Get set

The panic in global financial markets has sparked an unprecedented rush into safe US Treasury securities, driving yields on short-term government notes down to almost zero.(...) The low yields reflect a surge in demand for these instruments, seen as the safest in the world during times of turmoil.(...) Analysts say the fear factor has pushed up demand for Treasuries, since investors are virtually certain the US government will not default.(...) Bob Eisenbeis, analyst at Cumberland Advisors, said the unprecedented low yields are a sign of "dysfunction" in markets. Eisenbeis said US municipal bonds are paying upwards of 6.0 percent tax-free and corporate bonds even more, but that fears of default and a lack of knowledge about underlying bond quality have led investors to shun these alternatives. One reason for the surge in demand for Treasuries, said Eisenbeis, is the Federal Reserve's decision to flood financial markets with liquidity including through other central banks. Many central banks and commercial banks are reluctant to use this cash for traditional lending, and are buying Treasuries to ride out the storm, Eisenbeis added. A big question for the market is whether the Treasury market has become a bubble that will burst. Although the low rates allow Washington to borrow money cheaply, Eisenbeis said such a scenario could be perilous for the economy and the dollar.(...) "There are lots of reasons to believe this Treasury rally is unsustainable, and that a day of reckoning is fast approaching," he said. "When you have this huge flood of liquidity into the marketplace, that can't last forever," he said. A bursting of this bubble could mean a rush out of Treasuries, forcing the government to pay higher rates on an unprecedented amount of debt. (...) Mike Larson, an analyst at Weiss Research, says the long-term bond market could be "the biggest bubble of all," worse than the dot-com and real estate bubbles.(...)"Treasury bonds almost never move this far, this fast. And interest rates, which move in the opposite direction of bond prices, almost never fall this far, this fast," Larson said. (emphasis mine) AFP

David Seaton's News Links
One of the most interesting things about the decline of the American empire is that not only are the broad outlines familiar to most of the world's educated inhabitants, but even many of the details are too: details that in any other culture would be private "family" stories. That way we can use the English language and the American situation as a universal parable or mythology when broadly discussing the human condition.

Some readers of mine ask me for Spanish stories and, when I can, I am happy to oblige. The problem with doing this in an English language blog is having to provide masses of context about situations that most readers are not too familiar with.

However today there is a Spanish story that most Americans can appreciate.

As some of you may already know Spain's real estate bubble is one of the few that can rival America's and it is also deflating spectacularly.

Here is an item from an English language review of the Spanish press about Spain's second largest real estate developer, Martinsa-Fadesa:

El País notes today that the Martinsa real estate company overvalued the worth of its land by up to 19,000%. The paper claims that the company ended 2007 with profits because of these accounting irregularities, and gives as an example some land in Las Palmas worth a million € in their accounts, but valued at 179 million. A plot in A Coruña sold for 1.5 million appeared in the accounts with a value of 84 million.

That, in a nutshell is what this universal crisis in all about: cooked books, hidden debt, assets whose true value is unknown and perhaps unknowable. This has been going on at every level until value itself has become impossible to determine and wealth is frantically looking for someplace safe to hide.

We are now living through a gigantic spasm, perhaps another birth pang, perhaps the final death throes, of what Naomi Klein calls "Disaster Capitalism": the legacy of Milton Friedman.

What was once the proud ship of Marget Thatcher and Ronald Reagan, the SS Milton Friedman, for decades a powerful intellectual movement, is now sinking in a tragic farce of unregulated larceny. Viewed from outer space it must be a barrel of laughs.

When we look at economic news though, it is important to put them immediately into a human perspective. Here is some interesting context:

