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 The Global House of Cards Is Collapsing

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Registration date : 2007-07-01

PostSubject: The Global House of Cards Is Collapsing   Sun Aug 19, 2007 9:11 pm

The Global House of Cards Is Collapsing

August 15th, 2007 · 1 Comment

The core meltdown of the world financial system, which has been in preparation for a long time, has now occurred, with the collapse of the subprime mortgage market in the United States…
by Helga Zepp-LaRouche
The core meltdown of the world financial system, which has been in
preparation for a long time, has now occurred, with the collapse of the
subprime mortgage market in the United States. Beginning with two hedge
funds belonging to Bear Stearns, a series of such funds have gone to
ground due to speculative failures, and the turbulence has finally
spilled over into the international markets and implicated financial
institutions in Germany, France, Great Britain, and Australia. And that
is only the beginning.

While most of the press internationally is in full cover-up mode,
the near collapse of the German “industrial credit bank” IKB has
shocked some in Germany into recognizing the situation. Jochen Sanio,
head of the German banking regulatory agency BAFIN, admitted that this
amounted to the “worst banking crisis in Germany since 1931.
According to the Süddeutsche Zeitung, the “whole German banking system”
was in danger, which was obviously the reason for a temporary rescue of
the IKB by the German government and the Kreditanstalt für Wiederaufbau
(Reconstruction Finance Agency), at the tune of 8.1 billion euro (over
$11 billion).
But this is only the tip of the iceberg; more U.S. mortgage banks,
such as American Home Mortgage, are in serious distress. One reason for
that lies in the practice of so-called “adjustable mortgages,” whereby
the buyers can acquire real estate they cannot afford, and in which,
for a certain period of time, rather low interest rates on the
mortgages fall due, but then, after a prescribed period, at most two
years, are automatically raised. When the higher rate goes into effect,
the payments rise in the range of hundreds of dollars per month. The
adjustable mortgage market went into full swing in the Spring of 2005,
thus, an avalanche of increases in the rates has occurred precisely at
the present time.
All in all, increases in the interest rates on adjustable rate
mortgages affect 12% of all mortgages in the United States, raising
mortgage payments by a trillion dollars. In October alone, mortgages
will be jacked up by over $50 billion, and eventually all categories of
mortgages will be threatened. According to Moody’s, between
1995 and 2005, about 3.2 million homeowners bought houses on the basis
of subprime mortgages or similar credit-terms, and thus, it is expected
that about 2 million of these homes will be lost in the next months.
The flood of housing foreclosures has led to a dramatic collapse in
real estate prices; because of the exposed position of the financial
institutions, it will become considerably harder to get new mortgages,
and the effect on the real economy, including jobs in the construction
sector, will be catastrophic.
Much more dramatic than this situation, is the fact that the
collapse has been accelerated by another process with very much more
far-reaching consequences, namely the drying-up of the Japanese yen
carry trade. With it, dried up the paradise of cheap liquidity, which
for years permitted investors to borrow advantageously in yen at a zero
interest rate, in order to invest in higher-interest-rate sectors
around the world. The flood of liquidity from this source amounted to
$500 billion, which has been as good as cut off. In
the face of rising interest rates, now speculators who have contracted
cheap yen credit, and were met with losses in the American mortgage
market and in the hedge funds, have sought desperately to turn their
investments into cash in order to pay back their yen loans, which has
led to an up-valuation of the yen. Again, this increases the losses of
the speculators. The reverse leverage, leading to the collapse of the
speculative pyramid, is in full swing.
Banks and financial institutions are suffering from a kind of
withdrawal shock. Because, while the takeover mania by the hedge funds
and private equity funds has recently reached dimensions never known
before—worldwide, the hedge funds in the first half of 2007 have taken
over companies worth $2.3 trillion—they are sitting on a debt mountain of $1.5 trillion, of
which a portion, in light of the always growing reach of the capital
markets, threatens to become bad debt. The credit institutions, in a
panic, are trying to get these debts off their books by year’s end,
because they could otherwise not undertake any new financial
operations. For the market of mergers and takeovers, the honeymoon is
definitely over.
Analysts from Crédit Suisse are warning that the banks are having
great difficulties in selling new bonds—if they can’t do this, the
credit lines to the hedge funds and other market participants must be
cut off, which must lead again to a cascade of liquidations.
