Western Financial Markets: A DC Skeptic Analysis

Does anyone understand what the financial markets (and the companies, governments, and organizations that run them) have been doing from 2008 – Present? They seem clueless, suicidal, and crazy.

How are the actors clueless? How else can you describe institutions that push for austerity measures that will very certainly keep the economies bond investors invested in stuck in a stagnant growth cycle? It’s only after you achieve growth AND bring down unemployment that you normalize interest rates and tighten spending policies in a deflationary recession. R. G. Hawtrey (1938), A Century of Bank Rate (London: Longmans, Green, and Co.), pp. 144-5. This has been known since the Great Depression. A more recent example is Japan’s Lost Decade, where budget cuts only made things worse in a deleveraged economy. Considering all recent economic growth can be traced back to the stimulus and restocking inventory (search the blog history – there’s a post for the evidence), I’d say we’re definitely still there. But still the deficit hawks – their message not resonating in boom times – are now crying out for austerity measures on their gigantic media soapbox at exactly the wrong time to do so, by all relevant historical indicators.

Secondly, the current financial regulation reform proposal, supported by Democratic leadership in the White House and Congress, doesn’t target the causes of the Great Recession. Senator Dodd claims:

“The root cause of our economic crisis was a lack of consumer protection,” Dodd said, emphasizing that the current regulatory structure is “hopelessly inadequate.” Citation.

President Obama describes the financial regulations bill as such:

President Obama praised the proposed bill, calling it “a strong foundation to build a safer financial system” and saying that it provides the government with “essential tools to respond in a financial crisis, so that we can wind down and liquidate a large, interconnected failing financial firm. It allows us to protect the economy and taxpayers so that we can end the belief that any firm is ‘Too Big to Fail’.” (Same article as above)

The problem, of course, is that the TARP bailouts were required not just for one large, interconnected failing firm, but for all of the large, interconnected firms. They were all going to fail. The bill doesn’t address why this was necessary or plan for them all failing again. In short, it neither prevents another Great Recession nor allows a path to get out of systemic failure, because there is no way to save the financial system unless you reform the environment of its business practices. The true root cause of the Great Recession was unregulated derivatives of packaged subprime mortgages. Banks bought the mortgages, sliced them up into securitized financial packages to be traded among all of the few artificially (created through public policy – not the market) big financial institutions.

Strong legislative language that would regulate and reign in the derivatives trading that broke the big financial institutions is still in the current financial regulation bill. And the reason the bill hasn’t passed yet is most likely because the language is still in the reform package. Democratic leadership and Wall St lobbyists are waiting for Senator Lincoln (Arkansas) – a supporter of Big Finance – to finish playing her derivatives trading game to win her primary, before the Leadership continues with its ineffective, feel-good legislation.

How are they suicidal? First reason is the same as above. Second is our Too Big To Fail Banks haven’t learned much. They are still lobbying hard for the status quo – the same system that caused the crisis. But now, it won’t have the backing of even a substantial minority of the public. (And that was in 2009! before the humongous bonuses phenomenon.) My point being is they want the same system that the public now hates them for and won’t tolerate another bailout of. And they will certainly fail catastrophically again, because the status quo is an unsustainable indebted industry. How do we know the Big Banks want the same system in place? Take a look at these figures. You’ll notice the congressmen who were strongly against substantive financial regulation changes were paid huge amounts of money to their campaign coffers. Just check this out. In a fair society, this would be called bribery, but here in the World’s Greatest Democracy they are called campaign donations.

How are financiers crazy? This video should do the trick. You can just hear the crazy. Whenever I think of Wall Street, I think of an entire office building of people all yelling and throwing things simultaneously. Generally acting like this man sounds.

I’ve also written a summary of the past two years of Western political economy after the jump, as I understand it. It doesn’t make sense to me either.

In the US, 2.5 years ago our financial institutions were considered the best international industry. “What’s good for Wall Street is good for America,” is what we were told through the media and pop culture. Lehman Brothers was about the third best-performing company of the bunch, and every Goldman Sachs worker was considered a brilliant financial sage. Suddenly in 2008, people realized the housing bubble had burst in 2006 and no one had any money. Why? Despite the knocks on public companies Freddie and Fannie Mae, who certainly deserve criticism for lending expensive mortgages to people too poor to pay them, most of the subprime mortgages that “popped” were done through private companies, in the form of derivatives. The US financial sector, it turned out, had been inundated with derivatives of subprime mortgages. Watch the link, it’s from 2007. Yeah they knew about it then.

Derivatives were not traded publicly, so no one knew that every big bank was fucked, because every bank  had subprime mortgage securities. Most companies couldn’t even tell how much money they had invested. While derivatives alone didn’t cause the financial collapse, everyone realized they couldn’t possibly know how much money they were set to lose. This set everyone into a BALL DROPPING PANIC. Even though they made the system, lobbying since the 80s to repeal financial regulation and fill top government regulation positions with cheerleaders, and still fucking lobby against tough derivatives language in 2010!

But I jump ahead. So the banks were losing money, so much money that they looked set to collapse. Even though there are bankruptcy laws specifically designed to establish an ordered dissolution of companies that fuck up (GM used it fine), the six biggest banks were so big and had so much of everyone’s money, that if they all went down at once (and it’s likely they would have) everyone’s money would have been sucked into this limbo-void where, like a financial black hole, no force could resist its pull.

Obviously, this caused an epic collapse, so the Bush Administration produced TARP. Republicans looked (and were/are) so inept at managing the economy, Obama won and he pushed a major stimulus package to stave off Armageddon. This has kept GDP growing almost by itself with a little help from restocking inventory. (Note the lack of organic free market growth. It’s stunning.) So now there’s debate on financial regulation reform, and also now, financial chaos in Europe.

Iceland went chaotic, followed by the Baltic states.  Though they are in the Euro, they are small so no one gave too big a shit. Europe watched American markets descend into chaos and claw its way back. Three months ago the euro was the world’s second strongest currency with manageable debt levels in member states, but now, its countries are mostly deemed  in trouble. What are financial markets judging it off of? Greece? The country that cooked its books with Goldman Sach’s help and can’t raise any revenue because income taxes were optional and everyone retired on welfare at 55. That is not the norm in the EU; Greece was the exception. And now the OECD, the Organisation for Economic Cooperation and Development, the bastion of cautious macroeconomics, is advocating austerity measures for economies with unemployment above 10%! The world is insane. The end.

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