No need to panic, let the market decide By William Bowles

14 August 2007

“We’ve got blind panic… and obviously a complete lack of confidence [in the market]” – Tony Craze,

It should be obvious to all and sundry by now that capitalism is in dire straights. Last week’s meltdown of the world’s major capital markets was only ‘rescued’ by the injection of literally hundreds of billions of dollars from by the European Central Bank, the Bank of Japan and the US Federal Reserve. So much for the magic of the ‘market’ which we are continuously told, solves all problems. And in fact, last week’s injection by the European Central bank of something like $100 billion dollars didn’t do the trick! More had to be ‘injected’ in order to stave off a total collapse of the world’s stock markets. The ‘injection’ is in reality a bail-out of the commercial banks.

But all the injection does is lower the value of the currencies in circulation, it’s effectively throwing bad money after bad money in an attempt bail out the capital markets. Will it work? Nobody knows, least of all the ‘experts’. Isn’t capitalism wonderful.

Ostensibly the problem was caused by what are termed loans in the ‘sub-prime market’, which to you and me are bad loans made to people who cannot afford to pay them back, primarily for mortgages which the rise in interest rates have made them too expensive for the unfortunate house ‘owners’. These loans were made by commercial banks in the US who are now saddled with losses totalling billions of dollars.

One major US lender, American Home Mortgage had already ‘gone under’ as they say, with bad loans totalling $100 billion dollars and it filed for bankruptcy the other day.

So what’s going on here? We are told that left to itself, the ‘market evens things out’, supply and demand all that garbage so why are governments intervening? Aside from anything else, if governments don’t intervene, the entire capitalist order would collapse but at the heart of the problem are the weird and wonderful devices the banks have invented in order to get rid of their bad loans.

Essentially the commercial banks ‘package’ the loans (labelled innocently as “financial derivatives”, a fancy word for debts) along with a lot of other crap and sell them off to other banks, insurance companies, hedge funds, futures traders and such like. However, nobody really knows who owns these debts as they are hidden inside all kinds of devices with the name of “collaterised mortgage obligations”. It’s all smoke and mirrors.

The problem is that nobody wants to buy them fearing (quite rightly) that they are not worth the paper they are written on, debts are only bought if there’s a good chance they’ll get paid off.

Most amazing to behold however is what the financial ‘experts’ have to say on the subject, not that it amounts to much of anything, thus we read:

“[M]uch depends on the speed and extent of the equity market falls. Is this just a correction, or is it the start of something deeper?” — Howard Archer, Global Insight

“Market participants don’t know whether to buy on the rumour and sell on the news, do the opposite, do both, or do nothing, depending on which way the wind is blowing. The atmosphere is febrile.” — State Street Global Markets

“At the moment, it seems that nearly every financial market is becoming increasingly violent.

“This is odd because normally whilst we may have chaos in one sector, another is generally peaceful.” — Simon Denham, Capital Spreads

In other words these so-called experts are totally clueless about how to solve the problem but they do know what caused it and occasionally we do come across a kind of admission:

“The worry is that should banks make losses, it would hurt their earnings and their profitability, making them less willing to fund the takeovers and buyouts that have underpinned much of the stock markets’ recent gains.” — ‘World Shares Fall On Credit Fears’, BBC Online News, Friday, 10 August 2007.

In other words, vast amounts of money have been borrowed in order to finance takeovers, the problem however is that buyouts and takeovers produce absolutely nothing of value, they are merely speculative ventures. In other words, the vast fortunes that have been made by speculation are based not on the production of real goods and services but on loans made on the gamble that the future value of these stocks will rise.

Worse still, not only does nobody know who actually owns these bad debts but nobody knows which banks are in trouble and which ones aren’t (and those that are in trouble, are not likely to announce the fact).

“The complexity of the financial markets has only added to the sense of dread as investors have no idea which institutions own what debt, leaving the markets to be riven by rumour and counter-rumour. “There is great uncertainty as to how far risks are spread within the financial system and exactly where the losses reside,” said Paul Niven, at F&C Asset Management. “The market is trading on fear.”” — ‘Central banks pour in billions – but global slide goes on’ — The Guardian, Saturday, 10 August 2007

Thus the real cause of the current panic is financial speculation caused by unrealistically cheap credit and almost no regulation of speculative markets, which whilst money was cheap suited the banks just fine, but once interest rates started to rise and defaults started to spiral, investors pulled out of speculative investments and moved their capital to more stable climes.

The Guardian on Saturday (10/8/07) asked its readers rhetorically:

“What can I do about it?”

“Not much. Worried investors may sell their shares or unit trusts, but this could be at a loss.”

Isn’t capitalism wonderful.

For more on the topic see

‘Margin Call’ by James Kunstler, Atlantic Free Press, 14 Aug 2007

‘Stock Market Brushfire; Will there be a run on the banks?’ by Mike Whitney, Atlantic Free Press, Monday, 13 August 2007

‘Jitters, Panic, Anxiety As The Market Meltdown Sends A Chill’ by Danny Schlector, Atlantic Free Press, 13 Aug 2007

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