The Credit Shock

The New York Times reports that Treasury Secretary Henry Paulson will speak tomorrow about the intervention of the US government in crumbling credit markets. According to the Times, Mr. Paulson will say, “This is not about finger-pointing, it is about putting an aggressive plan together and moving forward.”

What was the first plan? An ill-founded scheme to demonstrate how mercenaries supporting aspirants to the Junior Chamber of Commerce could secure a US beachhead in the Middle East? Or, how historic low interest rates set by the Federal Reserve coupled with the crippling of regulatory authority for land use and natural resource decisions could trigger vast societal benefits through a boom in housing markets?

In any case, we are nearing the end of the Bush presidency whose legacy is as described in a 2002 conversation between a senior administration official, probably Karl Rove, with Times’ writer Ron Suskind: “We’re history’s actors and you, all of you, will be left to just study what we do.”

Please, God, that we should be left only with that.

Three weeks ago major US banking institutions, represented by Citigroup Inc. and JPMorgan Chase & Co., began meeting with the former Goldman Sachs chief, now Treasury Secretary. The topic of conversation: a plan to revive the asset-backed commercial paper market.

In so far as the “reality-based community” is concerned, people who “believe that solutions emerge from your judicious study of discernable reality”, investors aren’t wasting time cogitating: they’re well along the process of turning the US dollar into garden mulch.

In an exceedingly carefully phrased roll-out in major newspapers, details are beginning to emerge of the new discernable reality: its essential features are bribery papering over fraud.

The fraud, as defined by cratering secondary markets for mortgage backed securities, is exactly as Warren Buffett predicted of financial derivatives: they are proving to be “weapons of mass financial destruction.”

The bribery appears to be in the creation of a new, multi hundred billion dollar fund–the result of the meeting between the big banks and the US Treasury– for which fees will be paid to Wall Street executives and lawyers in order to dispose in “an orderly way” off-book assets that are worth far less than banks have told their investors.

Cynics, gather ’round: it’s nearly fascinating as watching the Greenland ice sheet melt. Both are happening slowly but with a fair degree of certainty that the end of the day is a big stinking mess we lack tools to clean up. The reality-based community of investors are not going to take this well.

This is not how disaster capitalism is supposed to work (read Naomi Klein’s, ‘Shock Doctrine, the rise of disaster capitalism‘), but it does appear to be the new Manifest Destiny.

In so far as immediate finger pointing is concerned, this past July Wall Street executives told the public that problem in debt markets were contained to the subprime sector for mortgage backed securities. In other words, poor homeowners in Dearborn and Detroit. That little fiction didn’t sell through.

Throughout the late summer and fall, banking committees in Congress have been spinning themselves into a fine fettle, mixing Democrats and Republican indistinguishably, seeking solutions to the millions of homeowners at risk of foreclosure. The main event appears to be simply loosening the bridle that had been put on Fannie Mae and Freddie Mac for financial misdeeds.

Let them loan more. Let them loan more freely. Having finished, apparently, the finger pointing at the greed that had marred Fannie Mae and its quasi-public mission only a few years ago.

As much as network news likes to feature stories of foreclosed homeowners, the real meat is Wall Street whose executives became addicted to the profits from financial derivatives.

Now, the banks themselves have to be rescued to restore “free markets” to normal operation. In 1998, it only took four billion and the cooperation of the Treasury Department with the big banks to bail out the private hedge fund, Long Term Capital Management.

Today the mainstream media shies from reporting the extent of what is unfolding: a few hundred billion is a drop in the bucket compared to the total market for of asset backed securities at risk that underwrote the late, great building boom.

There are two reasons the mainstream media has lagged behind the story.

First, the blizzard of profits from the housing boom obliterated depth perception as it might be applied by a critical analysis of how corporate America and government is organized: to keep consumers passive, dumb, and happy.

