Not Enough Money in the World: The Real Monster in the Meltdown Closet
Monday, 13 October 2008
This is the beast in the dark that is haunting the feckless leaders of the developed world: $55 trillion of unaccountable debt, and no way of knowing how much of it is even now being flushed down the toilet, taking the global economy with it.The myth has quickly taken hold that the global financial crash was caused by bad mortgages. This has allowed rightwing hatemongers to blame the meltdown on the "liberal" programs that encouraged home ownership among a small percentage of lower-income people (a poisonous canard that parts of the mainstream media have actually done a fairly good job of knocking down), while "progressives" of various stripes have denounced banks and other financial institutions for pushing over-easy credit on people who couldn't really afford it.
Unsustainable mortgages are a key factor in the global crash, of course. And many people (most of them white, by the way) did take out mortgages they would not be able to afford if the housing bubble ever burst, which it has, most spectacularly. And yes, it is undeniable that the financial services industry has been tempting people with easy credit like schoolyard pushers flashing reefers.
All of this was bound to end badly, and did. But this alone would not have been enough to threaten the destruction of the entire global financial system, nor cause the blind, screaming panic that has strangulated the financial markets, seized up the vital flow of money between banks, and caused the "free" market-worshipping governments of the Western world to carry out nationalizations and interventions that, in sheer numbers, dwarf anything ever seen following a Communist revolution. (As John Lancaster notes in the London Review of Books, the Bush Administration's takeover of Fannie Mae and Fannie Mac alone was "was, by cash value, the biggest nationalisation in the history of the world." And that was just the beginning.)
What has struck mortal fear in the heart of markets and governments is not bad mortgages, but the almost incomprehensibly huge and complex market for "derivatives," based in part on mortgage debt -- but also on a vast array of other sources that were "securitized," turned into tradable if ghostly commodities then sold off in a bewildering variety of increasingly arcane forms. This was accompanied by the expansion of yet another vast market in insurance mechanisms designed to protect these derivatives -- mechanisms which themselves became "securitized."
At the same time, the financial services industry used its paid bagmen in governments around the world to loosen almost all restrictions not only on securitization and the trading of derivatives, but also on the amount of debt that institutions could take on in order to play around in these vastly expanded and deregulated markets. For example, as Lancaster points out, UK's Barclays Bank had a debt-to-equity ratio of 63 to 1:
The result of all this has been the construction of a gargantuan house of cards, based on next to nothing, and left alone in the shadow of building "perfect storm" of greed, deregulation and political corruption.
That storm has now struck. The house of cards has fallen down, and revealed a hole of derivatives-based debt that could not be filled, literally, by all the money in the world, much less by the mere trillions that national governments are frantically throwing at it today.
Yes, "mere" trillions. As Will Hutton explains in the Observer:
Try to imagine that: a $55 trillion market now at risk of complete destruction. Even the derivative debt owed by individual institutions stands at nation-wrecking levels. For example, a single bank in Britain, Barclays again, holds more than $2.4 trillion in credit default swaps, the tradable "insurance" mechanism against securities default. This is more than the entire GDP of Great Britain. If all this paper goes bad, there are not enough assets in the entire country to pay it off. And that's just one bank, in one country.
Hutton gives the details:
This is the beast in the dark that is haunting the feckless leaders of the developed world: $55 trillion of unaccountable debt, and no way of knowing how much of it is even now being flushed down the toilet, taking the global economy with it.
The massive interventions were are seeing might stabilize the markets temporarily, or at least arrest their free fall long enough to come up with some kind of massive restructuring of the global financial system. Or they might not. For it is by no means certain that the wisdom, and the political courage, to come up with a more viable system can be found among the world's political leaders -- all of whom, as we noted here the other day, have risen within the present system and, to one degree or another, owe their own power and privilege to the "malefactors of great wealth" and the extremist cult of market fundamentalism. There is no indication anywhere that the circle of collusion and corruption between governments and Big Money has even lessened, much less been broken, by the economic catastrophe. All of the various bailout plans and "coordinated actions" still have as their chief aim the preservation of the malefactors in their current state of wealth, privilege and domination. As Jonathan Schwarz notes:
The only slim hope we have for any genuine reform -- even an imperfect, conflicted, compromised reform, which is the only kind we will ever have in this world, until the lion lies down with the lamb -- is that the sheer scale of the real problem -- the $55 trillion beast, the very real potential for the complete destruction of the global economy, and the state power that depends upon it -- might force some politicians to turn apostate, renounce the market cult, and bite the hands that have fed them for so long.
Absent this near-miraculous possibility, we will be left with yet another rickety house of cards, slapped together on the fly -- largely at the malefactors' direction and for their benefit -- while the beast gapes wide his ponderous jaws, and prepares to swallow us whole.
Chris Floyd has been a writer and editor for more than 25 years, working in the United States, Great Britain and Russia for various newspapers, magazines, the U.S. government and Oxford University. Floyd co-founded the blog Empire Burlesque, and is also chief editor of Atlantic Free Press. He can be reached at firstname.lastname@example.org.
This column is republished here with the permission of the author.
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This story was published on October 13, 2008.
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