Wednesday, October 22, 2008

CRASH TALK WEDNESDAY OCT 22

Senator Bernie Sanders - When Congress reconvenes, it is clear to me that it must pass a massive "Rebuild America" program in order to address the looming economic crisis. If we can put up $700 billion to rescue bankers from their irresponsible decisions, we must make a major investment putting millions of Americans to work rebuilding our country.

We should make a major financial commitment to improving our roads and bridges. We must develop energy-efficient rail lines for both freight and high-speed passenger service and promote public transportation. We need to bring our water and sewer systems into the 21st century. In terms of job creation, every billion dollars invested in the physical infrastructure creates 47,000 new jobs.

With a major investment, we could stop importing foreign oil in 10 years, produce all of our electricity from sustainable energy within a decade, and substantially cut greenhouse gas emissions. We can make the United States the world leader in the construction of solar, wind, bio-fuel and geothermal facilities for energy production, as well as creating a significant number of jobs by making our homes, offices, schools and factories far more energy efficient.

We should make a major financial commitment to education. We must end the disgrace of millions of children under five attending totally inadequate child-care facilities while millions of other families are unable to afford a college education. We must invest in new classrooms, new computers, energy-efficient heating and cooling systems. That would not only create jobs, but relieve some of the burden on the regressive property tax.

In these harsh economic times we should extend unemployment benefits from 26 weeks to 39 weeks, so that more than 1 million Americans do not run out of their benefits by the end of this year. We should increase eligibility for food stamps and other nutrition programs to assist the hard-pressed middle class as well as the poor. We should substantially increase funding for the highly-effective community health center program so that, at a minimum, all Americans have access to affordable primary health care, dental care, and low-cost prescription drugs.

Finally, with cities and states facing deep deficits and cutting basic services, we must make a major, immediate financial commitment to states and municipalities. Their crisis will only grow worse as homes are foreclosed, as income and capital gains decline, as fees on sales of homes and motor vehicles diminish. For too long, unfunded federal mandates have drained the budgets of states and communities. The strength and vitality of America's communities must be restored.

Joshua Holland, Alternet - While the U.S. housing market is worth somewhere in the neighborhood of $10 trillion, it was Wall Street's wheeler-dealers -- and their lobbyists and allies who kept regulators out of their business -- who built a house of cards out of "exotic" mortgage-backed securities and other "derivatives" worth as much as 60 times that figure -- paper wealth backed by little more than the irrational belief that what goes up will never come down.

It was the investment bankers who pushed those debt-backed securities hard to investors who were looking for huge returns on their dollars -- much better than they could get putting their money in old-school investments like stocks and bonds. Their hard sell created so much demand that it encouraged lenders to write loans to just about anybody for just about anything; loans, after all, were the raw material for the alphabet soup of "exotic" investment vehicles -- the "collateralized debt obligations," "credit default swaps" and other innovative products that have now turned "toxic."

That gets to one of the hardest pieces of this whole mess to understand -- why would Wall Street want lenders to push out billions of dollars worth of loans that were inherently risky?

Here, a bit of context is crucial. The financial industry first started churning out derivatives in the early 1980s. That was part of a larger move away from traditional investments -- manufacturing, agriculture and (long-term) commodities -- and into the speculative economy as the returns on money put into the "nuts and bolts" economies of the advanced world began to dwindle in the 1970s.

At first, investors mostly gambled that interest or currency exchange rates would go up or down. Then, during the 1990s, when interest rates were low around the world, the demand for more exotic "structured" investments -- including various derivatives and swaps based on debt -- skyrocketed.

This brings us to a key issue in the banking mess, one that has serious ramifications for how we move forward in the future. Obscured by the finger-pointing is a simple question: How could a drop in the value of the American housing market -- even a 20 percent drop in home prices -- threaten to bring down the entire global economy?

Part of the answer is "leveraging" -- using a limited amount of cash to buy a much larger position in an investment. Leveraging is a common investment tool, but there are rules in effect in regulated markets like the major stock and bond markets that limit the amount that an investor can leverage -- for example, the SEC says you have to put up at least 50 percent of the cost to buy a stock on American stock exchanges. But these fancy debt-backed investments are contracts between two gamblers and are not subject to those rules. They're traded "over the counter" -- in an opaque and largely unregulated exchange. . .

As financial reporter Gillian Tett detailed in the Financial Times, a crucial moment in the development of the crisis occurred back in the mid-1990s, when JP Morgan was struggling to deal with the huge number of loans on its books and needed large reserves of cash in case those loans went belly-up. It was then that two groups of young Wall Street hotshots -- one that was creating those exotic new investments and another that was knee-deep in "subprime" loans -- started talking with one another and realized they could essentially launder risk by slicing and dicing bundles of sketchy home loans. . .

So, let's look at the chain from a shaky mortgage to a financial meltdown. First, the financiers took those mortgages and made them into mortgage-backed securities. Then, they took those securities and sliced them up into collateralized debt obligations, which got sold off and repackaged again and again.

