Economics is the most dismal of dismal sciences. It is always and forever about the same thing-- justifying somebody else's immiseration. It is a dismal science, in part, precisely because it imagines itself to be a science-- a precise, objective calculation, when in reality it is a pseudo-science with its pseudo-scientists practicing their dismal mathematics, applying their dismal algorithms, all of which are variations on the single governing truth of capital: garbage in, garbage out.
But so much for historical considerations. Hank and Ben knew what they were doing. The next day, meeting inside the infectious disease ward previously known as the New York Federal Reserve Bank, Hank and Ben walked over to the room occupied by the Lehman Bros. First Ben placed a sign on the door to the room, "Nothing By Mouth," it read. Hank placed a second sign, written in bold-- Do Not Resuscitate. Then, together, they took a pillow, and carefully, quietly, forcefully, pushed it down onto the face of the barely breathing brothers. And held it there.
"That's done," said Hank, rubbing his hands.
"Easier than I thought it would be," said Ben, stroking his beard.
"Now what?" said Hank.
Neither had the slightest idea.
4. Wednesday's Children
On Wednesday, October 1, the Fed's first order of business was to remove the enforcement action that it had had in place since 2006 against Mitsubishi UFJ bank for violations of anti-money laundering requirements. It seemed a little churlish of the Fed to maintain the action when, after all, it, the Fed was in the midst of the greatest money laundering scheme in history. Besides, maintaining the action might have been embarrassing after Mistubishi had agreed to purchase 25% of the newest member of the Federal Reserve System, Morgan Stanley.
On Friday, October 3, the Congress approved the Treasury's bail out program. Bush promised to sign the legislation as soon as it reach his desk.
'God bless our brave investment bankers," said Hank.
Quoting Conrad's Nostromo, Ben replied, "Ah yes, we must comfort our friends....the speculators."
On October 7, the Fed announced the creation of another special purpose vehicle, the Commercial Paper Funding Facility. The CPFF was authorized to purchase unsecured and asset backed commercial paper with maturities of 3 months directly from the issuers. The FRB in essence was absorbing all default risk in the commercial paper markets. God bless our brave investment bankers.
Wednesday came around again all too soon. The FRB cut its funds rate 1.5 percent, in a concert with actions by the Bank of England, the European Central Bank, the Swiss National Bank, the Bank of Canada to defibrillate the bank lending markets. Ah yes, we must comfort our friends...the speculators.
But the real news of Wednesday's children was the new news from the past that emerged from the Fed's release its review of the Shared National Credit program.
In 1997, the Fed established the Shared National Credit program in concert with the FDIC and the Office of the Comptroller of the Currency. In 2001, the Office of Thrift Supervision was co-opted into the program as an assisting agency. The stated purpose of the program is to provide an "efficient and consistent review and classification of shared national credits." The program rates the quality of the credit, the loans and loan commitments extended by supervised institutions and their affiliates for lines of credit, loans, commitments in amounts that exceed $20 million per transaction and that are shared by three or more unaffiliated supervised issuers, or where portions of the original transaction are sold to two or more unaffiliated institutions, with each purchaser assuming a proportional share of the extended credit.
On October 8, this Wednesday's child, the SNC report, the assessed the outstanding credit as of December 31, 2007. The volume of extended credit rose by more than 22% from the previous report, reaching $2.8 trillion. The SNC employes two categories to identify changes in total portfolio credit quality. Classified credits are those issues that are "substandard," "doubtful," and "loss." Classified credits have well defined potential for loss including default. Criticized credit incudes all classified credits and includes credits that require "special mention." Special mention credits have potential weaknesses that may move them into the classified category if corrective actions are not initiated.
Wednesday's child reported that the volume of critcized credit issues expanded to $373 billion, or 13.4% of the credit portfolio as against 5% of the portfolio in the previous year. Classified credits measured 5.8% of the portfolio, growing from 3.1% the prior year.
The volume of classified credits doubled for US banks, foreign banks, and non-bank financial institutions. Although representing only 1/5 of the total shared credit portfolio, the non-bank institutions hold the largest share of the classified loans.
In the year of study, credit classified as substandard grew 122% and now exceeds the substandard amounts of the recession years 2002, 2003. "Doubtful" credit increased 373% and "loss" expand 231% although volumes in both categories are below those of the recession years.
Criticized credits (watch and worry) concentrated in services, commodities, and manufacturing sectors. Classified (cover your eyes, it's almost too late to worry) concentrated in service, manufacturing, financial, and real estate sectors.
Wednesday's children full of woe.
