The interesting part of the ongoing global financial crisis is an eye-opener for the peoples of the planet: no one knows what exactly is going on. That is, where, why and what went wrong. There are some explanations about how it started (sub-prime) and why it is continuing (evaporation of liquidity); but they are not satisfactory explanations: (“The explanations that have been given for the crisis and its bailout are opaque”: Paul Craig Roberts, When Greed is Rewarded: Government of Thieves, WSWS). What makes the explanations dissatisfactory is that there is no sound suggestion about what is to be done. Further, the commentators – including economic experts and financial wizards – are not able to suggest how long the crisis will last or how deep the malaise is. Their ignorance of the true nature of the crisis is betrayed by the fact that no one is able to suggest what sort of corrective measures are required to plug the holes for the future, and what the ultimate consequences will be for the ordinary man – who, the wizards tell us, will have to pay up for his dear skin’s sake, even if the crime is not his. (Gulf investors might lose in billions). The bail-out scheme was so unpopular with the tax-payers that there were threats of imposing martial law in the USA, if the bill had failed in Congress. It is being said about the bail-out measures that the “estimated cost to the American people has risen to $2.25 trillion.” (Barry Grey, “US bank losses wipe out years of paper profits” WSWS, 18th Oct. 2008). If the things go on in the US the way they have been going since the start of the century, the country is not far from martial law, anyway. (Is it not realization of the dire conditions the country has been passing through that led the neo-cons to take away several socio-political rights from the Americans, and press them into wars?)
The main felon of the present crisis has been identified: USa. Yes, with its “a” in the lower case, because that is what USA is likely to be at the end of the crisis: i.e., if there is any end to it; though very likely not, since cycles do not end anywhere. It will be cycle after cycle. Like September 2001, about which it was said – truly – that the world will never be the same thereafter, the financial events of the September of 2008 also promise that the world will never be the same hereafter. (“The days of American financial supremacy are over”: German Minister of Finance). September 2008: Yes, a fine anniversary for the Americans and a subtle reminder that mischief generated goes around to ultimately return to the perpetrator. It is going to be USa in several senses: economic, social, political, and military. (“A study [called], Recent Trends in Infant Mortality in the United States, found that at least 28 other countries now have lower death rates for infants in the first year of life”: Patrick O’Connor, WSWS, 18th Oct. 08). Its super-power status is shaken too, although it is not down and out. What exactly will be the situation will depend on several factors, the outcome of the present financial crisis being one; and this one itself will lead to be a bitterly long winter.
However, since the full fallout of the present turmoil is going to be realized in 5-6 years, if not more, the situation will remain unclear and the people’s confidence in USA’s economy will remain shaky. And, this is the worst part of the crisis so far as US is concerned. With a cloud of doubt, skepticism, lack of confidence and trust settled over USA, massive investments of the sort noticed during the last 2-3 decades, will remain vacationing (perhaps in China). It was not so much the technological lead of USA, but huge foreign investment in its trusted markets, that gave it the leading economic status. With that came the social, political and military supremacy.
How did the crisis start? Why did it happen at all? In the words of a financial observer:
“The recent market instability was caused by many factors, chief among them a dramatic change in the ability to create new lines of credit, which dried up the flow of money and slowed new economic growth and the buying and selling of assets. This hurt individuals, businesses, and financial institutions hard, and many financial institutions were left holding mortgage backed assets that had dropped precipitously in value and weren’t bringing in the amount of money needed to pay for the loans. This dried up their reserve cash and restricted their credit and ability to make new loans… The whole thing was one big scheme. Everything was great when houses were selling like hot cakes and their values went up every month. Lenders made it easier to borrow money, and the higher demand drove up house values. Higher house values means that lenders could lend out even bigger mortgages, and it also gave lenders some protection against foreclosures. All of this translates into more money for the lenders, insurers, and investors… it went on until the borrowers were not able to pay the mortgage… Unfortunately, many borrowers got slammed when their adjustable mortgage finally adjusted. When too many of them couldn’t afford to make their payments, it causes these lenders to suffer from liquidity issue and to sit on more foreclosures than they could sell. Mortgage-backed securities became more risky and worth less, causing investment firms like Lehman Brothers to suffer. Moreover, insurers like AIG who insured these bad mortgages also got in trouble.”
