Sunday, March 16, 2008

Virtual Paper, Part 2

The Long and the Short of It

"The short-term outlook is grim. The capital markets are in total disarray."

The short and long of it boils down to this: For capital, production is useless; capitalism is the production of uselessness. Use only exists as a pack animal, a vector, a mule for the appropriation and realization of surplus value. That realization occurs, when it occurs, in the markets, in exchange, in the exchange value not of any particular commodity, but in the exchange values of all commodities. "Circulation," writes Marx, "sweats money from every pore." And the capital markets are supposed to be the biggest steam bath of them all.

But given that production has no use in, of, or for social need, and only in private exchange, the purpose of capital can only be in the reproduction of the terms of exchange, in the expansion of the markets; in the reproduction of the instruments of production as private property always and ever seeking its "value" in the market, and the reproduction of labor as wage-labor, yielding that value, that packet of time as money, beyond its own maintenance, yielding surplus value.

And so there we have it, the long and the short of it: Production has no value except as it augments expanded reproduction; exchange has not value except as it augments expanded exchange; and finance has no value except as it augments refinancing.

With their Structured Investment Vehicles, their Asset Backed Commercial Paper, their Collateralized Debt Obligations, their Collateralized Mortgage Obligations, their Credit Default Swaps, their Repurchase Obligations (REPOS), with all that and more, the bourgeoisie, true to themselves, financed to engage in refinancing. Circulation was sweating money; and the fevered brow, the damp hands, the soaked-through shirts, dripping foreheads were exuding the liquid and the liquidity of this book-entry life.

Except...... except the bourgeoisie were driven, and drove themselves, to borrow in the short-term, utilizing obligations with defined terms, in maturity times and values, to finance and refinance expanded purchases of long-term obligations, with extended maturity times and "mark to market" variable values.

The rates of the profit in the short-term available through this process are inherently thin. In fact, profit itself is not used to measure, to finance the reproduction of these "borrow short, purchase long" transactions. Cash flow, the volume and rate of payment prescribed in the long-term securities such as mortgages, at the base of this pyramid becomes the crucial factor in refinancing existing loan agreements, securing new loan agreements, and squaring the circle all over again.

Leverage, the assumption of debt to expand the potential pools of payment, to bring the rivulets of cash flow together into a current strong and fast enough to keep the wolf from the door is the vital process to these circuits of capital. And leverage, the assumption of debt, changes everything.

When there is disturbance in the cash flow, in the rate or amounts of underlying repayments, the processes of circulation is disrupted, and the sweat from every pore that was so sweet to the purveyors of virtual paper turns cold. Then leverage, meeting the demands of leverage, turns liquidity into liquidation. Then leverage transforms value into devaluation. Leverage changes assets into debits, deficits, burdens.

When the reduced rates of profit inherent in capitalist expansion yield less profit available for reallocation to the banks and bankers, brokers and traders, through their marvelous markets, circulation seizes up in the imperfect reflection of the problem at the heart of capitalist production.

When that happens, then leverage identifies, makes identical, capitalist reproduction and the destruction of all assets, all prospects for social development, and all this to preserve the uselessness of capitalist production. In Baghdad. In New Orleans. And on Wall Street.

And that is the real long and short of it.

S. Artesian 031708

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Next: Virtual Paper 3, Origins and Reappearance

Saturday, March 15, 2008

Virtual Paper, Part 1

The markets are dead.-- credit strategist, Lehman Brothers.

1.(We're not that lucky)

Woozy and boozy in the waning days of the second four year term of the idiot son of an idiot father, that is to say George W. Bush as sired by Ronald Reagan, US capitalism staggered across the stage of global finance, looking and sounding like Britney Spears at the MTV music awards-- bumping into everything, knocking over food and drink, spraying blood and filth on those conga-lined up to feast, and swap more than spit, at the pig's trough called leverage. The biggest of the big bulls in the China shop, bulked up on steroids, growth hormones, and off balance sheet investment "vehicles," had changed, but not overnight, into a regular bear on the Chinese shopping network, and the Chinese shop floor.

Reeling under its weightless cargo of strips, tips, tranches, zeros, coupons, CDSs, CMOs, CDOs, CLOs, ABCPs, ARMs, SIVs -- in one word junk, but junk packaged in an infinite variety of ways, the bankers carioced their way through that wacked out Minny Mouseketeer's repertoire, beginning and ending the show with their favorite lyric: "Oops, I did it again."

Juiced and jacked, the whole gang, Merrill and Lynch, Bear and Stearns, Morgan and Chase, Citi and Corp, Northern Rock, CIBC and RBS and UBS and Credit Suisse and BNP and Paribas and Commerzbank had proclaimed themselves masters of the Enron universe, earning that right by their conjugal visits paid to Andy Fastow.

"Give us a place to sit, a keyboard, and a broadband connection, and we'll move the earth," they, these new asset-backed Archimedes had proclaimed just before falling flat on their faces; just before bouncing up again like a dead cat.

2. Appearance of the Problem

(Size does matter)

Headlines were made in June 2007 when hedge funds organized and spun off by Bear Stearns reported massive trading losses on their portfolios of mortgage backed securities. The headlines, however, like the hedge funds, were days late and dollars short.

In September 2006, US banks were reporting a marked slowdown in demand for housing loans. The reports were, as reports often are, less than thorough in describing the significance of the slowdown. Residential stakes account for one-third of US banks' nine trillion dollars in assets.

The US mortgage market, valued in 2006 at approximately 11 trillion dollars, containing 1 trillion dollars worth of sub-prime mortgages, had been tapped to collateralize the issuance of 2 trillion dollars worth of securities. The bankers, commercial and investment, ever cognizant of the need, not for compliance with any standards or requirements, but rather for the appearance of compliance, moved these financial instruments, these "conduits," these "vehicles" off their balance sheets into "arms length," "stand alone" status, thus preserving, with a wink and a nod to the heroes of leverages past, Milken, Boesky, Regan, Keating, Knapp, Leeson, Lay, Skilling, and of course, St. Andrew the Martyr, their "compliance" with Tier 1 capital requirements.

Standards, requirements, money, capital requires all these to function, to form a "base" for exchange, and just as it does with money, capitalism succeeds in debasing all. Debasement of financial instruments is part of the devaluation of all values inherent, necessary to the maintenance and advancement of decrepit capitalism.

March 15, 2008 S.Artesian

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