wall st crisis
16 Sep 2008
It's Panic Time
Wall Street's financial crisis has widened to a true panic, writes Ben Eltham. The world economy now faces its most serious threat since 1929
"I'm standing outside Lehman Brothers headquarters on 7th Avenue and 50th Street in New York City watching Lehman Brothers die," writes Fortune Magazine's managing editor, Andrew Serwer. "Employees, some in suits, others in casual clothes, are filing out with all they can carry as time runs out."It's a crisis that began in slow motion but is now unfolding on the pavements of the world's most famous financial district. The New York Times and Fortune have published photographs of people carrying out boxes from the marbled foyer of Lehman Brothers' Times Square headquarters. The Wall Street Journal reports "the US financial system was shaken to its core". CNBC calls it "Bloody Sunday" and a "financial tsunami".
Yesterday the US stock market suffered its worst daily plunge since the September 11, 2001, terrorist attacks, with the Dow dropping 500 points.
One of Wall Street's biggest and oldest merchant banks, Lehman Brothers, has gone bust. The company filed for bankruptcy on Monday morning, New York time, under chapter 11 of the Bankruptcy Code.
Lehman is just part of a spreading disaster on Wall Street. Another famous merchant bank, Merrill Lynch, sold out to the Bank of America over the weekend in a last-ditch ploy to avoid the same fate. A major US savings bank, Washington Mutual, is also in trouble, as is a huge insurer, the American Insurance Group.
A year ago, Wall Street had five major merchant banks. Now only two are left.
The crisis reached boiling point on Friday evening, New York time, when US Treasury officials - including Treasury Secretary Henry Paulson and Chairman of the Federal Reserve, Ben Bernanke - briefed senior Wall Street executives that there would be no government bailout of Lehman.
"There is no political will for a federal bailout," said Bernanke's top New York official, Timothy Geithner, according to reports in the Wall Street Journal. "Come back in the morning and be prepared to do something." So began a frantic weekend in which Lehman Brothers CEO Richard Fuld tried to find a willing suitor to buy the troubled bank. None were found. With Lehman Brothers shares falling 94 per cent since the start of 2008, the company was out of cash and out of time.
In response, the US Federal Reserve has announced yet another rescue package of soft loans and relaxed collateral provisions to try and keep Wall Street from imploding - the latest in a long line of attempted bailouts since the sub-prime crisis first emerged in August 2007. Like those earlier announcements, this latest statement seems unlikely to stem the onrushing tide. In a separate development, other Wall Street firms rolled out a $70 billion program of emergency loans.
How did it happen?
As I explained in March this year, the sub-prime crisis emerged unexpectedly in a financial industry enjoying a four-year boom. The risks of dubious mortgages were thought to have been tamed, owing to the clever packaging and on-selling of that debt to a cascade of secondary lenders through elaborate financial instruments like "collaterised debt obligations" and "credit-default swaps".
But that was before the US housing crisis, in which a speculative bubble in home lending burst spectacularly. Many mortgagees defaulted on loans that banks thought were secure, and lenders could no longer sell on that debt - or even insure it. Some heavily indebted householders destroyed their properties or simply stopped paying their mortgages, forcing lenders to take costly and time-consuming court action to repossess homes. And some housing markets (for instance, parts of California and Florida) are so depressed that buyers cannot be found. The resulting liquidity crunch has savaged the bottom lines of scores of US financial institutions.
UQ Professor of Economics John Quiggin has called the sub-prime crisis "the end of neoliberalism". What he means is that the massive nationalisation of the mortgage companies Fannie Mae and Freddie Mac "marks the failure of the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state".
Unfortunately for the rest of us, Quiggin is probably engaging in wishful thinking here, if only because the die-hard proponents of neoliberalism live in a cloud-cuckoo land where the reality of market failure never sets in. Even so, the sub-prime crisis and subsequent Wall Street panic is the gravest instance of market failure in two generations. The bankruptcy of Lehman will place severe pressure on other banks, which will now have to unwind any positions they held with Lehman as a counter-party - probably at a loss. This poses a whole range of further problems to the stability of a vulnerable and inter-connected financial system.
As I asked in my March article on the forced sale of Bear Sterns, "why do banks fail so regularly?" The reason is that they are inherently unstable: all banks lend out much more than they hold in assets. If confidence in a bank dries up, the result is a panic like the one we saw on the weekend. Customers rush to pull their money out - this is called a "run" - and the institution collapses. We've already seen two of these so far in this crisis: the UK's Northern Rock and IndyMac in the US.
In other words, banks and other companies that lend money are dangerous institutions, and need to be regulated carefully. One of the things the sub-prime crisis has clearly demonstrated is that the banking and finance industries don't necessarily understand the way their industry is interconnected. But because of the money that could be made in a housing asset boom, legislators were persuaded by aggressive lobbying to relax lending standards. Further, under Alan Greenspan, US fiscal policy was kept purposely lax, which only made the bubble worse.
If enough financial institutions fail, the turmoil can spread to the rest of the economy. There must now be a significant risk of this in the US and European economies. In the Great Depression, thousands of American banks failed and millions of ordinary citizens lost their savings. The result won't be as bad this time. But the long-term effects of the Panic of 2008 will undoubtedly affect the world economy. More US companies will fail before this crisis abates.
There are also lessons here for Australia. Although our financial regulations are much more stringent than those in the US, our housing sector is similarly over-valued. The housing sector is already stalling in NSW and may be about to turn in other states. If Australia suffers a housing bust on the scale of the US, UK or Spain, Australian banks will eventually come under the same sort of pressure that has destroyed Bear Sterns, Merrill Lynch and Lehman Brothers.
At that point, Reserve Bank chief Glenn Stevens will really be earning his money.
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Oh please Ben, "…the reality of market failure never sets in…" Huh? - the trouble with your argument is that these failures are exactly caused by a LACK of a free market, and that’s the reality "which never sets in".
News flash #1 Ben, a "free" market is one which is NOT controlled by overt regulation or by a central authority and news flash #2 - the US monetary and banking system is ENTIRELY controlled by it’s central bank.
Since when did the system of Central Banks with their command economy style control over money, credit markets and interest rates comply with the minimum requirements of a free market system?
You were wrong in your March article and you are wrong again now.
