The New Wave of Financial Instability

Is This the Big One? 
by MIKE WHITNEY

Global stocks were hammered on Friday for a second straight day on news of a slowdown in China and turbulence in emerging markets. The Dow Jones Industrials suffered its worse drubbing in more than two years, tumbling 318 points on Friday to end a 490 point two-day rout. Emerging markets currencies were whipsawed by capital flight as foreign investors fled to the safety of U.S. Treasuries. Turkey’s lira and the Argentine peso were particularly hard hit setting record lows in the 48 hour period. The scaling back of the Fed’s $85 billion per month asset purchase program, called QE, has altered the dynamic that made emerging markets the “engines for global growth”. The policy reversal has triggered a selloff in risk assets and sent EM currencies plunging. Here’s a summary from Bloomberg:

“The worst selloff in emerging-market currencies in five years is beginning to reveal the extent of the fallout from the Federal Reserve’s tapering of monetary stimulus, compounded by political and financial instability.

Investors are losing confidence in some of the biggest developing nations, extending the currency-market rout triggered last year when the Fed first signaled it would scale back stimulus. While Brazil, Russia, India, China and South Africa were the engines of global growth following the financial crisis in 2008, emerging markets now pose a threat to world financial stability.” (“Contagion Spreads in Emerging Markets as Crises Grow,” Bloomberg)

Paradoxically, Bloomberg editors blame the victims of the Fed’s failed policy for the current ructions in the markets. In an article titled, “What’s Behind the Emerging-Market Meltdown” the editors say,”emerging-market governments … should recognize that this week’s financial-market turmoil was, to varying degrees, their own fault.” … “the best way for emerging-market governments to restore confidence would be to improve their policies.”

Logically, one would assume that the editors would throw their support behind capital controls or other means of stemming the destructive flow of speculative capital into domestic markets. But that’s not the case. What the editors really want, is policies that trim deficits, slash public spending, and allow foreign investors to continue to wreak havoc on vulnerable economies that follow their free market diktats. The article is a defense of the status quo, of maintaining the same ruinous policies so that profit-taking can continue apace.

The Fed was warned early on that its uber-accommodative monetary policy was spilling over into emerging markets and creating conditions for another financial crisis. Take a look at this excerpt from an article in Bloomberg back in 2010 where Nobel prize winning economist, Joseph Stiglitz, explicitly warns the Fed of the dangers of QE.

Bloomberg:

“The U.S. Federal Reserve’s plan to boost purchases of bonds poses “considerable” risks by increasing capital inflows to emerging markets, Nobel Prize- winning economist Joseph Stiglitz said in Santiago today.

“All this liquidity that they’re creating is not going back to grow the American economy and is going to Asia and other emerging markets where it’s not wanted,” Stiglitz said…..Increased capital inflows could cause emerging market currencies to appreciate and could create asset bubbles, he said.” (“Stiglitz Says Fed Stimulus Poses `Considerable’ Risks for Emerging Markets,” Bloomberg, Dec 2010)

Events have unfolded exactly as Stiglitz predicted they would, which means the Fed is 100% responsible the carnage in the stock and currencies markets.

The policy has pumped nearly “$7 trillion of foreign funds” into EMs since QE was first launched in 2009. According to the Telegraph’s Ambrose Evans-Pritchard, “much of it “hot money” going into bonds, equities and liquid instruments that can be sold quickly….Officials are concerned that this footloose capital could leave fast in a crisis, setting off a cascade effect,” Pritchard adds ominously.

Whether last week’s bloodbath was just a prelude to a bigger crash is impossible to say, but it is worth noting that the Fed has only reduced its purchases by a mere $10 billion per month while still providing $75 billion every 30 days. That suggests that markets will probably face greater turmoil in the months ahead. Check out this clip from USA Today:

“Emerging markets need the hot money but capital is exiting now,” says (Blackrock’s Russ) Koesterich. “What you have is people saying, ‘I don’t want to own emerging markets.’…

The bigger fear is if the current crisis in currency markets morphs into a full-blown economic crisis and leads to financial contagion, says Matthias Kuhlmey, managing director of HighTower’s Global Investment Solutions.

