Just another Reality-based bubble in the foam of the multiverse.

Wednesday, February 24, 2010

Failures are the Plan

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust...

This is a special case of the general rule of χάος.

We are told there is a second tidal wave of bank closures coming as adjustable interest rates reset, people lose their homes, and banks are forced to close because of this.

So let's get this staight. In 2008 the burst of the housing bubble caused a wave of bank failures, and to save the strongest the feds were forced to bail them out, to the tune of several trillion dollars worth of loans. Which the banks promptly used to gobble up more banks, make more adjustable rate loans, and award themselves bonuses. Leading inevitably to another major peak of foreclosures, failures, takeovers, and bailouts of those too big to fail.

Nice scam, isn't it? It's unthinkable that we let the banks too big to fail go the way of the dinosaur. It's unthinkable that we adapt, and regulate how they lend the money we give them, or break their operations into separate corporate entities that can fail nicely without troubling the rest of us. It's unthinkable we help the people whose lives are plunged into chaos because they were led into the lion's den by a lender.

It's unthinkable we remedy the whole situation by changing the way the game is played.

James K Galbraith, in an opinion piece you're not likely to read in a 'Merikan newspaper:

"Now that the immediate crisis has passed," Policy Network asks for "long-term strategies to shape our post-recession economies" and "to promote economic growth".

But the immediate crisis hasn't passed. It is not over for the jobless. It is not over for those losing their homes. It is not over for Greece, Spain, Portugal, or Iceland, facing ruin in the capital markets.

Europe has no plan for jobs. In America, President Obama has recently sent a jobs programme and a call for investments in transportation, clean energy, and education to a Congress in stalemate. No country has a credible plan for effective homeowner debt relief. Central European countries appear to respond with folded arms to the plight of their near neighbours.

The right goal is not to shape "post-recession growth". Growth is not assured; it cannot be assumed; and it is not even the highest priority. The right task is to find a fair, effective, and sustainable path out of crisis.

People need work. We face the challenge of climate change. The broad outline of a programme is therefore plain. There is no mystery about it. In 1929, Keynes wrote, "there is work to do; there are men to do it. Why not bring them together?" Today as then, it is that simple.

Do we need to "rethink the relation between the market and the state"? A futile hope! Those who once thought the market could flourish without the state have either already "rethought", or they cannot think. They are our own Stanley Baldwins and when they discourse on this subject, "it not only is nonsense … but it looks like nonsense to any simpleminded person who considers it with a fresh, unprejudiced mind".

In the crisis, the financial sector collapsed. It hasn't recovered. The big banks remain open, but they make few new loans, take practically no commercial risks, and their old customers – households without wealth, businesses without hope – make no effort to obtain credit. In this situation, the state must act. It can act through the banking system by mandate, as it does in China and as it used to do in Japan and France. Or it can bypass the banks and go to work directly – as it did in America in the New Deal and as Keynes proposed for Britain in 1929...

The question facing world leaders today is not what to do. It is whether to do it. There are two goals to meet: full employment and sustainable energy. That's technically complex. But the complexities are complexities of engineering, organisation and politics. They are not complexities of economics or finance.

The question is posed as though it involved deep questions and high obstacles, whose true nature the uninitiated cannot be expected to grasp. Thus the hue and cry over public debt and deficits – projected to be unsustainable – for reasons never stated – in the long run. Our papers and our television speak of almost nothing else. But if they are right – as all the voices of Wall Street and the City say – then how come the long-term interest rate on the government bonds of the rich countries remains so low? In the US, the federal government can borrow for 20 years at less than 4.4%. And it can borrow short-term for practically nothing.

In truth, the deficit/debt uproar is a deliberate effort to sidetrack attention, to defeat the will of the electorates in the US, as well as Greece among others, who stubbornly insist on effective action, economic recovery and financial reform. Those behind the uproar never foresaw the financial crisis. They never warned against the dangers of excessive private debt. Their interest is plain: they profit from private debts. So it pays to make believe that private is productive and public is sterile, that private is stable and public is not, when the reality is the other way around...

Gates and the Pentagon huff that we, like Europe, are not spending enough on national security.

I'd say more Americans likely died of heart attacks last year because of the economic crises and the inability to afford decent health care than were killed in all the Wars on Terra in America, Iraq, or Afghanistan combined.

The pillaging of the nation and the world by the bank$ters and their Company is a national security crisis delivered to the American and European people by those who would rule us.

χάος is the plan.

1 comment:

CrisisMaven said...

The Greeks shouldn't have been allowed to join the Euro astheydidn't qualify. They shouldn't have joined as the Euro was doomed anyway. And now they're all going to gefault together.