Without a Fundamental & Sudden Change in the World Financial System

re posted from                                    LAROUCHEPAC


Without a Fundamental & Sudden Change in the World Financial System, a New Crash is  Coming

By  ·  December 04, 2018


December 2018

The Crash of September 2008 should never have happened.  Just over a year before the decision was made by the neo-liberal monetarists running the Bush Treasury Department  and the U.S. Federal Reserve to allow an over-leveraged, bankrupt Lehman Brothers to go under, setting in motion a chain reaction collapse which threatened to vaporize the entire western financial system, economist Lyndon LaRouche identified the danger as “systemic”, and offered a solution.

In a public webcast on July 25, 2007, LaRouche forecast that the present international financial system is,

“now currently in the process of disintegrating. There’s nothing mysterious about this; I’ve talked about it for some time, it’s been in progress, it’s not abating. What’s listed as stock values and market values in the financial markets internationally is bunk! These are purely fictitious beliefs. There’s no truth to it; the fakery is enormous. There is no possibility of a non-collapse of the  financial system—none! It’s finished, now! The present financial system can not continue to exist under any circumstances, under any Presidency, under any leadership, or any leadership of nations. Only a fundamental and sudden change in the world monetary-financial system will prevent a general, immediate chain-reaction type of collapse.”

Several weeks later, LaRouche unveiled a proposal to address the unfolding crisis.  His Homeowners and Bank Protection Act (HBPA), had it been passed by the Congress, would have initiated an emergency, orderly bankruptcy reorganization of the largest banks, forcing them to choose whether to continue as investment banks, engaging in highly speculative risky trading.  Should they choose to do that, they would be denied any government protection or safety net, and would be forced to write down or write off the hyper-inflated assets on their books—in other words, to eat their losses, a recognition that the high leverage of financial institutions, that is the ratio of debt to assets, had reached historic levels, and the debt would never be paid off.  Under terms of the HBPA, commercial banks which shut down their trading divisions would be protected, but would have to work with homeowners who could no longer afford payments on the homes with prices which had been sent into the stratosphere by the mortgage-backed securities bubble, to allow them to stay in their homes, eventually rewriting the terms of their mortgages, once the bubble popped.

Instead, the neo-liberals running the Bush administration insisted that the economy is strong, and nothing should be done.  The Democrats in Congress, funded by the same financial interests as the Republicans, and holding the same view that high stock valuation was an indication of economic strength, also rejected LaRouche’s proposal, and instead opportunistically focused on blaming Bush, hoping to use the crisis to win the 2008 election.  As a result, when the stock market crashed in September 2008, the system came within a few hours of total collapse.  When the crash did occur, after Lehman was sacrificed, the decision was made by the City of London and Wall Street to bail out the banks, especially those deemed “Too Big to Fail”, and other financial firms.  At the same time, nothing was done by political leaders of both parties, to aid the tens of millions of working class and middle-class Americans who lost their jobs, their homes, their communities and their futures, all sacrificed while Wall Street was given virtually free money from the U.S. Federal Reserve and other central banks, to renew their speculative swindles.  Estimates of money-pumping for bailouts range from $14 trillion to $23 trillion, with most of that going to prop up worthless financial instruments held by banks and speculators, allowing them to continue profiting from trading these opaque assets, which had either no underlying value, or one which could not be determined.  Efforts to “reform” the system, such as the Dodd Frank bill, paid lip service to curbing risky speculative practices, while continuing to weaken efforts at real re-regulation.

Had LaRouche’s proposal been adopted, the U.S. would have been spared the effects of the 2008 Crash, which cost millions of jobs in manufacturing—most of which have never been recovered—and led to between 4 million and seven million families losing their homes.  And the mandated regulation of banking proposed would have directed credit flows to the real economy, which is that part engaged in real physical wealth production, while withholding funds for speculators profiting from churning markets, buying and selling exotic assets, such as financial derivatives,  and related fraudulent instruments.


