Savage Meltdown
Debt, Credit, and Financial Crisis
Part I: The Historical Antecedent
Debt, Credit, and Financial Crisis
Part I: The Historical Antecedent
Despite the silent yet obvious presence of Uncle Sam's Plunge Protection Team, as of 1PM EST today Uncle Sam's stock-market has fallen roughly 600 points in 3 days. While Bubble TV (i.e., CNBC) suggests that now is the time to invest, for months the serious mouthpieces of bourgeois economists - The Financial Times and The Wall Street Journal - have warned their readers about the risks posed by a credit crunch brought on by the collapse in the housing market. While these risks have only begun to make themselves manifest on the floors of the world's stock exchanges, their ramifications have shaken the confidence of the ruling order.
In a series of essays, Savage Justice will use mainstream sources as reference points to explore the current turbulence within the global economy. We begin today by examining the economic crash of 1929 to give an historical context to the current credit crunch. We will then analyze, in detail, the most volatile and dynamic economic phenomena that threaten global capitalism today: the housing 'bubble', hedge funds, CDOs, the carry trade, debt, and the money supply. Finally we will conclude with an investigation of these economic indices with respect to oil politics and the current geopolitical chessboard.
In 1929, a worldwide depression came about due in large part to a loss of faith in capitalist growth brought on by an unwillingness of international financiers to lend money as it had throughout the decade. Uncle Sam's Stock Market crashed that year when banks and brokerage houses began calling in massive quantities of the margin loans that had in large part fueled the stock market explosion of the 1920s. These loans required people to cover only 10% of a stock's value and banks would front the remaining 90%. This system 'conveniently' allowed people to parlay their 'profit' in the stock market into more stock, which in turn yielded more 'profit'.
And this worked... for a while.
Their 'profit,' however, existed only on paper. Nominally it belonged to the investor, but in reality the stock belonged to the banks themselves.
In the present context, we see the same phenomenon at work when people refinance their homes. Individuals get credit - an immediate infusion of cash - while the bank takes real ownership of the home. The system works magnificently until home values stop appreciating.
The same was true in the 1920s as stock values climbed higher and higher.
As it does today, corporate propaganda downplayed the inherent risks in this scheme, and like today many people came to believe that the commodity in which they owned only a tiny fraction was actually theirs. But in reality the bank owned it, as evidenced by their ability to call in the margin loans at any time for any reason.
And this is precisely what happened.
Goldman Sachs and other over-exposed banks grew increasingly wary of the structural weaknesses of an economic system sustained not by material reality but on speculation, debt, and a metaphysical belief in perpetual growth. The very banks initially responsible for easy credit became concerned about the risks posed by their exposure to such large quantities of suspect stocks so, to cover themselves, they began to call in the margin loans that most concretely threatened their financial viability.
This onset of margin calls by the market's foremost cheerleaders precipitated a snowball effect, causing stock values to fall quickly and investor confidence to wane markedly. To cover the margin calls, stockholders often tried to sell the stocks themselves. But there were few buyers. The increasing pace of the sell-off of unwanted stock caused their prices, already determined chiefly by the faith of stockholders, to come crashing down. This in turn led to additional margin calls.
In their haste to obtain the capital necessary to cover their debts, those who used 'house money' ran to the banks. But the banks, too, held mountains of paper that had, almost overnight, become ostensibly worthless. When the banks themselves were incapable of producing the necessary capital to cover the margin calls, many had to shut their doors and sell off their own assets at pennies on the dollar.
We do not mean to suggest that the situation in 1929 overlaps perfectly with our present circumstances. However, the fundamentals remain the same. At all times, capitalism must grow. And that engine of growth - today as yesterday - is credit.
Then, as now, we see the effects of a sudden refusal by major financial institutions to extend cheap credit to all comers.
In the corporate world, a tightening of the credit market has recently shown itself in the inability to finance major buyouts like the one involving DaimlerChrysler and the collapse of the BearStearns Hedge Fund due to the worthlessness of debt obligations (CDOs) packaged as investments. The explosion of bankruptcies and the apocalyptic claim that "we are experiencing home price depreciation almost like never before, with the exception of the Great Depression" made by people like Countrywide CEO Angelo Mozilo reveal a similar crisis slowly unfolding in the consumer credit market.
Two decades before the stock market crash of 1929, JP Morgan precipitated the economic crash of 1908 that ultimately gave rise to the birth of Uncle Sam's central bank, the Federal Reserve, by calling into question the ability of banks to cover their loans.
