Gordon Brown is being feted as the “master of the universe”. Stock markets yesterday were delirious with joy, making record-breaking, stratospheric leaps yesterday as governments around the world bailed out the banks. Right-wing Tory newspapers joined in unalloyed praise for the bankers’ government.
Is the financial storm over then? Er, no actually.
So far, sums approaching £2,000 billion (= £2 trillion) of taxpayers’ money has been committed by the governments of America, the UK and Europe to the bankers’ bail-out. Central banks are pouring “unlimited” amounts of US dollars into the global financial system in what will prove yet another failed attempt to prevent the mother of all meltdowns.
How can we be so sure?
Yes, £2 trillion sounds a lot, but the collecting bucket is effectively bottomless. This unimaginably large sum of money is dwarfed by a series of other giant hot-air balloons of fantasy finance queuing to burst in the background whilst Brown’s Punch to the bankers’ Judy struts temporarily in the foreground.
Among the balloons is the market in credit default swaps (CDS), a way of trading in risk. It began life in the mid-1990s and, largely because it has always been unregulated, and appeared to offer the possibility of reducing, or at least sharing risk, it attracted a great deal of interest.
The simple version of the story goes that a swap enables an organisation making a loan to a customer to insure against the customer defaulting on payments by establishing a private contract with a third party, paying a kind of insurance premium. It can’t be called “insurance” because that would make it liable to regulation. You wouldn’t want to call it “protection” either. People might think you’re a gangster.
The market grew very fast. Most major organisations are now caught up with each other in a lacework of interconnected contracts. Ok, so how much are we talking about? It’s difficult to be precise, because all the trading is in unregulated contracts hidden from public view. Nobody really knows. Data from the International Swaps and Derivatives Association (!) show that at the end of June, the CDS market had a notional value of $54 trillion. That's the same as the planet's 2007 GDP and nearly four times the value of all shares traded on the New York Stock Exchange. Other estimates puts the figure nearer $65 trillion. So what is the chance of this particular balloon bursting? It already did. On Friday, Moneyweek put it like this:
“When one side of a trade defaults, it starts a chain reaction that raises the risk of others losing money. That's called 'counterparty risk', and is partly what has spooked investors into selling off assets and lenders into curbing credit. The collapse of Lehman Brothers has had a particularly big impact. Lehman wrote more than $700bn-worth of CDS. Now it's gone bust, investors who had taken out these CDS have been left without the insurance, so they're having to buy more, even though prices are now rising because of the general turmoil.”
Initial results of the auction to determine the value of CDS on Lehman Brothers showed banks, hedge funds and other sellers of protection facing losses in the area of 90.25% of the insurance they sold.
The CDS market is only 10% of the global derivatives market, which covers all contracts taken out to minimise risk. This is the mysterious, unregulated world of futures, forwards, options and swaps. According to the Bank for International Settlements, the notional amounts outstanding at the end of 2007 totalled about $550 trillion on contracts privately traded between parties. As the global recession deepens, the number of parties unable to fulfil contracts will grow rapidly.
Is the storm over? It’s only just beginning to blow!
Gerry Gold
Economics editor
For revolutionary solutions to create a sustainable, not-for-profit economy in place of global capital alongside a real democracy based on People’s Assemblies. Visit our web site at www.aworldtowin.net
Showing posts with label Banks ball-out. Show all posts
Showing posts with label Banks ball-out. Show all posts
Tuesday, October 14, 2008
Monday, October 13, 2008
'The worst is yet to come'
The emergency state bail-out today of Britain’s major banks to the tune of £37 billion marks the end of an era and is the clearest indication that the recession that prompted the global financial crash is already turning into economic depression.
Shortly before he became prime minister, in July 2007, Gordon Brown told bankers that the previous ten years has been a period “that history will record as the beginning of a new golden age for the City of London”. He praised bankers for being “pioneers of free trade” with a “deep and abiding belief in open markets”.
How times have changed! Over the weekend, the very same bankers were forced to go cap in hand to the state to try and stave off total collapse. But boosting banks’ capital assets with taxpayers’ billions will not save the banks from the globally economic tsunami that is building with each passing day. As recession turns to depression, the indebtedness of the banks will grow exponentially as ordinary people can’t pay their debts and businesses go broke.
What is ending is the era of corporate-driven, debt-fuelled globalisation. The consequence is not some slowdown but the destruction of large portions of capital created in this period, leading to a cycle of mass unemployment, sharp reductions in consumption, even more job losses and the wiping out of lenders when people/corporations can’t service their debts.
