Masthead graphic based on a painting by Gudrun Thriemer.

Wednesday, January 07, 2009

Henry C K Liu, "Monetarism enters bankruptcy," Asia Times, January 5, 2009.

[While Chris Grevler at the Boston Consulting Group babbles about a "vicious cycle of thrift" (see also "Greed is good"), Henry Liu reminds us that

"as the housing bubble burst, home equity loans collateralized by inflated home prices were putting most home mortgages under water and an increasingly large number of home equity borrowers in default."
Meanwhile Canadian Credit Unions were still advertising equity loans on TV, while UNCTAD was warning that
"governments and central banks must also recognize that a modern financial market chasing higher and higher returns based on the expectation of ever-rising prices in certain sectors or certain assets is a beast that must be tamed before it causes acute damage and threatens the whole system" (October 2008).
What is the scope and meaning of all this? Events that were first (i.e., July-August 2007) pooh poohed as a correction or an emergency have matured into a full-blown crisis. A host of wishful thinkers who believe that capitalism is still alive and ailing, have declared the end of capitalism--or Western Civilization, or both. Michael Finley at Defense and the National Interest asks seriously, "Is the global financial crisis a 'bear market rally' in the decline of the state, or its resurgence [i.e., a resurgence of the state]?"

Even Alan Greenspan calls it an economic, not a financial crisis. In March, Philip Blond at the Independent implied that calling it a "liquidity crisis" was a neoliberal delusion. He argues that the crisis is "an asset insolvency crisis brought about by massive debt leverage. Neo-liberals are still reacting as if the emergency was one of liquidity" (Independent Mar 08). Many voices in the wilderness. -jlt]

ABS holdings which, when applied to a market decline, exponentially drove prices even lower.

Large US investment banks had pooled subprime residential ABS totaling $383 billion and sold the paper to investors worldwide in 2006. By September 2007, 21%, or about $80 billion worth, of the mortgage securities were in default, plus another $20 billion sold by smaller firms. There were $18 trillion of all forms of outstanding ABS, and market analysts estimated at the time that marked-to-market losses would be in the range of $400 billion to $600 billion. Yet media reports cited only about $150 billion of acknowledged losses as of the end of 2007. The trough, of which no one had any reliable estimate, remained in the unknown future despite the Federal Reserve's frantic rate reductions, which by December 2008 has reached near zero.

  No recovery from speculative excess can be expected without a policy-induced rise in employment and wage income to catch up with an asset price bubble.

The impact of the subprime defaults had been magnified as firms purchased for a fee slices of these original-rated pools and repackaged the assets a second time, rated them a second time, and later sold them as lower-tiered units at higher yields to investors with a bigger risk appetite. The impact has been global, as most international money center banks have offices in all major financial centers around the world. (See the three-part Pathology of Debt, Asia Times Online, November 27-29, 2007.)

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