Global Financial Crisis (1 Viewer)

[Nebuchanezzar]

This is not a failure of capitalism, you twat. Fannie Mae and Freddie Mac were set up and subsidised by the US government to do what the free market would never do, and this is provide ridiculous amounts of subprime credit to people with a high probability of defaulting on their mortgages. They then packaged these debts and onsold them to other firms, which bought them because, while they were not actually securitised by the government, there was an implicit suggestion that, should a situation like this come about, the government would compensate them.

The spectacular failure of these markets had a higher degree of inevitability than Sam04u dying a virgin, because when government fucks around with markets on such a grand scale it's always going to start raining shit sooner or later.

Yes I believe you. Keep spouting your 90's capitalist ways, Mr. Thatcher.

 

[youBROKEmyLIFE]

Yes I believe you. Keep spouting your 90's capitalist ways, Mr. Thatcher.

What's your alternative cocksucker?

 

[Nebuchanezzar]

Complete and utter control.

 

[katie tully]

Complete and utter control.

www.greenleftweekly.org.au

 

[katie tully]

lol, just for lulz

Financial crash: A system in chaos

20 September 2008


The latest chaos on Wall Street — the worst financial upheaval in the US since the 1930s Great Depression — highlights not just the scale of the world financial crisis, but the needless destruction caused by the blind competition at the core of capitalism.


The Wall Street crisis will almost certainly make the current economic slump worse. A shadow banking system beyond the reach of regulators in the US or any other country is crashing down, destabilising the world financial system.

Even before the latest crisis, Bill Gross of Pimco, a big money-management firm, warned that an uncontrolled liquidation of debt by financial institutions “can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami”.

The risk of such a catastrophe is growing. As hundreds of billions of dollars in financial assets vaporise, banks will be forced to raise interest rates to increase the amount of money they have in their reserves. This, in turn, will cut off credit to business and consumers alike, further choking an anaemic economy.

Falling tax revenues will trigger painful cuts in social spending. Home prices will continue their downward slide, and the number of home foreclosures will rise. The unemployment rate will jump still higher.

Workers who do hold onto their jobs will have already seen their real income cut this year due to inflation and shorter working hours — and they’ll face renewed employer attempts to slash pay and pass on the costs of health care.

In short, the financial turmoil threatens to turn an already bad recession into something the US hasn’t experienced in decades.

The wreckage in the financial markets has also left the US economic model in ruins.

Since the mid-1970s, “corporate America” and the politicians of both capitalist parties have championed supposedly “free market” solutions involving deregulation of business, privatisation of government services and “flexible” labour markets, based on weak unions and an increase in the use of part-time, temporary and contract workers.

But now, after decades of preaching “personal responsibility” to working people and attacking the poor for their “dependence” on welfare, Wall Street is running to the government for multi-billion-dollar bailouts and emergency low-interest loans, all at the taxpayers’ expense.

The nationalisation of Fannie Mae and Freddie Mac, the government-sponsored mortgage companies that own or guarantee nearly half the nation’s US$12 trillion in mortgages, committed up to $200 billion in government money to make sure that holders of the companies’ bonds get their investments back.

The Fannie-Freddie bailout came just six months after the Federal Reserve Bank stepped in to provide $29 billion in taxpayers’ money to finance JPMorgan Chase’s takeover of the investment bank Bear Stearns.

The Fed also used a Depression-era law to create special “lending facilities” to funnel billions more in low-interest loans to troubled Wall Street investment banks like Lehman Brothers.

Federal Reserve Bank chair Ben Bernanke and treasury secretary Henry Paulson claimed that such moves would prevent a repeat of the debacle at Bear Stearns, which went into crisis because of a decline in the value of the mortgage-backed securities that it owned.

The Fed even agreed to accept some toxic mortgage-backed securities as collateral for those loans.

