The End of Free Markets and the US Dollar
This has been the first week in seven years that the mainstream media have actually been reporting important news. The top news, of course, is that greed and incompetence in the private sector of the US financial ‘services’ industry has now proved to be so massive that the entire financial sector is unraveling.
The US government had two possible responses. It could allow these long-time advocates of deregulation to be hoist on their own petard, which most of them surely deserved, but which would have collapsed global stock markets, thrown millions out of work, and extinguished the life savings and retirement hopes of most of the population. Or it could bail them out, not one by one as they fell, but preemptively, by guaranteeing (with taxpayer’s money) every financial company’s junk securities and junk mortgages — those reckless zero-down, no interest for one year, no payments for one year offerings to hopelessly overextended borrowers — which is what it has opted to do.
The price tag for this operation will easily surpass one trillion dollars. The US treasury doesn’t have this money, or any money for that matter — it is mired in unrepayable debt already thanks to the Bush wars and Bush tax cuts for the rich. So it will print this money. It will flush more than a trillion dollars of new paper into the global markets and pray that the Chinese and the Arabs will accept it.
Because the Chinese are dependent on US trade, they probably will. Because the Arab princes are afraid of an end of US military largesse and the threat of further US military chaos in their region, they may accept it too. It’s a giant game of chicken now. Everyone knows that the US dollar is now essentially worthless, and once people start bailing out, it will collapse. Just a matter of when, now. Six months or twenty years, sudden or gradual.
What’s fascinating is that most US politicians, who are either ignorant of all this or in denial, are still running on a “less government” platform, when the only hope to avoid a global depression was and is massively more government. We’re talking about a takeover, essentially a nationalization of the private sector, on a scale that’s never been seen before. The US government will soon effectively be keeping entirely afloat an industry that now produces close to 30% of the GDP, second only to the war industry that it is the only customer of. In other words, adding to what it already produces, the government (your tax dollars at work) could soon be responsible for three quarters of the entire US GDP. As the WSJ reported earlier this week, “the US financial system resembles a patient in intensive care” (thanks to Craig De Ruisseau for this link). Two days later, the patient is comatose.
And there’s more. Yesterday, in an act of staggering irresponsibility, US regulators placed a ban on short-selling. What that means is that people who bought hedges to protect themselves from losses in a downturn are now forced to cover those hedges, and take massive losses. To cover those losses, they had to buy the very stocks they’re worried will fall, and the huge rush of buying pushed the stock market up and made millions for short-term speculators gleefully ready to sell these stocks at artificially inflated prices.
What’s left is a horrifically fragile and overpriced stock market. Everyone is now trying to figure out how to get out without precipitating the inevitable panic and decline. The NYT reports:
Hedge fund managers who made vast profits betting against the nationís financial titans called the ban unfair, and said the move would only prolong the financial crisis. Some traders said they were no longer betting on the intrinsic health of companies, but rather on what the government might do next. Others simply withdrew from the market.
ìSome of my clients are literally closing their books and going on their vacation for two weeks ó they canít operate in this environment,î said Meredith A. Whitney, a financial services analyst. ìYou pack up and come back and play the game when you know what the rules are.î
Some hedge fund managers complained bitterly that they had been singled out, even as they were among the few to properly manage risk. Those whom the government had propped up were the investment banks, whose hundreds of billions of dollars in losses arose from reckless risks undertaken to raise profits to hedge-fund-like levels.
ìBailing out the banks should not be done,î said Carl C. Icahn, the activist investor. He suggested that the government should have extended those firms a loan, instead of buying their toxic mortgage-backed securities.
Icahn and the rest of Wall Street know full well, of course, that “extending those firms a loan” would be just throwing good money after bad, since the security behind those loans would be worthless, and the loans would ultimately be defaulted as the companies went under.
It is almost as if the regulators suddenly decided that short-selling — hedging your bets that the stock market would go on rising forever — was unpatriotic, un-American. The ‘free’ market is now only ‘free’ if you’re betting that it will rise. And it’s certainly no longer ‘free’ to the US taxpayer.
