GIANT GLOBAL PYRAMID SCHEME |
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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 is a 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. 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.
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