Tuesday, September 16, 2008

Closer and closer to the financial cliff

The “Western” financial system has been heading for crisis for quite some time, and this week the most serious developments (so far) have occurred.

On Monday, it was announced that the US investment bank, Lehman Brothers, had failed, and a buyer could not be found. The US taxpayer (who was not asked) had bankrolled Bear Stearns out of trouble, and then Fannie May and Freddie Mac, but the decision seems to have been that it was politically suicidal to use more taxpayers money to prop up a failing bank at this stage.
The immediate aftershocks of Lehman Brothers going down have been huge, with the US Fed putting $50 billion into the money markets today, the ECB contributing €70 billion, and the UK treasury pumping in £20 billion.

Next to go may be AIG, whose shares were depressed by up to 50% today. If AIG fails, the problems will multiply again. If AIG is rescued by the Fed, the debts end up on the books of every US taxpayer.

The ongoing problems illustrate a raft of difficulties with the way that western financial system (and to some extent, capitalist society as a whole) operates.

Firstly, there is the complexity of the system – the financial institutions are interlinked by a spiders web of vast loans, credits, debits, sales, and speculation – the problem being that should one major institution fail, there is a serious risk of the disaster spreading, as the outstanding loans to all the other institutions will not then be honoured. One major institution just has failed, and we’re about to find out how far the rot that this generates will spread.

Secondly, the banks and investment houses have been speculating on highly risky mortgage-backed products. An unknown number of these mortgages are going to default, and whichever institutions are holding the derivitave products when the music stops, are going to be saddled with the bad debts. Due to the leveraging, some, or many institutions, may not have enough capital available to cover the debts that they may be exposed to. If they can’t cover their debts, they either find a buyer who has enough money to deal with the debts, or they go under.

In other words, financial institutions the world over are sitting on bombs. None of them know who has the bombs, none of them know how big the bombs are, none of them know when they are going to go off, and none of them know if they are strong enough to survive what bombs may unfold underneath them. Every bomb that does go off, increases the likelyhood and size of all the others.

Thirdly, and most seriously, these financial institutions are considered essential to the functioning of modern society in the West, but are allowed to function completely for-profit and rake off the money for private benefit. Despite this, they are considered so essential that when they get in serious trouble, they are sometimes bailed out with our taxpayers money.

That being the case, why are these companies not completely nationalised, and run for-profit for the good of the revenue in that country?

If the public is to bail out these financial operations when the going is tough, is it not right that society at large should benefit from the profits flowing from the good times?

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