ANATOMY OF A CRISIS

By Philipp Hersel

[This article published in: Attac Rundbrief 2/2008 is translated from the German on the World Wide Web, http://www.attac.de. Philipp Hersel is a member of the Attac study group on financial markets.]




In March 2006 what everyone predicted many years ago really happened: the prices of homes in the US stopped climbing. This was good news, particularly for those needing living space. Like elsewhere, houses in the US are bought on credit. Until March 2006, everything seemed normal.

The problem is that a large part of US real estate financing, the so-called “sub prime” market for real estate credits to poor borrowers, functioned according to the model of a chain letter. One bought a house and after a few years when the first interests and service charges were due the borrower either became insolvent or the bank auctioned off the house and recovered interests and service charges on account of the higher home price. In this case, the banks have a good business and the poor live on the edge and lose their meager savings.

Since July 2007, a “crisis” has developed out of this sad daily routine in which low income homeowners are not the only losers. The banks that gave these real estate credits and then resold them are also stricken. For the banks, the “special investment vehicles” or “conduits” had the advantage over subsidiaries of not appearing on the balance sheets of mother companies. In these conduits, good credits and “sub prime” real estate credits were thrown together as in a great basket. To enable banks to buy these credits, the conduits lent money to capital investors through short-term securities (with other banks, insurances and investment funds who bought these securities). The interests and service charges of these capital investors should be paid with the interests and service charges of homeowners. The margin was the profit of the conduits. In fine weather, this was a roaring business. But when many homeowners could not pay any more, the conduits broke down and fell back to credit lines they would have received earlier from their mother banks. When the crisis deepened, these credits of the mother banks would clearly never be repaid because most conduits were insolvent, at least short- and intermediate term conduits. At the same time the securities of the conduits became worthless because no one knew which good or bad real estate credits were poured into the respective basket. Perhaps the homeowners will repay some time or other in ten or twenty years.

No one knows what risky credits are hidden in what cellar. Because no bank knows this, one bank does not trust other banks any more. What is praised in textbooks as “risk control” (glossing over the facts) has functioned so perfectly that no one knows any more how the risk will be paid…

A “systemic financial crisis” exists if no trust prevails any more between the central actors on the financial markets. Banks do not lend money any more because of mistrust to one another so the money stays in their cellars. This is also true for insurances, investment funds etc. Still other banks want to give money to producing businesses. To close the gaps, central bankers pumped hundreds of billions of dollars and euros into the financial system in the last months. The money supply was expanded. No inflation danger went along with that expansion as long as only “dormant” cash in the cellars of banks, insurances and funds was involved.

In the meantime trust is so shaken that bankers like Josef Ackermann (Deutsche bank) cry for the state. Now the state should help the financial industry after decades of lobby work for deregulation.

Now it is time to turn back the wheel of regulation. For example, conduits must be prohibited and risky real estate credits restrained. At the same time possible political actions countering crises must be expanded. Capital movements must be documented and controlled internationally. As a by-product, tracking down tax evaders will be easier. In addition, we need a cooperative international currency system for example in the sense of targeted zones so exchange rate fluctuations of dollars and euros can be limited politically.

Nevertheless all this only combats symptoms. As long as the wealth of this world is concentrated in fewer and fewer hands, the pressure of this concentrated capital remains and is exploited globally on financial markets. Therefore radical redistribution, nationally and internationally, is the command of the hour.

How important to have other-than-english translations that give us more than the usual old USA view on events that affect us all. thank you.

and the point of wanting governmental bailouts, [read every- person's taxes taken to help those who seek to profit from every possible disaster and mistake] even while they are giving up just a bit of self-regulation....tho not too much, but just enough for a good trade-off - to profit some more...

and the corp or bank going back to being a bit more transparent, not too much tho, just enough to get lots of cash back now from the very people whom the corporations = banks = rating agencies = financial markets, et al. ...when can not profit their usual ways ...for the moment....

and the loud publicized "help us ! or the world will come to an end” ...[the threat to induce more fear and intimidate the pubic into letting them have more of our money or our power ]... as repeated in "YOU will lose your jobs....YOU will lose your bank- savings....YOU will be sorry if you dont save us - and our profits " is broadcast loudly and in the mass media presses ...even without any deeper analysis of what this cry for money by the monied might really be and mean for their readers or listeners.

and then without a public vote or voter agreement, the bail out happens anyhow... by private firms that go under the guise of "essential financial services", like the USA "federal" reserve bank, that is not a governmental agency at all tho it has all those powers ... the Feds are just labeled as if it were one USA Federal Agengy or another.

Yes, there are more, being so cash-political-powerful as they ARE = more powerful than the public governments in terms of running our lives, and taking over the 'show'. They decide [for us ?] who to give OUR MONEY to help. Then a trickle only goes to the ordinary folk to make it all look like it is an equal-charity- to-all-concerned...but it’s not really so.

Every tax dollar or Euro does not go towards the Public Good or public works...and if deregulation meant each bank & company were now on their own,then why ask for government help later ? Because they get it, every time.

same as Enron ? same as any airline that had money problems and were bailed out first by Reagon's firing air controllers and then before and also after 9-11 by the USA govt [ while "not in my name" but still it is my money too] ? same as Bears $tern was ‘saved’ ? same as any bank that is "insured" by our own tax dollars, as were so many in the S&L bail outs that some of our current govt officials made themselves wealthier on too ?

does it ever stop or change ?

How important to have other-than-english translations that give us more than the usual old USA view on events that affect us all. thank you.

and the point of wanting governmental bailouts, [read every- person's taxes taken to help those who seek to profit from every possible disaster and mistake] even while they are giving up just a bit of self-regulation....tho not too much, but just enough for a good trade-off - to profit some more...

and the corp or bank going back to being a bit more transparent, not too much tho, just enough to get lots of cash back now from the very people whom the corporations = banks = rating agencies = financial markets, et al. ...when can not profit their usual ways ...for the moment....

and the loud publicized "help us ! or the world will come to an end” ...[the threat to induce more fear and intimidate the pubic into letting them have more of our money or our power ]... as repeated in "YOU will lose your jobs....YOU will lose your bank- savings....YOU will be sorry if you dont save us - and our profits " is broadcast loudly and in the mass media presses ...even without any deeper analysis of what this cry for money by the monied might really be and mean for their readers or listeners.

and then without a public vote or voter agreement, the bail out happens anyhow... by private firms that go under the guise of "essential financial services", like the USA "federal" reserve bank, that is not a governmental agency at all tho it has all those powers ... the Feds are just labeled as if it were one USA Federal Agengy or another.

Yes, there are more, being so cash-political-powerful as they ARE = more powerful than the public governments in terms of running our lives, and taking over the 'show'. They decide [for us ?] who to give OUR MONEY to help. Then a trickle only goes to the ordinary folk to make it all look like it is an equal-charity- to-all-concerned...but it’s not really so.

Every tax dollar or Euro does not go towards the Public Good or public works...and if deregulation meant each bank & company were now on their own,then why ask for government help later ? Because they get it, every time.

same as Enron ? same as any airline that had money problems and were bailed out first by Reagon's firing air controllers and then before and also after 9-11 by the USA govt [ while "not in my name" but still it is my money too] ? same as Bears $tern was ‘saved’ ? same as any bank that is "insured" by our own tax dollars, as were so many in the S&L bail outs that some of our current govt officials made themselves wealthier on too ?

does it ever stop or change ?