The ongoing collapse of the stock market and the loss of hundreds of billions of dollars managed by Wall Street investment banks illustrate the pitfalls and danger of free market capitalism facing the entire working population of the United States.
1.
The near bankruptcy of Social Security
The attempt by the White House and leading Republican and Democrat congresspersons as recently as 3 years ago to 'privatize' Social Security essentially turning over the management and investment of trillions of dollars in Social Security funds to Wall Street with the argument that private investors would earn more, would have led to the bankruptcy of the entire Social Security fund.
Privatization would have allowed the major private investment banks to speculate and leverage even riskier financial instruments with the disastrous results we are witnessing today. While private pension funds go belly up Social Security continues. It is the private pensions, which have gone bankrupt not the publicly managed Social Security fund, contrary to the experts and critics of Social Security. Clearly the current private debacle argues for public control and management of pension programs.
2.
All the major private pension funds for public and private employees, including TIAA CREF, CALPERS and labor union pensions have lost anywhere between 23% to 30% since January and show negative growth over the past 5 years. Clearly linking pension funds to the stock market has severely reduced the living standards of retirees, forcing many to remain in the labor force into their seventies and beyond or to sink into poverty. Pensions linked to publicly funded productive activity would avoid the losses and risks embedded in investing in the stock market.
3.
The bipartisan strategic decisions to convert the US into a 'service' economy as opposed to an advanced and diversified manufacturing economy is the root cause of the collapse of the US financial system and the emerging long-term recession. From the 1960s onward, the political elite adopted policies that promoted finance, real estate and insurance, the so-called FIRE sectors which raised rents, redirected subsidies, provided tax concessions and subsidies, and destroyed and displaced industry. The re-conversion of the FIRE economy back to a balanced manufacturing economy and welfare state, essential for reversing the collapse of the US economy, will require a major political upheaval.
4.
The massive flight of capital from productive sectors to FIRE was accompanied by the huge surge of capital overseas, making the domestic economy over dependent on 'services', particularly volatile and risky 'financial services' and highly indebted consumers. The conversion of the US from a diversified economy to a 'FIRE' monoculture increased the probability of a general collapse if and when the financial/real estate market went under. Recovery and sustained growth can only occur with the return of a diversified economy, the retention of capital from overseas flight and large-scale, long-term public investment and incentives for the productive and social service sectors.
5.
The pursuit of military-driven empire building at the expense of joint ventures and reciprocal trade agreements with countries with expanding markets, strategic energy sources and large populations and markets, created enormous budget and trade deficits and alienated potential sources of markets and strategic commodities. Trillion dollar military expenditures in pursuit of prolonged, costly colonial wars (without end), diverted funds from the application of technological advances and high-end manufacturing, which would have lowered costs and increased market competition. Equally important, by shifting from market-driven domestic expansion to overseas military-driven conquest, the entire axis of economic power shifted from industrial to financial capital. Finance capital essential to funding government budget deficits incurred through military expenditures, grew in influence Wall Street replaced the steel-belt as the axes of power in Washington.
6.
The ascendancy of militarism and financial capital facilitated the increase of influence of a virulent power configuration promoting the regional hegemonic interests of a colonial-militarist state specifically, a previously marginal political lobby the pro-Israel-Zionist power configuration (ZPC). The military-driven empire builders saw in the ZPC a strategic ally in pursuit of their
global conquests; the ZPC saw an open door to high office and multiple opportunities to promote Israel's expansionist agenda through their influence in Congressional Committees, electoral campaigns and direct White House appointments.
The ZPC surge to the top echelon of power was aided and abetted by the increase of financial support they received by members in strategic positions in the most lucrative financial institutions.
The ZPC was an economic beneficiary of the speculative bubble: it was the massive infusion of financial contributions that allowed the ZPC to vastly expand the number of full-time functionaries, influence peddlers and electoral contributors that magnified their power especially in promoting US Middle East wars, lopsided free trade agreements (in favor of Israel) and unquestioned backing of Israeli aggression against Lebanon, Syria and Palestine.
