12 September 2007
Explaining economics is probably the most difficult thing for any writer to undertake, especially if one’s take on things is not in the mainstream, that is to say, not what they call classical economics, which is another way of saying that capitalism is the only possible system, so it’s interesting to see how the mainstream media deal with the current ‘credit crisis’ or perhaps a better way of putting it is to say we have a crisis because the credit’s run out. Just too many bad debts which wouldn’t be so bad except nobody knows who owns the debts or even where the hell they are!
It’s a case of being just too clever for your own good. With the deregulation of financial services under Reagan/Thatcher/Bush/Blair, we now have a return to the bad old days of the Robber Barons where anything goes (except nobody knows where it’s actually gone).
Stockbroking corps, investment outfits, banks and insurance companies are free to dream up all kinds of scams involving betting on the future value of a bit of paper (well, not even paper, it’s all on computer); futures trading and hedge funds are the most well known but there are dozens of combinations of bet on offer, some so arcane that nobody knows how they really work except the person or persons who dreamt them up in the first place. All have their analogy at the racetrack, spread bets, each way, combinations, splits, losers, winners and so forth.
But they all have one thing in common, they all take place in an imagined future where the actual value of the piece of paper is irrelevant, what counts is that when you ‘invested’ in it, you made the right guess as to what it’s value would be at some future date, less or more, it doesn’t matter.
It’s brilliant, only a bunch of really clever crooks could dream it up (except that what was previously illegal is now legal, this what I mean by a state run by a bunch of gangster capitalists who have stacked all the rules in their favour).
So for example, the so-called sub-prime lending catastrophe (let’s not forget the poor schmucks who are getting their houses repossessed, a fact that’s rarely mentioned in news coverage of the crisis) is made even more of a catastophe by the fact that the billions in debts owed to banks has been ‘broken up’ into millions of ‘small’ debts and then ‘repackaged’ with a bunch of other financial notes and then sold off to some clever cuts in the investment section of an institution, who sees yet another chance to actually print the money (rather than producing something real).
It’s fucking brilliant. What’s more, because financial trading has been deregulated pretty well globally, these debts have been sold, resold, repackaged, resold, split, recombined, and had who knows what else done to them, right across the planet!
So that’s what they mean when they say they don’t know where the debts are. Meanwhile, the state in the form of the Central bank has had to step in with billions in cash to prop up a banking system that’s on the verge of crashing.
The BBC Website, 10th August explains it in the most anodyne terms:
‘Leading UK and European banks may be forced to pay out as much as Â£70bn ($142bn) over the next 10 days as the global credit crunch continues to bite.
‘The banks may have to pay out that sum if investors, such as pension funds, decline to buy the banks’ latest debt issues which are now due for renewal.
‘Analysts say investors are reluctant to buy the new debt until the full impact of the US home loans crisis is known.
‘With fewer buyers for the debt, banks may have to refinance it themselves.
‘Institutional investors, such as pension or insurance funds, are usually happy to buy the commercial papers, as the banks then pay them interest, and they are traditionally seen as very safe investments.’
BBC NEWS | Business | Banks could face £70bn debt bill
The same piece ends with following ominous statement:
‘An unnamed boss of one of the UK’s largest banks told the Sunday Times at the weekend that conditions in the money markets were the worst for 20 years.’
Twenty years ago in 1987, we had ‘Black Monday’ when stock markets the world over took a dive that was comparable to the 1929 Crash.
And of course, what rational institution would throw good money after bad? Instead, the state steps in and bails out the banks! So much for letting the market decide. It seems that state intervention is okay as long as it’s to help out capitalism.
What the media only hint at is that it’s all connected in real time, thanks to computers, so even though the sub-prime crisis is wholy a US thing, these repackaged debts are now part of the global circuit of capital, doing the rounds you might say, and ending up in the portfolios of insurance companies and banks across the planet, who are effectively stuck with them because they don’t know where the debts are either.
You must also be aware of the fact that traditionally, banks make their profits out of your debts, so when it comes to assets, for a bank it’s the debts that count, the entire thing rocks along on the interest earned (which is why the interest rate is so crucial to profitability). And banks sell these debts to investors such as insurance companies on the ‘promise’ that the debts will get paid off, plus of course, a profit.
But deregulation of the banking sector has meant that banks are using your money to invest in anything that moves; currency speculation, land, takeovers, and of course the now infamous ‘collaterised mortgage obligations’.
Making credit cheap to obtain is an easy way of creating demand and it looks great in the propaganda, as long as the interest rate stays low enough for people to repay the loan but it ignores the fact that the money in circulation is falling in value, that is over time, you get less for your buck. Inject billions more into the system and the value falls even further; it’s called inflation.