As jobless numbers reach levels not seen in 25 years, another crisis is unfolding for millions of people who lost their health insurance along with their jobs, joining the ranks of the uninsured. (...) Starla D. Darling, 27, was pregnant when she learned that her insurance coverage was about to end. She rushed to the hospital, took a medication to induce labor and then had an emergency Caesarean section, in the hope that her Blue Cross and Blue Shield plan would pay for the delivery. Wendy R. Carter, 41, who recently lost her job and her health benefits, is struggling to pay $12,942 in bills for a partial hysterectomy at a local hospital. Her daughter, Betsy A. Carter, 19, has pain in her lower right jaw, where a wisdom tooth is growing in. But she has not seen a dentist because she has no health insurance.(...) About 10.3 million Americans were unemployed in November, according to the Bureau of Labor Statistics. The number of unemployed has increased by 2.8 million, or 36 percent, since January of this year, and by 4.3 million, or 71 percent, since January 2001. Most people are covered through the workplace, so when they lose their jobs, they lose their health benefits. On average, for each jobless worker who has lost insurance, at least one child or spouse covered under the same policy has also lost protection, public health experts said.(...) Nearly 4.4 million people are receiving unemployment insurance benefits, an increase of 60 percent in the past year. But more than half of unemployed workers are not receiving help because they do not qualify or have exhausted their benefits. About 1.7 million families receive cash under the main federal-state welfare program, little changed from a year earlier. Welfare serves about 4 of 10 eligible families and fewer than one in four poor children. New York Times

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An increasing number of people who retired in recent years, confident they had set aside enough to live on comfortably, are finding themselves strapped. The stock market plunge and the housing downturn have affected many Americans, of course. But retirees have been particularly pinched because their homes and investments are the primary assets they depend on for income. As a result, many of the country's elderly are finding themselves in Nelson's situation, low on money and looking for work. "Suddenly the rug has been pulled out from under them," says Alicia H. Munnell, director of the Center for Retirement Research at Boston College. Business Week

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Workers who got three days' notice their factory was shutting its doors voted to occupy the building and said Saturday they won't go home without assurances they'll get severance and vacation pay they say they are owed. (...)In the second day of a sit-in on the factory floor that began Friday, about 200 union workers occupied the building in shifts while union leaders outside criticized a Wall Street bailout they say is leaving laborers behind.(...) Organizers of the action said the company can't pay employees because its creditor, Charlotte, N.C.-based Bank of America, won't let them.(...) Bank of America received $25 billion from the government's financial bailout package. "Across cultures, religions, union and nonunion, we all say this bailout was a shame," said Richard Berg, president of Teamsters Local 743. "If this bailout should go to anything, it should go to the workers of this country." Outside the plant, protesters wore stickers and carried signs that said, "You got bailed out, we got sold out." CBS2-Chicago

So, in the snippet from AFP that opens this post we see that US treasury bonds may constitute a bubble greater than the real estate or the Internet bubbles. We may surmise that a collapse of their value would have consequences far greater than those bubbles bursting have. Among those consequences might be hyperinflation and the subsequent pauperization of all Americans except the very, very rich.

The hardships portrayed in the snippets from the Times and from Business Week would multiply exponentially and the frequency of the actions that CBS2 Chicago writes about would multiply with them in lockstep. What are now isolated incidents could become an ungovernable cauldron in a very short time if the great mass of Americans were instantly pauperized as happened recently in Argentina.

Larissa MacFarquhar has written a "must read" profile of Naomi Klein in the current New Yorker. The following snippet may give an idea where the USA is headed right now:

The only time (Naomi Klein) has ever felt a whiff of utopia was in Buenos Aires, in 2002, when the political system had virtually disintegrated—during the time that she and Lewis were filming “The Take.” “That moment in Argentina was an incredible time because a vacuum opened up,” she says. “They had thrown out four Presidents in two weeks, and they had no idea what to do. Every institution was in crisis. The politicians were hiding in their homes. When they came out, housewives attacked them with brooms. And, walking around Buenos Aires at night, there were meetings on every other street corner. Every plaza where there was a streetlight, people were meeting under it and talking about what to do about the external debt, I swear to God. Groups of one hundred or five hundred people. And organizing buying groceries together because they could get cheaper prices, setting up barters because the currency was worthless. It was the most inspiring thing I’ve ever seen.”

If the 20th century has any lessons to teach us, it is that sort of scenario we see laid out clearly before us leads to massive social unrest and upheaval: if not properly managed it can be the classic yeast culture that every apprentice fascist dreams of.

Probably the left's greatest task in the coming months and years is steering this convulsion toward peace and solidarity and away from the temptations of war and mob violence. DS

Greenspan redefines "cleaning up"

David Seaton's News Links
To understand where Alan Greenspan is coming from, it's important to know that as a young man he was one of Ayn Rand's most favored disciples and that her magnum opus, "Atlas Shrugged" could be said to be his "bible". Outside of the parameters of human relations affirmed by all major faiths, it is a book whose philosophy Gore Vidal described as “nearly perfect in its immorality.”