“The currency story is fascinating and can be a slippery slope – be cautious,” says Kuhlmey, adding that the Asian crisis in the summer of 1997 that started with a sharp drop in the value of Thailand’s baht, turned into a broader economic crisis that engulfed Indonesian, South Korea and a handful of other countries. It also rocked financial markets.” (“Why emerging markets worry Wall Street,” USA Today)

So, is this the Big One, the beginning of the next financial crisis?

It’s too early to say, but investors and analysts are worried. Fed tightening (via “taper”) will be felt in markets around the world. The trouble in emerging markets will intensify deflationary pressures in the Eurozone and put a damper on China’s growth. Slower global growth, in turn, will create balance sheets problems for undercapitalized and over-leveraged banks and other financial institutions which will increase the probability of another Lehman Brothers-type default.

According to Reuters, a normalizing of interest rates in the US, (which most analysts expect) “could cut financial inflows to developing countries by as much as 80 percent for several months. In such a case, nearly a quarter of developing countries could experience sudden stops in their access to global capital, throwing some economies into a balance of payments or financial crisis, the Bank said.” (“Rout in emerging markets may only be in Phase One,” Reuters)

Clearly, the potential for another financial meltdown is quite real.

For more than four years, the Fed has buoyed stock prices and increased corporate margins through massive injections of free cash into the financial markets. Now the Central Bank wants to change the policy and ease its foot off the gas pedal. That’s causing investors to rethink their positions and take more money off the table. What started as a selloff in emerging markets could snowball into a broader panic that could wipe out the gains of the last four years.

The Federal Reserve is entirely responsible for this new wave of financial instability.

The Wall Street Takeover and the Next Financial Meltdown

Did you really think the bad economic times were over? Bitch please!

A Free Pass for Financial Predators

Coup of the Elites

by ROBERT HUNZIKER

 

The American plutocratic revolution is now complete. The proof is: There are no criminal charges for the housing bust and financial meltdown of 2008. Starting with Reagan in the 1980s, as of today the Right has won their decades-long overthrow for complete control of America. An elite corps of wealthy now runs the country. Their bloodless rebellion, a coup d’etat whereby the Left was nullified by a tripartite (bankers, academia, and politicians) cabal’s tour de force, is a sharp contrast to the old-fashioned traditional bloody coup d’etats were accustomed to in South America, e.g., the Chilean September 1973 military coup against President Allende conducted by ultra right wing General Pinochet, who, after bombing the presidential palace, massacred the Left (See: the film Missing, by Costa-Gavras, Universal Pictures, 1982.). Of course, Pinochet’s old-fashioned coup had the advantage of speed and efficiency, completed within hours, whereas America’s bloodless coup took decades to accomplish, but on the other hand, America has not yet condoned military occupation on domestic soil.

The proof of a successful coup by the plutocratic elite is everywhere on display because it is absolutely remarkable how much we know about their unethical and/or criminal behavior behind America’s 2007-08 financial meltdown without knowing what to do about it!

As Charles H. Ferguson, winner of the 2010 Academy Award for Best Documentary Feature, Inside Job, says, “There is overwhelming evidence of massive criminal behavior” in the 2007-08 real estate bust and financial meltdown, but nobody has been charged with a crime. This, in part, is why he recently published Predator Nation, Corporate Criminals, Political Corruption, and the Hijacking of America, Random House, 2012, which book footnotes/documents the virulent combination of unchecked greed and criminal behavior behind the financial collapse of 2008. Ferguson identifies leading bankers, academics, and politicians who collaborated to pillage the American public. The book has been called a “roadmap for prosecution,” naming the culpable, stating the crimes, referencing laws that were broken.

