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THE GLOBAL FINANCIAL MELTDOWN
#35
MOUNTING WORLDWIDE PATTERN OF FINANCIAL BREAKDOWN
http://www.larouchepac.com/news/2007/09/...kdown.html

Contrary to the financial press-directed myths, that "the markets have calmed down," there is a pattern over the past 48 hours, that shows the intensification of the systematic world financial breakdown, and the resulting panic coming to the surface.

** Speaking at the Kansas City Federal Reserve's annual conference at Jackson Hole, Wyoming, which many of the world's leading bankers and economists attend, economist Martin Feldstein delivered a panicked warning. "The economy could suffer a very serious donwturn," Feldman, President Reagan's former chairman of the Council of Economic Advisers said, presenting the possibility of a tightening credit crunch. Feldstein stated, "A sharp reduction in the interest rate, in addition to a vigorous lender-of-last resort policy, would attenuate that very bad outcome," and made the case for slashing the Federal Reserve's federal funds rate by 1 full percentage point, from its current 5.25% to 4.25%.

Also at Jackson Hole, Federal Reserve Board governor Frederic Mishkin said Sept. 1, that "central bankers should ease monetary policy quickly and aggressively in response to a big fall in house prices," according to the Sept. 2 Financial Times.

(Economist Lyndon LaRouche has made it manifestly clear that the money-pumping proposals of the type that Feldstein and Mishkin advocate, would create a hyperinflation by far more serious than that of 1923 Weimar Germany.)

** The seizing up of credit markets. Bloomberg reported Sept. 2, that during August, the yield on three-month Treasury bills fell by 84 basis points-- from 4.95% to 4.11%-- the largest single monthly fall since Sept 2001, the month when 9/11 occurred. Such a large fall could only occur, as investors flee other investments, and make heavy purchases of 'safe' Treasury bills, which drives the price of those Treasuries up, and thus, simultaneously, (inversely) pushes the yield on Treasuries down.

In parallel, the global commercial paper market has contracted 11% over the past three weeks from $2.22 trillion outstanding globally, to $1.98 trillion.

** Citigroup Foreign Exchange, a division of Citigroup released a newsletter Aug. 24, first made public yesterday, that projected that, due to the similarity between 1987 and 2007, based on parameters such as the "the leverage buyouts/merger mania," conditions possibly exist for a repeat of the 1987 stock market crash.

** Robert Diamond, the CEO of Britain's Barclays, in an exclusive interview Sept. 2 with the Sunday Telegraph, made a plea to the central banks, "we need to find a way to get liquidity into the short end of the curve [short-term financial paper]. ... That's down [up to] to central banks." On Aug. 31, Barclays, which is Britain's third largest bank and the fourth largest financial services company in the world, was forced to borrow 1.6 billion pounds ($3.2) from the Bank of England's "special facility" in order to bail out its Cairn Capital hedge fund, which is still hemorrhaging.



FINANCIAL CRISIS: 'EPISODE' or 'CLASSIC BANK RUN'?
http://www.larouchepac.com/news/2007/09/...k-run.html

Last Friday at Jackson Hole, Wyoming, where 34 central bankers gathered for their annual "bonding" session, Federal Reserve Chairman Ben Bernanke described the current financial collapse as merely an "episode." Not only private economists there, but also Bernanke's German counterpart, Bundesbank President Axel Weber, had a very different characterization of the deepening financial crisis.

The front page the Sept. 3 Financial Times reports comments made by Weber, in which he compared the situation today to a "classic bank run".

"What we are seeing is basically what we see underlying all banking crises," Weber said, "but now it is happening outside traditional banking structures, among conduits and structured investment vehicles."

This is the first time since the crisis broke in early August, that a central banker dared to to call it a "banking crisis," and to make such a comparison. But according to the Financial Times, it is an assessment shared by policy makers in the U.S. Federal Reserve, if not by Bernanke himself.

The London Independent quotes Weber saying, "What we need to do as central bankers, and we are clearly doing that, is to help them in the de-leveraging process. There is no underlying problem of solvency, it's one of liquidity. So swift action is needed.



