(update I, and II, below)
Background of the Financial Crisis
In the intermediate period between 2008 and 2009 economies in Europe and North America were in free-fall. Stock markets plunged and banks reeled and, in a domino effect that moved from America to Europe, cascaded to the global economy. By June of 2009 however the general GNP’s (Gross National Product) of most developed countries had sprung back and the rise in corporate profits had come back to their pre-crisis levels (and now have vastly surpassed this reaching heights never seen before). At the same time the unemployment of the majority of American and European populations have kept to exceedingly high numbers which were based on the financial crisis’s loss of (minimally 1,400,000 per month) positions every monthly cycle.
Given that unemployment has remained at the crisis’s high levels, while the profit of corporations and the salaried packages of CEO’s (Corporate Executives) has reached the highest levels ever, why has there been not been a more urgent direction and call by governments to bring the problems in hand? (The major call, as opposed to bring the general class back to pre-crisis levels of employment and net income, has been instead to attack social programs which benefit mostly these in need of the social safety net),
Two factors have set up this crisis and the second of these, along with ill-timed calls for austerity everybody but the top 2% of the population, continue to suppress the healing of these economies.
Interest Rates and the Housing Bubble
After the collapse of the dot-com bubble in the 1990s western countries cut the short term interest rates back by the Banks (European Central Bank, Federal Bank USA). This fueled an incentive to borrow money in order to obtain property which was seen as a “steady-market” value which would not decrease. This was the primary reason for a market value “bubble” to be formed in housing and property. The short term interest rates were artificially kept at this low value in both America and Europe by the “European Central Bank” and the USA’s “Federal Bank”, and was still in place in 2005. This was the foundation for the encouragement of artificial increases (more people want that house because they all have money so a “bubble” is inflated) in property values which will, in the confused common wisdom of the moneyed society, “never lose value”
After the financial crisis in Asia (1997) countries hit by this crisis (see Japan for instance) wish to run surpluses in their economies to ensure against these problems in the future. These countries begin to hoard foreign property as a means to do this. The Asian countries are now running surpluses and begin to purchase items, property and assets in countries such as Spain, Britain, and the US. China as well suppresses the value of its currency to help perpetuate exports (and the deficit surplus this means) and corner markets keeping the Asian market strong and draining capital from other counties which then could be purchased in assets.
The purchase of these assets in these countries as Spain, England, and the US by the Asian countries, results in a lowering of the long term interest rates (verses short term above). These long term interest rates nosedive in countries such as Ireland, Greece, Spain, and Germany. Within these countries, as now both long term and short term interest rates are low, property seems easily obtainable and a steady value and, this thinking, fuels property values upward to massive “bubble levels”. The leaders of these nations (and the economic advisors and leaders in these countries) remain entrenched in the idea that property is never going to decrease in value and even can be seen to “largely reflect strong economic fundamentals” of the country (2008, Bernake head of the Federal Bank in the US) even in the face or the strange behavior of this market.
The Parallel economy of financial instruments
With the above two points in place what will really bring western economies to its knees (1) is the siphoning off money to the corporate sections of society through the use of financial instruments which circulates money in a parallel economic structure where the money is not used to produce but to “use money to make money” .
The most common instrument used by the stock market and the banks, which precipitated the 2008-9 crises, was the repackaging of loans. The Original lender, that is a Bank which gives you a loan, now “sold” these “loans” to others for a profit. In turn these loans were split up and “resold” to others (and could go on forever) feeding the property bubble. This practice, called originate-and-distribute, of subprime mortgages was sold as “AAA” investments and picked up as “good investments” for everything from countries (see Greece) to retirement plans and everywhere in-between where a quick and large profit was to be had. Deregulation of the markets meant that personnel funds of banks (where you save your money) bled into the investment part of the Banking System (where higher risks could be taken on investments) putting the savings of the populace at risk in this financial instrument of “loan repackaging”. These “instruments” (for subprime mortgages) are called mortgage-backed securities (MBS) or collateralized debt obligations (CDO). (2)
These instruments circulated money, and the bets which are made on this money, in a financial “industry” which produced the instrument itself as the object to be bought. (3)
Some Other Instruments of Finance
Contributing to this enlarging bubble, which became more obviously unsustainable, here are a few other important “financial instruments” which contributed to the collapse:
Leverage:The amount of money the Corporations have on hand to make a purchase.