Economic recovery is contingent on ending budget busting military imperialism. That will not happen unless there is a wholesale replacement of the political elite nurtured on the metaphysics of military-based
global power.
No economic recovery is possible now or in the foreseeable future as long as the US Congress and executives provide trillion dollar bailouts to Wall Street's insolvent speculators, bankroll 700 billion dollar budgets of ever expanding war spending and while Zionist power brokers dictate US Mideast policies.
The lessons of the past tell us a great deal about what paths we should and shouldn't take.
Social Security still exists precisely because the US public rebelled and defeated its proposed handover to Wall Street and it remained a publicly run program. The financial system collapsed because the US economy 'specialized' in a single crop finance at the expanse of a diversified productive economy. The political system is totally discredited because it is run by a failed political elite which blatantly represents and acts on behalf of a few thousand financial oligarchs; a couple hundred militarist oligarchs and a few dozen zealous Zionist organizations.
The 'power elite' is only as powerful as it is able to manipulate, intimidate and beguile three hundred million plus US citizens into thinking that they are indispensable to their lives.
The overwhelming popular rejection of the privatization of social security and the Wall Street bailout suggests that the ruling oligarchy is not invincible.
Si se quiere entender lógicamente la crisis lo primero que hay que tener en claro es que la presente todavía no es una crisis capitalista (en el sentido
global de la expresión) sino la primera fase de un colapso financiero-bursátil con reciclamiento y centralización de la
rentabilidad financiera y una reconversión feroz de los grupos que controlan el sistema financiero imperial desde EE.UU. y la Unión Europea.
Solamente la confluencia (a corto plazo) de dos factores complementarios,
1.
La "crisis estructural (recesión económica)
2.
La "crisis social" (el impacto en la sociedad),
...va a detonar como desenlace la "crisis global" del sistema capitalista.
A pesar de los mitos y falsas teorías sobre el "colapso global" o el "derrumbe del Imperio del dólar" todavía el sistema capitalista no está en crisis (entendida como pérdida de control y de gobernabilidad), sino que los que están en
crisis son el sistema financiero y los mercados bursátiles.
En este escenario, y aunque suene exagerado, el sistema capitalista todavía no está en crisis, sino que está haciendo negocios con la
crisis.
Eso explica porqué en un proceso compulsivo de caídas y subidas de bolsas, de derrumbes bancarios en cadena, la "crisis" todavía no impactó directamente en la economía real de los países y en las sociedades a escala global.
Lo que sí estalló y está en crisis, a partir de septiembre de 2007, es un modelo de acumulación y especulación financiera (la "burbuja inmobiliaria") cuyo desenlace produjo un nuevo proceso de rentabilidad capitalista en la crisis (los "rescates financieros") y una reconversión (compras y fusiones) de los grupos súper concentrados que controlan el sistema financiero imperial centralizado en Europa y EE.UU.
Si no se entienden los factores en interacción, la "crisis financiera" (inducida para reciclar la rentabilidad perdida) y la "crisis estructural" de la economía (nacida como emergente de la "crisis financiera"), y la "crisis social" (que llega como consecuencia de la crisis estructural con recesión) se cae en el mito reduccionista, propagado por el propio sistema, de la "crisis bursátil" que deposita todo el problema en el "mal" o "buen" funcionamiento de los bancos y el sistema financiero.
En un orden secuencial, para que la crisis se convierta en "global" (el desenlace) tiene que haber una convergencia interactiva de la "crisis financiera" (los mercados del dinero), la "crisis estructural" (la economía real) y la "crisis social" (el impacto de la crisis económica-financiera en la sociedad).
Solo la convergencia interactiva de estos tres factores (por acumulación de crisis) va a producir (a modo de desenlace) la "crisis global" del sistema capitalista proyectada desde las economías centrales (USA-UE) a los países que integran la red a escala planetaria.
1.
Fase 1 - La "crisis financiera" (El efecto bursátil)
Una "crisis financiera" como la que estamos viviendo, es antes que nada un reciclamiento de la rentabilidad capitalista: Lo que estaba en un casillero, se traslada a otro. Lo que estaba en Merrill Lynch se recicló en el tablero contable de Bank Of América que compró a la entidad semiquebrada.