How this tragedy occurred right under the country’s collective noses is a lengthy and nefarious story. Charles Ferguson’s new book covers this story with remarkable detail. Ferguson’s diatribe is laced by a book cover depicting a one hundred dollar bill folded into the image of a hand, flipping the bird, an obvious reference to the perpetrating financial, political, and academic elite’s haughty attitude towards the general public, emphasizing the dauntless, depraved lawlessness behind their theft committed in broad daylight. And, part of Ferguson’s thesis is exactly that, i.e., criminal acts led to, and were the cause of, one of history’s worst financial meltdowns. He also paints the picture of how America has been hijacked by a financial elite, an oligarchy that operates at the expense of the entire American population: “The financial sector is the core of a new oligarchy that has risen to power over the past thirty years, and that has profoundly changed American life.”

Ferguson’s ingenious work is, without a doubt, on target because we, as a nation, know it is true. Not only have oodles of articles and books already flushed out this repugnant story but intuitively, the citizens of the country know it is true because of how the disaster came down, namely: Governmental policy and Wall Street chicanery turned the housing industry into a gigantic Las Vegas craps table and dispensed free playing chips to beginners. Millions of unsuspecting Americans bought into this deal-of-a-lifetime, and when the house of cards tumbled, unsuspecting American taxpayers rescued the culprits, but the bankers already tucked away gargantuan fees.

We also know it is true because it happened in broad daylight, right before our eyes, caught on camera was the U.S. Treasury Secretary Henry Paulson, former CEO of Goldman Sachs, on one knee before a stern-faced, but dismayed, House Speaker Nancy Pelosi, pleading congressional approval for $700 billion (taxpayer funds) to bail out his buddies (so sorry Richard S. Fuld, Jr., CEO, Lehman Brothers, no jerks allowed.) Meanwhile, the Federal Reserve turned the SWIFT international wire system white hot, spreading trillions of US Dollars around the globe to foreign banks and multinational corporate interests in order to keep the worldwide ship of state afloat, and surrounding these horrifying events, the housing market crumbled apart like broken tinker toys, credit dissipated, and Wall Street crashed with the durable S& P Index registering a nasty, and ominously devilish, 666 low print early in March 2009.

As of today, people who are not normally schooled in the language of the Wall Street know names of people and of programs, like Goldman Sachs, Bear Stearns, Lehman, Freddie Mac, credit default swaps, and derivatives. Wall Street and big banks are the butt ends of crass jokes on late night TV, and inequality of income/wealth has never been so obvious. According to a recent Survey of Consumer Finance by the Federal Reserve, median family net worth fell 40% from 2007 to 2010. Meanwhile, according to Forbes magazine, billionaires and multi-millionaires set all-time records. The discrepancy between Middle America and Wall Street has never been so radiantly exposed, and the general public has finally learned how Wall Street makes a killing off their backs. Most likely, Goldman Sachs’ CEO Lloyd Blankfein, whose firm bet against (short sales) toxic securities they sold to other institutions, would not survive a stroll down Main Street in certain parts of the country.

The American public is overly informed about how and why one of the most corrupt and stupidest-ever financial schemes body-slammed the world economy, but as Charles Ferguson astutely declares, “Nobody has gone to jail” (poor ole Bernie Madoff must feel like he’s carrying the burden for everybody.)  Mortgage brokers, Wall Street investment bankers, commercial bankers, credit rating agencies, accountants, and politicians are complicit in the world’s biggest-ever ponzi scheme, taking advantage of the entire population of the country and sticking it to foreign banks/institutions by selling them toxic housing securities. The pure ugliness, brazenness, and gall of the perpetrators is enough to turn one’s stomach. As for CEO Fuld, he was attacked shortly after it was announced Lehman was bankrupt: “He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold.” (The Telegraph, October 7, 2008.)

According to Ferguson, there is overwhelming public evidence in (1) lawsuits, (2) depositions, (3) government investigations, and (4) whistleblowers of highly illegal conduct in the housing bubble and financial crisis. There is a staggering amount of evidence that CEOs of Wall Street firms, like Lehman Brothers, were warned that their financial controls were inadequate and their accounting was wrong, or to put in it in plain English: ‘their books were cooked’. A prime example is a memo warning to top Lehman executives by Senior Vice President Matthew Lee, “I feel it is my ethical and legal responsibility to point out to you that there are billions of dollars of unjustified assets on our balance sheet.” (To see the memo, Google: “Matthew Lee and Lehman.”) A month later Lee was dismissed from the firm and the CEO of Lehman continued to stand by the firm’s financial statements even though warned of extreme problems, inaccuracies, and overstatements, e.g., ‘Repo 105’ transactions artificially boosted the firm’s balance sheet by $50 billion! This is illegal corporate behavior of the first order, but where are the criminal charges?