“There were other factors as well, including the cheap credit which made it too easy for people to buy houses or make other investments based on pure speculation. Cheap credit created more money in the system and people wanted to spend that money. Unfortunately, people wanted to buy the same thing, which increased demand and caused inflation. Private equity firms leveraged billions of dollars of debt to purchase companies and created hundreds of billions of dollars in wealth by simply shuffling paper, but not creating anything of value. In more recent months, speculation on oil prices and higher unemployment further increased inflation.”
To put it differently, and in the words of another economic analyst, the markets fell:
“Because all along the financial chain — from bankers to brokers to borrowers to investors — people deluded themselves. They thought they could throw out the old rules of money. They thought they could cut corners to make a quick buck. In short: they were trying to get rich quickly instead of to get rich slowly.”
According to us however, the above needs some correction. It was not only the “get rich quickly” infection that led to tossing rules of the game to the winds. It was the deep realization in the USA specifically, that the days of “get rich slowly” used to be in historical times. The all-pervasive Chinese products throughout the nook and corner of the country, their amazing economic performance, and, in contrast the incomparable indolent performance of the American industries, its military adventures draining out the Treasury, the mounting debt (a legacy their great-grandchildren will inherit), and, finally, the incompetence and dishonesty of their politicians (who serve the rich, who help them to power) – were the factors that were driving financial institutions, lenders, borrowers, investors and common man to a soul-shattering nightmare. So, everyone said, “Let’s get rich quick.” The economic adage “get rich slowly” has lost its appeal because the people’s fear is that, “maybe, tomorrow does not belong to us.”
Greed is a subjective factor to explain what led to this present turmoil. In practical terms, house mortgage, and particularly sub-prime failure is being cited as what triggered today’s crisis. A mortgage granted to a borrower is considered sub-prime. It is camouflage to say in reality that it is loaning out by the lenders (financial institutions) to a party with a “less-than-perfect credit report.” In yet simpler terms, it is to lend to someone who is clearly known as one who will not be able to pay back. This is where the greed story fits. The housing industry knew, especially in USA and UK that the man in the street had “some” money in his pocket, although not enough to take a property on mortgage. That “some sum” was the target. So, devious schemes were worked out, involving a major bank, a sub-prime bank, insurance companies, real estate agents, and several other ancillary institutions, by which the aim was to convince the common man who held some liquidity that he could still own a house, if not for living, then, for re-sale. Millions fell victim. They were aware that they did not have the financial strength to pay the mortgage amounts. But they were made to believe that the rules had been so bent, that they, the main banks, the sub-prime banks, the client, the real estate agents, and anyone else involved – could somehow make some money out of the deal. But since it was all a make-to-believe device, it did not work. Millions (some 5 million in USA alone) who were unable to pay the monthly mortgage bills, had to, after they had paid several installments, surrender the properties: broke in finance, broken of hearts, broken of hearths. Thus, that “some” money that they had been able to save over the years, or could borrow from the banks, was cleverly transferred from their accounts into the accounts of the operators. (In our times, if you are not careful, they can steal the kohl of your eyes).
A question is often asked. What happened to all the money, those hundreds of billions? The answer comes in several-fold details. Firstly, the amounts that were drawn by anyone involved in mortgage and businesses of similar nature were easy premiums used for buying luxury items. It came easy, went away easy. With the help of the inflated prices, the earnings of the executive officers of the financial institutions skyrocketed. As Barry Grey remarks: “The Financial Times reported last month that compensation for major executives of the seven largest US banks totaled $95 billion over the past three years, even as the banks recorded $500 billion in losses.” (The losses were of course announced after the earnings had been pocketed).