Perhaps if you had read Satyajit Das back then you might have had a better comprehension of the causes of the current banking and credit crisis.
Failed free market? Ye right! When you’re done with Satyajit Das read Prof Marc Faber and then dip your toe into a bit of Prof Antal Fakete, or Jim Rogers, or Warren Buffet, or George Soros and then, as a crowning glory, read Dr. Oleg Mozhaiskov, the deputy chairman of the Bank of Russia, who gave a speech to the London Bullion Market association’s Bullion Market Forum in Moscow back in 2004 and in which he warned people like Prof John Quiggin in the West of this impending catastrophe unless we steer away from the same socialist control economy style systems which have destroyed the economies of each and every socialist state to date.
Here is a clue Ben, there is a difference between the terms "controlled" and "free", really there is, look it up. This is not a "free market" failure, it is a "controlled market" failure because money, interest rates and the control of credit have been 100% controlled by our Central Banking system since before you were born.
As the USA slowly embraces socialism, and rids itself of what little free market system is left, so it will die the same long economic death as Soviet Socialist Russia. The world already knows that there is an inversely proportional relationship between a nation’s drive toward socialism on one hand and it’s financial and economic health on the other. Putin knows it, the Russian Bankers know it, the Oil producing nations of the world know it and China knows it which is why they are no longer bankrupt while an increasingly socialist West is becoming hopelessly bankrupt at the same rate at which it rejects free market principles.
That’s the reality which never sets in Ben.
Yeah! That’s it! We just haven’t been free market enough. I propose a system so free of regulation that I can pop around to Rockjaw’s place and go through his wallet. Screw the poor. Screw the idiots who spend their money on food and school fees instead of servicing an overpriced mortgage sold to them by misrepresentation of the financial market by that very same market.
Screw international investment banks. These dens of socialist activity have dwelt in our midst too long and must be weeded out! Is Senator McCarthy still alive? Can he be revived?
The USA has become the new communist state, that much is clear. We must isolate ourselves from this nanny mentality and arm ourselves and our children with slug guns. Every failure of the free market system must be a failure to go far enough because the free market system is perfect. That’s right PERFECT!
Was it Plato or Socrates who decided to teach his horse to go without food? He almost had it perfectly trained when it died. Free-market believers like Rockjaw would claim that the experiment didn’t continue for long enough. That’s faith for you!
The ultimate free market is lawlessnes. Survival of the fittest. Mr Rockjaw, i am happy to give you any commisions or fees you can trick me into paying as long as i can come over to your house and beat the S#!T out of you whilst stealing it back. That is a true free market.
I am sure you value physical safety and enjoy laws that ensure you are safe. I like a secure and safe market to protect me from economic and business bullies.
All or nothing i say.
Whuuu!! You feeling sore about something Dr Dog? Does it upset you that no one will willingly dedicate their lives labouring away for no gain other than to support your lifestyle Dog?
I feel your pain!
And I hope your wallet is nice and fat Dog, because thanks to the brilliance of our socialist thinkers, you’re the one who is ultimately going to carry the can for this mess, but hey, every time socialism fails we hear complaints that there is not enough regulation to impose the perfect control system - that’s right, PERFECT!
Go look after your own wallet Dr Dog, mine is doing just fine without your help or controls.
Cheer up, maybe Sarah Palin will do it. She seems to be to the right of Bush.
Greenconscience I’d like to see you try to beat anything out of anyone, and by the way, the use of coercion and threats of violence are in fact a socialist idea and are incompatible with the minimum requirements of a free society.
Peterbest, if you are going to make reference to philosophers from the Periclean age, at least familiarise yourself with what they said instead of using bullshit to fill in those huge blanks from your crappy socialist education which the rest of us wasted our money paying for.
Here is one straight from the trial of Socrates as is recorded by both Plato and Xenophon - "My crime is that I am a public benefactor, I should be maintained at public expense. Let my sentence be not death but a fine of One Mina."
So the old civilised Greeks also understood what it was like to be milked pale by a lazy mob of permanently unemployables who expect a hardworking society to subsidise their worthless lifestyles.
During the trial of Socrates they were referred to as "public benefactors" today they call themselves socialists and Central Bankers, but between then and now they have always been more accurately known as thieves and confidence tricksters.
Pretty soon the US won’t have the funds to pay their bureaucrats at the Fed anyway.
A picture tells more than 1000 words. A photo in the press today showed a young woman leaving Lehman with her personal possessions in a box.
On top was a wine bottle - very much like champagne.
Where else in other than cuckoo land does anyone work that allows that at their desk. Could it be in preparation for the celebration of another huge bonus
A bonus for manipulation - not production - is what has brought them down. let’s hope there will be a new world review of overpaid
free enterprise proponents with incredibly strong socialist beliefs when it
comes to tough times of their own making BUT which they transfer to the lowly paid and underprivileged
‘your crappy socialist education which the rest of us wasted our money paying for….’
‘milked pale by a lazy mob of permanently unemployables who expect a hardworking society to subsidise their worthless lifestyles.’
Anyone who resorts to this kind of elitist abuse loses credibility for anything else they say. This guy makes Sarah Palin and George Bush sound human.
But billgale, modern Central Banks and their associated banking class like Lehman, Bear Stearns, AIG, WaMu, Merryl Lynch et al are all products of modern socialism. Central banks are a "monetary authority". Central banks "control" the regulation of money, credit and interest rates. The emphasis is on the term "control"
"Free enterprise" as you put it, or, a free market system, rejects systems of control or market manipulation. A free market system and Central Banking system are therefore mutually exclusive.
Here’s a test for you, try to imagine any socialist system anywhere in the world without a Central Banking system to bleed the working class into starvation. Try to convince a socialist state to get rid of it’s Central Bank and you will quickly realise that Central Banks are the single most important tool in the socialist economist’s toolbox. They are certainly not the bank of choice for any free market.
So to blame this credit crisis mess, which was caused by irresponsible Central Bankers and overspending socialist governments across the Western world on the "free market" is entirely an act of complete ignorance.
Ancient Greek society was a slaveholding society. Anyone that "reads in" any kind of "egalitarianism" (be it bent towards the ‘free market’ or ‘socialism’) into ancient western ethics is "talkin’ out their arse."