We are now experiencing how the greatest liquidity bubble in the history of the financial markets is beginning to burst.
Lyndon LaRouche incisively recognized the beginning of this development
when he identified Nixon’s intervention on Aug. 15, 1971, namely the
loosening of the fixed-exchange-rate system, the separation of the
dollar from the gold reserve standard, and the creation of the
Eurdollar market, and with it, of private credit creation, as the
beginning of a process which would lead to a new depression.
Alan Greenspan, who can take dubious credit for his part in this
development, going down in history as “Mr. Bubble,” is responsible for
the recent explosion of the casino economy. After the Crash of 1987,
which showed parallels with “Black Friday” of 1929, he had the glorious
idea of inventing “creative financial instruments.” To that category
belonged, among other things, credit derivatives. By 1998, the volume
of credit derivatives amounted to $180 billion. When, in September of
1998, the LTCM hedge fund, in the context of the Russian state
bankrtupcy and the GKO crisis, threatened to go bankrupt, the G-8
nations decided to set a huge liquidity-pumping machine into motion. In
2006, the volume of the “wonder-weapons” of financial transactions, the
so-called collateralized debt obligations (CDOs), reached a fabulous $3
Through these “structural products,” the bankers package credit
risks of totally different kinds of debtors into bundles, divide them
into different classes of risk, and sell them to investors. The
defenders of this practice argue that the hedge funds thereby play a
positive role, because they spread the risk onto many shoulders. This
theory has only one devastating flaw: As long as all asset prices are rising, everything functions wonderfully—because there is also no risk; but at the moment a reverse-leverage collapse sets in, the linkage between the different market segments through the hedge funds drags the whole system into collapse.
A further problem arises from the fact that, through the instrument
of the credit derivatives, a house of cards has been built up. The
difference between creditors and debtors is wiped out, the debtor
appears at the next moment as a creditor to another debtor, who again
gives out credits from his side, and so on. This is, at the same time,
the mechanism for the wondrous multiplication of money. Because when
the market participant receives such a loan, this loan becomes the
reserve capital for loaning a new credit to someone else. And thus, a
further spiral goes into effect. Greater credit issuance provides more
room for greater securitization; the creation of more liquidity again
allows for greater credit issuance.
As they say, as long as the speculative bubble can inflate further, as long as the credit issuance increases, everything is fine (at
least in the monetary realm, but not in the real economy, which has
been sacrificed in this process). But if, as now, in the event of poor
quality mortgage markets, there comes a break, and, as a result of the
drying up of the liqudity pump which follows from the end of the yen
carry trade, there occurs a reverse-leverage process in this pyramid,
then the illusion bursts, and the system crashes. What we experience
today, is the psychologically highly interesting process of how
limitless greed, in the nature of physical lust, turns, almost
overnight, into limitless angst. If no one believes any more that the
emperor has new clothes, everyone sees that he is naked.
At the moment that the subprime mortgages, which were bundled into
interest-bearing securities such as CDOs, fell in value, the banks and
other financial institutions could no longer loan or borrow on the basis of these CDOs, as reserve capital or collateral.
As a result, the global wave of liquidity dried up. A further aspect of
the sell-off began when the banks had difficulties in financing the
takeover of Chrysler through the private equity firm Cerberus (the
locust fund which significantly bears the name of the hound of Hell).
Then where do we stand? Are those right, who say that there need
only be a “straightening out” of the markets, and a little
bloodletting, and then let the central bankers and established powers
again take control?
It is interesting that an unorthodox newsletter in France, La
Chronique Agora, asked July 31, under the headline, “Stockmarket Crash:
Can You Still Escape?” The writer answered: “I don’t think so. This time the crisis is too deep and the worry well installed….
This time the alert on the credit markets is of unprecedented
magnitude. Long minimized, its gravity is becoming more obvious each
day…. The ongoing phenomenon marks the end of an epoch: that of the
illusion of unending world liquidity.”
The next weeks will leave no doubt that Lyndon LaRouche is right, and all his critics will be discredited. There is nothing to expect from the Bush Administration, as long as Vice President Dick Cheney remains in office.
Therefore, everything depends upon whether the world heeds what former
Mexican President José López Portillo recommended in 1998: “Listen to
the wise words of Lyndon LaRouche.”
This article appears in the August 10, 2007 issue of Executive Intelligence Review.
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