During that process, investors' cash gets leveraged further and further, to the point at which the whole thing is based on little more than vapor -- paper wealth that can disappear in a flash with a market downturn.

NYU economist Nouriel Roubini described it like this:

"Today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund or funds that will in turn leverage these $4 million three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself leveraged nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards."

That's precisely what's happening in today's financial markets, and the blame lies squarely at the door of the investment banks (and the deregulators who enabled their excesses). The lack of transparency in this "speculative economy" is such that nobody knows precisely who is holding onto what securities and derivatives, and the complexity of these investments means that they're almost impossible to accurately value in the real world. That combination has resulted in a kind of panic among the investor class, with everyone fearful that all these exotic bets might be called in. That has made it tough for the banks to raise cash, and has led to hoarding of whatever cash reserves they have. That has frozen the global credit market, and is spilling over into the nuts-and-bolts economy in which most of us live.

Chris Hedges, Truth Dig -
Our oligarchic class is incompetent at governing, managing the economy, coping with natural disasters, educating our young, handling foreign affairs, providing basic services like health care and safeguarding individual rights. That it is still in power, and will remain in power after this election, is a testament to our inability to separate illusion from reality. We still believe in "the experts." They still believe in themselves. They are clustered like flies swarming around John McCain and Barack Obama. It is only when these elites are exposed as incompetent parasites and dethroned that we will have any hope of restoring social, economic and political order.

"Their inability to see the human as anything more than interest driven made it impossible for them to imagine an actively organized pool of disinterest called the public good," said the Canadian philosopher John Ralston Saul. . .

Our elites-the ones in Congress, the ones on Wall Street and the ones being produced at prestigious universities and business schools-do not have the capacity to fix our financial mess. Indeed, they will make it worse. They have no concept, thanks to the educations they have received, of the common good. They are stunted, timid and uncreative bureaucrats who are trained to carry out systems management. They see only piecemeal solutions which will satisfy the corporate structure. They are about numbers, profits and personal advancement. They are as able to deny gravely ill people medical coverage to increase company profits as they are able to use taxpayer dollars to peddle costly weapons systems to blood-soaked dictatorships. The human consequences never figure into their balance sheets. The democratic system, they think, is a secondary product of the free market. And they slavishly serve the market.

Dean Baker, Prospect - Robert Samuelson desperately wants to cut Social Security and Medicare. To advance this agenda, he is pushing nonsense to young people, telling them that they should be furious about their parents and grandparents' Social Security and Medicare.

While young people have ample grounds to be angry at people like Samuelson and his wealthy friends who have rigged the rules to shift the bulk of the country's wealth into their pockets (e.g. the $700 billion bank bailout), it is close to lunacy to be angry at their parents and grandparents for getting their modest Social Security benefits. Of course Medicare is getting expensive, but that is because papers like the Washington Post protect the interests of the insurance industry and the drug companies, thereby making health care far more expensive in the United States than anywhere else in the world.

The reality is that most seniors will have almost nothing in retirement other than their Social Security and Medicare. This is largely because media outlets like the Washington Post touted the stock and housing bubbles and were largely closed to those issuing warnings of the disasters that these bubbles would cause. Most people therefore acted based on the views presented to them by the ill-informed "experts" whose voices were (and are) transmitted by these media outlets.

The basic story is that Samuelson is anxious to beat up on the victims of this disaster, but is too cowardly to mention the powerful (including his employer) who were really responsible.

Portland Press Herald, ME - Last month, contracts for future nonresidential construction in southern Maine plummeted 62 percent compared with September 2007, from $22 million to $8 million, according to McGraw-Hill Construction, which provides analysis to the construction industry. For the year, contracts for future nonresidential construction -- which includes industrial and office construction as well as retail --have dropped 12 percent from the year before, from $281 million to $247 million.

Malone said he expects the retail vacancy rate in Greater Portland, which has hovered around 1 percent in recent years, to climb to 6 or 7 percent by year's end. It's all the result of a glut of new retail space, lackluster sales, the national credit crunch and the dismal national chain restaurant climate, said Malone and other industry watchers.

"The fast casual restaurant category and sit-down restaurant are dead on the national level," said Gene Beaudoin, a partner of New England Expeditions. . .

Nick Turse,Tom Dispatch Recently, according to the Los Angeles Times, Rich Paul, a vice
president at Value Options Inc., which handles mental health referrals, said that over the last year stress-related calls arising from foreclosures or financial hardship had gone up 200% in California. Similarly, Dr. Mason Turner, chief of psychiatry at Kaiser Permanente's San Francisco Medical Center, reported "a fourfold increase in psychiatric admissions at his hospital during August, with roughly 60% of patients saying financial stress contributed to their problems."

1 Comments:

At October 23, 2008 7:03 AM, Blogger jbsjohn said...

Senator Bernie Sanders has been at the front lines, leading on this crisis, from the beginning. He has spoken with an independent voice and is shouting to the rafters what follows. He does an incredible job of questioning Bush's nominee for the White House Budgeting office Jim Nussle. Listen to him and please, if you're so inclined.
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Jbsjohn

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