Now, with the Fannie-Freddie nationalisation and Lehman’s bankruptcy, this strategy has failed spectacularly. With $639 billion in assets set to be liquidated, Lehman’s bankruptcy is six times bigger than that of WorldCom, which went bust in 2002.

This time around, the Fed and the Treasury refused to finance a rival bank’s takeover of Lehman, as they had done with Bear Stearns.

Whether the decision to let Lehman go down was made because another bailout wasn’t politically defensible or because the Fed simply didn’t have the money available isn’t yet clear. But it was an enormous gamble.

“Mr. Paulson seems to be betting that the financial system — bolstered, it must be said, by those special credit lines — can handle the shock of a Lehman failure”, wrote economist Paul Krugman in his New York Times column. “We’ll find out soon whether he was brave or foolish.”

Lehman won’t be the only financial titan to bite the dust. An even more famous Wall Street firm, Merrill Lynch, had to sell itself to Bank of America in order to avoid the same fate.

Just days after Lehman’s collapse, AIG, the world’s largest insurance company, was handed $85 billion in government funds to avoid bankruptcy.

Washington Mutual, the largest savings and loan in the country, and Wachovia, the fourth-largest bank, could also go under soon.

If either one files for bankruptcy, it would wipe out the Federal Deposit Insurance Corporation (FDIC), which protects deposits up to $100,000. The FDIC has just $50 billion to insure more than $1 trillion in total deposits.

Can falling house prices really be responsible for a crash of this scale?

In fact, the housing bust has acted as a detonator for more powerful explosives — the enormous debts of all kinds piled up in the shadow banking system created by deregulation.

At the center of this banking deregulation effort was former Texas Republican Senator Phil Gramm, now Republican presidential candidate John McCain’s leading economic adviser and his likely choice for treasury secretary if he wins the November election.

And it was Democratic president Bill Clinton who signed into law the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which, as Timothy Canova wrote in a recent issue of Dissent, “swept aside parts of the Glass-Steagall Act of 1933 that had provided significant regulatory firewalls between commercial banks, insurance companies, securities firms and investment banks”.

Canova continued: “Banks were suddenly free to load up on riskier investments as long as they did so through affiliated entities such as their own hedge funds and special investment vehicles. Those riskier investments included exotic financial innovations, such as the complex derivatives that were increasingly difficult for even experts to understand or value.”

Alistair Barr of MarketWatch summarized the consequences: “The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.

“While this system became a huge and vital source of money to fuel the U.S. economy, the sub-prime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn’t have reliable access to short-term borrowing during times of stress.

“Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.”

Whether we’re at the brink of such a collapse is anybody’s guess.

For example, the unregulated market for “credit default swaps” — a form of insurance for bondholders — is worth a mind-boggling $62 trillion on paper, equivalent to four times the annual gross domestic product of the US

The bankruptcy of Lehman will trigger multibillion-dollar payments from insurers to bondholders. But since these “swaps” are privately traded from one institution to another, no one knows who owes what to whom — or whether they can afford to make such payments.

If they can’t, more bankruptcies could follow.

Whatever shape this financial calamity takes, there’s one certainty: Capital, as always, will try to push the costs of the crisis onto the backs of working people, both in the US and around the world.

But this time, the insanity of the system has been dramatically exposed.

A financial crisis on a scale unseen for generations will lead millions of people to question why they must make sacrifices for the sake of a tiny minority of wealthy parasites.

It’s time to make the case for a new, planned economic system — one that’s under the democratic control of working people, aimed at meeting human needs rather than bankers’ greed.

 

[Nebuchanezzar]

www.greenleftweekly.org.au

www.imurderbabiesforlulz.biz

 

[withoutaface]

Yes I believe you. Keep spouting your 90's capitalist ways, Mr. Thatcher.

Disprove my premises, sir, or kindly step off.

 

[Nebuchanezzar]

I actually don't know much about economics (especially in this sphere), but from what I've heard, a lack of regulation is to blame.

 

[withoutaface]

I actually don't know much about economics (especially in this sphere), but from what I've heard, a lack of regulation is to blame.

