Markets 'Not Out of the Woods Yet'

New York, New York - Get out your party hats and strike up the band.
We are about to celebrate the second anniversary of the GFC - the
Global Financial Crisis.

No doubt the event will be marked by event-driven television
programming and on the world's op-ed pages, even though this is a
crisis that began long before most of the world found out about it.

The market meltdowns began in September
2007, but this has been a slow-motion catastrophe that started with the
euphoria of financial bubbles that seemed to defy the laws of gravity
by only rising.

When the markets were up, there were few naysayers.

Economist Brad Delong was one of the few reminding us that:
"Institutions and human psychology lead financial markets to bounce
back and forth between exuberant greed and catatonic fear."

The housing bubble created in 2001 by a combination of low interest
rates set by the Federal Reserve's Alan Greenspan, massive, predatory
sub-prime lending by shadow lenders and financial institutions, and
so-called market "innovation" in the form of exotic derivatives,
securitisation and deregulation all pushed profits in the financial
services industry to new highs.

'Financial monster'

The consequences were largely ignored, as a process called
financialisation put more and more power in the hands of the economic
architects on Wall Street.

New York University's Dr Nouriel Roubini was called "Dr Doom" for
predicting the emergence of a "financial monster" that could not be
sustained.

Roubini reasoned: "Combine an opaque and unregulated global
financial system where moderate levels of leverage by individual
investors pile up into leverage ratios of 100 plus; add to this toxic
mix investments in the most uncertain, obscure, misrated, mispriced,
complex, esoteric credit derivatives that no investor can properly
price; then you have created a financial monster that eventually leads
to uncertainty, panic, market seizure, liquidity crunch, credit crunch,
systemic risk and economic hard landing."

What he and many others did not draw adequate attention to were the
underlying structural problems in the US economy that led it to
collapse.

Stephen Lendman of Gobal Research enumerated some of them:

- Soaring consumer debt; - Record high federal budget and current account deficits; - An off-the-chart national debt, far higher than the reported level; - High and rising level of personal bankruptcies and mortgage loan defaults; - An enormous government debt service obligation we are taxed to pay for; - Loss of manufacturing and other high-paying jobs to low-wage countries; - A secular declining economy, 84 per cent service-based and mostly composed of low-wage, low or no-benefit, non-unionised jobs; - An unprecedented wealth gap disparity; - Growing rates of poverty in the richest country in the world; - A decline of essential social services

As the financial markets became more volatile, credit began to
freeze, and an event outside the US signaled the deeper global crisis;
customers were queuing outside London's Northern Rock bank demanding
their money back.

Bank runs

Soon the Bank of England was pumping money in just one day after
warning others, in the name of "moral hazard" rules, not to bail out
lenders who had engaged in irresponsible practices.

A Wall Street insider told me: "A century ago, the depth of a
banking crisis was measured by the length of the queue outside banks.
These days, financial panics are more likely to be played out through
heavy selling in share, bond or currency markets than old-fashioned
bank runs."

The bankers knew how bad it was. Here is Jim Glassman of JP Morgan:
"The credit-market storm is a far more dangerous thing that anything
we've seen in memory."

More and more news reports were glum. Here is the Sydney Morning Herald
in Australia reporting on "How Bad Debt Infected the World": "The
foreclosure butterfly flapped its wings in small town USA and the
hurricane built and tore through world banking."

In many countries, angry critics blamed the US for exporting a form
of "financial Aids" worldwide. Luiz Inacio Lula da Silva, the Brazilian
president, blamed "white men with blue eyes on Wall Street".

"I believe there is a systemic debt problem and it will take years
to work out - and the Federal Reserve cannot resolve the issues," said
Richard Bove, a bank analyst at Punk Ziege.

Michael Bloomberg, the mayor of New York City and a financial guru, also said the causes went deeper.

He believed the global credit crunch had as much to do with public
debt as the US sub-prime meltdown. The billionaire media and business
mogul talked about the "lunacy" of debt levels in the US and the UK at
the Conservative Party conference in Britain.

"This is not a mortgage crisis," Bloomberg insisted, "It's a crisis in confidence and we're all in it together."

Bail outs

Washington responded with interest rate cuts and the injection of
billions into banks, along with similar stimulus efforts by central
banks in other countries.

Despite this, the credit markets remained locked and the problem
remained unsolved. Businesses closed, some went bankrupt and jobs were
cut.