A Bank or Corporation does not need the entire “money in hand” to buy things. Countries, and their market regulating institutions, will impose a standard for how much you should actually “have” in hand to say what you have “someplace else” in order to stabilize the market and give common accepted models to economic behavior. The Standard during regulation (and after the Great Depression when this was put in place) was 7 to 1 (dollars). After the deregulations of the markets in Europe and America the leverage became 70 to 1, or sometimes even higher. In short – to buy something worth 70 (dollars), where once I had to actually have 10 (dollars), now meant I only had to have 1 (dollar) to carry out the purchase. When the collapse occurs the Corporations are seriously in the “red”. For instance from 2004-07, the top five U.S. investment banks each significantly increased their financial leverage to over $4.1 trillion (money which actually didn’t exist). And when the collapse happened those Corporations around them, and who had accepted their “leverage”, were pulled into bankruptcy as well. One Ship took all the ships with it!
Credit Default swaps: A form of insurance to an investment.
This is a financial instrument where you may “bet” on whether or not the asset (thing) you bought will “work” or not (be defaulted on – so you lose your money), or it can be applied to a package you have sold to others (you can bet on things you have no interest in or don’t own. See Dead Peasant insurance). As Members of corporations received a percentage of the sold or purchased package (loans here) there was no “downside” to buying and selling “bad” packages as you still made money on the transaction though the company you work for may suffer. Also you can now “bet against” the set of “bad” (called toxic) packages. Two things which are counter to what would be in the best interest of economies and companies, but are good for the CEO package, are manifest here – Buying or selling toxic (bad) things is destructive to the company and but makes millions for the CEO (and when the company goes bankrupt, or the CEO is fired for incompetence, they will receive a “bonus” of millions as well). Buying bad investment still gives CEO’s a slice of the pie, and you can bet against a bad investment you sell to others (but do not tell them is “toxic”), therefore giving you a incentive to see your own things fail.
There are many variations of these types of financial instruments, but the above contributed most to the collapse of 2008-9, and, as the millionaire George Soros says: “The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility”.
( Information on above video: DIVESTMENT is a short film set in a corporate board room during the Irish financial collapse. The dialogue is drawn from actual divestment ‘war room’ scenarios, terms used by the Irish property industry and investment bankers. This shows the type of language used by the “industry” and is usually used to obscure what the instruments do, and to deflect blame.
Credits online at www.stillfilms.org)
Shadow Banking and the Contradiction of Self-regulating
This level of Banking, where money is used only to make more money and risk in the “market of money” is wild and only sits at the lower ends of the pyramid (not at the top levels), has been termed the “Shadow Banking” System. Businesses and Countries (starting with deregulations of the financial markets and Banks in thte 70’s and 80’s) see the wildly growing packets created in this financial market and place their money there as opposed to the staid and boring low yielding bank deposits. However these repackaged financial risks, being founded on the ideas of the low interest loans and given a patina of the “quick” and high yield buck of hedge funds, and financial instruments (and created in the newly deregulated investment banks), both created and were propped up by the elusive bubble. The Shadow Bank system, using the highly abstracted numbers of money (with these instruments being bets both for and against the packages the Investment bank created. And yes, you could bet against the very thing you made! Nothing could go wrong there), yielded ,what seemed to be, higher payback rates to the investor than more ordinary Bank deposits, because of the high risk and not really needing the original money to cover the purchase (having the money to back what you bought — see leverage above). With the deregulation of the financial markets the rules that applied to conventional banks were circumvented and money bet on money (which made money) and the packets moved between companies and investors (which made money) regardless of their actual value and whether they would succeed or collapse became the norm. The problem came to show itself at the point of crisis when the money, which wasn’t government-guaranteed, showed itself to be non-existent and therefore became a pivot point for a crises of confidence about the banks and the shadow system itself.