As one commentator observed: “Usually, a banking crisis follows some form of economic crisis: lenders are hit by wave after wave of customer bankruptcies until they themselves cannot take any more and topple over. This time, the banking collapse has preceded the recession… Instead, last week’s stock market rout marked the point when the usual direction of cause and effect was reversed: now it is the real economy that is expected to take its cue from the markets.”
The indications are all present. A slowing world economy has forced down the price of oil, while mining companies are in difficulties because China is importing less. General Motors, once the world’s largest carmaker, is one of several colossal companies on the verge of bankruptcy. It has already temporarily shut down its European factories to preserve its precious cash reserves.
In Britain, Keith McGregor, restructuring partner at Ernst & Young, said: "UK profit warnings continued to come thick and fast during the third quarter, crossing over the 100 mark once again. It is deeply concerning to think that the worst is almost certainly yet to come for UK corporates." It is predicted that 2 million people could lose their jobs by the end of the year.
Homelessness charity Shelter predicted last week that there will be around 45,000 repossessions this year, with one in 150 homeowners already three months or more behind on their mortgage repayments. The number of court orders for mortgage repossessions is 24% higher than last year. The number of homes being sold in Britain has fallen to its lowest level since 1959 in August. The new house-building sector has collapsed, with tens of thousands being laid off.
Under these conditions, for the state to take on the debts of the banks is not only a massive transfer of wealth to the private sector – it also focuses future risk on itself. The next stage could be a currency crisis as government debt spirals out of control. Britain could then easily face its own “Iceland moment” and state bankruptcy. As a result of today’s actions, national public debt is likely to exceed total national income. Tax increases and spending cuts are on the immediate horizon.
The crash of banks and other financial institutions is at the same time the failure of the capitalist economic system as a whole, whose thirst for profit-driven expansion at any cost has brought humanity to this point of disaster and catastrophe. This the fundamental issue we will address at our Stand Up for Your Rights festival this Saturday.
Paul Feldman
AWTW communications editor
Shortly before he became prime minister, in July 2007, Gordon Brown told bankers that the previous ten years has been a period “that history will record as the beginning of a new golden age for the City of London”. He praised bankers for being “pioneers of free trade” with a “deep and abiding belief in open markets”.
How times have changed! Over the weekend, the very same bankers were forced to go cap in hand to the state to try and stave off total collapse. But boosting banks’ capital assets with taxpayers’ billions will not save the banks from the globally economic tsunami that is building with each passing day. As recession turns to depression, the indebtedness of the banks will grow exponentially as ordinary people can’t pay their debts and businesses go broke.
What is ending is the era of corporate-driven, debt-fuelled globalisation. The consequence is not some slowdown but the destruction of large portions of capital created in this period, leading to a cycle of mass unemployment, sharp reductions in consumption, even more job losses and the wiping out of lenders when people/corporations can’t service their debts.
As one commentator observed: “Usually, a banking crisis follows some form of economic crisis: lenders are hit by wave after wave of customer bankruptcies until they themselves cannot take any more and topple over. This time, the banking collapse has preceded the recession… Instead, last week’s stock market rout marked the point when the usual direction of cause and effect was reversed: now it is the real economy that is expected to take its cue from the markets.”
The indications are all present. A slowing world economy has forced down the price of oil, while mining companies are in difficulties because China is importing less. General Motors, once the world’s largest carmaker, is one of several colossal companies on the verge of bankruptcy. It has already temporarily shut down its European factories to preserve its precious cash reserves.
In Britain, Keith McGregor, restructuring partner at Ernst & Young, said: "UK profit warnings continued to come thick and fast during the third quarter, crossing over the 100 mark once again. It is deeply concerning to think that the worst is almost certainly yet to come for UK corporates." It is predicted that 2 million people could lose their jobs by the end of the year.
Homelessness charity Shelter predicted last week that there will be around 45,000 repossessions this year, with one in 150 homeowners already three months or more behind on their mortgage repayments. The number of court orders for mortgage repossessions is 24% higher than last year. The number of homes being sold in Britain has fallen to its lowest level since 1959 in August. The new house-building sector has collapsed, with tens of thousands being laid off.
Under these conditions, for the state to take on the debts of the banks is not only a massive transfer of wealth to the private sector – it also focuses future risk on itself. The next stage could be a currency crisis as government debt spirals out of control. Britain could then easily face its own “Iceland moment” and state bankruptcy. As a result of today’s actions, national public debt is likely to exceed total national income. Tax increases and spending cuts are on the immediate horizon.
The crash of banks and other financial institutions is at the same time the failure of the capitalist economic system as a whole, whose thirst for profit-driven expansion at any cost has brought humanity to this point of disaster and catastrophe. This the fundamental issue we will address at our Stand Up for Your Rights festival this Saturday.
Paul Feldman
AWTW communications editor
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