La "burbuja inmobiliaria" activada por el capital privado llegó a su fin (crisis) en septiembre de 2007, y ahora llega la "burbuja estatal" (reciclamiento) con el Estado imperial como principal operador de los negocios financieros.
En este marco, la operación de "crisis" con el rescate financiero USA-UE, no es otra cosa que una operación de negocios con la crisis que los gobiernos del euro y Washington utilizan para poner en marcha un nuevo ciclo de rentabilidad que reemplaza al ya agotado con el colapso de la hipotecas subprime en EE.UU.
No se trata de una "salida de emergencia" a la "crisis", sino de una operación de negocios financieros en alta escala activada por los grupos capitalistas sionistas súper concentrados que controlan Washington, Wall Street, la Reserva Federal USA y los bancos centrales de Europa y Asia.
Todavía, vale precisarlo, no hay "crisis global" del sistema capitalista (que va a venir como resultante final del actual proceso) sino una "crisis financiera" inducida principalmente por la necesidad de rentabilidad y de reconversión de los grupos capitalistas que controlan los resortes operativos del sistema financiero imperial desde Wall Street y las metrópolis imperiales europeas.
En las jornadas "negras" que vienen experimentando los mercados del dinero, billones de dólares no se evaporaron sino que solamente se pasaron de unas manos a otras.
En primer lugar, y como concepto central: La llamada "crisis financiera", es una crisis activada y controlada en todos sus resortes esenciales por medio del "rumor" y la información manipulada que hacen subir o bajar las acciones en Wall Street y las principales plazas financieras del Imperio.
La quiebra en cadena de bancos o de instituciones financieras es inducida, manipulada y estratégicamente operada para producir un reciclamiento de la rentabilidad financiera (en crisis con el colapso subprime) y una reconversión del sistema financiero que centralice el control y el funcionamiento del sistema capitalista mediante una mayor concentración de la riqueza (ley darwiniana del capitalismo).
Los mercados bursátiles no son "libres" (como establece el mito del "libre comercio") sino instituciones mercantiles que funcionan sujetas a la ley de la oferta y la demanda manejada por los grupos que hegemonizan el control y la información sobre su funcionamiento.
En consecuencia, en las bolsas solo se "oferta" (se vende) o se "demanda" (se compra) aquello que los grupos hegemónicos y controladores quieren.
Las bolsas (y las acciones) suben o bajan atendiendo a una dinámica marcada por los intereses de los controladores del mercado financiero.
Su objetivo es preciso y determinado: Generar un proceso de quiebras y, consecuentemente una crisis del sistema financiero, que posibilite la depreciación a niveles límites de los activos y acciones empresariales que luego los grupos más súper concentrados (los operadores de la "crisis") comprarán a precio de remate.
En consecuencia, si que hay quebrar a Lehman Brothers o a Merrill Lynch para concentrar súper activos en Bank Of América o Morgan Chase, se hacen bajar (mediante rumores e información manipulada) las acciones de estos dos gigantes, y luego de su quiebra (como consecuencia de la depreciación de sus acciones) serán comprados a precio de remate o se fusionarán en otra sigla.
Pero en esta dinámica nada se pierde, sino que se recicla. En otras palabras, cambian las denominaciones pero los accionistas y los gerenciadores (que son "anónimos") continúan con una mayor concentración de acciones en sus bolsillos.
Mediante el "rescate financiero", los Estados imperiales USA-UE reciclaron una nueva "burbuja" ganancial no ya con dinero especulativo proveniente del sector privado, sino que ponen compulsivamente los recursos públicos al servicio de un nuevo ciclo de rentabilidad capitalista al margen de una ascendente crisis de la economía real que marcha por vía paralela.
Esto implica que, cuando hablamos de "crisis financiera", estamos hablando de un problema superestructural (y relativamente controlable) del sistema capitalista que todavía no alcanzó su pleno desarrollo de "conflicto global" con proyección y efectos concretos en el plano de la economía real y de la sociedad a escala mundial.