I think that the Lehman coverage has been a a bit misleading though. The US government is only too happy to be cast as the objective bystander - only too ready to dish out "tough love" to the "poor little rich kids" of Wall Street that have become "too greedy". Why is the spotlight not shining on the consequences of the actual actions of the Fed in the last few days? What happens when you relax the type of asset you accept in exchange for government bonds? Can the US government balance sheet bare the strain? (especially after having already debt financed the most expensive war ever waged) Which governments (China) loose out if the US decides to devaluate its exchange rate in order to cope with all the additional debt?
By the way, I don’t think George Soros is against central banks.
I love it!
Lehman Bros: Where Ninja’s meet the American Psychos.
No Income No Job and no Assets, (ninja) They really need the money, that is socialism is’nt it? They got the money from the big end of town. So old Rockjaw is correct to some extent, I’m sorry to say.
The bigger they are the harder they fall someone once said.
Well guys, cloud cuckoo land is a wonderful place,but then we know that unlike psychiatrists who collect the rent from those who build the castles in the air, the ones who live in them now will actually be paid for by the taxpayer. That’s the way the ball bounces.
Anyway, who needed superannuation anyway?
The climate will change and "This is the way the world ends, repeat, not with a bang but a whimper", more like a champagne popping and finding water inside the bottle instead.
Hey buddy, got a dime for a cup of coffee?
Sorry could you make that A$1000
But Bob, slavery IS socialism in its absolute form!
The ancient Greeks used force and coercion to deprive slaves the right to their individual freedom and the fruits of their labour were taken from them by their masters.
Modern socialism uses force and coercion to deprive it’s citizens the right to individual freedom and the fruits of their labour are taken from them by their masters on an increasing scale relative to their rate of productivity.
Please explain the difference between the two systems.
If ‘slavery IS socialism’ there can be no ‘difference between the two systems.’
However, I don’t find your reason for equating the two convincing.
The surplus from social production is always the object of contention within a culture. Controlling this surplus always involves force and coercion.
You seem to be arguing for the idea that the "free market is a meritocracy." (Although I can’t be sure).
But what is the measure of ‘merit’ if not an objectively or consensus determined ‘rate of productivity’?
That would mean, by your own definition, that "socialism IS a free market."
Rockjaw, I’m sore about a lot of things, but not my concerns about you or anyone else supporting my lifestyle (which you seem to have made considerable assumptions about).
I was simply implying, as does Greenconcience ( I agree with your evaluation of his likely physical prowess, arms like celery sticks) that a completely deregulated system is anarchy, leaving you or anyone else vulnerable to straight out theft.
Are you advocating for anarchy Rockjaw? I thought facism was more up your alley, since so many of us are inferior unemployables.
In terms of the difference between slavery and socialism I agree that socialist states of the past have had some similarities. But I could also claim that these states DID NOT GO FAR ENOUGH! They left room for resources and power to accrue to leaders, making it by definition no longer a socialist state.
But why are you against slavery Rockjaw? The born to rule mentality suffuses your posts. Surely slavery is one way proper citizens like yourself can ensure the plebs like me don’t get too big for our boots.
As to my socialist education (you’re right, Sharon Burrows was my English teacher, and a very good one), I assume then that you wanted people like me attending your private school, taking your lunch money and making fun of your stupid hats.
How far to the right do you have to go before you fall off the edge of reality?
My private school Dog? Now who is making assumptions? The "funny hat" was a yarmulke and my cultural background has prepared me well for the sort of abuse which you advocate. Your views or so barberous and outdated I was a little surprised somebody like Chaucer was not your English teacher Dog.
The trouble with coercion Dr. Dog is that soon the coerced get pissed off with the filth and the squalor typical of socialist states that they demand their freedom and liberty, but then the socialist state fills the streets with blood, snot and tears - and then freedom prevails and socialists are forced back to work for their living again. The world has witnessed this so often now that the monotony is becoming quite boring.
Forget socialism Dr Dog, it’s a failed system and besides, socialism is sooooooo last millenium. Pack away your 1950’s wardrobe and welcome to the new millenium where slavery is no longer considered an acceptable socio-political/economic option.
This new generation does not think slavery is all that cool Dog.
Bob, I have argued for or against nothing - the point being conveyed here is that the current credit and monetary crisis blamed on "free markets" were in fact caused by socialist banking systems and not the free market.
And Bob, the "measure of merit" is inconsequential in a functional economic system, and besides, "consensus", although a great indicator of fashion, has never been much use in determining scientific fact or defining the laws of nature or the laws of economics.
Bob, in the 21st century the tired and incompetent amongst us won’t need outdated and barberous socialist systems to force the rest of us to support them because a healthy labour market will provide them with ample jobs to work for a living and those who are completely unemployable can live off the proceeds of corporate taxes.
Well that’s interesting Rockjaw but you aren’t really answering any of my serious questions. Are you an advocate for anarchy? You seem to think regulation in any form is unacceptable.
Your utopian free market as described - ‘in the 21st century…’ is simply a statement, you present no evidence that the free market is capable of providing this jobs for all conditions.
And your claim that socialism is an abberation of the last century is absurd. Surely free market has had as good a run as any socialist system, and has resulted in as much dysfunction as socialism, albeit in different ways. I am unsure what you mean by barberism, I can’t think of anything more barbaric than the capitalist system.
As for your personal comments, you are not saying that you didn’t go to a private school, just that you went to a different private school than what I thought. So as a born to rule Jewish man rather than a born to rule Anglican, where would you suggest young people who cannot afford private school go?
I guess if you eliminate socialised education they can work in mines and loom mills so that the free market owners can keep them in their place from the get go.
Born to rule Jewish man? Born to rule Anglican? What are you talking about Dr Dog?
What does my race, gender, nationality or religion have to do with any of this Dr Dog?
The last socialists who murdered millions of my people have already said everything there needs to be said about socialism, state coercion and, as you put it, "the aberration of socialism of the last century". Study those aberrations and you might find that socialism is not as attractive as your brainwashed mind might trick you into believing.
Of what importance is the school I attended? This is not a discussion about my religion or the school I attended. I have simply challenged the mistaken notion presented here in this forum that the current international credit crisis is the result of a free market system. That is what this discussion is about.
