Hard Times

Financial expert Martin Weiss has been a leading investor safety advocate for decades. On October 14, he issued "an urgent update on these wild, wild markets" and explained what most observers ignored. As world markets soared on October 13, "bond markets suffer(ed) a dramatic decline." He concluded: "if you think (October 13′s) euphoria means the government’s newer and bigger bailout plan is going to be a success, think again."

Equities aren’t at the epicenter of the crisis. Bonds and credit markets are:

— "subprime mortgages first collapsed;"

— mortgage-backed bonds imploded;

— commercial paper also;

— interbank lending froze; and

— "the entire global financial system (approached) a systemic meltdown."

A future day of reckoning is ahead in global bond and credit markets. Washington’s "master plan" may "temporarily stimulate" Wall Street rallies. Possibly "ease some panic in some debt sectors." That’s worlds from ending a crisis of this magnitude, and Weiss’ advice is to "move decisively from risk to safety." For protection and to profit from "the next phase of the crash."

• A d v e r t i s e m e n t

Since summer 2007, all central bank plans "backfired," and the new US and EU ones "are no different." While authorities liquified markets, fires raged inside them. Instead of solving problems, they created greater ones. Instability, not calm. The "very panic they sought to avoid. The same thing is going to happen this time….The bigger it is, the more desperation it denotes." And more of it means it’s likelier their plans will fail. Recovery will come eventually. First, however, "the economy will suffer a great fall," and America’s contagion will spread everywhere.

Ismael Hossein-sadeh cites University of Maryland economist Herman Daly in his October 14 article titled: "Why the Bailout Scam Is More Likely to Fail than to Succeed." He lists five reasons:

— a lack of "faith and trust," not liquidity; the world is awash in the latter and more is coming;

— too little good money to redeem the bad kind; mountains of it in the multi-trillions, and no one knows how much;

— no help provided for distressed homeowners; a key source of the crisis; preventing mortgage defaults is crucial; if they’re serviced, mortgage-backed securities can be restored along with the solvency of their holders; absent that, greater insolvency;

— no economic stimulus is included to inject purchasing power into the economy; it’s vital to revive production, create jobs and reverse the economic slide; and

— a "socially-responsible fiscal policy" is needed; mirror opposite the current one; anchored by ruinous military Keynsianism; wealth transfers to the rich; ending responsible social policies; and creating mountains of unrepayable debt.

Add to these a regulatory-free environment. Speculative finance crowding out productive investments. Massive fraud allowed to persist unchecked, and excesses creating even greater ones. Overall a broken, pernicious, unsustainable model corroding from within and taking America and world economies down with it. Remedies being implemented assure greater problems. At best only short-term relief, and in the end economic ruin. In all likelihood the republic with it.

The Housing Bubble – The Core Economic Problem

Many analysts cite the imploding housing bubble as the core US economic problem. The large and growing volume of bad mortgage loans. Heading up to 20 million under water in 2009. The implications of millions of foreclosures and their negative effect on the economy. Until home valuations stabilize, no recovery is possible. But according to experts like economist Robert Shiller, it’s likely months off before it happens.

In the Great Depression, home prices plunged 30%. Today they’re down around 20%, and Shiller believes they may match or exceed that era’s levels. Even worse, when valuations stabilize in nominal terms, most homeowners will keep losing money. A very disquieting prospect to consider. It may force many households to walk away from their properties because retaining them is too costly.

Not helping are plunging housing data and the October National Association of Home Builders (NAHB) Housing Market Index (HMI) hitting a record low. According to NAHB’s chief economist David Seiders, it’s "clear evidence than an additional economic stimulus package is needed." Enough to spur home buying. All three HMI components fell. Current sales conditions and expectations hit record lows, and buyer traffic matched its July low. It affected all regions, and Seiders said  builder sentiment was the worst he can remember.

Before his death in summer 2007 (at age 88), Kurt Richebacher was a well-respected economist and financial analyst. Also a fierce critic of speculative finance, particularly on Wall Street. In 2004, he reflected on the housing bubble (before most others) in a commentary titled "Property Bubbles: Beware of Property Bubbles."

He cited critical US "economic and financial imbalances." The nation’s growth "depend(ent) entirely on the continuation of the frenetic housing bubble." The certainty that "all bubbles end painfully, housing (ones) in particular. They’re an especially dangerous (type) asset bubble because of their extraordinary debt intensity." By extracting wealth (through refinancing) from rising valuations and by "heavily entangl(ing) banks and the whole financial system as lenders." Thus, property bubbles have historically been the main cause of major financial crises.

Japan in the late 1980s for example. Its stock and property bubbles burst, but the former got most of the attention. The "property deflation continued for 13 years" through the timeframe of his article. With "calamitous effects on the banking system through a horrendous legacy of bad loans." Japan’s "building sector" also suffered and "never recovered from the depression following its (late 1980s) excesses."

• A d v e r t i s e m e n t

Richebacher wondered if America’s fate may be similar and asked "Is the US economy in better or worse shape today (in 2004) than in 2000 (as it faced recession)? Is it in a self-sustaining recovery?" Absolutely not…."it is in dramatically worse shape." The result of binge borrowing. Financing "leveraged asset purchases and soaring imports. The former involve no income creation; the latter involve income destruction. By implication, this borrowing represents entirely unproductive, or dead-weight, debt, yielding to debtors no future flow of income from which to pay their debt service." A bad ending is assured. In summer 2007 it arrived. Its effects are painful and worsening. No sign of a quick or easy resolution is evident nor will Wall Street’s bailout produce one. According to University of Chicago economics professor Casey Mulligan, it represents a minute fraction of the problem. It may only buy a couple of months relief. Nothing more.

