Future Prospects — Bleak and Growing Bleaker
Maybe not as bad as Ambrose Evans-Pritchard saw them last month in the UK Telegraph. But who knows. He may be right. His September 22nd column was headlined: "Crisis may make 1929 look (like) a walk in the park." He cites meager and fleeting effects from "buckets of liquidity" and quotes economist (92-year old) Anna Schwartz saying "Liquidity doesn't do anything in this situation. It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue."
Schwartz also gave the Wall Street Journal an October 18th interview in which she said Treasury and Fed policies are wrong. She repeated that liquidity isn't the problem. At issue is uncertainty "that the balance sheets of financial firms are credible." As a result, credit spreads haven't budged because you don't know who's solvent and who isn't and too many are in the latter category.
Liquidity was the issue in the 1930s when the money supply contracted sharply. Not today with bank problems on the asset side of their ledgers. "All these exotic securities that the market does not know how to value. They're toxic because you cannot sell them. Your balance sheet is not credible, and the whole market freezes up. We don't know who to lend to because we don't know who is sound." Schwartz is worried that Paulson is trying to save banks, not the system. Insolvent ones and said we shouldn't "be recapitalizing firms that should be shut down." They should be allowed to fail. "Everything works much better when wrong decisions are punished and good (ones) make you rich."
She commented also on what caused the current crisis. Like in the 1920s, it started with a "mania." In every case, it was expansive monetary policy generating an asset boom. She's very critical of Alan Greenspan dropping interest rates to 1%. Seeing the negative effect and doing nothing about it. She's no gentler with Ben Bernanke and accused him of fighting the last war. The result so far is failure. "So my verdict on this present Fed leadership is that they have not really done their job."
As a result, lenders are hoarding cash and economist Peter Spencer said that global authorities have just weeks to make things right. Instead they're making them worse. Unless changed, things may start to implode.
Economists like Nouriel Roubini aren't as dire but nonetheless see grim times ahead. His October 17th commentary echoed them:
- continued negative economic surprises;
- "a major surge in corporate default rates;"
- a weak recovery "as the recession becomes severe" and credit spreads widen;
- "the risk of a CDS (credit default swap) market blowout as corporate defaults" spike;
- hundreds of hedge funds collapsing; liquidation of their assets and the toll on financial markets as a result;
- major insurance companies in trouble;
- "a slow motion refinancing and insolvency crisis for many toxic LBOs;"
- "the risk that other systemically important financial institutions are insolvent" and need expensive rescue packages;
- the continuing vicious circle of falling asset prices; the result of ongoing deleveraging into illiquid financial markets;
- growing numbers of margin calls as asset prices fall; cascading them lower as a result;
- the continuing housing slide "pushing over 20 million households into negative equity by 2009;" and
- the risk of an emerging or developed country experiencing a severe financial crisis; much like Iceland in recent days.
Roubini calls the last factor "crucially important" and cites about 12 or more emerging economies "in serious financial trouble." Especially in Eastern Europe, including Turkey, but also Korea, Indonesia and Pakistan. The risk of contagion is worrisome as even tiny Iceland (population 300,000) sent tremors globally.
Overall, risks and vulnerabilities remain. They're growing, not receding. Not a hint of resolution is in sight and observers expressing near-term optimism need a reality check. The best to hope for is a severe, protracted recession. Most likely globally. Further, inadequate measures are in place, and more corrective ones are needed to avoid an economic meltdown. The longer they're delayed, the worse conditions will get.
Globally we have a severe recession combined with a financial and banking crisis. The result of the largest ever leveraged asset and credit bubbles. Multiple ones in housing, mortgages, credit, equities, bonds, commodities, private equities and hedge funds all simultaneously imploding. There's no simple or easy way out of this and overwhelming risks of something much more serious loom. Unmentioned in daily business news reporting that instead touts a market bottom and a great time to buy stocks. Leaving unexplained the risk of doing it in a very hazardous climate.
People today should be cautious and demand far more from elected officials than they're getting. Critical times like these require radical measures. So far only handouts to Wall Street. To fraudsters through what economist Michael Hudson calls a "con game (and an) unprecedented giveaway of financial wealth." What financial affairs author Ellen Brown brilliantly explains this way:
We are seeing "the collapse of a 300 year Ponzi scheme. All the king's men cannot put the private banking system together again, for the simple reason that (it's) reached its mathematical limits." It needs new borrowers but doesn't have them. This racket has gone on for 300 years "ever since the founding of the Bank of England in 1694." The whole world now is "mired in debt to the bankers' private money monopoly." The dirty game has reached its finite limits. "The parasite has finally run out of its food source."
World governments are scrambling frenetically as a result. Supplying mountains of credit (liquidity) to support troubled and over-indebted banks. Leaving distressed households high and dry and sticking them with the bill.
Eventually the game will end badly. In this case, a lengthy asset and debt deflation. Long after bankers took the money and ran. Wrecking economies and throwing ordinary people to the wolves. Michael Hudson puts it this way:
"Neither the Treasury nor Congress is helping to resolve this problem." Newly issued debt won't re-inflate markets or stabilize the economy. Just the opposite. "As debt deflation eats into the domestic market for goods and services, corporate sales and earnings will shrink," and so will market valuations. The end result will be "the very bankruptcy that the bailout was supposed to prevent."
That prospect is nightmarish so here we are. America's economy is eroding. Government and Wall Street are orchestrating it. Maybe even willfully, and here's the legacy they're leaving. The nation "passing from democracy to oligarchy (and steering it is) a bipartisan financial kleptocracy" chuckling all the way to their offshore tax havens.
Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at lendmanstephen AT sbcglobal DOT net. Visit his blog at sjlendman.blogspot.com and listen to The Global Research News Hour on RepublicBroadcasting.org Mondays from 11AM - 1PM US Central time for cutting-edge discussions with distinguished guests. All programs are archived for easy listening.