Make your point Dog, and bring to the task that measure of common decency to play the ball and not the player and try not to allow it to upset you too much that people are capable of enjoying the joys of life as free and encumbered human beings who are Muslims, Anglicans, Jews, Catholics, agnostics and atheists without the need to introduce your proposed brand of coercion, intimidation, naked bigotry and psychopathic threats of violence to uphold a political ideology which has already caused the deaths of hundreds of millions of human beings across the globe.
Rockjaw, you are over the top. It was you who introduced your background into the arena. And since you earlier cited George Soros as supporting your anarchistic-sounding notions, on the contrary it sounds to me as if Soros has proposed something more akin to your "socialism" even (horror of horrors) at an international level:
"The job of the IMF would be to regulate the capital flows, the capital market, and be a lender of last resort in case of a crisis. You would also need adequate regulation of the banking systems in the various countries that would probably fall outside the capacity of the IMF; it would be more appropriate to the Bank of International Settlements of Oslo, to set standards and so on. So, that’s for regulating the market. Now, I think that the World Bank has to be developed as an institution that would make public monies available for creating a more level playing field—because you have some income maldistribution within individual countries—and that’s very much part of a democracy, creating equal opportunities, ensuring people that they can have access, for instance, to education. Now, internationally, that is, at the moment, not available. So, I would like to see the World Bank develop in that direction, as a creator of a more even playing field." www.simulconference.com/clients/sowf/interviews/interview3.html
"the "measure of merit" is inconsequential in a functional economic system’
How else does one determine "economic value" if not by personal preference? (Labor theory of value, perhaps?) What is personal preference if not an validation of socially conceived ‘measures of merit’?
"consensus, although a great indicator of fashion, has never been much use in determining scientific fact or defining the laws of nature or the laws of economics."
Which ‘laws of nature’ are not determined by epistemological convention/consensus? The entire discipline of neo-classical economics is predicated on the elevation of a particular consensus view about how rational choices are made.
My word Rockjaw, for a man in control of his destiny you certainly sound insecure; one little step away from spraying bullets at the bludgers and cretins in the Westfield Mall I fear. Can you sing in tune? Some people can’t sing in tune but I wouldn’t advocate sterilizing or slaughtering them. No matter what task you can imagine there are always some people who won’t be able to do it. The rest of us carry them because if we don’t they might become a far greater inconvenience for us paragons of perfection. One minute we’re smugly sneering down at these useless parasites, the next minute they’re going mad, spitting out insults along with streams of saliva and stabbing us so they can steal our satisfyingly-stuffed wallets. They must be wiped from the face of the earth, of course, but when you’ve wiped them out it seems you might have to move on to George Soros! Boy, life’s tough at the top.
No rowena, I responded to the presumption made about me that I am the product a private school education with "funny hats".
And rowena, read what WAS said about Soros which is that he has expressed his opinions on this credit crisis and from those opinions it is quite clear that he does not consider this credit crisis to be the cause of a "free market system".
Bob, "…The entire discipline of neo-classical economics is predicated on the elevation of a particular consensus view about how rational choices are made…" - which "neo-classical economics" do you refer to Bob and what "consensus" do you refer to? Good heavens Bob, modern economists can’t even agree on a universal definition of "money" used to transact those rational choices which you refer to.
peterbest, your observations about what ancient Greek donkeys or horses thought about economics made a lot more sense. That was a good choice of topic for you mate, you should stick with it.
Boy, the Lunatic Left are particarly nutty and easy to foam at the mouth in this forum!
Their complete inability to even begin to understand what the real cause of the world’s current credit problems are (or even find the non-blasphemous or non self censored language to talk about it) are clear signs of the rapid decline of our left thinkers.
The term "thinkers" is used with caution.
Rockjaw, for what it’s worth, Dr Dog’s hats were "stupid", not "funny". There’s a distinction between the pointless and the ridiculous.
Here is how I read the schools and hats reference:
It’s true that just because it may be inferred from your position that you are now against public education, it doesn’t mean that you always were or that your parents were. It may have been a mere reasonable induction. However it seemed that you would on principle send your children to a private school, or would attend one now yourself if you had the choice.
In my experience, among schoolboys generally, hats (be they boaters or caps) are associated with private schools generally. Few public schools require boys to wear them. "Stupid hats" is a sneer at the upper class. While most (but not all) private schools were established by religious institutions, there are many students who are sent there for non-religious reasons nowadays. You are the one who focused on religion, which did not occur to me as a relevant factor in the context.
I am no expert on Soros, but it does not sound as if he blames "socialism" for our woes. I would have to look him up again, but some form of "fascism" sounds a more likely culprit as far as I am concerned.
Rockjaw, perhaps you should do a little more reading too. I’d be interested to hear you name a country that got rich through free trade. Actually, as Ha-Joon Chang - a Cambridge economist, no loony leftie - points out in Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, none did; they became rich through collusion between government and the private sector (whether political-military cooperation or less sinister methods) and then went around advocating free trade because, as the richest, it would benefit them. The British Empire in the 19th century is a fine example, as is the US in more recent times. Even back when the Brits were doing it, nobody believed them - other countries knew how the Brits had got rich and complained they wanted to ‘kick away the ladder’. The US had some of the strongest home-industry protection in the world for a long time. Taiwan, South Korea, those models of prosperity through free trade? Massive and continuing government intervention in their economies, particularly in the developmental stage. If you want other mainstream sources on deregulation, try Paul Volcker’s recent comments (ex-head of the Fed), or the aghast economists who called Nixon’s currency market deregulation ‘a return to barbarism’.
Anyway, I agree that, at the moment, there isn’t really any global free trade. (There is socialism, but only for the losses of the wealthy.) But contrary to what you might think, the only place complete deregulation has been tried - in South America, under the guidance of Milton Friedman and the Chicago Boys - it was an unmitigated disaster. Even Pinochet couldn’t take it after ten years, and renationalised a whole bunch of companies. The sad (to you, anyway) fact is that markets need regulation. If there’s no regulation, they spiral out of control and wealth ends up highly concentrated while a whole lot of people starve to death.
Cheers
philannetta.blogspot.com
Thanks for that philanetta, but of all the glaringly obvious examples of why you are wrong, the current one I keep in mind, as I trade the world markets, is the example of socialist Zimbabwe.
The Chicago boys? Not socialist? You have obviously not studied them deeply enough.