5. Stormy Monday
The shock wave from the Lehman Bros. assisted suicide was, as the song says, so wide can't get around it, so high can't get over it, so low you can't get under it. Ignorant of anything and everything that couldn't fit, that they couldn't learn on their flat screens, the Fed and the Treasury had relied on algorithms instead of homework. They powerpointed the world financial markets right into shutdown.
Simple homework would have told Hank and Ben that killing Lehman would be nearly cataclysmic for the tissue thin financial networks. Lehman Bros. alone accounted for 1 of every 8 trades conducted on the London Stock Exchange. After Lehman filed for protection under bankruptcy law, 97 administrators were put to work across the globe trying to unwind Lehman's trades, settle its accounts, organize claims for and against, and, in short, simply find the money.
On October 13, the Fed, again attempting to mitigate the damage from this action, announced that it would make take joint actions with the Bank of England, Bank of Japan, European Central Bank, and the Swiss National Bank in their 7, 28, and 84 day auctions of US dollars. Said the Fed, in what must be one of the most restrained confessions of desperation:
Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction. Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded.
The next day, Tuesday's are just as bad, the Fed announced that swap lines to the Bank of Japan will be increased to accommodate any amount required.
One week later, Tuesday's were still just as bad. The Fed announced the-soon-to-be-created special purpose vehicle, the Money Market Investor Funding Facility. The MMIFF, when and if ever functional was designed to directly purchase certificates of deposit and commercial paper, having maturities between 7 and 90 days, issued by "highly rated financial institutions." Total dollar limitations on purchases by the MMIFF were not identified.
As the month closed, Wednesday came around again. The Fed announced it was establishing currency swap lines with the central banks of Mexico, Brazil, Korea, and the Monetary Authority of Singapore. Each line measured $30 billion dollars.
Mexico, Brazil, Korea, Singapore, Japan, the ECB, Canada, Switzerland-- 1 year, 2 years ago these were part of the advancing wave of countries that would replace the United States in a "new epoch" with China, of course, at the head of the advance. These were some of the countries running trade surpluses with United States, supposedly accruing declining US currency and grossly overvalued US debt instruments, supposedly forced to "subsidize" the parasitic US economy, supposedly providing it with goods and services in exchange for paper crumbs from the imperial table.
In 2007, the US racked up a $3 billion deficit in merchandise trade with Brazil, a $12 billion deficit with the Republic of Korea, an $117 billion deficit with the European Union, an $87 billion deficit with Japan, $69 billion with Canada, $76 billion deficit with Mexico. Japan was the largest holder of US debt instruments. Russia, Brazil, Korea, had increased their foreign exchange reserves since the dark days of 1998 and 2000.
Why now was the Fed extending unlimited temporary currency swaps with these countries?
First and foremost, because the banks and financial institutions within those countries would not or could not extend credit to importers or exporters to facilitate shipment or delivery of goods. Banks and financial institutions wouldn't lend to each other. They would not place themselves on the hook for the full value of an export or import contract. When the central bank of Brazil reduced the reserve requirements for the country's banks in order to facilitate lending to business, the banks turned around and used the released funds to invest in high yield government securities.
But secondly, these central banks do not own the dollar reserves and those US debt instruments, just as in fact the US does not really run a trade deficit with most of those countries. The international trade of the US is essentially one of export and reimport. Imports from related parties, subsidiaries of US companies abroad, account for almost half of total US imports. Once trade is adjusted for this, the US trade deficit declines by 75 percent. For 2006, the adjust trade deficit declines to $226 billion and that amount is accounted for by the increased prices for a single imported commodity-- petroleum.
The US debt instruments held by international central banks are made up in part of just those revenues from US related party trades. The instruments represent in part the profits of those countries' domestic businesses trading with the US and other countries. The instruments represent in part the currency obtained and required for participating in the US security markets. The instruments represent the importance of US and Western European banks, of dollar denominated debt, in the economies of all countries. These instruments do not represent any latent economic power of Japan, Brazil, India, the EU, China, Canada, Mexico, or Russia over the United States. These instruments do not, in essence, belong to any of those countries. Those countries do not own the revenue stream that is tapped, and trapped, by the instruments.
Much has been made of Russia's stabilization fund, fed by revenue from oil and gas sales. Between 1999 and 2008, Russian pushed approximately $565 billion into that vehicle. What has not been publicized is that during that same period, Russia increased its indebtedness to US and Western European banks by $490 billion.
August, September, October, and November have made whole what was before only revealed in part by the declining exchange value of the dollar after 2003; by the importance of US financial markets to the profitability of the world's banks-- that the idiots, bumblers, fools at the head of the US financial system are in fact geniuses dancing on the world's grave. They are the best representatives their class, the US bourgeoisie, could ever have.
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