DEBT IS NOT AN ASSET
John Hoefle
http://larouchepac.com/news/2007/09/01/d...asset.html

"I don't know how the financial system is going to survive through October," Lyndon LaRouche commented on Aug. 31, after reviewing recent developments on the global financial front. We need to get the firewalls up fast to protect the population, he added.

The growth of the global financial system is premised upon a very simple fraud, namely the treatment of unpayable accumulated debts as assets. Those "assets" are then leveraged many times over, turning thousands into millions into billions into trillions of dollars of financial bets. With each passing year, the financial system gets further divorced from reality, further past the edge of the cliff.

Incurring debt can be useful, if the monies obtained by that debt are used to build up the productive capacity of a society, but when that debt becomes a substitute for productive activity, then it just makes the situation worse. That's the problem we face today. Since our economy operates upon borrowed money--households, businesses and governments--every default carries the risk of triggering an avalanche of losses, and threatens to set off a chain reaction which will take down the system itself. Each loss brings us closer to that chain reaction, and the losses are coming fast.

Economic Deficit
Since the economic and political policy shifts of the 1967-1970 period, at the direction of the financial oligarchy, the United States has deliberately dismantled what was once the most powerful industrial machine in the world, backed by a society committed to scientific and technological development, and replaced it with a information and service economy based upon computers, services and financial speculation. Under this regime, the incomes--in real terms--for most of the population began to decline, particularly for those people who lost their higher paying industrial jobs; at the same time, the costs of living began to rise. To make up the difference, households began taking on debt, primarily via credit cards, car loans and home mortgages. Businesses also escalated the use of borrowed money, via bank loans, commercial paper and the bond markets. Debt became a way of life, slowly losing its stigma and after a while, we were so hooked that we began to pretend that we were managing our debt, instead of our debt managing us.

This debt grew and grew, and began piling up in the banking system. The banks could only hold so much. Everyone understood that while individual debts could be paid, the total debt could not, so an elaborate system of rolling over old loans into new loans was established, and the banks began packaging this debt into securities and selling them to investors, in amounts never before seen. These securities might be based on debt that could never be paid, but in accounting terms they still qualified as assets on the books of the investors, who then borrowed against them or turned them into other securities, which they could sell. Pretty soon, the values of all the securities, derivatives and other bets dwarfed the amount of debt upon which they were nominally based, and far outpaced the value of the physical assets upon which the entire edifice rested. As this mess grew, it got pushed farther and farther off the balance sheets of the banks, into the off-balance-sheet netherworld of the derivatives markets and the hedge funds, operating through unregulated pirate coves like the City of London's Cayman Islands.

This speculative casino grew so large that it took over the global economy, and the more it grew, the more voracious its appetite for funds. Real estate prices were pushed up in the U.S., in Europe, Japan and elsewhere to create new debt to feed the machine, vacuuming money out of households, businesses and governments, sucking the real economy dry. Eventually, as had to happen, the casino got so big that there wasn't enough money to keep it going.

One of the key components of this bubble, the U.S. housing market, hit the wall in 2005. The rate of increase of home prices stalled, and began to fall to the point where many areas are now seeing not just a slowing rate of increase, but absolute decreases in housing prices. To try to keep the game going in the face of this decline, the financiers began loosening mortgage standards and relaxing loan terms, anything to make a sale. This was not about selling homes, but about selling mortgages, keeping the money flowing into the casino. Houses, from the standpoint of the casino, were a byproduct of their debt-farming scheme.

Shockwaves
Since the global financial system is basically a giant pyramid scheme which must grow lest it collapse, the shrinking of the money flow has triggered shockwaves of losses reverberating through the system. As prices fall, those who bought at the peak of the market are the first to run into trouble, with mortgages worth more than their homes. Many of these buyers also had the loosy-goosy mortgages; some had ARMs, and are faced with escalating monthly mortgage payments even as their home values fall, other buyers lose their jobs or have health problems, and still others bought homes for speculation. Whatever the reason, the level of defaults and foreclosures began, and continues to rise while prices fall, and that spells trouble for the trillions of dollars of financial paper based upon real estate values.