The ultimate test for desirability in a political economic system, philanetta, is the extent of personal freedom enjoyed by its participants and that test can be verified by a study of the extent to which any system relies on coercion or the threat of violence for its existence and, like terrorism, any human endeavour which relies on either violence or coercion is entirely unacceptable and will always end in disaster.
Socialism cannot exist without both and it is human nature to revolt against limitations of freedom.
Well Rockjaw, when you talk about your taxes being used to educate me and others you hold in distain, I can only assume you went to a private school. You have done nothing to counter that impression. I, like many others see these institutions as training to rule, for the born to rule.
Your arrogance and blind right-wing rhetoric proves my point. Stupid hats are a feature of many private schools so I took a punt. Its unfortunate but hardly damning that your hat was a yamulke rather than a straw boater.
I am uninterested in your race, gender, religion or nationality. What interests me is your support of a system that is designed to accrue ever more resources to the well off, leaving those at the bottom of the heap ever more disadvantaged. These arguments rarely come from the poor, so I assume you are one of the people I am talking about.
You make claims about both free market and socialism with no regard for reality. There has been as many pro socialist as anti socialist revolutions, both as bloody as each other. The propensity of humans do do violence to one another has very little to do with traditional right/left political stance; unless you are a pacifist. You sure don’t write like one.
Similarly people will and do revolt against the lack of freedom within either system. Are you keen on Csarist Russia? Pre-revolutionary France? India before Ghandi? Do you really expect me to beleive that people had more freedom under those regimes?
None of this makes your argument against socialised institutions any more convincing, and in terms of frothing at the mouth I have to say you bring more genuine vitriol to your posts than anyone else here.
And still you can’t tell me if you accept that a deregulated system is anarchic and therefore makes many people vulnerable to those with power, wealth or the willingness to do harm to others to progress self.
Sorry to burst your bubble there Rockjaw, but Zimbabwe - like many other developing nations - fed itself until it took the IMF’s advice, started with the notorious Structural Adjustment Programs and destroyed its agricultural sector. See Haiti as well - they’re eating the country itself at the moment.
Yes, the amount of personal freedom is the ultimate test of a society. All systems dampen that to a degree - it’s the compromise we make because we’re linked with everyone else in the society, and we can’t always do/have everything exactly as we want. Unfortunately for your argument, most people earn below the average wage in their countries and therefore don’t want deregulation, because it disadvantages them further. This means that any government that wants to deregulate needs to use coercion or political cover, which both harm the personal freedoms of the majority - both in the short- and long-term - more than paying a bit of extra tax. Are you saying those free-market experiments in South America were successful? And can you give me an example of a country that has become rich through deregulation, rather than pushing that line when it’s already rich?
philannetta.blogspot.com
Well, I agree with much of what you say philanetta, especially your observations about Zimbabwe. Visit Africa today and you will hear one African economist after another tell you all about how the IMF has been nothing more than a global central bank which has impoverished that continent with the same monetary magic which impoverishes many western nations under the monetary authority and control of their respective Central Banks.
The IMF and World Bank have replaced the european nations as the colonists of Africa. Dollar diplomacy philanetta, and that is how Africa is being bled pale today.
One example of how free trade has benefited a modern nation is China, on the verge of starvation only a short time ago and today it holds one of the world’s biggest foreign reserves. Russia is another good example. Bankrupted under it’s socialist system only a few years ago, and now it has reinvented itself into a free trade zone holding greater reserves than USA, UK, Australia and Canada combined! How? What happened? Free trade happened!
Philanetta, the failure you refer to in South America had nothing to do with deregulation, the failure was caused by the Central Banking systems which the "Chicago Boys" so love. It was a monetary problem, not a "free trade" problem. Once you have control over the issuance of currency, credit and interest rates, all the free trade in the world will not help you one little bit.
The same Chicago boys have long been trying to convince certain Muslim Nations to accept their Central Banking systems, complete with the immisering and usurous system of fiat which is on the verge of collapse in the west.
Sharia law does not permit usury and so those nations neither accept the smooth talk of the Chicago Boys nor do they suffer from credit crises or inflationary pressures. Their problems are not a lack of Central Banks but rather the absence of free markets for their commodities and consumer products.
Now, consider this, if what you are saying about "free trade" is correct, then castigatory sanctions brought against nations by the international community is really a good thing since sanctions deprive the target nations the ability to trade freely.
So really, if what you suggest is accurate, well then the many nations who have suffered the imposition of sanctions should consider themeselves rewarded if you think like a socialist while the free market thinkers would consider them punished!
As I write the price of gold has risen more in one trading session than it has done in decades, why? Because the world is rapidly starting to realise that paper, fiat currencies and the socialist style Central Banking systems on which overspending governments and their Central Bankers so rely, which have caused this credit crisis which Ben has written about, are on the verge of a massive failure. Gold is in the process of proving many of the modern economists who worship at the alter of socialist style centralised monetary authorities - wrong on all counts. So there goes the "consensus amongst neo-classic economists" which Bob Karmin was talking about.
When economists can agree on the definition of money, you will find that gold will not be considered "a barbarous relic" anymore, but that it is in fact the only true money left in the western world. Watch the price of gold philanetta, and learn from the message which that price has for us all.
A compromise? Exactly! That’s the whole point isn’t it?
Dr Dog, get a life, and stop spitting all that bile at other groups. Poor, wealthy, it really does not matter, but placing tags on people is fast going out of fashion as this new paradigm shift into a whole new world unfolds itself right before our eyes.
Go with the flow Dr. Dog, and feel the excitement with which the world’s youth across the world are feeling as they experience ever greater levels of freedom and liberty deprived them for so long under last century’s socialist rule.
Get with this new revolution Dog and say goodbye to the revolution of the 1960’s. Greet the 21st century with less bile and hatred, hey, it might even make you feel a whole lot less frustrated with life and whole lot better about yourself.
"Benevolence is its own great reward" - remember?
It’s not often I find myself agreeing with Bob but Rockjaw, your crazy-brave opinions have lined me up in Bob’s camp!
