The Sky is Falling...

or something like that.

Robert Reich offers one of the most comprehensible explanations out there.

The Meltdown (Part IV)

The Dow is see-sawing but the reality is that the Bailout of All Bailouts isn't working. Credit markets are largely still frozen. Despite all the money going directly to the big banks, despite all the government guarantees and loans and special tax breaks, despite the shot-gun weddings and bank mergers, despite the willingness of the Treasury and the Fed to do almost whatever the banks have asked, the reality is that credit is not flowing. It's not flowing to distressed homeowners. It's not flowing to small businesses. It's not flowing to would-be homeowners with good credit ratings. Students are having a harder time borrowing for their tuition. Auto loans are drying up.

Why? Because the underlying problem isn't a liquidity problem. As I've noted elsewhere, the problem is that lenders and investors don't trust they'll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years -- the derivatives, credit default swaps, collateralized debt instruments, and so on -- has undermined all notion of true value.

Many of these fancy instruments became popular over recent years precisely because they circumvented financial regulations, especially rules on banks' capital adequacy. Big banks created all these off-balance-sheet vehicles because they allowed the big banks to carry less capital.

Paulson is recapitalizing the banks -- giving them money directly rather than relying on reverse auctions -- largely because he's come to understand that the banks have taken on so much debt that the reverse auction system he told Congress he would use(designed to place a market value on these fancy-dance instruments) will leave too many banks insolvent.

But pouring money into these banks, expecting they'll turn around and lend to small businesses and Main Streets, is like pouring water into a dry sponge. Nothing will come out of it because Wall Street is so deep in debt that the banks are using the extra money to improve their balance sheets. They're hoarding it because their true balance sheets -- considering the off-balance sheet vehicles they created over the past several years -- are in such rotten shape.

In other words, taxpayers are financing a massive effort to save Wall Street's balance sheets from Wall Street's previous off-balance-sheet excesses. It won't work. It can't work. The entire effort is merely saving the asses of lots of executives and traders who got us into this mess in the first place, and whose asses should not be saved at taxpayer risk and expense.

What to do? Immediately require the Treasury to stop the broad Wall Street recapitalization, and require Wall Street to lend the money directly to Main Street. At the same time, force Wall Street to write down its true balance sheets: Let the executives and traders take the hit. Let their shareholders and even their creditors take the hit for Wall Street's collosal irresponsibility. This is the only true way to restore trust. It's also the only way to save Main Street's small businesses, homeowners, students, and everyone else.

Crashing the system II

I'm happy to see (via M. Thoma) that those who are crashing the systems are at least not making quite as much money.

Change is in the air for financial superclass, by David Rothkopf, Commentary, Financial Times: ...The re-engineering of international finance has been one of the transformational trends of our times – in just a quarter-century, capital flows became massive, instantaneous and controlled by a new breed of traders representing a handful of major financial institutions from a few countries. Their rewards have transcended any in history as shown by an estimate ... that the top hedge fund manager last year made $3bn.

The concentration of power has also steadily grown..., the key executives are in the US and Europe, underscoring the transatlantic nature of this elite. Change, however, is in the air. The history of elites is one of their rising up, over-reaching, being reined in and supplanted by a new elite. Several recent developments suggest that the financial crisis could signal the high-water mark of power for this group.

First, the crisis is prompting a re-regulatory drive. The power of financial elites had been evident in their ability to argue that global financial markets and markets in new securities should remain “self-regulating” (how many of them would hop into a self-regulating taxicab?), then when crisis comes ... these champions of less government involvement have then persuaded governments to cauterise their wounds.

Now, however, there are encouraging, if preliminary, signs of a push towards more effective collaboration between governments – the first steps towards creating the much needed checks on global markets... This could erode the agility of financial elites to play governments off against each other, with the weakest regulator setting the rules.

Checks on markets? Gosh, I wish someone had thought about that before.

Get rich and stay that way!

A new article by the Financial Times indicates that the truly rich are weathering the current financial crisis just fine, thank you.

World’s rich shrug off credit crunch

By Daniel Thomas in London

Published: April 20 2008 16:38 | Last updated: April 20 2008 16:38

The ranks of the world’s rich swelled to 8m during 2007 as the wealthy proved immune to the strains across global economies in the latter half of the year.