Secondly, we should never forget that there is no real money in the US markets. It is virtual money. No, not even paper money. It is plain and simple virtual money. Account books show electronic figures. But where is the actual money? These are only figures. Well, there was never any cash against those figures. “In an act of supreme idiocy” (Eric S Margolis: The Disaster Prone President, Khaleej Times, Oct. 13th 2008), “the US and Exchange Commission… allowed banks to lend out $30 for every $1 they had in reserves…” People ask, “Where did all the money go?” The answer is, “There was never any money to be taken out in bags and boxes.” The virtual money created a bubble economy (which has burst).
Thirdly, the property prices were artificially raised high. So, even the imaginary money was over-valued to the tunes of billions. This was a bubble too which had to burst. Bubble economy created bubble profits: Richard Sylla, an economist and financial historian at the Stern School of Business at New York University, said, “The (bank) losses now are showing that in some sense the profits reported in earlier years were not real, because they were taking too much risk then.” So, when you ask, “Where has the money gone,” the answer is, “what money you are talking about?” (Earlier you deposited so much gold against so much currency that a government wished to print. The US abolished that rule).
Hundreds of millions of people who suffered American aggression, among whom not only Muslims (one million widows in Iraq alone), but others in the ravaged Central and South American countries, and indeed millions within Europe and US itself – but who did not invest in American financial institutions – are actually delighted at the events of the financial meltdown. Every new day brings them good news. They hope, pray, and believe in the collapse of America. But, on our part we do not see that as happening, at least not immediately. Nor, is the American economy heading for a complete collapse. The system is too large, pervading, entangled, and, most importantly, wheeled by the world economy of $47 trillion, to collapse even in a few years. But the signs are definitely downward and as definitely irreversible.
We said at the beginning that the failure to know what exactly is going on is an eye-opener. Why? Well, it should lead humankind to the natural conclusions that the entire system of finance based on interest-bearing transactions through banks and financial institutions (such as the Insurance Companies) is inlaid with unknown dangers. Add to it the woes of virtual money. (Islam insists on cash deals). The world economic system needs an alternative. In the present system you do not know what exactly is going on, and so, where it will lead to: the banks rob the common man through interests – rob and rob, at higher and higher rates – until he collapses. When individuals collapse, economic activities that they were engaged in, collapse. Ultimately the economy collapses. The governments have to then bail out by injecting freshly printed money. Some money comes through borrowings on interest. (China has so far lent US 1.5 trillion dollars). With virtual money down into the economy, the cycle re-starts with the hidden hand of the Devil tempting the humans into financial black holes; which is what American economy is where now. By the latest count, it owes the rest of the world figures that, according to a BBC news flash, cash counting machines cannot show in digits: $10, 000, 000, 000, 000, 000. (10 trillion. Some say it is 12 trillion). It can be safely said that the clothes that every American wears are from borrowed money!
If the above can be related to the hidden hand of the Devil, there is another Hidden Hand working, viz., the Hidden Hand of God. “While Bush and Cheney were obsessed with war against Muslims,” writes Margolis, “they ran the US economy onto the rocks.” Although we do not know for sure whether the present economic crisis can be linked to aggression against Iraq and Afghanistan on the one hand, and, on the other hand to preventing charities all over the world, yet we have justification in saying that war, murder, mayhem and destruction wrought on hapless peoples had to earn Divine wrath. An American acknowledges:
“Many Christians are adamant in their support of the war, in spite of the long-established facts that the American people were simply lied to in going over there… If one supports the war, one is also inadvertently supporting the lies that made it possible. It’s ironic that Christians, among the strongest supporters of the war, have supported an administration of liars.” (Kyle West, “Why So Many Christians Support the Iraq War,” http://blogcritics.org /archives/2008/10/17/2244282.php, Oct. 17, 2008).
To say that the present turmoil need not be linked to wars and destructions, is to be unkindly to the Americans. It would amount to assuring them that worse days are ahead of them. This is because if this is not the punishment for their crimes of aggression, then another has to come. Let them choose between the two.