After the crisis became obvious and the collapse enfolds, in order to insure the entire financial system does not self-destruct, the governments hit by this event needed to prop up the financial institutions, even though it was these self-same institutions themselves created, caused, and perpetuated the problem. Along with this “propping up” of the guilty companies by vast influxes of money (and, in the case of the US these companies getting interest free loans) generally the perpetrators of this crisis were allowed to remain in place and currently are getting the largest bonus packages in history (part of the problem was the bonuses as they rewarded the number of financial packages “moved” and not their viability). However, as this weighs on the deficits run by these countries a call is now being made be implemented which shift the burdens of the problem from the 2% who created and still benefit from the Shadow economy to the rest of the social body. This austerity shifts money from the general fund of the populace to the upper moneyed class creating a determined and pressurized shrinking of the middle class. (4)
As the economist Richard Wolff has stated (and as most economists, who work outside of conservative think tanks would agree, see, for instance, Paul Krugman): So, now we know about the $15bn-plus 2010 pay package for Goldman Sachs partners and employees. The top rungs will get their many millions each, with lesser and lesser amounts going down the GS hierarchy. The mass of its more than 35,000 employees will, as usual, get much, much less than the top. In addition, the appreciation of Goldman’s share prices likewise adds billions to employees who got stock options, which were likewise distributed very unequally throughout the firm. The unequal division of rewards within Goldman Sachs mirrors and mocks the far larger social divide it feeds….
While vast wealth flows for the tops of finance, austerity is the watchword…
Now, in the next act of an accumulating social tragedy, the governments’ responses – austerity – drive yet another degree of separation between the 10 % at the top of the nation’s corporate pyramid, and of its income and wealth distributions, and everyone else.
Just like speculation in credit default swaps and “jumbo” mortgages for people without jumbo incomes, deepening economic divisions will prove unsustainable.
And why, in an earlier call to arms Wolff notes who controls the dialogue about the crisis and who will pay: Then, governments turn on their people to impose austerities (cutbacks in social programmes, social security, etc) needed to restore government budgets busted by that rescue’s huge costs. Like someone convicted of murdering his parents who demands leniency as an orphan, corporate America demands conservative government and austerity on the grounds of excessive budget deficits. Mainstream media and politicians take those corporate demands seriously, reminding us who controls whom.
Exhibition “Derivatives, New Art Financial Visions”. La Casa Encendida, Madridm 2006
(1) This also explains why, even though CEO’s and corporations are making record profits and packages, the economies of the world are still in the midst of the decrease of salaries of the majority of the population, the devolution of social programs helping the majority of the members of a society, and rampant unemployment.
(2) This is a typical example of how the Financiers use titling to keep these instruments difficult to understand. Even many of the CEO’s of companies which use these complex instruments have said on the record that they do not understand these instruments, or how it caused the crisis. Goldman Sachs CEO Lloyd Blankfein stated in 2010, “these financial instruments are so complex nobody understands them” but that’s ok, “we should make money on them”.
(3) The Foreclosure Crisis, which has just begun is founded on these instruments which repackage a loan and resell it. When this loan is resold who then “owns” the property the loan was originally given for? As the loans are separated up and resold it has become vastly unknown. Therefore mills, in the most extreme case, have emerged which will create paperwork, from nothing, proving who owns the property. This Fraud has begun to occur in numerous cases and has had horrific and amusing (only from a distance) results.
(4) The money which is funneled to the financial companies, which reap these, large and uncalled for benefits, must come from somewhere (zero-sum game). More Socialized Countries are pushed into raiding public works and the safety net programs (austerity). In the US there is a call for elimination of all safely net programs and cooping them to the private (elimination of “Socialism”). This is a means for the financial companies to obtain the last bits of money in the country to re-invest into the financial packages. This will gather up the last segments of cash and move it up to the 2%. European countries have the vernacular of “austerity” being friendlier to the concept of socialism; America is inclined to the language of Unregulated Capitalism (and fear of “Communism” and “Socialism”).
(Information on Performance: On the evening of January 16th the Glass Bead Collective executed a guerilla projection in solidarity with the RVK 9 on the Icelandic Embassy in Washington DC. The nine protesters in Iceland are being tried for “Violating the immunity and peace of Parliament, spoiling its ability to work in peace.” If convicted, they face up to 16 years in prison.
This persecution stems from the protests that overthrew Iceland government in 2008 in the aftermath of the bank default debacle. Nine people out of dozens who entered the Parliament to demand address of the consequences of the economic and social collapse, were randomly chosen and prosecuted under this archaic stature.
Projecting a short movie that explains the story and the reasons for the initial uprising, and a simple statement that we are all Reykjavik 9, the action underscores the hypocrisy of the Icelandic State which is prosecuting people who were victimized by the biggest financial fraud in history.
Iceland sees itself as one of the most democratic and pure states in the world, while in reality it is engaged in blatant persecution of political dissent.
