Haircut Time for Bondholders

[Crewleader]

Time for Geithner and Bernanke to Go


March 12 , 2009

Haircut Time for Bondholders

By MIKE WHITNEY

"The only function of economic forecasting is to make astrology look respectable."

-- John Kenneth Galbraith

When George Soros recently said that the financial system had "effectively disintegrated", it caused quite a flap. But Soros was not exaggerating. The financial system has disintegrated. What we are experiencing now is just the fallout from that event. This is easier to understand using an analogy. Imagine watching the demolition of a hundred-story skyscraper. After the explosives detonate and the building implodes, the chunks of debris and the shattered glass begin to fall to the ground below. That's where we are right now. The financial super-structure has already been blown to bits, but a thick shower of fragments keeps raining down on earth. Rising unemployment, falling consumer confidence, severe contraction of the economy, growing pessimism; these are all the knock-on effects of a full-blown system collapse.

In 2008, the source of funding for residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), consumer asset-backed securities (which include everything from student loans, credit cards, and auto loans) and home equity loans almost completely dried up. In fact, all that's left of the previously vibrant credit markets, is the agency mortgage-backed securities sold through Fannie Mae and Freddie Mac which rely exclusively on government funding. Apart from government sponsored GSEs, their is no mortgage credit.

What does it all mean? It means that Wall Street's credit-generating mechanism has disintegrated, cutting off 40 per cent of the blood-flow to the economy. This is why the drop in spending has been so sudden and precipitous. No economy, however strong, can reduce credit by 40 per cent without sliding into a depression. Every area of industry, trade, investment, commerce and consumption has been battered. No sector has been spared. Housing will continue to plummet, because the primary funding mechanism for selling mortgages no longer exists; all the applications are now shoveled over to Fannie and Freddie. Wall Street has gone A.W.O.L.

http://www.counterpunch.org/whitney03122009.html

[eridani]

1. So, can someone explain why we need securitization at all?

Can our economy get along without it? If not, why not?

[Skink]

2. Because every investor up the food chain must have 30 percent profits.

[eridani]

5. In other words, we don't really need it.

Is there any reason, any at all, why a sane society would allow this?

[Laelth]

3. Long, but good. n/t

:dem:

-Laelth

[Kolesar]

4. Tough read, too full of jargon for the layperson

Here's what I got from it, though:

The only hope is to do the unthinkable; dispatch the FDIC storm troopers to the teetering banks on Friday night and shut down the biggest offenders pronto. Don't wait another minute. The real reason Geithner is stalling is because he's afraid that foreign bondholders will cut him off at the knees and stop purchasing US debt. That's a threat that has to be taken seriously, but it shouldn't stop him from doing his job.

--
Bondholders own everything and they shouldn't be trifled with. They represent foreign banks, governments, sovereign wealth funds, and industry giants. They can afford the losses better than the taxpayer, but they won't be happy about it. There's bound to be retaliation and gnashing of teeth. It will require a carefully executed strategy to avoid a bloodbath; a surprise incision with a razor-sharp scalpel followed by an Obama-led public relations campaign to placate the enraged bondholders. It won't be easy, but it has to be done, and fast. Unfortunately, we are no where near the point where anyone at Treasury or the Fed will set aside the corporate agenda long enough to do the people's work. That's why Geithner will have to go. Bernanke, too.