And in any case, it’s all pointless (except for those made homeless), there is no way these fragmented debts can be recombined. It’s a nightmare but just one of a sequence of systemic faults (remember Enron?), it’s what happens when the market rules everything and there are no rules; it ends up ruling nothing, as it’s just chaotic systems in action. The ‘experts’ are clueless and it’s born out by the so-called news coverage, for to admit that it’s the actual nature of the economic system that’s the problem, is unthinkable (as well as being impermissible).
The BBC’s Website, 10 September, had the following piece, allegedly written to explain why and what’s going on:
‘It was not just stock markets that have been worried.
‘Interest rates in credit markets – such as the bonds issued by companies and governments – have been rising as investors price in previously unknown risks.’
I love it, ‘previously unknown risks’? Like the billions in ‘Ninja’ loans (No Income and No Job or Assets) were an unknown risk?
‘Fears that more undisclosed bad debts would surface in the banking sector led other banks to cut back on their everyday lending to one another.’
Banks rarely, if ever, use their own money, they use yours or they borrow from central banks (the state), normally short-term loans (no more than three months) hoping to repay the debt from the profit on the interest charged to its borrowers.
‘This drove up the bank’s overnight lending rate, which usually tracks the base rate set by central banks.
‘In London, as the crisis began, the cost of overnight lending (the London Interbank Offered Rate) rose dramatically, from 5.85% on Wednesday 8 August to 6.45% on Friday 10 August, and similar sharp changes occured in Frankfurt and New York.
‘If this had continued, it would have undercut the ability of world central banks to regulate interest rates, and would have raised the cost of borrowing across the board.
‘That led the European Central Bank and the US Federal Reserve to step in and pump in billions of dollars to prop up the financial system.’
‘Prop up’? Bail-out is the correct term, for without the injection of cash from these central banks, commercial banks would have gone bankrupt (some banks that specialised in home loans, already have including one ‘small’ bank to the tune of $100 billion).
Under the heading of ‘What are the wider implications?’, the BBC piece says absolutely nothing of any value, instead it offers the following:
‘Even if the central banks stem the financial panic, there seems to have been a general shift in market perceptions about risk.’
Generally, the riskier the investment, the higher the interest rate – but now the additional premium for risky investments (the ‘spread’) is set to widen sharply.’
In other words, the capitalist system is caught between a rock and hard place, for it has only been able to claim ‘growth’ of the economy by making it easy to borrow money, which keeps consumption on the up (over 60% of the GDP in the UK is actually composed of consumer spending, all of it financed through borrowing).
In other words, the ‘growth’ is an illusion, it’s all down to consumption and financial speculation and in any case, most of the consumer products purchased are not even manufactured here. It’s a house built on sand.
The BBC ‘analysis’ goes on:
‘Stock market fluctuations are a normal part of stock market activity, and no one can say how far shares could fall or how long the slowdown could persist.’
‘Markets have had quite a sharp rise in the past 18 months, and the current correction may simply return them to previous levels.’
In other words, the BBC along with the investors are clueless about the real nature of the economy, so for example, although â€œcompany profits have been strong and the world economy seems to be entering a period of revival, especially in Europe and Japanâ€ , what the BBC does not mention is that the rise in the value of shares is based largely in speculative ventures eg, sub-prime loans and most importantly, on buyouts and acquisitions, where the buyers borrow lots of money to finance the takeover in the knowledge that the inevitable cuts in jobs brought about by the mergers and acquisitions will be used to pay the loan back.
The BBC ‘analysis’ ends with:
‘What does it mean to you?
‘Many individuals own stocks and shares – about half of all US households, and around a quarter of those in the UK.’
What the BBC doesn’t tell you is that for the most part, our ‘property-owning democrats’ own only tiny share portfolios, the real deals take place in the boardrooms of insurance companies, banks and investment corps, where billions of shares live.
‘If the stock market falls continue, they [the public] may feel less wealthy – and be less likely to buy goods and services, slowing the economy.’
I love the BBC’s (mis)use of words, where being in even deeper debt is called â€œfeel[ing] less wealthyâ€ . Are we to understand then, that being broke is just a state of mind?
But the real (and related) kicker comes right at the end of the piece:
‘In addition, many pension funds own shares which make up part of their portfolio used to pay people’s occupational pensions.
‘If shares fall, they may have less money to pay future pensions, and employee contributions may have to rise.’
in other words, we will have to pay for the sub-prime scams and a bankrupt banking system, it’s the dot.com bubble bursting all over again.
But note how the BBC presents the crisis using innocuous phrases, everything is low key (musn’t cause a panic) and designed not to reveal the real causes; unregulated financial markets, financial instruments so arcane and complicated that to the average person, they must be okay and above all, do not reveal that the ‘growth’ is based on speculation in stocks and currencies and selling chimeras to an uninformed public, who, just like the investors who sell them, are out to make money without actually producing anything of value. Isn’t capitalism wonderful.