Por lo tanto, y con la "crisis financiera", solo estamos en las "vísperas" de lo que algunos (sin entender los pasos) apresuradamente ya señalan como "crisis global" del sistema capitalista.
2.
Fase 2 - La "crisis estructural" (el efecto en la economía real)
La "crisis estructural" paralela y emergente (que se potencia y activa con la "crisis financiera") tiene su origen en el proceso recesivo que ya se verifica en las dos economías centrales del sistema: EE.UU. y la Unión Europea.
Tanto la Reserva Federal de EE.UU. como el Banco Central Europeo, así como el FMI y el Banco Mundial vienen advirtiendo que las economías de Europa y de EE.UU. pararon de crecer, y la desaceleración se acentúa a raíz de la baja del consumo y la suba de los alimentos y de la energía.
La crisis, como fue planteada hasta ahora, viró de lo "financiero" hacia lo "económico-financiero": Tuvo un epicentro en la crisis hipotecaria de EE.UU., se expandió a los mercados financieros globales (subdesarrollados y desarrollados), y ahora ya toca variables estructurales de la "economía real" por medio del proceso desatado por el cóctel suba del petróleo + suba de alimentos = proceso inflacionario, que ya padecen las economías centrales del sistema capitalista: EE.UU., Unión Europea y China.
A este escenario, se suma la naciente crisis del crédito que (según todos los pronósticos) va a obrar con un efecto de acelerador del proceso inflacionario-recesivo paralizando aún más las primeras economías del sistema capitalista (EE.UU.-Europa-China) con un impacto directo en los países de la periferia.
Como resultante no deseado, la ola de pánico que genera la "crisis financiera" produce (como está sucediendo) el retiro del dinero efectivo en masa, desparece la liquidez, y los bancos restringen créditos: ese es el mecanismo clave que activa la recesión que hoy ya empieza a proyectarse desde los países centrales a la periferia.
La falta de crédito, a su vez, actúa como principal disparador de la detención de la producción y de la suba de precios lo cual genera un consecuente proceso de achicamiento del consumo y despidos en masa de trabajadores y empleados, en EE.UU. y Europa.
Como dicen los expertos: Las "crisis financieras" hacen estallar la confianza en el sistema financiero, y desatan la furia "vendedora" en los mercados donde empresas e inversores se desprenden de sus acciones y tratan de convertirlos en "efectivo" dejando las plazas sin liquidez.
*
Y un mercado sin liquidez (sin circulación de dinero) genera escasez de dinero.
*
Y la escasez de dinero genera dos efectos inmediatos: Retracción del crédito y suba de las tasas de interés.
*
Y la retracción del crédito y su encarecimiento genera como efecto inmediato: Caída de producción y baja de las ventas.
*
Y caída de producción y achicamiento de ventas en los códigos del empresariado capitalista significa sólo dos alternativas:
o
Suba de precios
o
Despido de personal, para conservar el margen de rentabilidad vendiendo y produciendo menos
De esa manera, la "crisis estructural" genera las condiciones para el advenimiento de la "crisis social".
3.
Fase 3 - La "crisis social" (El efecto en la sociedad)
La "crisis estructural" con proceso recesivo (desatada como emergente de la "crisis financiera") conduce inevitablemente al sistema capitalista hacia un proceso de "crisis social con pérdida del control y de gobernabilidad política a escala global (Esto ya se verificó con los estallidos sociales durante la escalada de los precios del petróleo).
El tercer factor que media como desenlace (a modo de acción reacción al cierre de empresas y despido de personal) entre la "crisis financiera" y la "crisis estructural" es el "conflicto social", expresado por huelgas y estallidos sociales masivos.
En América Latina, por ejemplo, entre el 60% y el 70% de la masa laboral está en "negro" (empleos precarios y sin indemnización por despido), y con la recesión y el desaceleramiento productivo las empresas (para conservar su nivel de rentabilidad) van a generar despidos en masa: El detonante de las huelgas y los conflictos sociales.
El efecto más inmediato de la "crisis estructural" con recesión es la desocupación en masa y la suba de precios.