For those of your interested in some further reading on the origins of the sub-prime crisis, here are a couple of fascinating articles:
Roger Lowenstein’s investigation of the ratings process whereby mortgages are turned into CDO’s
http://www.nytimes.com/2008/04/27/magazine/27Credit-t.html?_r=1&oref=slo…
Martha Poon’s fascinating investigation of the FICO score and its role in the spread of mortgage collateralisation
http://socfinance.wordpress.com/2008/08/06/prize-to-ssfer-martha-poon-an…
I’m indebted to DK.au and Robert Merkel at Larvatus Prodeo for these links
Philanetta, just a point of curiosity from your comment about "paying a bit more tax" - do you suffer from the mistaken belief that "taxes" is what funds public spending? If that is what you believe then you may want to double check your understanding of how modern Western nations with Central Banking systems actually function since we "floated" our currencies way back in the early 1970’s.
Inflation, philanetta, inflation - which is the creation, from nothing, of money and credit under the complete control of Central Bankers and overspending governments which benefit from the system, that is how public spending on social services is funded.
The people who "pay" for this cost are not the taxpayrs, but the fixed income earners, the very people who have been bulshitted into believing in the very system which claims to help them the most.
When thinking of nations with "money" under the control of Central Banking auhorities do not for one minute believe that taxes help the poor or that taxes redistribute the riches of the wealthy. In monetary systems which rely on the control of Central Banks, like we have in the Western world today, governments and Central Banks destroy wealth by debasing the value of the currency which fixed income earners are forced to accept in return for their labour.
Taxes merely limit the extent of the inflation, which, as Friedman correctly stated, is a monetary phenomenon which CAUSES a rise in prices.
This same monetary phenomenon is what has caused the current credit crisis and THAT is why Volcker, when faced with similar problems a few decades ago, allowed the markets to find a market related interest rate instead of using his power of control to "fix" the rate as Bernanke is doing now.
In fact, Volcker is arguably the person who can be given the credit for the long period of prosperity which we have all experienced since his tenure.
This time around the credit crisis is being managed entirely differently. Bernanke has sworn to resolve these excesses by inflating, or, as he is better known to have said, by "dropping money from helicopters" if necessary. In other words Bernanke will MANAGE this crisis by doing more of exactly the same thing which got us into this mess in the first place - controlling the supply of money and credit, rather than allowing the free market to function correctly.
In a proper free market system no Central Bank or government is permitted the power to create money from nothing and so these credit problems which will probably result in a massive world wide depression would never occur.
Read Dr Ellen Brown "Web of Debt", or "End of Illusions - Economist (July 17 2008) or Nouriel Roubini, "How to avoid the "Mother of all Bailouts" or Walker Todd "Receivership or Conservatorship for Fannie Mae, Freddie Mac and Failing Banks" - American Institute for Economic Research (July 15, 2008).
Or just read anything from the pen of the courageous Dr. Catherine Austine Fitts or read the report of the David Walker, the American equivalent of the Auditor General who resigned in disgust at the appalling mess which he saw unfolding ahead.
Thanks for the links Ben.
"crazy-brave"?
Flattery will not alter my opinion you know Ben!
And my camp has a lot more space to lounge around than yours or Bob’s, so you should come over some time, and I promise you Ben, it is a lot easier to "socialise" at my camp!
haha Rockjaw, I’ve been following this thread for a day or so now and have you finally played your hand? Gold, is that the answer here? A return to Ricardian notions of comparative advantage and a banking system backed by a gold standard? History seems to show that free trade has never existed. If we grant this assumption then what is it that we have. Has it been socialist dominance (whatever that means, are you speaking metaphysically?) or has the case been empire. If you can see your way to the last possibility then what we are facing here is not socialist control of the global financial sector through central banking (I assume you mean Keynesianism when you say socialist?), but dollar (US) hegemony exercised through control of the worlds central banks. The central banks of Australia and Europe have more loyalty to the global financial architecture, ruled over by the US dollar, than they have to their own societies.
Then we go back to Bob, to quote “Which ‘laws of nature’ are not determined by epistemological convention/consensus?”.
We can move this idea to explain quantity theory of money which o’l Milton Freidman breathed new life back into in the 60’s. “Inflation is always and everywhere a monetary phenomenon”. This has enabled the ideological infiltration of central banking to spread throughout the whole world. But this is not socialism. Its empire neo-colonialism. Hilarious I just read the post again and there you are mentioning Friedman.
ryip, you have caught me out! I suppose reading Newton and his contribution to the Gold standard has twisted my mind more than my social skills could tolerate!
How could a man who could so famously define the mathematics of gravity with such clarity make such a blunder with the mathematics of money?
Its all too much for me ryip, let me out of here, I have to get rid of this worthless socialist paper and convert it to specie quickly before the price of silver rallies beyond my reach leaving me stuck with these worthless notes and nothing more to make my contribution to society.
You just don’t seem all that benevolent to me Rockjaw, so I have to take your exhortations with a grain of salt.
I would be very interested in any evidence that young people across the world are undergoing some sort of revolutionary increase in freedom based on free market. Don’t just bring out China, no-one here has advocated for a system that regulated, and I applaud the freedoms recently won there and in other previously communist states.
I suspect that your sources of information are as closed as your politics. Who are these young people? What is your direct line to understanding the prevailing fashion with regards to economics and freedom?
Further to that, if it is simply a matter of fashion, of people like me getting with the program, then do you acknowledge that we are simply in a cycle that will swing back toward socialism as the worst abuses of your free market become unpalatable to the majority of people?
‘Poor, wealthy, it really does not matter’ - written like a true wealthy person. I consider this relevant, I am not personally upset that you seem to be well resourced, I just think that your opinion of the free market is tainted by the way it serves or has served you above some others.
Also you don’t respond to any queries about the basic philosophy behind your interest in free market systems. Particularly you haven’t really responded to the post that started all this, which is to ask, again, just how deregulated you want things to get and do you see any negative implications from what still apears to be a call for anarchy.
In the midst of your boasting about what you have, it looks a lot like you are simply justifying your own greed, unless you have some evidence of the freedoms you keep writing about.
You appeal to play the man not the ball, so here you are, not a bile gland in site. Perhaps now you can respond with something other than assurances that you are right.
If economics ever becomes a real science and not, as it is now, a set of competing ideologies the public should be spared any more of these uncontrolled experiments.
Relax Dr Dog, talk to Ben and Bob and convince them to accompany you over to my camp where you will quickly realise that none of this is about me at all and where you might also be pleased to learn that none of this about you either!
