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Red Lights Blinking
Yuck!
Another rough day on the subprime front. AIG, the world’s largest insurer and one of the biggest mortgage lenders, said residential mortgage delinquencies and defaults are becoming more common among borrowers in the category just above subprime.
France’s biggest listed bank, BNP Paribas, froze $2.2 billion worth of funds, citing subprime woes. And the European Central Bank felt it had to inject $130.5 billion into euro-zone money markets to help calm jittery markets.
Mortgage defaults growing
Lets take a step back and look at the feed back lopes here.
A peak "resets" of the adjustable rate mortgages, after which the borrower has to pay more interest, is expected for this fall. After that mortgage delinquencies rates will move even higher as people will recognize that they can not pay the houses they bought.
The foreclosures will come and a glut of houses will hit the real estate markets at a time where risk premium on interests will increase and borrowing standards will be more stringent. There will be no buyers for these houses. House values will sink further and more people will default. A positive (self enforcing) feed back loop.
On the lending side the mortgages have been packed into mortgage backed securities and repacked into collateralized debt obligations. These were certified by rating agencies as having a certain "risk class" and value. The rating agencies are payed by the issuer of such securities and use "mathematical" models to determine value and risk.
One can assume that some moral hazard was involved here and some double A or triple A rated papers are in reality of B– quality.
Where all the misrated MBSs and CDOs of the last years ended up is unknown. But anything labeled "money market fund" or such can be suspected to have at least some of them.
Invertors will withdraw money from these funds and the fund managers will have to sell some assets, MBSs and CDOs, to pay out to the leaving investor.
Next comes this:
BNP Paribas SA, France’s biggest bank, halted withdrawals from three investment funds because it couldn’t "fairly” value their holdings after U.S. subprime mortgage losses roiled credit markets.
The funds had about 1.6 billion euros ($2.2 billion) of assets on Aug. 7, after declining 20 percent in less than two weeks, spokesman Jonathan Mullen said today. The bank will stop calculating a net asset value for the funds, which have about a third of their money in subprime securities rated AA or higher.
BNP doesn’t know if the bits of paper it sold to investors are worth 2 billion, 1 billion or 0 billion. There is noone who wants to buy this stuff now. If there is no buyer there is no market and no price.
We will see this again and again throughout the next months. Funds everyone thought to be fine will close down or report heavy losses because they include perfectly rated MBS and CDO junk. (BTW – a lot of pension funds and endowements are said to hold this stuff too.)
People want to sell their funds because losses appear, suddenly everyone wants out. But there are no buyers and the value of the assets are thereby undetermined. The markets freeze up and suddenly there is no value at all. This is the positive feed back loop on the lenders side.
The ECB was smart today to recognize this immediately. It reacted quickly and inserted liquidity so at least the big banks could go and buy some stuff so the markets didn’t freeze up. I guess the ECB knew what was coming and was prepared. What else do they know?
There will be more and bigger fond losses in New York and London. I am not sure that the Fed is prepared to act so swiftly too.
The crunch in the credit markets will spread to equities. The shares of the financials will sink because of the losses in the bond markets. The general stock markets will be hit because consumers confronting higher credits rates will have less to spend. The U.S. economy and maybe the world will fall into recession.
I agree with the import of Bea’s article that this financial crisis was absolutely planned, it is not an accident.
Every time that Central Banks inject cash to “maintain liquidity,” they are increasing the money supply, which increases inflation. This amounts to a de facto transfer of money from the uninvested to the highly invested; that is, from the lower classes to the upper classes.
Yet, it is always the lower classes who are blamed in the press. Wall Street is lauded for “offering mortgages to those with less than average credit so that they can own their own homes.” The poor are blamed for not being able to keep up with the payments, and somehow causing this crisis. But the issue is not the fecklessness of the poor, but the creation of all manner of ARMs, guaranteed to increase interest and payments over time to usurious rates, at the same time that standard fixed-rate mortgage instruments were withdrawn from the reach of the poor — and at the same time that laws were passed allowing credit companies to change terms with only 30 days notice, thus saddling high percentages of the poor and overworked with new delinquencies, driving down their credit ratings, and driving them into these new instruments, which of course, the liberal press touted as being “more affordable.” Sheesh!
And all of this was set-up by the Clinton administration. But the sheeple can’t think, or remember, or connect any dots whatsoever.
Of course, this is but one tiny aspect of the whole financial picture, which itself is but one small part of the larger picture, which does include de-industrializing the US, at the same time that freedoms are withdrawn, dissent is silenced, militarization is increased, and ownership is centralized and narrowed. It does include control of the food supply and medication of the population.
Well, I am being overly terse here for lack of time.
But I have always said that issues of one’s own money separates the radicals from the liberals — and on this blog nearly everyone is a liberal. When I argued on this blog that one could not separate the profits garnered from investing in gold from the damage done by gold mines I was greeted by a huge…. silence.
The system is set up that way. It is gamed into creating little capitalists of us all. By making us dependent upon our retirement funds for our well-being in our later years we are forced to buy into the capitalist system of eternal growth, and “amoral” (to use Soros’ term) investments.
But there are no real “amoral” investments. All money spent on economic activity adds to someone’s wealth at the expense of another person, species, or the planet. Capitalism always produces “externalities.” Let’s face it: There aren’t enough sustainable stocks and extractive resources for all of us to invest in when one needs growth to make it through old age.
Rather than society just agreeing to care for everyone in need, we are stuck with people having to care for themselves by a strategy of financial growth, largely by investing in large corporations. We are collectively destroying our world and its long-term future in order to provide for our individual short-term futures. We are being practically suborned into making this Mephistophelean choice.
How to change things? Invest in your local community, not some multi-national corporation. Go for win-win local returns. Follow the work of Katherine Austin Fitts and others, all descended from EF Schumacher and others. Form care groups, similar to insurance companies, where people bond together and pledge to care for each other. Forget vacations and travel and spend your time learning your local habitat in depth, as the native people did.
The world financial crisis is not an accident. It is easier to control the insecure than the secure. As the planet reaches its limits to growth, the elite need a mechanism to control the masses. This is what we see being implemented.
We can counter this but not by playing by their rules. We can’t win by all of us finding the “right” investments — that will leave more losers than winners, and there is nothing progressive about increasing wealth disparities.
We can only counter centralization and personal disempowerment by decentralization and communal empowerment. And where we put our money is the single largest thing we can do with our lives. More than all the time we put into activist causes, if we take the money supply away from the financial and corporate junkies, we will change the world.
Posted by: Malooga | Aug 13 2007 6:12 utc | 48
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