While material economic reality is determined exclusively by the available productive forces, the markets rely principally on an almost religious faith in their own capacity to grow. Without saying so, however, that 'faith' presupposes an endlessly available supply of credit. When the credit supply dries up, the market's growth engine ceases to operate, producing a crises in confidence that can lead to a global crash.
For a host of reasons and in a number of ways, we see the beginnings of such a phenomenon occurring today. In the coming days, we will explore them.
In a series of essays, Savage Justice will use mainstream sources as reference points to explore the current turbulence within the global economy. We begin today by examining the economic crash of 1929 to give an historical context to the current credit crunch. We will then analyze, in detail, the most volatile and dynamic economic phenomena that threaten global capitalism today: the housing 'bubble', hedge funds, CDOs, the carry trade, debt, and the money supply. Finally we will conclude with an investigation of these economic indices with respect to oil politics and the current geopolitical chessboard.
1929: Fake Money & Economic Collapse
In 1929, a worldwide depression came about due in large part to a loss of faith in capitalist growth brought on by an unwillingness of international financiers to lend money as it had throughout the decade. Uncle Sam's Stock Market crashed that year when banks and brokerage houses began calling in massive quantities of the margin loans that had in large part fueled the stock market explosion of the 1920s. These loans required people to cover only 10% of a stock's value and banks would front the remaining 90%. This system 'conveniently' allowed people to parlay their 'profit' in the stock market into more stock, which in turn yielded more 'profit'.
And this worked... for a while.
Their 'profit,' however, existed only on paper. Nominally it belonged to the investor, but in reality the stock belonged to the banks themselves.
In the present context, we see the same phenomenon at work when people refinance their homes. Individuals get credit - an immediate infusion of cash - while the bank takes real ownership of the home. The system works magnificently until home values stop appreciating.
The same was true in the 1920s as stock values climbed higher and higher.
As it does today, corporate propaganda downplayed the inherent risks in this scheme, and like today many people came to believe that the commodity in which they owned only a tiny fraction was actually theirs. But in reality the bank owned it, as evidenced by their ability to call in the margin loans at any time for any reason.
And this is precisely what happened.
Goldman Sachs and other over-exposed banks grew increasingly wary of the structural weaknesses of an economic system sustained not by material reality but on speculation, debt, and a metaphysical belief in perpetual growth. The very banks initially responsible for easy credit became concerned about the risks posed by their exposure to such large quantities of suspect stocks so, to cover themselves, they began to call in the margin loans that most concretely threatened their financial viability.
This onset of margin calls by the market's foremost cheerleaders precipitated a snowball effect, causing stock values to fall quickly and investor confidence to wane markedly. To cover the margin calls, stockholders often tried to sell the stocks themselves. But there were few buyers. The increasing pace of the sell-off of unwanted stock caused their prices, already determined chiefly by the faith of stockholders, to come crashing down. This in turn led to additional margin calls.
In their haste to obtain the capital necessary to cover their debts, those who used 'house money' ran to the banks. But the banks, too, held mountains of paper that had, almost overnight, become ostensibly worthless. When the banks themselves were incapable of producing the necessary capital to cover the margin calls, many had to shut their doors and sell off their own assets at pennies on the dollar.
We do not mean to suggest that the situation in 1929 overlaps perfectly with our present circumstances. However, the fundamentals remain the same. At all times, capitalism must grow. And that engine of growth - today as yesterday - is credit.
Then, as now, we see the effects of a sudden refusal by major financial institutions to extend cheap credit to all comers.
In the corporate world, a tightening of the credit market has recently shown itself in the inability to finance major buyouts like the one involving DaimlerChrysler and the collapse of the BearStearns Hedge Fund due to the worthlessness of debt obligations (CDOs) packaged as investments. The explosion of bankruptcies and the apocalyptic claim that "we are experiencing home price depreciation almost like never before, with the exception of the Great Depression" made by people like Countrywide CEO Angelo Mozilo reveal a similar crisis slowly unfolding in the consumer credit market.
Two decades before the stock market crash of 1929, JP Morgan precipitated the economic crash of 1908 that ultimately gave rise to the birth of Uncle Sam's central bank, the Federal Reserve, by calling into question the ability of banks to cover their loans.
While material economic reality is determined exclusively by the available productive forces, the markets rely principally on an almost religious faith in their own capacity to grow. Without saying so, however, that 'faith' presupposes an endlessly available supply of credit. When the credit supply dries up, the market's growth engine ceases to operate, producing a crises in confidence that can lead to a global crash.
For a host of reasons and in a number of ways, we see the beginnings of such a phenomenon occurring today. In the coming days, we will explore them.
Labels: Capital, Class Warfare, Savage Meltdown
posted by John Brown at 27.7.07
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