To make a long story short, Greenspan's years at the Fed have not been about the economy, which is now beginning to unravel: these years have been about Greenspan, who is now about to make a lot of money writing and speaking. And if what he writes or what he says about current affairs destabilizes that economy... hard cheese (that's British for tough shit). DS

Greenspan: His Fault - Portfolio.com
Abstract: Greenspan’s book will make headlines over the next few weeks, in part because of his surprisingly downbeat assessment of the economy and financial markets. But even though he left the Fed more than a year and a half ago, his recollections aren’t of merely historical interest. The current turmoil on Wall Street is largely a result of policy decisions he made during his final years. By keeping interest rates too low for too long, he encouraged a borrowing-fueled speculative binge, which has now given way to a credit squeeze. By failing to crack down on the mortgage industry, he allowed subprime hucksters to peddle dubious loans, which the financial industry’s math whizzes packaged for investors. Coming on top of his role in creating the internet-stock mania a decade ago, the mistakes Greenspan made—now playing out in home foreclosures and hedge fund collapses—will surely color historians’ views of his long tenure, if not his own account of it.(...) Since leaving the Fed, he has continued to make news, if not always in ways he would like. Within weeks, he started making off-the-record appearances before select audiences: hedge fund managers, investment bankers, and the like. Inevitably, some of his remarks slipped out, causing disruptions in the markets. In February, he said a recession was possible before the end of 2007—a comment that contributed to a 416-point fall in the Dow. In May, he put the chances of a recession at one in three. Two weeks later, he rattled international bourses by saying that a bubble had developed in the Chinese stock market and a “dramatic contraction” was inevitable. When Greenspan was chairman of the Fed, his public statements were famously delphic. While he is entitled to make a living—he reportedly charges $150,000 a speech and received an $8.5 million advance for the book—there is something jarring about his late-life discovery of clear, declaratory English. His predecessor, Paul Volcker, was barely heard from for years after he retired, and Greenspan’s failure to follow that example has perplexed some of his former colleagues.(...) Citing fears (which proved to be misplaced) of Japanese-style deflation spreading to the United States, he kept the federal funds rate at 1 percent until June 2004, by which point the economy had been growing steadily for more than two years. By failing to tighten monetary policy, Greenspan created an apparently limitless supply of cheap credit. After adjusting for inflation, the cost of cash was close to zero. Investment banks, hedge funds, and other financial operators were able to obtain money at minimal cost and use it to finance risky investments. To a lesser extent, so could ordinary Americans. In a feat of levitation almost without precedent, the prices of nearly all speculative assets moved in the same direction: U.S. stocks went up; foreign stocks went up; residential real estate went up; commercial real estate went up; oil went up; gold went up; sugar went up; coffee went up; Treasury bonds went up; junk bonds went up. To make money, all you had to do was suit up, buy something, and sit back and watch it grow.(...) Greenspan has come up with a new argument. “These adverse periods are very painful, but they’re inevitable if we choose to maintain a system in which people are free to take risks,” he said in August. Because of his Randian view of the world, there is no reason to doubt that Greenspan believes what he said, but it raises the question of whether he was ever a suitable choice for Fed chairman, given his understanding of the job. The reason the Fed was set up, in 1913, was to preserve financial stability—to break the historical pattern of ruinous boom-and-bust cycles. Central banks maintain stability by limiting the types of risks people can take, either by raising the cost of borrowed money or by enforcing regulations. If all else fails and panic breaks out, they inject liquidity into the system by acting as a bank of last resort, which is what the Fed and other central banks were forced to do over the summer. Given Greenspan’s inaction during his final years in office, our current crunch was pretty much inevitable. In addition to reducing interest rates to 1 percent, he rejected calls for more vigorous oversight of the mortgage industry. Instead of outlawing such dubious practices as the provision of “2-28” loans—which lure borrowers by offering them cheap rates for two years and then sock them with enormous increases in their monthly payments—the Fed issued vague “guidance” letters that most lenders ignored.(...) Greenspan did get one thing right, though: his retirement date. Were he still at the Fed, he would be responsible for cleaning up the mess he helped create. While his successor, Ben Bernanke, watches anxiously to see who the next casualty of the credit squeeze will be—a Wall Street investment bank? a big hedge fund? a private equity firm?—Greenspan will be busy signing autographs at Borders and Barnes & Noble. If you want to question him about all of this, get there early. The lines will be long.
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The brink of bad times