PS bring some salt!
By the way, the reason I "boast" that "my camp" has a lot more space Dr Dog, is not to infer that it is "bigger" or "wealthier" but rather to highlight the fact that I am the only one in it! There is much more space!
All the rest of you are crowding up Ben and Bob’s camp - which might explain all your frustration. I understand Dog, because I know that nobody "socialises" well in crowded places!
PS bring another grain of salt!
hahaha Rockjaw I wish I bought gold back in 2001/2 when this whole business kicked off. I know of a few people who read the writing on the wall back then and are about to clean up.
ryip, Goldman Sachs and Co have done such a splendid job of manipulating the markets and bullshitting all the academics and financial media since engineering this recent collapse of the commodity markets that you have a wonderful opportunity to get rid of those RBA IOUs and exchange them for some real money on the cheap!
Don’t forget to thank Goldman Sachs for ruining the free market so efficiently.
ryip, don’t listen to all those stories from the Perth Mint either, they and Johnson M, their refiners, have got themselves into a little pickle of their own with all this confusion over whether gold is money that they seem to be caught with less stock than they claimed to be holding for their clients - oh dear, what a wicked web we weave!
Find a supplier which really does hold physical stock and then buy and hold.
In fact, with real interest rates as low as they are, and with all this tripe about deflation to keep the quasi-intellectuals sidetracked, you could borrow paper at current value, convert to real assets and pay back the loan when the paper is worth less than the rotting leaves from the tree used to print it while real assets fetch ever greater fistfuls of that same junk paper which they force onto us poor unsuspecting folks on fixed incomes.
We don’t ALL have to become victims you know! And granddad was right, doon’t trust the government’s paper, spend less than you earn and save the balance in GOLD and SILVER.
Hey Rockjaw, say more about deflation. Why is that not an issue? Isn’t lots of imaginary wealth in the process of vanishing? Or are you confident that central banks will monetize it into existence?
Mitchell, this webpage should help to answer your question:-
https://www.cia.gov/library/publications/the-world-factbook/rankorder/21…
Now note under Turkey, Greece and Italy how Australians enjoy the WORST current account balance in the world along with USA, UK and Spain. Wow!
Then check this out - the top three are - wait for it!!! China Japan and Germany! All the nations which actually WORK and SAVE for a living!
Canada, our economic twin, rates WAAAAAY up there with Finland and Belgium at #23 because those smart Canadians know how much cattle a socialist field can support - they don’t overdo it, and their economy has outpaced ours by far.
Check out the M3 money supply growth Mitchell, and see how Australia, New Zealand, USA, UK, Eurozone et al have all been growing their money supply at rates in excess of 10, 12 and even 15% per annum. Believe me, that is HUGE!
Now how does any self respecting economist honestly argue that the rate of inflation is as low as the rates they have shoved down our ignorant throats when the supply of money and credit is growing at rates at least three times as high?
Its the worker’s intelligence which is being insulted here Mitchell, because the worker is the poor bastard whose savings is being plundered to fund the excessive greed of the average socialist state.
Trust me Mitchell, there is only one way these crooks are going to attempt to navigate their way out of this mess, and that is to inflate like mad!
Watch this space, coming soon to THE WORLD ECONOMY - Stagflation and HyperInflation!
But first Central Bankers will prop up the USD with MASSIVE purchases of US Treasury bills, They have already propped up the US$ to unsustainable heights and they will continue to trash commodities as far as they possibly can. They will create the illusion of a deflationary cycle and then? WHAMMO!! Good old Goldman Sachs and Co rapes and pillages and spreads this financial syphillis which has infected the world’s credit and money markets.
Ask "Helicopter Ben" from the Federal Reserve who has been printing money like he owns all the forests in the world, or just check out the published figures for our own M3 money supply and try not to allow yourself to be fooled by these lying bullshit artists any more Mitchell, it’s your hourly wage which they have been stealing all along and it’s your hourly wage they will try to use to pay for their excesses.
Convert your cash into real money before they steal every last cent off you and leave you destitute with worthless life savings plundered by them when you become too old to support yourself.
You are right when you say its the workers intelligence that’s being insulted here Rockjaw. As I write this ABC news says the Fed is ‘flooding’ the market with 180 billion in some kind of ‘onslaught’. No mention of where this cash is coming from or what’s backing it! Nor that the tax payer will ultimately fund this injection of high power money. But then why bother, its all narrative, metaphor upon distracting metaphor. What we need here is ‘confidence’ not questions being raised as to the socialisation of losses. The common man will have to bend over and take and if he doesn’t like it the state will ensure the protection of property and privilege as it always has.
ryip, check out the latest capital flows. (July TICS report)
The bullshitters have 2 ways of measuring the flows - one is with long term securities and the other includes shorter dated instruments.
Take a look at the released figures for long term, see it? $6.09 billion. Okay, so now include the shorter term stuff and what do you get? Negative $74.79 billion!
Whichever way you look at it, flows were insufficient to fund the deficit and there has been widespread selling of US agency debt, corporate debt and equities. That is where the US has it’s Achilles heel.
Now Putin’s economic adviser was out recently threatening to sell off US treasuries not too long ago - makes you think, especially considering how peeved the Ruskies are already about those Polish nukes Putin has poked into his ear!
The United States, was probably ordered to call in as much of its USTreasury Bonds and USAgency Mortgage Bonds as possible, so as to isolate the damage from bond default inside the US as far as possible, and the idea is to minimise the unavoidable global effect. You should see the US$ sovereign (and quasi) bonds, derivatives and other financial and credit instruments as weapons of mass financial destruction.
Now, foreigners have finally begun to react. The order to call in US bonds was likely made by the most powerful bank on the planet, the Bank For International Settlements, which is the bank that distressed central banks turn to. See a recent Economist article entitled “Calling US Bonds Home!!!”.
Anyhow, three factors continue to pressure the breakdown within the US financial system: the Wall Street ruin fuelled by the trillions of outstanding derivatives and credit instruments yet to melt down, the US housing decline, and the deterioration of US jobs (see the car industry). A default will follow in the wake of a failed US financial system. Wall Street trumpets the silly claim that “Nobody could have predicted it.” Well, they did not listen to the gold analyst community!