In the ten years since 2008, this virtually free money has created a new stock market bubble, and driven housing prices again sky high, producing mega-profits for speculators.  Yet while politicians and pundits point to the millions of jobs which have been created, the vast majority are low-wage, part-time and temporary, and the real wages in many sectors, adjusted for inflation, have not grown since 1990. Millions of employed workers have seen a drop in real earnings since 2008.  For example, America’s 3.2 million public school teachers make less today, when wages are adjusted for inflation, than in 1990, according to data from the U.S. Department of Education.  In some states, the decline in wages is dramatic, such as $5,000 less per year in Arizona since 1990, and $8,000 per year in Oklahoma.  Net farm income has dropped by 50% since 2013, provoking a sharp spike in suicides.  According to a recent study by the Centers for Disease Control, the suicide rate for farmers is five times higher than the general population, and twice as high as that of military veterans.

The reports of “healthy” economic growth, which were produced by the Obama administration, and are now coming out from the Trump administration, ignore the degree to which “new income” created in the post-2008 economy is directly related to an overall rapid growth of debt.  According to reports from agencies, such as the International Monetary Fund (IMF) and Bank for International Settlements,which monitor the debt which has been building from Quantitative Easing and related money-pumping policies, the total volume of public and private debt has ballooned since 2008 by 60%, with much of the borrowing by corporations going into purchases of their own stock, rather than new plant and equipment, research and development, job training, etc. The overall corporate debt bubble has reached $15 trillion!  While there are many vulnerable “weak flanks” which could trigger a broader meltdown, there is urgent growing concern with this explosion of corporate debt, especially with the component of that debt which is graded at “junk bond” levels, which is leading to a growing recognition that these debts are uncollectible, and unsustainable.

For example, former Federal Reserve chairman Janet Yellen told the Financial Times on October 25 that she is concerned about the “huge deterioration” in lending standards in leveraged loan markets.  She warned these loans could lead to bankruptcies of large companies, adding that this should have been one of the lessons of the 2008 crisis: “It is not just a question of what banks do that imperils themselves [i.e., through such lending], it is what they do that can create risks to the entire financial system.”  The IMF issued a warning about their concerns for the deteriorating corporate bond market on November 12.  And U.S. Senator Elizabeth Warren addressed the same problem in a letter she sent to the leading agencies involved in regulating U.S. banks.  Warren wrote, “I am concerned that the large [corporate] leveraged lending market exhibits many of the characteristics of the pre-2008 subprime mortgage market.”

These concerns were amplified in a report issued by the Federal Reserve released on November 28, which stated that investment grade debt at the low end has reached “near record levels” of $2.25 trillion, which is approximately 35% of all debt in corporate bonds.  After listing a number of concerning factors, such as impending trade wars and geopolitical instability, it notes that these factors could trigger a “resulting drop in asset prices”, which “might be particularly large.”  (This is understated “Fed talk” for a stock market crash!)  Such a drop, it concludes, would make it difficult for companies to get funding, as “leverage is already high”, and would lead to significant bankruptcies.

While many of the “tech stocks” are undergoing significant retrenchment, the deeper implications of this process can be seen in shocks hitting once legendary institutions of U.S. manufacturing.  On November 27, auto giant General Motors announced it will lay off almost 15,000 employees, about 15% of its workforce, and close between 3 and 5 manufacturing plants, in cost-cutting measures.  While Wall Street welcomed the cutback—as fiscal austerity is the preferred solution of those focused solely on monetary performance, with little regard for the effects on the further scaling back of high-tech manufacturing on the ability of the economy to produce real wealth—President Trump insisted in a call with GM’s CEO that they must reopen the plants.  Reports have now surfaced that Ford may follow GM, with as many as 25,000 layoffs.  Another venerable firm, Sears, is undergoing major restructuring, shutting down stores and laying off employees, to free up funds to retire debt.  The main beneficiary of this process at Sears is the hedge fund owned by Eddie Lampert, who took over the firm in 2013, and is using the restructuring to pay off debt owed to his hedge fund.  In both these cases, as well as that of General Electric, the corporations have borrowed to buy their own stock, in a vain effort to increase its value.  Through this practice, the total debt has increased, while the ability to repay it has collapsed—and the stock value has been falling.