An "Oasis of Calm"

Along with Fidel Castro, Washington’s favorite Latin American target is Hugo Chavez. The Wall Street Journal’s Mary O’Grady attacks him relentlessly in her Americas column, and on October 6 (and earlier) said Venezuela’s economy is deteriorating. In a shambles. At a time it’s, in fact, experiencing robust growth.

Impressively with one of the highest world rates. It also tops most nations and the entire Hemisphere (including the US) with the largest international reserves per capita  ($1300). Credit Bolivarianism. Abandoning neoliberalism. Maintaining sovereign independence. Raising taxes and royalties on foreign investors to make them pay their fair share. Imposing currency exchange controls to prevent capital flight. High oil prices. Keeping a majority of the profits at home. Using them to develop Venezuela’s social state among other factors.

Amidst a world financial crisis. America, Europe and Asia on the ropes. Groping desperately for solutions. The Financial Times (on October 14) wrote: "While stock markets all over the world were ravaged in recent weeks, there was one oasis of calm: Venezuela’s tiny exchange, cosseted by capital controls, actually rose slightly on days where historic losses were being reported elsewhere." Even though a "handful of local banks and brokers" face serious losses. The Wall Street Journal failed to notice.

Ideas from the October 8 – 11 Caracas International Conference of Political Economy

Attended by 40 world specialists from 20 countries to propose South-based solutions to the financial crisis. They fear Western plans will worsen poverty, unemployment, and exploit workers worldwide. They reject a massive public debt increase. The greater concentration of capital, and a perverse restructuring to suck wealth to the privileged.

They fear an authoritarian capitalism. Class warfare and increased racism. Enormous productive and social costs plus weakened environmental sustainability. They call for economic and financial architecture reconstructing. An alternative post-capitalist model. What Venezuela calls Socialism of the Twenty-First Century.

They want more social spending and natural resources protections prioritized. Urgent financial regulations to protect savings, stimulate production, control currency movements, and prevent capital flight. They think it’s crucial to develop regional complementation. Balanced commercial integration. Industrial agricultural, energy and infrastructure improvement. Initiatives like cooperative trade and the Bank of the South.

Globally they want international monetary system reform. To defend savings and channel investments toward prioritized people needs. To curb speculation and lessen economic disparities. Overall they want new economic institutions in place of failed ones and said the crisis awakened the common interests of people everywhere. They made specific recommendations in areas of banking, finance, and the current social emergency.

They noted the complicity of the IMF, World Bank, Inter-American Development Bank, and transnational bankers in causing the current collapse and its consequences. They call them discredited and want a new financial architecture. They announced a second political economy conference for the first quarter of 2009 in Caracas.

The Crisis of World Capitalism – A Broken, Unworkable Economic Model

Over time, "free market" capitalism has grown larger, more powerful, more complex, more exploitive, and more crisis-prone. Currently notable because of massive Wall Street fraud. Financialization. Speculative finance. Computerized gambling instead of productive investment. Largely with no regulatory oversight.

When crises erupt like today’s, fire-fighting is employed to contain them. Moral hazard bailouts for investors taking imprudent risks. Insurance called the "Greenspan put" during his tenure. Currently, the Bernanke/Paulson one. So far, it worked. Eventually it won’t. Eventually may be now.

If so or later, the proof is in the pudding. Each crisis begets greater ones. Sooner or later, one too big to contain. It reveals the inherent flaw of an unworkable model. Broken and in disrepair. With even Washington Post writer Anthony Faiola wondering if it’s "The End of American Capitalism?" Too far gone to fix, but it likely will be. Patched up and reinvented one more time.

It was wobbly during the 1970s. At the depths of the 1974 recession and again in 1979 heading into the 1980 – 1982 one, Newsweek magazine and later Business Week ran the same headline on their covers: "The Death of Equities." One day perhaps, but they were early.

On October 10, Faiola wrote: "The worst financial crisis since the Great Depression is claiming another casualty: American-style capitalism." He means the "hands-off" kind. Not the free-market model as such. And one with more government intervention at times like these. At least "temporarily for a more restrained model, particularly in financial markets." In other words, a strategic retreat. Not a fundamental overhaul or admission that something this broken can’t be fixed. Just patched, but eventually it’s own internal contradictions will destroy it.

Meanwhile, prepare for what economist Michael Hudson calls "the age of oligarchy." With the "wealthiest 1 per cent of the population com(ing) into possession of even more returns to wealth than the 57 per cent" they now get. "Robin Hood in Reverse." From the public to the rich. Hollowing out America. Making it look like Mexico. Locking in "our age of deception…even more tightly." It’s a "self-defeating free-market strategy. Short-termism" that will prove to be the financial sector’s undoing. Perhaps industrial capitalism and the republic with it. If not soon, eventually.

Replaced by what is most worrisome. Egalitarian reforms come rarely but are possible. Past protest movements achieved them. Ones based on what Frances Fox Piven calls a "distinctive kind of power. Disruptive power." Past conditions were right and it happened. Piven wonders if another "popular upheaval" is possible. It’s "the big question of our time" and even bigger with reckless militarism. A permanent war economy. The erosion of democratic freedoms, and potentially the nation’s worst ever financial crisis. Nothing is certain or easy, but historically "hardship propels people to collective defiance," especially at times of extreme inequalities of wealth. Given the current state, what more urgent time than now.

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