These defaults set off what has become known as the "subprime crisis," which is said to be the cause of our current turmoil. If only the buyers had been more responsible, if only the subprime lenders had been less greedy, then we wouldn't have this "contagion" infecting an otherwise healthy system, we were told. As cover stories go, it was pretty successful, pushed by the bankers and the media cartels. It had all the right elements: little guys victimizing the poor innocent banks, families threatened with losing their homes, and no mention that this was a direct result of the nature of the financial system itself. All that drama and a coverup in one neat package.

Still, while a good cover story might shift the blame, it can't hide the losses, and the losses are growing day by day. Since assets these days are just someone else's debts, each default on a debt blows out someone's asset, and as the losses pile up, they trigger shockwaves of defaults through the system. To make matters worse, there are trillions of dollars of leveraged assets in the system, the value of which depends upon rising real estate values. That is, they are perceived to have value based upon the expectation that you will be able to sell them to someone else for more than you paid for them. When prices stop rising, the game is over.

A good example of how this works begins with Bear Stearns, a leading subprime lender which poured billions of dollars of mortgage-backed securities and collateralized debt obligations into hedge funds it controlled, only to see those hedge funds blow up. Merrill Lynch, which had loaned one of the fund some considerable amount, then seized and tried to sell some of the fund's securities that had been pledged as collateral. Merrill found it could only get some 50 cents on the dollar of face value, so it stopped the sale.

The implications of this failed sale are enormous, because it revealed publicly that the securities were not worth what they were being valued at on the fund's books, that the official valuations were fictitious--and not just at Bear Stearns or its hedge funds. Merrill Lynch stopped the sale not because of the losses it would take on the collateral, but because of the losses it and all its peers would take were they to begin writing down their own overvalued assets. Anything even approaching accurate accounting would blow them all out of the water.

Another bank which took a big hit in the Bear Stearns fiasco was Barclays, the British giant, and Bear Stearns is only part of its problems. Besides having some $300 million in the Bear Stearns funds, it also owns EquiFirst Corp., the subprime mortgage lender.

Barclays appears to be in big trouble at the moment. In addition to the losses from Bear Stearns, Barclays reported also faces significant losses from its involvement with German bank SachsenLB, which is being taken over by another German bank, LBBW. These losses arise from the meltdown in the asset-backed commercial paper market. Barclays has also agreed to "rescue" a $1.6 billion debt fund run by Cairn Capital, another player in the asset-backed commercial paper market. To keep its doors open, Barclays has borrowed some $4 billion from the Bank of England in the last two weeks, and there is no reason to believe the situation will improve.

Worse To Come
To keep this game going in recent years, the central banks began increasing the rate at which they were pumping money into the financial system. The rate of money being poured in was so great that the rate of the rate of increase in monetary emissions surpassed the rate of the rate of the growth of financial aggregates (the total of stocks, bonds, derivatives, etc.), creating hyperinflation of financial assets. We have long since passed the point where this is a debt problem which can be bailed out.  

What is occurring can only be understood from the standpoint of LaRouche's Triple Curve pedagogy, with a decline in physical assets and hyperbolic growth in financial and monetary aggregates, not as separate developments but as part of one continuous function. The more the physical economy is looted to provide assets for the bubble, the quicker the foundation upon which all the money and speculation erodes, in a self-feeding collapse. If you stop feeding the bubble it collapses, and if you continue feeding it, it also collapses. Such concepts are well beyond the capabilities of Wall Street's algorithms.

When debts are treated as assets, the assets of the system become an enormous liability, and a bubble which is built on the leveraging of such worthless assets, will collapse in a reverse leverage chain reaction much faster than it was constructed. Each time an asset collapses, it increases the rate of collapse of other assets, and accelerates the rate of collapse of the system as a whole. During periods like the present, when nearly all of the speculators are trying to sell their risky assets and flee into the security of Treasuries, the value of the assets fall with each attempted sale. They are worthless if no one will by them, and worthless even if someone does.

This collapse is playing out with different speeds in different countries, but all subsumed within an overall global decline in physical productivity and hyperinflationary increases in monetary and financial obligations. The rate of this collapse will increase hyperbolically, and the system will be gone by mid-October, LaRouche said. The explosions we are seeing now are mere grenades, with much larger ones to come. If the system hits a big landmine, it may not even make it to October. The greater the losses, the more unstable the system.

