promoted by roxy. Originally posted 2008-04-23 18:57:05 -1000

The “bail out” of Bear Stearns five weeks ago did nothing to solve the underlying causes of the unfolding financial meltdown, so another major crisis is unavoidable. The “bail out” of Bear Stearns has merely bought more time for the big players on Wall Street to try and drag this out past the November election, because what they fear above all else is the rise of a progressive political movement strong enough to pry loose their grasp on the credit mechanism -- the financial system -- of our economy.

The fundamental problem is the big players on Wall Street have misused the credit mechanism for their own private gains through the bloating of debt and speculation, at the expense of actually allocating and supplying capital to the real economy. This is what has caused the 30-year decline of the American industrial economy that Barack Obama observes has made many Americans bitter- a comment that was, all too typically, taken out of context by Obama’s opponents. So this diary will look at the underlying truth of Obama’s remarks, and offer some radical observations on the role of Wall Street, and what needs to be done.

promoted by roxy

In The Crash is past. Comes now Inflation, on March 2 (it seems so long ago), I warned that the official response to the financial crises so far was to save Wall Street and the financial system at all costs; that inflation was being unleashed; and this would mean a severe decline in our standard of living over the next few years. I alluded to a rise in food prices being one immediate cause of pain, and intimated that social unrest would be the result.

It’s happening much faster than I thought possible.

-- originally posted 2008-03-02 20:23:36 -- bumped, cho

Seems to me a lot of people don’t realize the worst financial crash since 1929 has already occurred. I suppose they are waiting for a big explosive fireball and a lot of noise like in a Hollywood movie, or for the nightly news on their wide-screen televisions to show pictures of desperate bankers and brokers splattered on the sidewalks in front of 60-story temples of finance.

This diary is my humble little attempt to let these people know that the crash has already happened. It began in August. I guess they didn’t notice, but a number of financial markets have already collapsed. First, of course, there was the derivatives based on sub-prime mortgages. That seems to be about where the common consciousness stops. But before U.S. Secretary Treasury Hank Paulson and Federal Reserve Chairman Ben Bernanke (a.k.a., Captain Carnage) even lifted a finger to try and sort out the sub-prime mortgage mess, they first had to deal with the collapse of the market for Structured Investment Vehicles. Since these two crises began last summer many other financial markets have also collapsed: corporate junk bonds, asset-backed commercial paper, municipal bonds. This last was saved just last week by New York State Insurance Commissioner Dinallo basically forcing Moodys, S&P and Fitch to give AAA ratings to the monolines insurers. All these markets have pretty much ceased functioning, with not even the banks that created some of this stuff willing to buy their own product. Financial institutions have also been disappearing, especially a number of hedge funds, the most recent being this past week: Peloton, a London-based hedge fund specializing in asset-backed bonds.

posted with permission of Robert Reich.

In his latest post Robert Reich takes on the argument that the next Democratic president will be hamstrung when it comes to funding socially necessary policies such as infrastructure development, health care, education etc., by the overwhelming priority of addressing the ballooning budget deficit.

Wednesday, February 13, 2008
David Brooks is Wrong: America Can Afford What Needs to be Done

Last week, the financial news was full of stories on credit default swaps, which appear to be the next shoe ready to drop in the financial crises millipede that has engulfed the globe since the IKB Deutsche Industriebank of Germany announced on July 30, 2007 that it was marking down the value of some of its financial derivatives based on U.S. sub-prime mortgages. From the comments posted in various blog discussions, of credit default swaps, it is very clear that most people are very, very confused. More troubling, most people are unable – or unwilling – to recognize that the world as they know it now crashing down about their ears.

Very basically, what is happening is that the financial and banking system has found that what it thought was measurable risk is instead unmeasurable uncertainty. And what the system cannot measure, it is unwilling to deal with. This uncertainty has now extended to the financial health of the very banks, hedge funds, and other financial agents themselves. Nobody knows how healthy or unhealthy anybody else is. Therefore, the banks and other agents in the financial and banking system have become unwilling to lend to one another. Goldman Sachs has estimated that these crises have contracted credit in the U.S. by $2 trillion (with a t, not a b). The U.S. economy is now about $15 trillion, as measured by gross domestic product--you can do the math for yourself, to see what a massive impact this is going to have on the real economy.

For the past few years, DailyKos is reportedly the most popularly read progressive political blog in the world. And on DailyKos, one “BondDad” has established a huge following for his posts on financial and economic matters, usually full of vivid graphs and concise explanations of events in the financial markets. Up until this past summer or autumn, “BondDad” presented his analysis from a perspective I fully agreed with: the U.S. economy was much weaker than it appeared to be because wages and earnings for the working and middle classes have stagnated since the 1970s, and a monstrous bubble of debt has been created to allow Americans to keep consuming despite their declining incomes.

But the past few months I have been increasingly distressed by BondDad’s postings, which have swung into alignment with Rubinomics – the Bill Clinton / Democratic Party version of “free trade’ “free market” economics which is unfortunately called “neo-liberalism.

In August 2007, an obscure bank in Germany disclosed that it had suffered crippling losses on some financial instruments it held, which were based on a pool of sub-prime mortgages in the United States. Within days, traders in financial markets around the world were panicking as they found it nearly impossible to determine which other banks might be having the same problem, and just how large that problem was. Central banks around the world poured in money to calm troubled financial markets, and U.S. Treasury Secretary Henry Paulson made a show of declaring that the problems of the U.S.

Likely Reich's views are not going to knock your socks off, but they are sound and to the point, which is why I like to post them--and he has given his approval to post them on ePm with appropriate attribution. Too often we are picking over the threads of campaign rhetoric and forget that people like Robert Reich who have held important cabinet posts--and served with integrity--under the Clinton admin. are available to guide the next Democratic dministration.

To check in with Reich, here is the link.

I am still watching Blitz most nights. I have compromised with my stomach by remoting Dobbs. First thing to note is how the media is still fanning the flames of race by constantly rehashing the Clinton/Obama rhetoric on the subject. I have let it drift by while preparing the evening meal, but I was truly stunned when Obama weighed in on how Bill Clinton, when he was president, didn't match up to Reagan's accomplishments. What did we have here?

Herb Greenburg, a regular commentator on the site Seeking Alpha posted a discussion piece on the mortgage crisis by a mortgage mortgage broker, Mark Hanson with whom he corresponds. Here is my commentary based on my reading of Hanson's argument. The short version is the worst is yet to come, but his detailed analysis is worth checking out for yourself. What follows here are my thoughts after reading Hanson's analysis. At the end I have excerpted Hanson's closing remarks.