Friday, August 10, 2007

The Sound of Free Market Fundamentalism

WAITING to hear the worst on Wall Street, October 1929.

HE'S said it. As shares plunged on markets around the world this week and banks both sides of the Atlantic poured in billions to cool things, but only spurred more panic, President George W.Bush almost echoed the famous phrase once used by predecessor Herbert Hoover.

"The economy is fundamentally sound" is what Hoover is supposed to have said. "The fundamentals of our economy are strong", George Dubya assures us.

The words have an ominous resonance. Hoover's assertion of faith was made in 1929 as the Credit Anstalt's crash set off the Great Depression. People who had been persuaded they could get rich investing their savings found themselves penniless. Millions found themselves out of work.

Just as the workings of the big capitalist economy can bring crisis, hardship, tragedy to inviduals and families, so the problem of thousands losing their homes, unable to pay their mortgages, is a major factor in the present economic crisis. The long extended paper chain of credit - fortunes built on faith in the system, far removed from the business of producing material wealth - may only relay the shock. Yip Harburg's "Buddy, Can You Spare a Dime?" may not be due for a revival yet, as the world's richest capitalist superpower finds ways to pass its difficulties on to poorer countries.

But it's time to sit up and take notice. Get out some of the old books and theory to see how it applies to today's problems. If things get worse, watch out for those who sold us on the system's infallibility finding scapegoats to blame. And watch out for some of those who fell for post-modern, post-Marxist versions of the capitalist faith falling back on primitive conspiracy-theories. Meanwhile here is the report from today's Guardian:

Credit fears hit global markets
David Teather and Andrew Clark in New YorkThursday August 9, 2007
Guardian Unlimited

Central banks on both sides of the Atlantic pumped billions into the financial system to calm nerves over an impending credit crunch today - but their actions only served to heighten alarm, prompting a fresh plunge in global share prices.

The European Central Bank injected an emergency €95bn (£64.5bn) into the markets in its first intervention since the turmoil triggered by the 9/11 terrorist attacks on New York and Washington DC in 2001.

In America, the Federal Reserve added $24bn (£12bn) in temporary reserves to the US banking system to shore up liquidity and bring down short-term interest rates, while the Bank of Canada mounted a similar operation.
The moves, however, seemed to fuel a sense of crisis over defaults in America's mortgage lending industry which are causing a ripple effect through the banking industry as much of the debt is bundled up and sold on.

On Wall Street, blue chip shares suffered their worst day for four months as the Dow Jones Industrial Average plummeted by 387 points to 13,270. Stock prices swung wildly and trading volumes hit an all-time record with 2.8bn shares changing hands. Of the Dow's 30 component stocks, 29 ended the day lower.
Bourses across Europe fell, with the FTSE 100 in London finishing down 122.7 at 6271.2. The nervousness spread to all assets that appeared risky, including commodities.

The fresh sell-off was sparked by an announcement from the French bank, BNP Paribas, that it had blocked withdrawals from three investment funds worth €2bn owing to the "complete evaporation" of liquidity. A spokesman for the bank described it as a technical issue and said he hoped it would be a temporary situation.

There were also reports that the US bank, Goldman Sachs, has suffered losses in two of its hedge funds. Goldman is said to have sold down positions at its North American Equity Opportunities and Global Alpha funds, both of which rely on computer models rumoured to have struggled with recent volatility.

Nick Parsons, head of markets strategy at nabCapital, said one of the reasons investors are so nervous is the sheer complexity of today's financial markets with the growth of instruments such as securitisiation and credit derivatives.
"The problem for the markets is they don't know where this is heading. It is like walking blindfold through a minefield. There is no way of knowing who owns this stuff. But what is clear is that this is not just a US problem. This debt is owned by a huge variety of institutions, some you've heard of, some you've never heard of and some you are probably going to hear of soon."

The ECB's intervention was the largest one-day amount ever stumped up by the institution. It lent the cash to banks at a bargain rate of 4%. The last time the ECB took this kind of measure was when it pumped €100bn into the markets over two days following the September 11 attacks. It described the intervention as a "fine-tuning operation" to ensure "orderly conditions in the euro money market".

US president George Bush tried to calm the situation, telling reporters that the problems in sub-prime mortgages were unlikely to spread to the wider credit market. "The fundamentals of our economy are strong," he said, although he accepted that there was a need for better financial education on the part of mortgage borrowers whose struggle to keep up repayments is at the root of the crisis.

"Anyone who loses their house is someone we've got to show enormous empathy for," he said. "A lot of people have signed up for things when they've not been sure what they're agreeing to."

Earlier this week, America's 10th biggest home lender, American Home Mortgage, filed for bankruptcy, while Bear Stearns co-president Warren Spector resigned following the meltdown of two mortgage hedge funds that his department ran. The world's biggest insurer, AIG, felt obliged to reassure investors that it had ample cash today, saying it did not need to sell any of its securities to raise cash in a "chaotic market".

Mervyn King, the governor of the Bank of England, went against the prevailing winds yesterday, when he maintained that there was no international financial crisis.

The Bundesbank meanwhile hosted a meeting with banks involved in the rescue of Europe's highest profile sub-prime victim, the lender IKB, to arrange details of its €3.5bn bailout. The market in Germany was rife with rumours of particular banks being in trouble. West LB was forced to deny that it was heavily exposed to the sub-prime market. The US Treasury said it "remains vigilant".

Dutch bank NIBC called off a planned initial public offering, blaming exposure to the US credit markets. Market sources suggested last night that Britain's hedge fund operator Man Group was delaying plans for a flotation of one of its funds because of deteriorating market conditions.
Guardian Unlimited © Guardian News and Media Limited 2007,,2145366,00.html

Labels: ,


Post a Comment

<< Home