Second, the proliferation of financial derivatives-intended to diversify risk-has the collateral benefit of distributing the fantasy of asset values in slow motion.

Trillions of asset-backed securities are floating around the globe on digital pulses through fiber optic cables, but no major financial institution wants to be the first to re-price assets to market.

They will hold these on the books or off the books as long as possible, at inflated values that don’t connect in any appreciable way to reality.

How odd that Wall Street lives and dies by quarterly profit reports from publicly traded corporations yet have been sitting on a toxic financial dump in credit markets for years with not even a whisper of complaint.

In the New York Times, Paulson’s efforts are described as “a delicate balancing act between two very different goals.” Those goals are: maintaining the confidence in financial markets and also, keep the game going for the housing industry and mortgage bankers who chafe at the notion of additional regulation.

Today, there is no will on the part of Congress to put the regulatory harnesses to a source of campaign cash that derives from a market that is essentially unregulated: financial derivatives.

Wall Street doesn’t want it. The home builders don’t want it. Why tamper with what your biggest campaign donors want? On the other hand, the version of disaster capitalism that is emerging is what only the short-sellers want.

The creators of asset backed mortgages take ordinary mortgages and package them into pools. The derivatives created from these packages of mortgages are sold to investors: they are sliced, diced, and reformulated in many different ways-but each time they are slightly changed, they create a rain of bonuses, fees, and commissions.

In recent years, mortgage backed sercurities were generated in the hundreds of billions by persuading consumers to take on more debt than they could reasonably afford. It was almost like spontaneous generation.

Take your ordinary suburban tract housing in Florida, for instance. In the past decade, production home building on cheap outlying land metastasized throughout the state of Florida.

During this time, environmentalists chewed mostly on each other over compromises to slow the pace of housing and commercial development in former wetlands and wildlife habitat. While most environmental organizations were distracted by divide and conquer and diversionary tactics, the building lobby converted the purposes of local government to zoning and permitting-doing battle with local regulations against the nation’s premier environmental laws meant to protect the air and water and natural resources we share.

In some cases, these were outright assaults that ended up in federal court challenges. But the worst damage, during this time of ascendancy in real estate speculation, was the domination of and appointment by local elected officials of lobbyists to local boards charged with “protecting the environment”.

In Florida, for instance, these environmental review boards worked with state agencies, like the Florida Department of Environmental Protection, to control water quality issues that had been abandoned by the federal EPA under duress of scientists. The legal term is “delegation”.

Once upon a time, suburban sprawl and all its accoutrements-from hollowed out urban cores to scary strip mall culture-were sold to the public as what the market wants. Every single day, that myth is played out in the halls of local government as though the crisis in the greater world of debt has no bearing whatsoever on reality.

The very nature of derivatives is meant to disperse risk: what they really disperse is accountability. The delegation of accountability so that it disappears is an essential feature of disaster capitalism.

Its manifest destiny has defined the problem as government itself-leading in the direction of divesting authority from federal to state, and from state to locally elected officials who live, virtually, in the pocket of the growth machine. Its result is exactly the sprawl-ridden, unsustainable landscape of Florida.

Today owners of asset backed securities are in the dark about the value of their investments. It is so distressing that hundreds of billions of asset backed securities cannot find buyers in the secondary markets, or, only at distressed prices.

That is what happens to junk when it is fairly valued.

Bloomberg reports, “Nothing in free-market theology says markets always work properly,” said J.D. Foster, a senior fellow at the Heritage Foundation in Washington and former Bush administration official. “If there’s something that can be done of a temporary nature to help markets, then that seems perfectly appropriate.”

What nonsense: a fairy tale from the party of “fiscal conservatives.”

Mispricing the true costs and accounting for growth is another way that asset back mortgages were able to deliver higher rates of return than baseline government debt.

To be purposeful and clear, means having a vision to protect and conserve-using regulations as a way to guide investment. It means wringing the speculators from the housing markets and from land development.

