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U.S. stocks fall 240 points, led by banks on outlook for more housing woes
Dominant Social Theme: No way around it. No options. No other way to approach this - and no light at the end of the tunnel, or not yet anyway. Blame the usual suspects and suck it up! Free-market analysis: It would be nice to see some responsibility taken by the actual culprits of the current financial mess. Who or what are they? Let's start with central banks around the world, and especially the American Federal Reserve (emphasis mine - JSB). Unfortunately, central banking is not likely to suffer nearly so much - either monetarily or in terms of bad PR - as those individuals and groups that central banking supports, investment bankers and the Western middle class. Right now, Wall Street, Bay Street, Howe Street, the City, etc., provide a kind of cordon sanitaire protecting the industry of central banking itself from too many questions. Yet analyze Western markets any way you wish and you always come back to the money supply as the controller - the maker of booms and especially of busts. In the boom times, central bankers like America's Alan Greenspan are modestly satisfied to take credit. In the bad times the finger gets pointed not at central banking and its champions but at banking handmaiden's - accountants, lawyers and other facilitators of the money system that has been put in place by bankers and their backers. Since this downturn is shaping up to be a doozy, such individuals in such professions had better do what they can to duck. Yesterday came word, for instance, of the National Australia Bank's decision to write off 90 per cent of its socalled US conduit loans. According to the Spectator's Robert Gottliebsen, "It is clear global banks have nowhere near provided for their exposures to US housing loans which … are experiencing a meltdown. We are now way beyond sub-prime. NAB says that it is suffering a 55 per cent loss on American housing loans - an event that has never happened in the history of a developed country in recent memory. This is an unprecedented event and means that the cost of bailing out the US financial system is now far beyond the highest estimates. A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression." Gottliebsen is frank about the mechanism: The cost of bailing out housing exposures to Fannie Mae and Freddie Mac will drain available capital, thus leaving less to shore up other banks in the US. Also, the problem is likely to metastasize beyond the residential market and spill over into the corporate market. He calls the flow "inevitable." And while conduit exposures are off-balance sheet, they are nonetheless a liability. Others weighed in on the NAB move, yesterday, including Oppenheimer analyst Meredith Whitney. She said that while banks, in general, have tried to wait out the mortgage market downturn, the delaying tactics are actually making their balance sheets worse because the assets keep falling. According to commentary on generationaldynamics.com, she predicted "a full-scale panic" when assets are finally marked to market. How would such a panic work? In Australia, the NAB write-down of 90% establishes the "market" for these instruments. Now other Australian banks will likely make similar write-downs at similar prices. The longer the "crisis" continues, the lower valuations go, the more banks, internationally are going to be faced with the harsh realities of significant, even historical, write-downs. And why shouldn't these valuations spread to America as well? Generational Dynamics goes so far as to estimate the possibility of a major financial crisis in the West at 75 percent, over the next 52 weeks. On Wall Street, the bleeding is apparently nowhere near stopping. Late on Monday, Merrill Lynch announced yet another write off of mortgage debt, this one for $5.7 billion. Just recently Merrill posted a second quarter loss of $4.9, with more than $9 billion of write-downs. And what of the D-word - as in "derivatives?" There are literally hundreds of trillions in derivative bets extant and operative - though nobody really seems to know how much. Mortgage valuations and mortgage money pools will likely continue to collapse - and at some point other kinds of derivative bets may be sucked into the mess. If these bets take a tumble, it will be difficult to say where the dominoes will stop falling. Investment bankers may bear the brunt of the deflationary end of the business cycle, but so does the middle class. Divorced from the marketplace, the fiat-money system is inevitably inflationary. Why? Because central bankers have no way of knowing how much money is too much. Not a single central banker, including most famously Alan Greenspan, can tell you how much money a given central bank should be printing. And for this very reason most of the time, if not all the time, they print it by the truckload, every minute of every hour of every day. The newly minted money is most powerful closest to home. So those close to the spigot receive the most buying power. Those who receive the money and credit at the back of the line - the poor and others who do not have access to new money - only get it when it is worth far less. And often they don't get very much of it at all. For the near-term it seems likely that central banks will frantically print money. They will print and print, and deal and deal, and twist endless government arms for endless government guarantees until someway, somehow, the mess they made is roughly contained. During this time, the "blame game" will be in full effect. Politicians, seeking to get out in front of messy economic news, will increasingly start to target investment bankers, but will soon move on to accounting types at major corporations - as they did earlier in the 2000s. Eventually, it will be the turn of the middle class - and the downturn will hurt in numerous ways. An inflationary recession is painful, but in very harsh business cycles, and this looks to be one, central banks may eventually begin to contract the money supply hard as they did the in 1970s and 1930s. If so, then the pain felt by middle class will be intense. The credit that many rely on will dry up even more. Loans, once plentiful, and then less so, will not be available at all. Hundreds of thousands, millions, of small businesses will fall on hard times go belly up. The middle class will be further confused, even as it is consolidated, its freedoms further curtailed. Conclusion: Each "financial crisis" further weakens the Western middle class and makes it more malleable, more timid. It is most certainly the central banking mechanism itself that is to blame, the creation of money out of thin air with all of its attendant effects. More frank discussion would be salutary, especially during a time when the impact of central banking policies, especially Fed policies, are being felt throughout the world. A real discussion about the merits of honest money, gold and silver, as well as a hard money standard, would go far to clear the air and educate many about monetary alternatives they likely didn't know they had. Will mainstream media take this route? It hasn't so far. |
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U.S. stocks fell and the Dow Jones Industrial Average lost more than 200 points for the second time in three days after the International Monetary Fund said there is no end in sight to the housing slump. Merrill Lynch & Co., American International Group Inc. and Fannie Mae led financial shares to a third straight drop as the IMF warned that worsening credit conditions may prolong the economic slowdown. Verizon Communications Inc., the second- largest U.S. phone company, slid to an almost two-year low on a bigger-than-estimated decrease in home-phone lines. Four stocks fell for each that rose on the New York Stock Exchange. "We're relatively bearish on financials because even when we get this crisis sorted out, the rebound is going to be muted,'' said Ralph Shive, chief investment officer of 1st Source Corp. Investment Advisors in South Bend, Indiana, which manages $3 billion.