Furthermore, according to Ferguson, “Over the last thirty years, in parallel with deregulation and the rising power of money in American politics, significant portions of American academia have deteriorated into ‘pay to play’ activities. The sale of academic expertise for the purpose of influencing government policy, the courts, and public opinion is now a multibillion-dollar business,” academia has become embedded within the finance industry and its greatest apologist, Exhibit A, is Lawrence Summers, former Treasury Secretary, former President of Harvard, former Head of the Council of Economic Advisors, former Mister Everything Economics, a proponent of the deregulation of financial services, i.e., elimination of the Glass-Steagall Act, which kept commercial bankers out of the risky securities business ever since 1933, stating, when significant parts of Glass-Steagall were overturned: “With this bill, the American financial system takes a major step forward towards the 21^st Century.”  Thus, Summers was directly behind the entire meltdown, but as a highly endorsed hedge fund/banking consultant raking in millions, before and after his stint with Clinton, he had to follow his true conscience, i.e., benefactors, and push to kill the 1933 Act, which successfully, and responsively, protected bank depositors from risky commercial bank shenanigans for over 60 years.

Summers is the one who dressed down Raghuram Rajan (Finance Professor, University of Chicago; Chief Economist IMF), who presented a paper about credit default swaps at the Federal Reserve Jackson Hole 2005 Conference titled Has Financial Development Made the World Riskier? accusing firms of “goosing up returns” with latent risk, which proved to be precisely what cratered A.I.G., asking the prescient question: “If firms today implicitly are selling various kinds of default insurance to goose up returns, what happens if catastrophe strikes?” Rajan’s critique was thoughtful, balanced, and very obviously on point; it is indeed a sad commentary that Summers immediately stood up, lambasting Rajan and calling him a “Luddite,” but on the other hand, since Summers planned to be or was/is in the pockets of hedge funds and Wall Street, he flippantly overlooked the most obvious of dangers to the entire financial system in concert with the “profits now” mentality that bends to Wall Street’s every wish.

The real mystery is how and why they get away with it when their crimes and/or despicable ethical behavior prove so hideous… and so obvious, and thus, many astute progressive mouths dropped wide open with dismay when President Obama insanely appointed Summers as the Director of the National Economic Council, which only goes to prove what a tight clique exist amongst academia, politicians, and Wall Street whereby bad judgment and/or unethical practices are overlooked in favor of companionship-to-profits.

Nobody has gone to jail and as Ferguson explained in an interview with Amy Goodman on Democracy Now, “There is overwhelming evidence of massive criminal behavior.” Ferguson says: “the American people need to take their country back.” He suggests some kind of nationwide movement but without stating specifics. Indeed, the stench of the entire cabal, including academia, politicians, Wall Street, and rating agencies is so loathsomely squalid, and rotten to the core, it would not surprise if perpetrators are dragged into the streets in the middle of the night, stripped naked, tarred, feathered and run out of town on a rail, assuming some daring citizens become so fed up with the ‘system’ they take matters into their own hands.

Otherwise, and because nobody has been criminally charged, one can bitterly assume the country is now firmly in the hands of a wealthy elite, including academicians who, similar to guns for hire, will say or publish anything for a buck. With 20/20 hindsight, it is now clear the citizenry of the country cannot trust, but also cannot do anything about (other than revolt in the streets), the tripartite cabal that stole their country in broad daylight right under their noses. And, really…  isn’t it a crying shame the intelligentsia, who we trust to educate our society, is so deeply involved… but… come to think about it, they probably saw what happened to their colleagues in Chile under Pinochet, concluding life is much better, and easier, when one is part of the Inside Job.

By definition … if no criminal charges are filed, the coup is complete.