 |
 |
Run On The System: Black Friday
MIKE WHITNEY
COUNTER PUNCH
Friday, October 10, 2008
Stock markets across the world are in a state of hysteria. The tidal wave of sell-offs, which began when Henry Paulson announced the Bush administration’s $700 billion bailout plan for the sinking banking system, has swelled into a global tsunami racing round the globe. Shares fell sharply across Europe and Asia for the fifth straight day following a 679 drop on the Dow Jones. Nearly $900 billion was wiped off the value of U.S. equities in just one trading day. The Chicago Board Options Exchange Volatility Index, the “fear index”, soared to a record 64. Credit markets remain frozen. Libor, the London interbank offered rate, nudged up slightly on Thursday night, signaling even greater resistance to lending between the banks. Until there is relief in the credit markets, stocks will continue to slide. But trust has vanished. The 50 basis points rate cut that was coordinated with foreign central banks has had no effect. The market is being driven by fear and pessimism.
White House press secretary, Dana Perino said Thursday that President Bush will address the country on Friday morning:
“He will assure the American people that they should be confident that economic officials are aggressively taking every action to stabilize our financial system. The Treasury Department is moving quickly to use new tools to improve liquidity, which is the root cause of this problem.”
(ARTICLE CONTINUES BELOW)
Bush still believes that the problem is “liquidity” rather than “insolvency”. When liabilities vastly exceed assets, liquidity does not help. The bad banks need to be closed so the good ones can be strengthened with capital injections.
New York Times columnist Paul Krugman said, “Last month, when the U.S. Treasury Department allowed Lehman Brothers to fail, I wrote that Henry Paulson, the Treasury Secretary, was playing financial Russian roulette. Sure enough, there was a bullet in that chamber: Lehman’s failure caused the world financial crisis, already severe, to get much, much worse.”
Lehman’s credit default swaps, (the derivatives which Warren Buffett calls “financial weapons of mass destruction”) are “unwound” on Friday. It could be a “non event” or it could trigger another sell off; it is impossible to know. If tens of billions of dollars are drained from already weakened balance sheets in counterparty deals that have turned sour, the market will react violently. Wall Street is on tenterhooks waiting for the news from Lehman.
There is general agreement among economists about what needs to be done to stabilize the financial system. The banks have to be recapitalized, all deposits have to be guaranteed (beyond the $100,000 FDIC limit) and additional stimulus has to be provided to increase consumer demand. Otherwise the United States is on the lip of another Great Depression. Too much time has been wasted on Paulson’s failed bailout for G-Sax and his friends on Wall Street. Buying the bad assets of underwater banks does not fix the problem. The banks need capital so they can resume lending and transmit credit to consumers and businesses.
Former head of the FDIC, William Isaac, summed it up like this:
“I was opposed to the bailout bill, mostly because I don’t think it will work. The banks — taking $700 billion of bad loans out of the banks doesn’t help get banks lending again. It just solves some problems in some banks. And it doesn’t have any leverage to it. If the Treasury were to put that same $700 billion and used that to invest in bank capital, the banks can loan $10 for every dollar of capital, roughly, which means that the Treasury would be creating $7 trillion of new lending capacity in the banks. And that is vastly superior to buying $700 billion of problem loans. It just — it will really give some punch to the economy. It will get banks back into the lending business….. And to do that we need to get some capital back in there.”
Isaac added: “The other major thing they really need to do… They really need to have the FDIC declare that there is a financial emergency. And when the FDIC does that, the FDIC should announce that during this period of crisis, all general creditors, all depositors, insured and uninsured, bondholders in our banking system, will be protected if a bank fails. And that, I think, will get the inter — the financial markets working again and get banks willing to loan to each other again.”
Nearly one third of all deposits ($2.5 trillion) are not insured under present FDIC guidelines. If these deposits are not insured, as Isaac says, there will continue to be a slow run on the banks which is why the credit markets are paralyzed.
Much of this week’s volatility in the market is the result of program trading (many sell orders were automatically executed when the Dow hit 9,000) and massive deleveraging in the hedge funds, the secretive $1.7 trillion industry. As credit gets tighter, the funds are unable to roll over their short-term debt and have been forced to dump their assets in an illiquid market at firesale prices. This explains the recent see-saw motion in the stock market; the huge 2 to 3 per cent intraday swings (positive/negative) This has added to the fear of smaller investors who have left the market in droves for the safety of US Treasuries or cash. That’s why the dollar has strengthened even though the Federal Reserve is printing money at a furious pace. The inflationary effects will not be apparent until the destruction of credit abates.
The biggest danger we face, in the short term, is a run on the financial system. Calm must be restored if we want to avoid another depression. Investors have already pulled a record $72 billion from stock and mutual funds, and put the money in US Treasuries and government-insured bank deposits. If the trend continues, the financial system will collapse. This is where leadership and credibility really matter. The Bush administration’s record on these issues is dismal. If the government overreacts and limits bank withdrawals or closes the stock market; the sense of desperation and panic will only grow. That increases the likelihood of rioting and violence, which is what took place in China just this week.