If you’re a taxpayer, you should be furious. The incompetent thieves who pocketed billions from reckless predatory lending are being rewarded with blanket bailouts from your pocket. Your currency, your life savings and your pensions have been put at risk, and will almost certainly be worthless within your lifetime, as the government and regulators of today choose to reward their friends and stall off real action to deal with this worsening crisis to the next administration. Shameful. This is an unmitigated disaster.
A Better Solution to the Financial Crisis: Ian Welsh has an idea that would work better to deal with the financial crisis in the US: “What the government should do instead is set up a Trust to buy mortgages at a discount, then reset them to 20, 30 or 50 year fixed mortgages with a reduced face amount. If the house is later sold, half of the increase goes to the government, so that taxpayers make a profit. The mortgage cannot be paid off before the end of its term so that financial scavengers cannot come around and, as they did over the last ten years, say ‘get rid of that mortgage, and take ours. It’s better. Honest!’, because we know that when they say better, they don’t mean better for the mortgage holder. The mortgage is attached to the property and is transfered to any new buyer. And the mortgage cannot be removed from the property, and any new mortgages attached to the property are junior to the government mortgage.” Thanks to Jon Husband for the link.
Plan B on Climate Change
Once you’ve come to grips with the grim financial future that now awaits us all, Thomas Homer-Dixon has some important ideas on the climate change front. I was a big fan of his book The Upside of Down which describes what is needed, starting at a grass-roots level and pushing upwards, to respond to climate change effectively. Now, in an extraordinary 78-minute video shot in Toronto last week he lays out Plan B for climate change — what we may (and probably will) have to do as more modest and tepid responses prove ineffective and as the positive feedbacks that are accelerating climate change in unforeseen ways make the situation worse, faster.
Please watch this video — it’s important. If you haven’t time for the whole thing, wait for it to download and skip to the 55-minute mark, where he talks about how rising oil costs are producing a surge in coal-burning, especially in China, that is accelerating carbon emissions. He then goes on to lay out a 7-item list of what we will need to do, in what order, to reduce atmospheric carbon below 350 ppm in time, which essentially means reducing man-made carbon emissions within a few years to zero.
He argues that we need to start working now on at least the first six steps, because they will take time to perfect and introduce, time that we don’t have to waste. He believes, with great trepidation, we will need all six steps to prevent massive climate change.
He has an editorial in today’s NYT that describes the sulfate flooding of the stratosphere (“geo-engineering the atmosphere”) that is #6 on this list. Step #7 is moving to a steady-state economy to replace our current growth economy. In light of what’s happened in financial markets now, I can see why he sees such a move as so radical and difficult. The capital markets would find a market without growth in profits unfathomable, impossible, since all capital markets function on material things being worth more, and people buying more, year after year. Without growth, stocks as currently formulated make no sense, so pensions and other investments will earn only inflation-equivalent interest, and will not increase in real value. Our entire concept of wealth creation will have to change. And, of course, population growth will have to end, too. More about this in a future article.
Thought for the Week: A quote by Franz Kafka on opening oneself to life’s little delights, from an absolutely extraordinary 2001 essay on our misguided obsession with happiness by EFF’s John Perry Barlow (please read it in its entirety; thanks to Evelyn Rodriguez for the link):
It is not necessary that you leave the house. Remain at your table and listen. Do not even listen, only wait. Do not even wait, be wholly still and alone. The world will present itself to you for its unmasking. It can do no other; in ecstasy it will writhe at your feet.
It has been a troubling week. People keep asking me what they should be doing. My advice is still the same: get out of debt (there is a trillion dollars for big financial institutions, but they’re not going to bail you out); and invest in learning — spend your time and money learning essential capacities that will make you resilient no matter what the idiots steering the economy, and the crooks bleeding it dry, do to us all. Learn how to grow and make and fix and maintain your own stuff, and do so in community with people you love and trust (contrary to the old western movies, loners perish, while people with strong caring networks do well). Buy goods that are more durable, even if they cost more. Buy less. Value your money less and your time and relationships more. And pace yourself — I don’t think this is “the big one” (the start of the second Great Depression) yet (I think that’s still a couple of decades off, when Peak Oil and Climate Change and the other horrific fragilities in our economy and society really start to come into play and compound the debt problem).But the Long Emergency has clearly, now, begun.
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