The only way to avoid a catastrophic explosion, LaRouche said, is to freeze the system, to put up firewalls to protect the population and the productive part of the economy, as outlined in his Homeowners and Bank Protection Act. The problem must be treated as a whole; trying to deal with selected aspects individually will solve nothing, and fail to stop the catastrophe.



ERECT A FIREWALL NOW: DEBT IS NOT AN ASSET  


"My estimate is that by the end of September, you won't have the United States, unless something is done about this crisis. I know what we're dealing with here. We're dealing with something which is analogous to what happened in Germany in the middle to Fall of 1923. It takes a different form; because what they're doing today is that they're monetizing worthless paper, and using that to create hyperinflation in the market. And this hyperinflation is hungrier and hungrier… and those inflationary effects are accelerating the breakdown of the housing sector. So that in about 30 days more of this stuff, you are going to have a blow-out of the U.S. economy, comparable to what happened in Germany, going in the direction of what happened in Germany in the Fall of 1923. We're that close." -- Lyndon H. LaRouche

We are now half-way through the month of September. One federal Congressman must have the courage to step forward and make himself or herself the primary sponsor of the proposed Homeowners and Bank Protection Act of 2007. Once this occurs, the LaRouche Political Action Committee will turn the country upside-down to rush this bill through Congress, before the oncoming foreclosure tsunami drives millions of families out of their homes and sets off a downward spiral of social chaos, destroying the United States. The HOBPA will place chartered banks under protection and will freeze all existing home mortgages, erecting a legislative firewall between the inevitable collapse of the Cayman Islands-centered speculative financial system and the every-day lives of American citizens.

"The lobbyists and managers of the offshore unregulated hedge funds know that they are already hopelessly bankrupt, and they are hysterically lying and pressuring Congress to cover up that reality. Only a mobilization of the American people, and local and state elected officials, can create the counter-pressure on Congress to assure that they do the right thing: Pass LaRouche's Homeowners and Banks Protection Act of 2007 -- with a veto-proof majority."

Every activist receiving this e-mail has the responsibility to generate a groundswell, pressuring Congress to pass the Homeowners and Bank Protection Act, now! State governors, representatives, assembly-men, legislators, city-councilmen, and county commissioners can all personally endorse this draft legislation – send signatures and endorsements into the LaRouche Political Action Committee, and become part of the trans-national crossfire effort to force the U.S. Congress to react, before it is too late!

"What else can you, as a citizen, do? Support the LaRouche Political Action Committee, and through it, the activities of the LaRouche Youth Movement. The hedge funds and other financial looters have armies of well-paid lobbyists mercilessly squeezing Congress to do nothing. For the American people, LPAC represents the only lobbying force in Washington and in the state capitals and city councils on behalf of the General Welfare. Make your contributions today."




THE PREDICTED FINANCIAL STORM HAS ARRIVED  
Gabriel Kolko
http://www.informationclearinghouse.info...e18296.htm


Contradictions now wrack the world's financial system, and a growing consensus exists between those who endorse it and those who argue the status quo is both crisis-prone as well as immoral. If we are to believe the institutions and personalities who have been in the forefront of the defense of capitalism, we are on the verge of a serious crisis-if not now, then in the near future.

The International Monetary Fund (IMF), the Bank for International Settlements, the British Financial Services Authority, the Financial Times, and innumerable mainstream commentators were increasingly worried and publicly warned against many of the financial innovations that have now imploded. Warren Buffett, whom Forbes ranks the second richest man in the world, last year called credit derivatives-only one of the many new banking inventions-"financial weapons of mass destruction." Very conservative institutions and people predicted the upheaval in global finances we are today experiencing.

The IMF has taken the lead in criticizing the new international financial structure, and over the past three years it has published numerous detailed reasons why it has become so dangerous to the world's economic stability. Events have confirmed its prognostication that complexity and lack of transparency, the obscurity of risks and universal uncertainty, especially regarding collateralized debt and loan obligations, will cause a flight to security that will dry up much of the liquidity of banking. "…Financial innovation itself," as a Financial Times columnist put it, "is the problem". The ultra-creative system is seizing up because no one understands where risks are located or how it works. It began to do so this summer and fixing it is not very likely.

It is impossible to measure the extent of the losses. The final results of this deluge have yet to be calculated. Even many of the players who have stakes in the countless arcane investment instruments are utterly ignorant. The sums are enormous.