The model employed harkens back to the days of the mid-1980s, when convicted swindler Michael Milken loaded up firms with debt in takeovers and leveraged buyouts (LBOs), then paid off the debt by dismantling the companies.  In the process, those doing the takeovers made money, while jobs were lost, pension funds looted, and research and development divisions were shut down.  While Milken’s overall model is still in use, of using debt at high interest rates to take over firms, the volumes of debt are orders of magnitude bigger, due to the deregulation of banking with the post-1999 Gramm-Leach-Bliley bill, which eliminated Glass Steagall bank separation in the U.S., and opened the spigot for funny money from the Fed, and from unregulated, offshore, largely British money machines of the “shadow banking” system, to flow into financial “securitization.”

There are other sectors of the U.S. economy which benefited from cheap credit, but are highly problematic today, as interest rates continue to rise.  The oil sector, particularly that involved in fracking, is again undergoing an ominous decline.  Oil prices have fallen by nearly 33% since early October.  As the price per barrel approaches $50, this is a flashing red light for the financial system, as drillers cannot afford to operate at this level, debt cannot be serviced, and a chain-reaction of non-payments in the oil patch can potentially blow out the whole shaky financial game. The Nov. 20 Houston Chronicle already sounded the alarm about price declines, pointing out that, “The oil and gas sector worldwide lost about $1 trillion in value during a 40-day period that began in early October and culminated” the week ending Nov. 16.  In the same time frame, interest rates have risen in the corporate leveraged loan markets, in which oil company debt is a large component.

Similarly, housing prices, which are part of the post-2008 “boom” heralded by monetarist economists, are falling, after a spectacular rise.  A Wall Street Journal feature article on November 26, “The U.S. Housing Boom Is Coming to an End”, highlights the paradox that even with a high demand for homes, prices are dropping.  Home sales have fallen for eight straight months.  A simple explanation is obvious: home prices went up much faster than wages, and, as interest rates climb, potential buyers are scared off.  The Journal uses the example of the Dallas-Fort Worth, Texas metropolitan area, where the median home price is now 50% higher than the peak in 2007, and many new developments feature many empty houses.  The housing market is one-sixth of the U.S. economy.

As this bubble expanded and is now popping, so have the numbers of homeless in the U.S.  Estimates from the Department of Housing and Urban Development are that there are more than 550,000 homeless in the U.S., with 134,000 in California.  These figures do not show the real magnitude of the crisis though, as many of those without homes are children, and their numbers are often not captured in official reports.  Further, since these figures represent numbers on any given night, there are many who find temporary shelter, who do not show up in the statistics.   For example, the Los Angeles Times reports that in Pacoima, California, of the 700 students at the Telfair Elementary School, 60 of them live in garages, with “no quiet place to do homework…no private place without distraction.”


What this brief survey shows is that the claims that the U.S. economy is experiencing “robust” growth and can be a driver for the world economy is a fraud, of the same sort perpetrated by  the Bush administration in the lead up to the September 2008 Crash, and Obama in his claim that his administration is responsible for a “recovery” from 2008.  The real issue is the fake economy field of “monetary theory”, whether of the “right-wing” Austrian school variety, or the “left-wing” brand of the acolytes of John Maynard Keynes, both of which focus on money as the primary measure of an economy and economic policy.

LaRouche has always emphasized that an economy is a physical process, a dynamic which depends on policies which maximize the creative powers of a growing segment of the population.  LaRouche has made numerous economic forecasts over the last fifty years,  and the accuracy of his forecasts, such as that of July 2007, have been the result of his approach to economics as a process of the transformation of a population to ever-more efficient modes of physical production.  What LaRouche identified in the crises since the end of the fixed-exchange rate Bretton Woods system, is that the monetarists’ policies have produced the parallel process of a growth of speculative debt and the decline of manufacturing, family farms, and investment in infrastructure.   This is why a new crash is coming, if there is no shift away from neoliberal monetarist theory, whether of the Keynsian or Friedmanite variety, to a New Paradigm, centered around the adoption of LaRouche’s Four Laws (see LaRouchePAC website), and U.S. cooperation with China, Russia and India, to create a New Bretton Woods.

Source: Harley Schlanger

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