"You can't believe how bad it's going to get before it gets any better."
Jim Rogers - commodities investment guru

David Seaton's News Links
My perspective is political, so I look at the coming disaster with that slant. I have the good fortune to know quite a few top Spanish financial folk who have been explaining all the details of the economic situation to me patiently... over and over for years, and although I really can't claim to understand any of this stuff, from my slant I have grabbed on to one or two "hinges" upon which the situation seems to turn... Again, from my particular, political, point of view.

In the article I've clipped below, Jim Rodgers, George Soros old partner says, "This is the end of the liquidity party". He also says, "We haven't had this kind of speculative buying in U.S. history." What does this mean politically?

The world has been swimming in money (liquidity) for years now and many "middle-middle-class" people (defined as people who live from their work and whose principal asset is their family home) have been living way beyond their means and have come to acquire the social attitudes of upper middle class people, (defined as those whose patrimony is deep and layered, with mature stock portfolios, multiple inheritances, land and the "taken with mother's milk" habit of managing all those things). Under this delusion these middle-middle-class" folk, once the "salt of the earth", have come to think of themselves as "players" and have identified with characters such as Bill Gates and Warren Buffet or even Donald (ugh!) Trump, as aspirational, fantasy figures.

So, not only is there going to be a lot actual hardship, but also terrible disillusionment... the end of a dream. Because to add insult to injury, the victims in this crash are going to have salt poured into their wounded self esteem, because the system is going to treat them with all the same compassion with which it treated the stranded black people of New Orleans.

There is this idea, taken from our Christian heritage, that suffering makes people better, even holy. It would be comforting to think that this economic wasteland of broken dreams would wake the victims up and make them more compassionate and raise their consciousness... (hum a few bars of "The International" here if you wish). That like in the days of the Great Depression there would be a surge of brotherhood, (Liberty, equality, fraternity?). Unfortunately suffering can also turn quite a few people into mean spirited sons of bitches. Mean spirited sons of bitches when organized are often called "fascists".

This coming crisis is the great, "to be or not to be", challenge for progressive politics. DS

Top investor sees U.S. property crash - Reuters
Abstract: Commodities investment guru Jim Rogers stepped into the U.S. subprime fray on Wednesday, predicting a real estate crash that would trigger defaults and spread contagion to emerging markets. "You can't believe how bad it's going to get before it gets any better," the prominent U.S. fund manager told Reuters by telephone from New York. "It's going to be a disaster for many people who don't have a clue about what happens when a real estate bubble pops. "It is going to be a huge mess," said Rogers, who has put his $15 million belle epoque mansion on Manhattan's Upper West Side on the market and is planning to move to Asia. Worries about losses in the U.S. mortgage market have sent stock prices falling in Asia and Europe, with shares in financial services companies falling the most. Some investors fear the problems of lenders who make subprime loans to people with weak credit histories are spreading to mainstream financial firms and will worsen the U.S. housing slowdown. "Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it'll be worse because we haven't had this kind of speculative buying in U.S. history," Rogers said. "When markets turn from bubble to reality, a lot of people get burned." The fund manager, who co-founded the Quantum Fund with billionaire investor George Soros in the 1970s and has focused on commodities since 1998, said the crisis would spread to emerging markets which he said now faced a prolonged bear run. "When you have a financial crisis, it reverberates in other financial markets, especially in those with speculative excess," he said. "Right now, there is huge speculative excess in emerging markets around the world. There will be a lot of money coming out of emerging markets.(...) The last stock market bubble to burst was the dot-com craze which sparked a crash from March 2000 to October 2002. When the last bubble burst in Japan, said Rogers, stock prices went down 85 percent despite the country's high savings rate and huge balance of payment surplus. "This is the end of the liquidity party," said Rogers. "Some emerging markets will go down 80 percent, some will go down 50 percent. Some will most probably collapse." READ IT ALL