The Economy Sucks - Catching Up with Bear Stearns

Watching the news on the Bear Stearns sale and its aftermath, has got me thinking about a depression. I doubt I am the only one. Today's New York Times and the Scottish Sunday Herald and The London Times have articles on the subject.

The New York Times published What Created This Monster? which is very long and, frankly, pretty tepid compared with The Sunday Herald. I know most categorize The New York Times as liberal but remember that it is the other paper of the New York moneyed class. The following is from The Times:

Bear Stearns’s vast portfolio of these instruments was among the main reasons for the bank’s collapse, but derivatives are buried in the accounts of just about every Wall Street firm, as well as major commercial banks like Citigroup and JPMorgan Chase. What’s more, these exotic investments have been exported all over the globe, causing losses in places as distant from Wall Street as a small Norwegian town north of the Arctic Circle.

With Bear Stearns forced into a sale and the entire financial system still under the threat of further losses, Wall Street executives, regulators and politicians are scrambling to figure out just what went wrong and how it can be fixed.

But because the forces that have collided in recent weeks were set in motion long before the subprime mortgage mess first made news last year, solutions won’t come easily or quickly, analysts say.

In fact, while home loans to risky borrowers were among the first to go bad, analysts say that the crisis didn’t stem from the housing market alone and that it certainly won’t end there.

“The problem has been spreading its wings and taking in markets very far afield from mortgages,” says Alan S. Blinder, former vice chairman of the Federal Reserve and now an economics professor at Princeton. “It’s a failure at a lot of levels. It’s hard to find a piece of the system that actually worked well in the lead-up to the bust.”

The Sunday Herald published the much shorter, THE RED MENACE with the subheadline of "The world's markets gambled on financial alchemy. They lost."

The irony, though, is that this time it isn't the working classes who are demanding that the state should take over, but the banks. The capitalists are throwing themselves on the mercy of government, demanding subsidies and protection from the capitalist market - it's socialism for the banks. Hedge fund managers of the world unite, you have nothing to lose but your bonuses.

On Friday, the heads of the big five British banks demanded - and got - another £5 billion in "emergency liquidity" from the Bank of England to add to the £5bn they received earlier in the week. But like militant shop stewards they complained it wasn't enough. "Look how much the banks are getting in Europe and America," they whinged. Hundreds of billions of dollars and euros are being thrown at banks in an attempt to save them from themselves.

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The quaint idea that loss-making companies should fail, to ensure the health and vitality of the capitalist system, has quietly been discarded. The banks, we are told, are "too big to fail", which means that they have to be taken into public ownership - like Northern Rock - or have their debts underwritten by government, like Bear Stearns, which comes to much the same thing. The central banks are also cutting interest rates to try to boost banking profits, and this is making currencies such as the dollar increasingly unstable.

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Moreover, with globalisation, trillions of dollars have been washing around the world markets looking for a home. This has created a monster: the market in financial derivatives; a Pandora's box of inscrutable financial instruments governed by supposedly failsafe mathematical formulae. Collateralised debt obligations - implicated in the subprime mortgage crisis - are at least rooted in nominal house prices, but they have been detached from the actual mortgages and sold as commodities in the securities market.

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Instead of just propping up bankrupt banks, the governments should be democratising them - mobilising their assets to stimulate the productive economy, repairing infrastructure, researching and developing new markets, and refitting western economies to combat climate change. It needs a kind of green New Deal - an update on Roosevelt's imaginative policies of the 1930s fought tooth and nail by the banks.

This paragraph comes from the same Times article metnioned above:

But broad new rules aimed at systemic risk are likely to face strong opposition from both the industry and others traditionally wary of regulation. Analysts expect new, smaller-bore laws aimed at the mortgage industry in particular, which was the first sector hit in the squeeze and which affected Wall Street millionaires as well as millions of ordinary American homeowners.

The London Times has an article with the rather cheerful (not) headline of America gets depressed by thoughts of 1929 revisited.

Could it happen again? The point man in the current crisis, Ben Bernanke, chairman of the Federal Reserve, also happens to be an expert on the era. The big mistake the authorities made in the late 1920s and early 1930s, he believes, was to allow so many banks to fail, guaranteeing a slump in the wider economy. This was compounded by other errors, including protectionism.

Bernanke’s task now is to ensure that banks are topped up with enough liquidity to keep lending. The Bank of England has come round to the same view.

By the way, anyone thinking of voting for McCain because the Democratic candidate is a woman or bi-racial might want to remember the Arizona Senator admission he knows nothing about economics.