In some ways, that is correct. Once you've already got the government fucking around in shit, you want to ensure the people they're subsidising don't use that money as a blank cheque to do whatever they want (think food stamps vs straight welfare). This doesn't change the fact that FM/FM never should've been created, and that this is the root cause of the current crisis.

 

[blue_chameleon]

Non recourse loans anybody?

Can't pay off my mortgage, i'll just give the keys to the bank and start again. At the time, the banks didn't care because they packaged up their debts into nice CDO's and sold them off as some magic investment.

 

[youBROKEmyLIFE]

It’s time to make the case for a new, planned economic system — one that’s under the democratic control of working people, aimed at meeting human needs rather than bankers’ greed.

Yeah I love emotion-drenched idiotic comments from fools that don't understand economics.

 

[ASNSWR127]

WAF actually offered a very clear explanation of his viewpoint.

Can you come up with a counter argument beyond "capitalism is evil lah."

No other argument necessary

 

[bigboyjames]

FDIC takes control of Wamu overnight, sells assests to JPM Chase.

Mccain and the republicans are blocking the $700 billion government bailout deal, deal is dead!

 

[withoutaface]

No other argument necessary

Well who am I to argue with the vast intellectual wealth of Lithgow High School?

 

[jb_nc]

Well who am I to argue with the vast intellectual wealth of Lithgow High School?

He did General Mathematics too, so watch out, he can (badly) process statistics and use the compound interest formula!

 

[withoutaface]

He did General Mathematics too, so watch out, he can (badly) process statistics and use the compound interest formula!

Looks like somebody's almost qualified to become the next US Treasury Secretary.

 

[Nebuchanezzar]

Well who am I to argue with the vast intellectual wealth of Lithgow High School?

or the mathematical ability of a bad hsc mathematics student from camden high!

 

[jb_nc]

Looks like somebody's almost qualified to become the next US Treasury Secretary.

haha

 

[Xayma]

This is not a failure of capitalism, you twat. Fannie Mae and Freddie Mac were set up and subsidised by the US government to do what the free market would never do, and this is provide ridiculous amounts of subprime credit to people with a high probability of defaulting on their mortgages.

Except a subprime loan was one that didn't meet the Fannie Mae, Freddie Mac criterion.

 

[withoutaface]

Except a subprime loan was one that didn't meet the Fannie Mae, Freddie Mac criterion.

http://www.freddiemac.com/news/archives/corporate/2007/20070418_subprime_commitment.html
Implies they were buying such loans in the first place.
http://www.abs-cbnnews.com/business/09/26/08/what-subprime-dummies-guide-credit-crisis-lingo

They exist for two reasons: to keep the supply of money people borrow from to buy homes available and at a lower cost.

They did not lend directly to homebuyers. Instead, they created a secondary market for housing loans--or mortgages--by purchasing these mortgages and providing them fresh money to make new loans.

They repackage these loans repackages the loans as mortgage-backed securities, stamp them with government guarantees, turn these mortgages around, and sells them to investors. In effect, they were acting as the bridge between mortgage lenders (lending to those who don't have enough money to buy a house) and investors (who have spare money to park and invest in the stock market).

Since the government guarantee assures the investors that the interest and principal will be paid--whether or not the original borrower pays--investors consider mortgage-backed securities from Fannie and Freddie as "safe" investments. The low interest rates these investors pay for these means the banks and non-banks can lend housing loans at low rates too.

Ergo they encourage the lending of money beyond what would be lent, were the government not signing on as guarantor.
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

In 1999, under pressure from the Clinton administration to offer more loans to minorities (who are traditionally underrepresented in the mortgage market), Fannie Mae began a program to extensively expand loans made to people with low to moderate credit.[39]

A subprime loan is any one which has a high likelihood of default. Examples being poor credit histories, low documentation, securities in areas where prices are dropping, higher LVR's, etc.