The falling stock market reflects the mood of the country as a whole. Confidence in the system has disappeared. The government has lost the moral authority to rule. People have lost faith in everything. Bush has created a tinder box which could explode in flames at any time. It is a dangerous situation.
The econo-blogs were abuzz all night Thursday. The prevailing feeling is that the Wall Street implosion marks the end of America’s dominance as the lone superpower. As always, economist Nouriel Roubini provided a chilling analysis of the present financial malaise:
Nouriel Roubini:
“The US and advanced economies’ financial system is now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system… and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.
“On the real economic side all the advanced economies…entered a recession even before the massive financial shocks that started in the late summer made the liquidity and credit crunch even more virulent and will thus cause an even more severe recession than the one that started in the spring. So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies.
“At this point the risk of an imminent stock market crash – like the one-day collapse of 20 per cent plus in US stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown….
“When markets that are clearly way oversold that even the most radical policy actions don’t provide rallies or relief to market participants, you know that you are one step away from a market crack and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls, cascading falls in asset prices well below falling fundamentals and panic is now underway.” (Nouriel Roubini’s Global EconoMonitor)
There’s a way forward but it will take a lot of digging out and a vision of the future that doesn’t center on Wall Street.
-
- Social bookmarks
- Email this article
- Print this page
October 10th, 2008 at 2:03 pm
Kyle Bates said : Nothing else will endure whats comin. Prepare for zombies, rodents, and mutants !
YOU COULD BE RIGHT
http://www.raidersnewsnetwork.com/
giants - nephilim - all of it.
(the Bible does say : `as in the days of Noah`)
October 10th, 2008 at 1:57 pm
The Credit Crunch Song - YouTube Another
victim of the Credit Crunch.. Antan Debt performs with his band “The Overdrafts”
http://uk.youtube.com/watch?v=s_iMS31mqmU
October 10th, 2008 at 1:56 pm
“They want a fascist planet with the superwealthy ruling it all
Since we’re too independent, America must be led to fall
When our credit’s been exhausted to subdue the Middle East,
They’ll install our debtor nation in the body of The Beast
Traitor…Dare call it treason”
–The Cornbread Mafia
http://www.youtube.com/watch?v=uw5dP5gy2Vs
October 10th, 2008 at 1:49 pm
most important things you need:
- magnifying glass, to make fire
- fishing hooks (also the very small ones), fishing line, even the 0.2 (serves to fix injuries)
- plastic container for water
- axe
- hunting knife with stone sharpener
- hiking shoes (good ones, 5 pairs)
- couple of nice tents
- a small book that tells you what plants you can eat
Nothing else will endure whats comin. Prepare for zombies, rodents, and mutants !
October 10th, 2008 at 1:45 pm
The only candidate that spoke of these issues in the primaries was Ron Paul.
The only candidate,
Do the Sheeple care? They will vote themselves into oblivion with Obama and Brzezinski’s reign of terror.
October 10th, 2008 at 1:34 pm
no! no true economist is surprised! it starts at HOME! its the attitudes and habits of WASTE and LAZINESS which one can observe on a daily basis in oneself which outisde in the material business world and the consumer society which is forced upon us, are disastrously overproportionated to a mega blitz of total greed and waste which is exploding now.
dont say we didnt see it coming.
this is THE ECONOMIC CRISIS all seers have predicted to happen shortly before world war three and the final disastrous end of 2000 years of wrong thinking and acting, the stupidity of the white man has reached its nemesis climax and will, along with his ” rational ” intellect, land in the trash bin of history, as the most shameless, most mean, most stupid and most retarded EVER example of a failed culture
October 10th, 2008 at 1:23 pm
I watched the market closely today. As is bottomed out, in late afternoon, a lie was told to the press by an Italian leader (the lie being that world governments were planning to shut down markets to calm them). This caused the market to rally back but just as quickly, once the lie was known, they began falling again. Now tonight, Baron Von Moneypants is going to offer some words to the markets, and I would imagine the BushCo. thieves will have their say this weekend. Lies, lies, and more lies, followed by pretty words from career criminals are sure to make a very interesting monday! Will it be a BLACK MONDAY? What is your prediction readers?
October 10th, 2008 at 1:07 pm
Congress was told of imminent martial law following stock crash during secret session on March 13th 2008! Must see!!!!!!!!!!!!!!
http://www.youtube.com/watch?v=anYvNF5RxeI
October 10th, 2008 at 12:59 pm
boy am I glad I have my survival gear ready to go on a moments notice! This shit is happening way too fast. I’m going to make a prediction: Next week will see runs on staple items, stores will begin posting “item limit” signs such as “only two bags of rice per family”… Martial law is imminent. prepare! prepare! prepare!
October 10th, 2008 at 12:54 pm
Is any true economist really surprised?