There was a 4.5 per cent increase last year in so-called “high net worth individuals”, those with assets of more than $1m, according to the 2008 wealth report compiled by Citi Private Bank and Knight Frank, published on Monday.

There was particularly strong growth of wealthy populations in the emerging economies of China and India, as well as those countries that have access to ­natural resources such as Kazakhstan.

Countries such as Brazil, Canada, Australia and ­Russia also each added more than 8,500 wealthy residents in 2007 on the back of the commodity boom.

The report says that the rate of growth of high net worth individuals has outpaced growth in both gross domestic product, and GDP per head, which it believes indicates that the rich are getting richer relative to their respective countries.

“This is not a perfect measure of relative wealth growth across income levels,” it says, “but there is an indication here that the ­plutonomy model retained its strength through 2007 and is in rude health.”

The US is still home to most of the world’s truly rich. High net worth individuals make up 1 per cent of the US population, with 3.1m people claiming to be dollar millionaires, and 460 to be billionaires.

Japan claims the next highest population of the wealthy, with 765,000 dollar millionaires, and then the UK, where there are 557,000.

The UK has seen the biggest increase in billionaires, however. Numbers rose by 40 per cent in 2007, from 35 to 49. China’s high net worth population grew by 14 per cent in 2007, and now number 373,000, almost as many as in Germany.

The report says there was little change in the investment activity of the very rich during the credit crunch in 2007, other than a shift away from structured finance. It says the very wealthy are “weathering the crunch” much better than insti­tutional investors, owing to the diversity of their port­folios.

More than 50 per cent invest in property, which has fuelled a rapid growth in luxury house prices across the world.

I'm not sure what the surprise is here, if any, but it does lend further (albeit circumstantial) evidence to the idea that the neoliberal economic regime will keep the world's weathly wealthy no matter what? Why? Well, if the economic system is tilted towards you and you pull most of the levers, why would capital flows reverse direction? Or, to put it differently, why would those in power do anything to put their wealth at risk?

The Bear Stearns example is pertinent. Rather than let the markets decide, the elite class used its power to subvert the market and pay off weathly stakeholders. Rather than fix the system, they protect themselves.

It's not a conspiracy...

I don't really believe much in conspiracies. Sure, they exist. But most things like, say, the killing of Allende by Pinochet supporters with strong help from the CIA, or the promotion of Curveball within the U.S. "intelligence" network, are actually done in the open. To call them conspiracies would be to deflect attention from the very real power of social networks and the (in)human actions that take place thanks to hierarchical and peer systems.

That's why I found the following a fun read. Corporations, especially in the last 50 years, have gone viral. The belief system they promote (to the disadvantage of many struggling humans) has spread far and wide, infiltrating the deepest core of our beings.

Is the consumerist totalization of this country and the world really a conscious plot by a handful of powerful corporate and financial masters? If we answer "yes" we find ourselves trundled off toward the babbling ranks of the paranoid. Still though, it's easy enough to name those who would piss themselves with joy over the prospect of a One World corporate state, with billions of people begging to work for their 1,500 calories a day and an xBox chip in their necks. It's too bad our news media quit hunting with live ammo decades ago, leaving us with no one to track the activities and progress of what sure as hell seem to be global elites, judging from the financial spoor we find along every pathway of modern life.

In our saner moments we can also see that it does not take dark super-centralized plotting to pull off what appears to have been accomplished. Even without working in overt concert, a few thousands of dedicated individual corporate and financial interests can constitute a unified pathogenic whole, much the same as individual cells create a viable dominant colony of malignant organisms -- malignant simply by their anti-human, anti-societal nature. We don't see GM, Halliburton, Burger King and CitiBank lobbying the state for universal health or clean rivers, do we? But mention unions or living wages, and the financial colony within our national Petri dish shape shifts into a Gila monster and squirts venom on the idea and shits money all over Capitol Hill. I looked at all this as coincidence for years until the proposition finally strained credulity so much that I threw in the towel and said, "Fuck it. There is only so much coincidence to go around in this world. [Source: http://www.joebageant.com/joe/2006/12/somewhere_a_ban.html h/t: http://www.electricedge.com/greymatter/archives/00007254.htm]