FREE FALL ON THE STOCK EXCHANGES

No government and no central bank can check the erupted world financial crisis nationally or regionally

By Michael R. Kratke

[This article published in: Freitag 04, 1/25/2008 is translated from the German on the World Wide Web, http://www.freitag.de/2008/04/08040501.php.]




For a week the deceptive quiet before the storm on the stock exchanges has ended. Professional faith healers like Jurgen Stark, chief economist of the European Central Bank, proclaimed again and again the “turbulences” were over and talk of a crisis was absurd. Nevertheless the stock profits of a whole year were lost in only a few days.

Since the beginning of January 2008, $800 billion in stock assets have gone up in smoke. Nearly every big bank had to admit billions of losses from failed speculative deals in their annual reports. With every new loss announcement, the mistrust of banks increased. The credit crisis continues – despite all attempts of the central banks to stabilize the money market with liquidity injections and lower interests. Recession fear cannot be throttled. What began as a subprime crisis on the mortgage market in the US has long infected all financial markets and the “real economy.”

On January 21, 2008, a truly “Black Monday,” the spreading fear of the great worldwide economic crisis led to panic on the world exchanges. In a few hours, stock prices and financial assets thundered to the cellar. Stock indexes posted dramatic losses of five to eight percent everywhere – in Europe, Asia and the US. These losses on a single day on the stock exchanges were greater than on any single day since September 11, 2001. That the losses lacked the officially defined marks of a stock market crash – a drop of more than ten percent on one day – is only a weak comfort. In India, the Nifty-index accounting for the largest 50 businesses of the country fell 10.68 percent. Since the beginning of the stock exchange year, the world exchanges have recorded a minus 15-percent (the German DAX alone nearly ten percent).

HOMEBUILDING IN THE US HAS COLLAPSED MORE THAN 40 PERCENT

Unlike the Asian crisis ten years ago, no national government and no central bank has succeeded today in curbing the crisis regionally or nationally. There is one simple reason for this. Everyone – from US investment banks to upright German industrial- and commercial banks and even the regional banks – joined in the high-risk game with credit derivatives. The extent of global trade with “structured financial products” rose thirty-fold since 2001. Hardly one bank has not speculated with hedge funds or other “conduits.” Mortgage-backed loans were and are only one kind of derivatives behind which bad credits lurk.

When the US mortgage crisis erupted in July 2007, its whole extent was hardly imaginable. However big banks, insurance companies, financial corporations and their subsidiaries worldwide are burdened with a multitude of unsaleable devalued securities. Bank managers worldwide try to hide the dimensions of the disaster from their shareholders.

Banks opened the money pump for one another, lowered money market interests to unheard-of levels, intensified credit conditions and hoarded finance capital. When the first quarterly reports were due weeks later, their mistrust of each other was corroborated. One big international bank after another had to fetch dead bodies from the cellar. Citi-bank, Merrill Lynch, J.P. Morgan, the Swiss UBS, Deutsche Bank and many others posted billions in losses for the third quarter. Over $145 billion was officially written-off. Banks, insurance companies and investment funds still sit on unsaleable speculative securities. The losses worldwide are estimated at $400 to $500 billion.