Esto impacta inmediatamente en las capas más desprotegidas (bajas y media bajas) de las sociedades, que se quedan sin el sustento inmediato para subsistir.
Durante la última escalada de precios con el petróleo, que llevó el precio de los alimentos a niveles siderales, se produjeron estallidos y levantamientos sociales simultáneos tanto en los países pobres de la periferia como en los países ricos de Europa.
Pero ese movimiento, en protesta por la suba de precios, resulta insignificante ante una potencial amenaza de despidos en masa que ya proyecta el proceso recesivo y la "crisis estructural" en las economías de Asia, África y América Latina.
De manera tal, que la "crisis social" (emergente de la "crisis financiera" y de la "crisis estructural") prepara las condiciones para el peor de los escenarios: La "crisis global".
4.
El desenlace - La "crisis global" (El efecto planetario)
En términos concretos, la "crisis global" del sistema capitalista solo va a estallar cuando la "crisis financiera" devenga en "crisis estructural" por medio de la recesión económica, la que luego se convierta en "crisis social" por medio del desempleo y el achicamiento del consumo a escala masiva.
En un orden secuencial, para que la crisis se convierta en "global" (el desenlace) tiene que haber una convergencia interactiva de la "crisis financiera" (los mercados del dinero), la "crisis estructural" (la economía real) y la "crisis social" (el impacto de la crisis económica-financiera en la sociedad).
La confluencia interactiva de estos tres factores es lo que va a posibilitar, a corto plazo, el desenlace de la "crisis global" del sistema capitalista donde los gobiernos (centrales y periféricos) van a perder el control social y político de sus países por medio de las huelgas y estallidos sociales generados por la desocupación masiva y la suba de precios.
Solo la convergencia interactiva de estos tres factores (por acumulación de crisis) va a producir (a modo de desenlace) la "crisis global" del sistema capitalista proyectada desde las economías centrales (USA-UE) a los países que integran la red a escala planetaria.
La "crisis financiera" y la contracción del crédito en los países centrales ya se proyectan en un proceso creciente de recesión económica global por el alto nivel de entrelazamiento de las economías mundiales en el proceso de importación y exportación.
En el actual modelo globalizado de economía planetaria los PBI juntos de EE.UU., la Unión Europea y China suman más del 50% del PBI mundial, mientras que el sistema capitalista está "dolarizado" (el dólar es la moneda patrón de todas las transacciones comerciales y financieras a escala global).
Pero hay otro dato que convierte a sus economías en el eje económico global: EE.UU., la Unión Europea y China, son los mayores compradores de petróleo y materias primas del mundo.
Estos dos factores centrales explican porqué cualquier oscilación o desequilibrio económico-financiero que tenga a estas tres economías centrales como protagonistas, impacta y se esparce inmediatamente por todo el "sistema".
EE.UU. y Europa son los principales compradores de productos chinos, y el gigante asiático, a su vez, es el principal importador de petróleo y materias primas de los "países emergentes", con lo que se puede deducir que si el Imperio estadounidense (en proceso recesivo) reduce sus compras, el impacto se va a proyectar inevitablemente en una crisis de China proyectada a los "países emergentes".
Con un proceso recesivo de su economía, EE.UU. (el principal comprador de la "gran fábrica" asiática) reduciría drásticamente sus compras a China, y Europa, que ya enfrenta un fenómeno recesivo en su economía comunitaria, ingresaría en una contracción de sus sistema económico productivo.
Como impacto inmediato, la economía china también ingresaría en un proceso recesivo (detención del crecimiento) que la obligaría a reducir sus importaciones de materias primas y de petróleo.
A su vez la reducción en la importación de materias primas y de petróleo por parte de China (el principal importador mundial) impactaría en las economías de Rusia y de los "países emergentes" (los principales exportadores de petróleo y de materias primas a China) que también podrían ingresar en un proceso recesivo.
