Postmortem on the "End of the World"

This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.

Equities worldwide posted gains Tuesday, with US shares leading the way by a long shot (the S&P posted its highest one-day gain in six years). The stellar performance was predicated on one thing, and one thing only: the anticipation that a new bailout package will be swiftly passed by Congress, in spite of Monday’s stunning rejection of the first bailout bill—and the sometimes unprecedented losses on stock markets that followed in its wake. And the rallies occurred despite the fact that just about all the other economic and market news was very, very bad (and with Friday’s US employment report for September expected to be poor): a record fall in US home prices in July, and the rise in the overnight dollar-based LIBOR rate (at which banks lend to each other) to a staggering 700 basis points (or 7 percentage points); and this rate rise in spite of the vast sums being injected into the banking system by the Federal Reserve and other central banks. In the case of the latter, the prospect of a new package did nothing to help: indeed, the outlook for interbank lending only got worse. And it also occurred as governments worldwide (indeed, groups of governments, as was the case with Belgian, Luxembourgeois—yes, that’s what they’re called—and Dutch authorities who joined forces in an attempt to shore up Fortis; but less accord was seen between Irish and British officials over Ireland’s unilateral guarantee of the bank deposits and debt of the six largest Irish banks: British officials fear that Ireland’s banks, which are now exposed to a gargantuan property bubble, partially the result of huge capital inflows from investors and firms like Microsoft, who used the island as a tax shelter, may now enjoy a competitive advantage over less-protected British banks) scrambled to protect banks that were considered, only a few weeks ago, to be more-or-less removed from the crisis—geographically and otherwise. In the wake of the collapse of Lehman Brothers, though, which involved the wiping out of certain classes of bond holders, banks, even relatively healthy ones, geographically removed from the epicenter of the crisis, are being pressured to shore up their capital bases and boost their share prices; and since the interbank market and other wholesale cash markets (as reflected in the LIBOR rate) are effectively shut down, and asset values on the banks are far from transparent, governments are being pressured to show depositors and bondholders that they will not lose their money.

Indeed, extending such protection will almost certainly be part of the new US package. As I write, talk is of increasing federal insurance on bank deposits from $100,000 to $250,000. The other major provision concerns what is known as “mark-to-market” accounting. As things stand, banks and other financial firms are supposed to value their assets at market value, or what they could presently fetch in the market, in order to participate in important transactions. But with many markets effectively shut down, there is simply no such price for many assets, even though they may ultimately be untainted by subprime and other defaults on their component revenue streams. This is because, on the one hand, no one knows—or probably will know for a long time—who holds the tainted securities (or insurance against losses on such securities, which takes the crisis way beyond subprime), and, on the other, all the banks are thereby being pressured to hoard their cash reserves, preventing funding for any sales that might get the markets going again, thereby establishing the sought-after market prices. Thus, the banks (and their lobbyists, of course), are arguing for at least a temporary suspension of this provision.

Will these measures pass? And will they work if implemented? It’s clear to me that authorities worldwide are now committed to doing everything in their power, up to and including nationalization of banks, to effectively force banks to start lending to each other if they must. This is especially the case inasmuch heroic resistance (which I fully applaud, and indeed participated in, in my infinitesimal way) developed to the idea of paying whatever the Treasury Secretary, that revolving-door Wall Street manikin, thought appropriate to getting the assets of the banks’ books and getting them profitable again, regardless or not the rest of us would have to pay the difference when the time came. But it remains the fact that getting the banks lending to each other again is the only way we can prevent a complete meltdown of the global financial system as we know it–which is interconnected to a point unknown in history–and all the economic and political turmoil that would ensue upon such an event: it’s that simple. If we, and any of our political partners joining us in opposition to the Treasury bills, had even an idea of what could replace this rotten system, I would be all ears: but I don’t believe most people currently in opposition even think there’s a problem here. But it simply won’t suffice to say that anything’s better than the system we now have; for that system was driven by the kind of desperation finance that accompanied a generation-long stagnation of wages and benefits that caused many of the same people complaining now, at the time distracted by their own skyrocketing house prices and the cheap goods they could buy in unprecedented quantities from sweatshops abroad, and with oodles of debt, to lose sight of any solidarity they might have with fellow workers who were experiencing more and more difficulty finding living-wage jobs, even as the economy, profits and productivity boomed.

This is why I remain in a state of frustratingly deep ambivalence about the bill. I’d like to think, as some even in the mainstream press have come to proclaim, that a fed-up populace is finally standing up to one of the most corrupt, inept and irresponsible constellation of ruling elites in American history. But I fear that many of those who oppose the bill now will jump ship as soon as their own money is threatened, as it will be if a bill is not passed, no doubt about it, and that the same people may be willing to give the government even more power (to the incoming administration) under those circumstances than to the one asking for it today. That might not seem like such a bad thing in the case of a Democratic victory, but, by that point, whoever is in power will have to recapitalize the whole, gargantuan system, and pay off creditors around the world as much as we can; and less and less will be available to spend on ordinary people, who will be bearing a whole lot more pain. And then there’s the argument from history to complicate matters even further: given the fact that we may well have almost no time left to combat climate change in particular, the idea of the global financial system, which has done much to make this problem so much worse in only a generation or two, going down, even in flames, is not so much just a good thing as a kind of necessity. I remain very frightened. Help me out, comrades: show me something to believe in.

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