Only a few of the many measures give us a rough estimate:

The present crisis began-it has scarcely ended there--with subprime mortgage loans in the U.S., which were valued at over $1.3 trillion at the beginning of 2007 but are, for practical purposes, worth far, far less today. We can ignore the impact of this crisis on U.S. housing prices, but some projections are of a 10 percent decline-another trillion or so. Indirectly, of course, the mortgage crisis has also brought many millions of people into the larger financial world and they will get badly hurt.

What the subprime market did was unleash a far greater maelstrom involving banks in Germany, France, Asia, and throughout the world, calling into question much of the world financial system as it has developed over the past decade.

Investment banks hold about $300 billion in private equity debts they planned to place-mainly in leveraged buy-outs. They will be forced to sell them at discounts or keep them on their balance sheets-either way they will lose.

The near-failure of the German Sachsen LB bank, which had to be saved from bankruptcy with 17.3 billion euros in credit, revealed that European banks hold over half-trillion dollars in so-called asset backed commercial paper, much of it in the U. S. and subprime mortgages. A failure in America caused Europe too to face a crisis. The problem is scarcely isolated.

The leading victim of this upheaval are the hedge funds. What are hedge funds? There are about 10,000 and, all told, they do everything. Some hedge funds, however, provided companies with capital and successfully competed with commercial banks because they took much greater risks. A substantial proportion is simple gamblers; some even bet on the weather--hunches. Many look to their computers and mathematics for models to guide their investments, and these have lost the most money, but funds based on other strategies also lost during August. The spectacular Long-term Capital Management 1998 failure was also due to its reliance on ingenious mathematical propositions, yet no one learned any lessons from it, proving that appeals to reason as well as experience fall on deaf ears if there is money to be made.

Some gained during the August crisis but more lost, and in the aggregate the hedge funds lost a great deal-their allure of rapid riches gone. There have been some spectacular bankruptcies and bailouts, including some of the biggest investment firms. Investors who got cold feet found that withdrawing money from hedge funds was nigh on impossible. The real worth of their holdings is hotly contested, and valuations vary wildly. In reality, there is no way to appraise them realistically-they all depend largely on what people want to believe and will take, or the market.

We are at an end of an era, living through the worst financial panic in many decades. Now begins global financial instability. It is impossible to speculate how long today's turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.

All central banks are wracked by dilemmas. They have neither the resources nor the knowledge, including legal powers, to remedy the present maelstrom. Although there is clamor from financiers and assorted operators to bail them out, the Federal Reserve must also weigh the consequences of its moves, above all for inflation. Then there is the question of "moral hazards." Is the Federal Reserve's responsibility to save financial adventurers from their own follies? Throughout August the American and European central banks plunged about a half-trillion dollars into the banking system in an attempt to unfreeze blocked credit and loans that followed the subprime crisis-an event which triggered a "flight to safety" which greatly reduced banks' willingness to loan. In effect, the Federal Reserve relied on banks to restore confidence in the financial system, subsidizing their efforts.

Central banks' efforts succeeded only very partially but, in the aggregate, they failed: banks and investors now seek security rather than risk, and they will sit on their money. The Federal Reserve privately acknowledges its inability to cope with an inordinately complex financial structure. European central bankers are in exactly the same dilemma: they simply don't know what to do.

But this scarcely touches the real problem, which is structural and impinges wholly on the way the world financial structure has evolved over the past two decades. As in the past, there is a critical split in the banking and finance world and each has political leverage along with clashing interests. More important, central banks were not designed to cope with today's realities and have neither the legal powers nor knowledge to control them.

In this context, central banks will have increasing problems and the solutions they propose, as in the past, will be utterly inadequate, not because their intentions are wrong but because it is impossible to regulate such a vast, complex economy-even less today than in the past because there is no international mechanism to do so. Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level.

Not only leftists are naïve but so too are those conservatives who think they can speak truth to power and change the course of events. Greed's only bounds are what makes money. Existing international institutions-of which the IMF is the most important--or well-intentioned advice will not change this reality.
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THE GLOBAL FINANCIAL MELTDOWN - by moeenyaseen - 08-27-2006, 09:59 AM

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