The great credit unwind of ‘08

Published on Online Journal, by Mike Whitney, Jan 31, 2008.

… Global market turmoil continued into a second week as stock markets in Asia and Europe took another tumble on Monday on growing fears of a recession in the United States.

China’s benchmark index plummeted 7.2 percent to its lowest point in six months, while Japan’s Nikkei index slipped another 4.3 percent. Equities markets across Asia recorded similar results and, by midmorning in Europe, all three major indexes – the UK FTSE Footsie, France’s CAC 40, and the German DAX – were all recording heavy losses. It’s now clear that Fed Chairman Bernanke’s ’surprise’ announcement of a 75 basis points cut to the Fed Funds rate last week has neither stabilized the markets nor restored confidence among jittery investors.

In Monday’s Financial Times, Harvard economics professor, Lawrence Summers, made an impassioned plea for further government action in addition to the Fed’s rate cuts and Bush’s $150 billion stimulus plan. Summers believes that steps must be taken immediately to mitigate the damage from the sharp downturn in housing and persistent troubles in the credit markets. He suggests a global coordination of policy, which is another way of admitting that the Fed has lost control of the system and cannot solve the problem by itself …

… So, how did things get so bad, so fast? How could the world’s most resilient and profitable markets be transformed into a carnival sideshow peddling poisonous mortgage-backed snake-oil to every gullible investor?


Author and stock market soothsayer Pam Martens puts it like this: How could a layered concoction of questionable debt pools, many of dubious origin, achieve the equivalent AAA rating as U.S. Treasury securities, backed by the full faith and credit of the U.S. government, and time-tested over a century of panics, crashes and the Great Depression.

“How did a 200-year old “efficient” market model that priced its securities based on regular price discovery through transparent trading morph into an opaque manufacturing and warehousing complex of products that didn’t trade or rarely traded, necessitating pricing based on statistical models? [The Free Market Myth Dissolves into Chaos, by Pam Martens, CounterPunch].

How, indeed?

The answer to all these questions is deregulation. The financial system has been handed over to scam-artists and fraudsters who’ve created a multi-trillion dollar inverted pyramid of shaky, hyper-inflated, subprime slop that they’ve sold around the world with the tacit support of the ratings agencies and the US political establishment. (wink, wink) Now that system is about to collapse and there’s nothing that the Federal Reserve can do to stop the Great Credit Unwind of ‘08.

As economist Ludwig von Mises said, “There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved”. (full text).

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