Down for the Count

[Joanne98]

By MIKE WHITNEY

"The great inter-war slumps were not acts of God or of blind forces. They were the sure and certain result of the concentration of too much economic power in the hands of too few men (who) felt no responsibility to the nation."

From the 1945 UK Labour manifesto Let Us Face The Future

There are signs that the credit crunch is easing. Interbank lending in dollars has fallen for a ninth straight day. The various indicators of stress in the market--Libor, the TED spread, and the Libor-OIS spread--are all gradually returning to normal, but the damage to the broader economy has been substantial. Major corporations have had to stretch their credit lines just to get the money they need to cover routine operating expenses and a lot of retailers have not been able to get funding for their inventories for the holiday season, so they'll either have to hire fewer workers or simply shut their doors for Christmas. Also, corporate defaults have increased as businesses have been unable to turn over their short-term debt. According to Fitch Ratings, the "crisis will cut growth in credit this year by 50 percent as financial firms reduce leverage, investors' appetite for risk declines, and the worldwide economy slows." When credit is less available, there's less business activity and the economy slows. Unemployment goes up and quarterly earnings go down. It's a vicious circle that starts with speculation and ends in panic. The financial system has to reestablish its equilibrium by purging the excessive credit that developed through low interest rates and lax lending standards. Financial institutions everywhere are in the process of deleveraging which is putting downward pressure on the main stock indexes and creating turmoil in the currency markets.

The US Treasury and Federal Reserve are now underwriting the entire financial system. The free market has been abandoned altogether. Everything from commercial paper to money markets is now backed by the "full faith and credit of the United States". Without that explicit government guarantee, the credit markets would still be frozen and the system would crash. But government guarantees do not address the real problem, which is toxic assets that must be accounted for and written down. All it does is take hundreds of billions of dollars in mortgage-backed garbage onto the nation's balance sheet and undermine the creditworthiness of the United States. Eventually, foreign central banks will see the folly of this maneuver and refuse to buy more US debt. When that happens, there will be a run on the dollar and a major dislocation in the bond market. Then, the financial system will grind to a standstill once again.

Secretary of the Treasury Henry Paulson's $125 billion capital "giveaway" to nine of the country's largest banks has helped to calm the credit markets, but it won't last. The "real economy" is beginning to stumble and the stock market is gyrating more wildly than anytime in history. Wall Street is consumed with fear and investors are ducking out the exits as fast as their feet will carry them. According to the New York Times, the banks probably won't even use Paulson's money to extend loans to consumers and businesses (as intended), but will hoard it to make sure they are sufficiently capitalized when their mortgage-backed assets are downgraded. Even worse, the banks may use the money to gobble up smaller local and regional banks. On Tuesday's Jim Lerher News Hour, New York Times journalist Andrew Ross Sorkin put it like this: "The other thing that some of them may do with that money is go out and make acquisitions and buy other banks, (which) means that you will not be getting this money into your pocket anytime soon....I think the larger issue is the economy and these banks, in terms of lending, are not going to start lending real money until the economy turns."

Paulson knows what the banks are up to; after all, these are his friends. The truth is, the $125 billion was not given to the banks to soften the effects of the recession or increase lending. It was given to make the strong banks even stronger so they could monopolize the industry. Paulson's real plan is "more consolidation" and less competition, or as economist Michael Hudson says, "Big fish eat little fish". The Treasury Secretary is using his authority to reward his friends rather than doing what is best for the country.

Continued>>>
http://www.counterpunch.org/whitney10242008.html

[Greyhound]

1. Is there a limit on the number of "We told you so" posts that can be made on DU?

And where are all those frenzied panic mongers that were everywhere during the debates?
:kick: & R

[westerebus]

3. Yes. 170 billion. n/t

[dixiegrrrrl]

2. Joanne, I always find your posts very informative.

Thank you.