En resumen, con la "crisis financiera" y crediticia que ya desató el derrumbe bancario en EE.UU. y Europa, comienza a completarse (y a profundizarse) el cuadro de "crisis estructural" recesiva de las economías capitalistas centrales que se irá proyectando cada vez con más fuerza hacia las economías de la periferia (principalmente los países exportadores de materias primas).
Los primeros coletazos inflacionarios-recesivos importados de la central USA-UE ya se verifican en países emergentes (en desarrollo acelerado) como China, India y Brasil, cuyas economías reales ya sufren el impacto de la crisis financiera.
La "crisis estructural" con recesión económica generalizada, proyecta a su vez la amenaza de una "crisis social" a escala global con ruptura de la "gobernabilidad" política por medio de una ola de conflictos sociales y sindicales (cuyos primeros efectos ya se presentaron con la crisis alimentaria) con proyección tanto en las potencias centrales como en los países "emergentes".
O sea que, y por efecto secuencial, con la "crisis financiera" el sistema capitalista solo está construyendo el primer escalón de la "crisis global".
Por eso el director del FMI dio en la tecla cuando dijo que:
"Lo peor está por venir".
The Twelve Steps to Financial Disaster
Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January?
It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.
To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.
That is the reason the Fed had thrown all caution to the wind – after a year in which it was behind the curve and underplaying the economic and financial risks – and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities.
To understand the risks that the financial system is facing today I present the “nightmare” or “catastrophic” scenario that the Fed and financial officials around the world are now worried about. Such a scenario – however extreme – has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.
Start first with the recession that is now enveloping the US economy.
Let us assume – as likely - that this recession – that already started in December 2007 - will be worse than the mild ones – that lasted 8 months – that occurred in 1990-91 and 2001.
The recession of 2008 will be more severe for several reasons:
*
first, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%
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second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch
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third, US households – whose consumption is over 70% of GDP - have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise
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now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted
So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters.
What will be the consequences of it?
Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession…
1.
First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use “jingle mail” (i.e. default, put the home keys in an envelope and send it to their mortgage bank).
Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders’ stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession.
2.
Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005 through 2007 had these reckless and toxic features.
So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages – already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe.
Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses.
And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing – rather than reducing systemic risk – and making the credit crunch global.
3.
Third, the recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks.
4.
Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up.
Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package – short of an unlikely public bailout – is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products.
Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses – and potential runs – on the money market funds that invested in some of these toxic products.
The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines’ downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system.
5.
Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead – with a short lag – to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a massive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today.
6.
Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors’ panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail.
But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide – an institution that was more likely insolvent than illiquid – has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks’ bankruptcies will add to an already severe credit crunch.
7.
Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans – a good chunk of which were issued to finance very risky and reckless LBOs – is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower).
Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone – not avoid – such bankruptcies and make them uglier when they do eventually occur.
The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions.
8.
Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD – or recovery given default – rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007).
But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen. While on average the US and European corporations are in better shape – in terms of profitability and debt burden – than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads.
Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely).
Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection – possibly large institutions such as monolines, some hedge funds or a large broker dealer – may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.
9.
Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions.
All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities.
Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can.
10.
Tenth, stock markets in the US and abroad will start pricing a severe US recession – rather than a mild recession – and a sharp global economic slowdown. The fall in stock markets – after the late January 2008 rally fizzles out – will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones.
A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.
11.
Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates – TED spreads, BOR-OIS spreads, BOT – Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors’ risk aversion – will massively widen again. Even the easing of the liquidity crunch after massive central banks’ actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.
12.
Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets.
Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.
Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per dollar of capital.
The recapitalization of banks sovereign wealth funds – about $80 billion so far – will be unable to stop this credit disintermediation – (the move from off balance sheet to on balance sheet and moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses will dominate by a large margin any bank recapitalization from SWFs.
A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in asset prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This massive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.
A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress.
Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties – driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities – will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch.
In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century.
Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night?
The answer to this question – to be detailed in a follow-up article – is twofold:
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first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century
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second, the extent and severity of this financial crisis will depend on whether the policy response – monetary, fiscal, regulatory, financial and otherwise – is coherent, timely and credible
I will argue – in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.