In March 2008, Bear Stearns became the first of the big banks to go
down. Others followed and many, like insurance giant AIG, had to be
bailed out.

Mortgage giants Fannie Mae and Freddie Mac were next to implode.

Suddenly the world was fixated on the fall of Wall Street. Lehman
Brothers was not bailed out - creating a ripple worldwide with its many
"counter parties" - and was soon driven into bankruptcy.

The Bank of America bought Merill Lynch in a transaction that is still being challenged.

On September 19, the Bush administration announced a $700bn bail-out plan to confront the crisis.

Ben Bernanke, the chairman of the Federal Reserve, would later
privately say they acted to head off an imminent collapse - a new
depression.

Publicly he was more restrained, saying: "If financial conditions
fail to improve for a protracted period, the implications for the
broader economy could be quite adverse."

Initially, this was seen as simply a financial problem but it
quickly became a social crisis too. States and cities began cutting
back essential services as their tax bases contracted.

Markets plunge

Then the Dow fell 777.68 points, the largest one-day point drop in history.

The index experienced its largest one-day point loss ever after the
House of Representatives voted down the government's proposed rescue
plan.

By April 2008, the IMF projected a $945bn loss from the financial
crisis. G7 ministers agreed to a new wave of financial regulation to
combat a protracted downturn.

As a recession was officially recogised in the US, American
consumers stopped trekking to the malls, sinking our consumption-based
economy even further.

There was a ricochet effect worldwide - declines in growth were dramatic.

Banks in many countries which had bought into US real estate and asset-less sub-prime mortgages reported vast losses too.

It was like a deck of cards collapsing.

For the first quarter of 2009, the annualised rate of decline in GDP
was 14.4 per cent in Germany, 15.2 per cent in Japan, 7.4 per cent in
the UK, 9.8 per cent in the Euro area and 21.5 per cent for Mexico.

The World Bank reported that by March 2009, the Arab world had lost $3 trillion because of the crisis.

In April 2009, unemployment in the Arab world was said to be a
"time-bomb" and, according to the Arab Labor Organization, it was among
the hardest hit regions in the world.

One month later, the United Nations reported a drop in foreign
investment in Middle East economies because of a slower than expected
rise in demand for oil.

In June, the World Bank predicted a tough year for Arab states.

Economic turnaround?

Yet in August 2009, the world's finance ministers were beginning to
declare victory, seeing signs of a slowing in the economic decline.
Some even cautiously projected signs of a recovery.

The amount of money lost is subject to much debate, largely because
those in the know have failed to agree on what should be included in
the final tally.

One estimate focusing on infusions of capital by central banks
around the world, so-called stimulus plans, and monies at risk in debt
swaps and shaky derivative products put the number at $196.7 trillion -
but that could be low.

In the US, unemployment continues to rise, foreclosures mount, as do bankruptcies.

Many journalists, politicians and economists appear to bemoan the
fact that adequate financial reforms and new regulations have yet to be
put in place.

Of the fact only a few executives have gone to jail despite evidence
of massive fraud in the housing market, Peter Schiff, a conservative
financier, noted: "No one has been held accountable for a financial
crisis that the professors, pundits and politicians told us would not
come.

"All the same players are running the game, [they] always change the rules so they stay on top."

Paul Krugman, the liberal New York Times
economist, seemed to agree: "Washington has done nothing to protect us
from a new crisis and, in fact, has made a new crisis likely.

"There have been many reports on what Wall Street firms did, and
continue to do to transfer wealth to their own coffers, but little in
the way of a criminal investigation, as if it is all above rigorous
scrutiny."

Many of the biggest banks are back in the business of handing out
giant bonuses and record compensation packages. Even as a lot has
changed, a great deal remains the same.

President Obama warned on September 22: "If we don't pass financial
regulatory reform, the banks are going to go back to the same things
they were doing before.

"In some ways it could be worse, because now they know that the
federal government may think they're too big to fail. And so, if
they're unconstrained [by stricter regulations] they could take even
more risks."

There is very little to celebrate on this "anniversary", the people
most in the know about finance are now wrestling with both hope and
despair - hope that a turnaround will spread and fear that another,
more serious downturn is possible.

They are all, however, acutely aware that there has been no structural change or new regulation.

As Americans often say: "We're not out of the woods yet."