to be able to loan and financial companies need access to credit. Through a discount window, the Fed has offered to exchange mortgage-backed securities of dubious value for AAA US Treasuries. Apparently that mechanism failed to provide Lehman with enough credit to forstave its bankruptcy. This means that the Fed has really lost control. Acccording to the Chicago Tribune, earlier this year economist David Hale heard Bernanke privately admit that "We have lost control...We cannot stabilize the dollar. We cannot control commodity prices."
Whether Bernanke blinked or not, it is clear that the recent depression in commodity prices may have been fleeting. Gold soared yesterday, along with oil. The Dow has been battered in two huge losses so far this week. The dollar sank against the Yen. These declines attest to the magnitude of the credit crisis, and the broadly held perception that the Fed can't do enough--that simply making more money available to lend and borrow won't head off the cascading consequences of the credit crisis.
An engineered crisis?
One consequence of the government providing bridge loans has been that shareholders of distressed financial service stocks sell their stock and instead choose to purchase bonds issued by the troubled company, as bondholders are typically farther up in line to receive the assets of a company as it liquidates. The share price then falls, which makes attracting capital that much harder.
Could this current financial crisis be engineered? Probably not. The impact to the superwealthy appears to be sufficiently bad as to disprove any hypothesis of a willfully contrived crisis--always an intriguing possibility to a conspiracy theorist like me. What is suggestive of a conspiracy is the amount of federal money being dispensed to protect wealthy individuals and corporations.
Unlike Naomi Klein's Shock Doctrine, private players aren't going to end up controlling financial companies--or are they? The Federal Reserve is a privately owned corporation. By providing the necessary capital for the bailout, the Fed has increased the amount of debt carried by the US government to unprecedented levels. As anyone who follows Ron Paul knows, public taxes that Americans pay go directly to the Federal Reserve. The Treasury is little more than a money-printing extension of the Fed who simply forwards our tax payments to the Fed to pay for the interest on our government's borrowings. What a system!
Unfortunately, our monetary system is based purely on IOUs, the promise to pay, and we measure wealth by how much of someone else's debt--be it the Federal Reserve's or someone else's--we own. The great Achilles Heel of such a system occurs when borrowers default, which happens because they aren't accumulating enough of someone else's debt fast enough.
Essential, fiat currencies are a constantly eroding store of value. It's just a question of cui bono, who profits, from the business cycle. After every economic calamity in the past century, the wealthy end up wealthier. Investment incomes increase quicker than do salaries. So as the working class buys less and less in times of inflation, wealthier types make more and more, their incomes exceeding the inflation rate. The poor end up making less in real terms while the rich accumulate more capital, although each dollar buys less.
Without investors willing to put capital in, and extend loans--this most definitely includes overseas sovereign wealth funds that prop up our dismal balance-of-payments, our debt-based capital system unwinds. Money lent which goes uncollected--bad debts--represent a massive destruction of capital. The good side is that inflation may be slowed--the bad side is that capital is not available to lend and the economy slows, perhaps quite quickly and radically.
Essentially the only thing propping up the industry is the addition of more money--liquidity. Sadly, in our commeditized financial markets, money has become debt and debt money. When we collect Federal Reserve Notes, we assemble someone else's debt, a promissary note. To assemble wealth, we assert a claim to being owed more. To create more wealth and money, we simply get our government to borrow more, through the Fed, and lend it out. If the interest the banks charge doesn't cover their defaults, they can't stay in business and lending slows or ends altogether. In such a crisis government becomes the lender of last resort, creating money from bonds it sells to the Fed. The Fed, in turn, absorbs interest from the loans they make to our government, which is making interest-only payments back to the Fed in the form of taxes. So more money lent out means more interest income for the banks. Now if interest rates make borrowing too expensive, the US government will find it harder and harder to bear the payment of interest alone.
Oops, we screwed up. Now bail us out
The absence of adequate regulation is highly suspicious. In the Bush era of lax regulations, a financial crisis could have easily been anticipated, and was, at least outside the mainstream media.
Regulatory circumventions from the subprime lending fiasco presaged the broader crisis. Eliot Spitzer had been trying to enforce mortgage regulations but had been actively inhibited by George Bush's Department of Justice. In an article written in March, Greg Palast explains:
"Instead of regulating the banks that had run amok, Bush's regulators went on the warpath against Spitzer and states attempting to stop predatory practices. Making an unprecedented use of the legal power of "federal pre-emption," Bush-bots ordered the states to NOT enforce their consumer protection laws."
Market collapse and large-scale federal intervention seems followed deregulation in the home lending industry just as it has for banking. Spitzer's fall from grace came the day after a huge bailout was announced as part of the Countrywide deal--kind of like how 9/11 came the day Rumsfeld spoke about $2.3 trillion that had gone missing from the Pentagon. Did Spitzer's humiliation serve as a shock meant to send a warning to other would-be regulators of the mortgage industry (which included all 50 Attorneys General.)
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