Economics Nobel Prize winner Joseph Stiglitz is a maverick, often critical, almost never toeing the party line, and he offers a good perspective on the pending disaster. He writes, “But the view that our recent success is based on a house of cards has more than a grain of truth to it. In recent years, financial markets created a giant rich man’s casino, in which well-off players could take trillion dollar bets against each other."
"These high-rollers were not just gambling their own money. They were gambling other people’s money. They were putting at risk the entire financial system, indeed our entire economic system. And now we are all paying the price.”
Stiglitz is correct, but all of this was made possible by a US Central Banking authority which at all times had it’s finger on the pulse and the trigger of the instruments which caused this mess. Greenspan is the twit who drove us all to it.
But there is more at stake now. The world is truly a global village and Putin is fairly upset at the reaction to Georgia.
In most "westernised" countries key central banks have been brought into the fold for manipulation, intervention, and intervention of financial markets and monetary policy, so as to coordinate policy toward systemic sustenance. However, abuse extends broadly to foreign locations and Australia has been a willing participant in these international protection rackets which have existed for at least two decades with Arabs selling their oil in US$ terms, recycling their surpluses into US$-based investments, and enjoying security offered by the USMilitary.
Their reward is an endless war in neighboring Iraq.
Currently the most dangerous relationships lie with China and Russia. After opening up grand foreign investment to the West, primarily the United States, Japan, Taiwan, South Korea, and Germany. Now China has also begun to rethink its relationships.
China has been more focused on regional development and closer trade ties within Asia and Africa. Much distress from financial, economic, and labor sources within the United States is being improperly blamed on China. Their lower labor wage is a consequence of their great population, something not repairable, but yet the USGovt places pressure on Chinese leaders to "find" a solution via their yuan currency. This will never address the burgeoning trade surpluses and mammoth sovereign wealth fund accounts. American insolvency and bankruptcy is not due to Chinese exploitation, but rather its cooperation with Western firms, most notably US firms, who expanded industrial plants in China.
Then there is Russia. Putin is not happy with those nukes in Poland, amongst other things, and to cover the entire saga would take volumes, but the US Treasury is the Achilles heel of the US right now, and Russia has already threatened to "bomb" the markets with US treasury Bills, in stern reaction to the Georgia War, its deceptions, and potential staging ground for an attack on Iran. If they do this China will have to join the rush to the exits as everyone joins the rush to sell the US$.
We are looking into a far larger picture than our Western media are willing to tell us and there is much to learn about this crisis which lies far beyond the streets of New York.
Suffice to say, there is going to be massive repercussions and the world will never be the same again after the dust has finally settled.
How do you protect yourself? The same way men and women have been doing for millenia, keep your money and value stored in gold and silver and give the crappy IOU notes from the Reserve Wankers back to them, you don’t need their debt, and gold and silver is nobody’s IOU.
Keep enough paper trash for your day to day transactions and keep the rest in specie. Stuffem!
I don’t want to keep this blog alive with this topic much longer so if you are interested e-mail me via NM and I will try to provide additional reference material and data from a commodities analyst’s perspective concerning this massive historical event as it unfolds.
I don’t want to keep it going much longer either, but have finally got round to a response. So, thanks for quoting China and Russia at me - you’re arguing my point for me. Russia particularly and China to lesser but significant degree made their progress under economies that were often planned, sometimes mixed. Even China isn’t completely deregulated, and the government has kept a stake in key strategic sectors. In Russia’s case, they’ve spent over a century trying to catch up to Europe - the closest they got, despite the devastation of war, was under a planned economy. Go ask a few of the 72 million Russians who were left in poverty by IMF reforms how they feel about the free market.
Also, I’m familiar with the work of Ellen Brown and other people you’re talking about. I agree with much of what they say: credit is a public utility and should be treated as such, private institutions should not be able to control a money supply and create currency - and inflation - out of thin air, etc. But Rockjaw, all of these are arguments for regulation! Further, to make the US situation plain, to say that the government is complicit in this financial crisis is completely correct. However, it’s a long bow to draw that that means regulation is bad. The US has been in the grip of deregulation fundamentalists for decades. Why do you think all these derivatives were created? It couldn’t have happened in a properly regulated economy, and the best institution to regulate is a representative government. The real problem is that there aren’t many of those around. And yes, I do believe that taxes are used to fund public goods - in civilised countries, anyway.
To repeat my main point, no country has ever become rich from deregulation. Countries have developed strong positions through mixed-economy development and relaxed regulations in some areas, which has made them richer. Great powers have been in a position to regulate less, as free trade advantages them more. These phenomena are often confused by people who see some deregulation and wealth and conflate the two. The only model that has proven time and again to develop wealth in an economy - spread THROUGH an economy, though still not perfectly - is the Keynesian model. Laissez-faire models are believed in as articles of faith - nobody has ever seen them work, but it’s always blamed on some external factor. This is incorrect - they don’t work because they cannot work. All laissez-faire systems do is make it easier for the well-off to become better-off at the expense of those who weren’t in a position to take advantage of the ‘free’ market.
Cheers
Phil
philannetta.blogspot.com
"Russia particularly and China to lesser but significant degree made their progress under economies that were often planned" - you mean they were on the verge of starvation under economies which were planned and regulated and as regulation eased so to did the starvation, poverty and squalor.
"China isn’t completely deregulated, and the government has kept a stake in key strategic sectors" - correct, and as that stake has declined so has China’s prosperity improved, an obvious inverse relationship.
"In Russia’s case, they’ve spent over a century trying to catch up to Europe - the closest they got, despite the devastation of war, was under a planned economy" - what you mean is that while the Russian citizens starved the state grew it’s military and it’s technology while its ruling class consumed champagne and caviar. Only the state ever benefited. On this point we should rely a little less on the propaganda of the west and note a little more what the Russians themselves have to tell us about their "planned economy".
"Go ask a few of the 72 million Russians who were left in poverty by IMF reforms how they feel about the free market" - this is a misrepresentation of fact. The oligarchs, the IMF and their attempts to do to Russia what they had already done to them back in 1917 was blocked by Putin whom, as you already know, has managed to bring Russia back from the poverty of socialism and the controlled economy by applying the simple mechanics of free market principles. That is why Putin is the first leader to have enjoyed such long lived popularity and support from Russians themselves. Don’t be sold on the propaganda we are sold in the west about modern