By superimposing this story on the public face of Iceland, the artists are revealing the true nature of the state in context to its projected image.
The Trial of the RVK9 began on January 18. Additional information on RVK9 is available at http://www.rvk9.org)
Marshall Auerback looks at the new UK Numbers and lets us know what this means for the notion of Austerity for the masses: There’s more evidence that fiscal austerity should never be a government policy objective. The UK has just released its 4th quarter GDP numbers and the results are predictably grim: a -0.5% decline in GDP for the last three months of 2010, versus a market expectation of +0.4%.
This comes as no shock to anybody who understands basic sectoral flows. Taking income out of the private sector in the absence of any countervailing flows from the government or external sector means lower output, slower growth and higher unemployment. The UK economy’s performance is totally consistent with this analysis.
Yet the F[inancial] T[imes] is flooded with articles from the likes of Roger Altman and Robert Rubin. Why let evidence get in the way of a good neo-liberal theory? Neither Altman nor Rubin understand that it would be ruinous for this country if the federal government took their advice and pursued budget surpluses at a time when the external sector is in deficit and the private domestic sector needs to save to reduce its damaging debt levels. They, like virtually all mainstream economists/policy makers, haven’t taken the time to understand the sectoral balances. If they had, they would know that they are pursuing a strategy that would force the private sector into further debt. That’s precisely what’s happening in the UK.
Mainstream economic theory (which Rubin embodies totally) claims that when private spending is weak, it is because we are scared of the future tax implications of rising budget deficits. This is Ricardian nonsense. As Bill Mitchell has repeatedly noted, “the overwhelming evidence shows that firms will not invest while consumption is weak and households will not spend because they are scared of becoming unemployed and are trying to reduce their bloated debt levels.”
We already have overwhelming empirical evidence in the European Monetary Union — Ireland’s government has collapsed as a result of its ongoing embrace of misconceived austerity and the economic crisis has morphed into a fully fledged political and social crisis. But now we also have the UK, which is some six months or more into the period of fiscal austerity even though many of the cutbacks have not been introduced.
The Companies and Banks Bailed out basically, and through sleight-of-hand, get the taxpayers to give their CEO’s Bonuses this year. Read the whole article to see how the Bailed-out companies use artificially constructed and obscure vernacular to create doubt that they are stealing:
“Goldman Sachs collected $2.9 billion from the American International Group as payout on a speculative trade it placed for the benefit of its own account, receiving the bulk of those funds after AIG received an enormous taxpayer rescue, according to the final report of an investigative panel appointed by Congress.
The fact that a significant slice of the proceeds secured by Goldman through the AIG bailout landed in its own account—as opposed to those of its clients or business partners—has not been previously disclosed. These details about the workings of the controversial AIG bailout, which eventually swelled to $182 billion, are among the more eye-catching revelations in the report to be released Thursday by the bipartisan Financial Crisis Inquiry Commission.”
And While the British government was saying they were going after the bonuses which contributed to the crash they secretly were attempting to slow the reform process down: It’s bonus season, the time of year when bankers show us what they really believe. As soon as they get their money, they spend much of it on land and houses. They know that these are safer investments than the assets in which they trade. If they trash the economy again, they at least will survive.
This year the frenzy will be almost as bad as ever. But it could have been worse. Here is the story, revealed by a leaked document, of how our government covertly tried – and failed – to kill tougher European rules on bankers’ bonuses, and how the chancellor of the exchequer appears to have misled parliament.
George Monbiot writes about the leaked memo (on his site as well). Summary of what it means, “we tell you guys who bailed out our friends, and now give them bonuses galore, that we’re on your side, but really we like them better”.
As of today January 29th, 2011, and how can one believe it:Goldman Sachs Group Inc. has more than tripled the salary of CEO Lloyd Blankfein to $2 million, and also granted raises to four other top executives.
The investment bank said in a Securities and Exchange Commission filing on Friday that its board’s compensation committee set the new base salary for Blankfein, effective Jan. 1. His previous salary had been $600,000.
The committee set salaries at $1.85 million for four other executives. They are Chief Operating Officer Gary Cohn; Chief Financial Officer David Viniar and Vice Chairmen Michael Evans and John Weinberg.
The filing didn’t elaborate on the reasons for the raises. The salaries don’t include other forms of compensation the executives can receive, such as stock options.