The solution is reformulating the system of packaging mortgages and their ratings. The new formula needs to be based on a clear and rational way to allocate development rights at the local level; in other words, integrating community design with long-term financing from private investors.

Intrusive? No more intrusive than disaster capitalism as it now exists for Americans, who appear to live on a giant set of a colossal Budweiser TV commercial, from sea to shining sea filled with intelligent Clydesdale horses, talking frogs and happy dumb us.

ALAN FARAGO of Coral Gables, who writes about the environment and the politics of South Florida, can be reached at alanfarago@yahoo.com.



More articles by:

Alan Farago is president of Friends of the Everglades and can be reached at afarago@bellsouth.net

August 20, 2018
Carl Boggs
The Road to Disaster?
James Munson
“Not With a Bomb, But a Whimper” … Then More Bombs.
Jonathan Cook
Corbyn’s Labour Party is Being Made to Fail –By Design
Robert Fisk
A US Trade War With Turkey Over a Pastor? Don’t Believe It
Howard Lisnoff
The Mass Media’s Outrage at Trump: Why the Surprise?
Faisal Khan
A British Muslim’s Perspective on the Burkha Debate
Andrew Kahn
Inhumanity Above the Clouds
Dan Glazebrook
Trump’s New Financial War on the Global South
George Wuerthner
Why the Gallatin Range Deserves Protection
Ted Rall
Is Trump a Brand-New Weird Existential Threat? No.
Sheldon Richman
For the Love of Reason
Susie Day
Why Pundits Scare Me
Dean Baker
Does France’s Economy Need to Be Renewed?
Weekend Edition
August 17, 2018
Friday - Sunday
Daniel Wolff
The Aretha Dialogue
Nick Pemberton
Donald Trump and the Rise of Patriotism 
Joseph Natoli
First Amendment Rights and the Court of Popular Opinion
Andrew Levine
Midterms 2018: What’s There to Hope For?
Robert Hunziker
Hothouse Earth
Jeffrey St. Clair
Roaming Charges: Running Out of Fools
Ajamu Baraka
Opposing Bipartisan Warmongering is Defending Human Rights of the Poor and Working Class
Paul Street
Corporate Media: the Enemy of the People
David Macaray
Trump and the Sex Tape
CJ Hopkins
Where Have All the Nazis Gone?
Daniel Falcone
The Future of NATO: an Interview With Richard Falk
Cesar Chelala
The Historic Responsibility of the Catholic Church
Ron Jacobs
The Barbarism of US Immigration Policy
Kenneth Surin
In Shanghai
William Camacaro - Frederick B. Mills
The Military Option Against Venezuela in the “Year of the Americas”
Nancy Kurshan
The Whole World Was Watching: Chicago ’68, Revisited
Robert Fantina
Yemeni and Palestinian Children
Alexandra Isfahani-Hammond
Orcas and Other-Than-Human Grief
Shoshana Fine – Thomas Lindemann
Migrants Deaths: European Democracies and the Right to Not Protect?
Paul Edwards
Totally Irrusianal
Thomas Knapp
Murphy’s Law: Big Tech Must Serve as Censorship Subcontractors
Mark Ashwill
More Demons Unleashed After Fulbright University Vietnam Official Drops Rhetorical Bombshells
Ralph Nader
Going Fundamental Eludes Congressional Progressives
Hans-Armin Ohlmann
My Longest Day: How World War II Ended for My Family
Matthew Funke
The Nordic Countries Aren’t Socialist
Daniel Warner
Tiger Woods, Donald Trump and Crime and Punishment
Dave Lindorff
Mainstream Media Hypocrisy on Display
Jeff Cohen
Democrats Gather in Chicago: Elite Party or Party of the People?
Victor Grossman
Stand Up With New Hope in Germany?
Christopher Brauchli
A Family Affair
Jill Richardson
Profiting From Poison
Patrick Bobilin
Moving the Margins