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Analysis
US Power on Decline
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Reflections on Wall Street Crisis
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| The deep-rooted structural causes of the American -and then-world economic crisis of 2008 lies at the fact that major US financial institutions use their clout to push US economy towards certain direction. Tanya Cariina Hsu of the Institute for Research: Middle East Policy elaborates the dynamics used by financial institutions to create myth-based economy, underscoring US power demise and the success of Islamic economy.
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Wall Street economic quagmire will certainly affect US status as a superpower. October, 2008, ( Reuters) |
In 2008, housing prices began to slide precipitously downwards and mortgages were suddenly losing value. Manufacturing orders were down 4.5 percent by September, inventories began to pile up, unemployment was soaring and average house foreclosures had increased by 121 percent and up to 200 percent in California.
US financial institutions had to stop trading these mortgage-backed securities, as now their losses would have to be visibly accounted for. Investors began withdrawing their funds. Bear Stearns, heavily specialised in home loan portfolios, was the first to go in March.
Misleading Solutions
| The US-funded bailout of $700 billion does nothing to solve the problem. |
Just as they had done in the 20th century, JP Morgan swooped in and picked up Bear Stearns for a pittance. One year prior Bear Stearns shares traded at $159 but JP Morgan was able to buy in and take over at $2 a share.
In September, Washington Mutual collapsed, the largest bank failure in history. JP Morgan again came in and paid $1.9 billion for assets valued at $176 billion. It was a fire sale.
Relatively quietly over the summer Freddie Mac and Fannie Mae, the publicly traded companies responsible for 80 percent of the home mortgage loans, lost almost 90 percent of their value for the year.
Together they were responsible for half the outstanding loan amounts but were now in debt $80 to every $1 in capital reserves.
To guarantee they would stay alive, the Federal Reserve stepped in and took over Freddie Mac and Fannie Mae. On September 7th 2008 they were put into 'conservatorship': known as nationalisation to the rest of the world, but Americans have difficulty with the idea of any government run industry that required taxpayer increases.
What the government was really doing was handing out an unlimited line of credit.
Done by the Federal Reserve and not US Treasury, it was able to bypass Congressional approval.
The Treasury Department then auctioned off Treasury bills to raise money for the Federal Reserve's own use, but nonetheless the taxpayer would be funding the rescue. The bankers had bled tens of billions from the system by hedging and derivative gambling, and triggered the portfolio inter-bank lending freeze, which then seized up and crashed.
The takeover was presented as a government funded bailout of an arbitrary $700 billion, which does nothing to solve the problem. No economists were asked to present their views to Congress, and the loan only perpetuates the myth that the banking system is not really dead.
Paulson's Coup
| Paulson was blackmailing Congress in order to lead a coup by the banking elite under the false guise of necessary legislation. |
In reality, the damage will not be $700 billion but closer to $5 trillion, the value of Freddie Mac and Fannie Mae's mortgages. It was nothing less than a bailout of the quadrillion dollar derivatives industry which otherwise faced payouts of over a trillion dollars on Credit Default Swaps (CDS) mortgage-backed securities they had sold.
It was necessary, said Treasury Secretary Henry Paulson, to save the country from a 'housing correction'. But, he added, the $700 billion taxpayer funded takeover would not prevent other banks from collapsing, in turn causing a stock market crash.
In other words Paulson was blackmailing Congress in order to lead a coup by the banking elite under the false guise of necessary legislation to stop the dam from flooding.
It merely shifted wealth from one class to another, as it had done almost a century prior. No sooner were the words were out of Paulson's mouth before other financial institutions began imploding, and with them the disintegration of the global financial system - much modelled after the lauded system of American banking.
In September the Federal Reserve, its line of credit assured, then bought the world largest insurance company, AIG, for $85 billion for an 80% stake. AIG was the largest seller of CDS, but now that it was in the position of having to pay out, from collateral it did not have, it was teetering on the edge of bankruptcy.
Global Domino Collapse
| Greenspan's pyramid scheme of easy money from nothing resulted in a massive overextension of credit, inflated housing prices, and incredible stock valuations. |
In October the entire country of Iceland went bankrupt, having bought American worthless sub-prime mortgages as investments. European banks began exploding, all wanting to cash in concurrently on their inflated US stocks to pay off the low interest rate debts before rates climbed higher.
The year before the signs had been evident, when the largest US mortgage lender Countrywide fell. Soon after, the largest lender in the UK, Northern Rock, went under - London long having copied Wall Street creative financing. Japan and Korea's auto manufacturing nosedived by 37 percent, global economies contracting.
Pakistan is on the edge of collapse too, with real reserves at $3 billion - enough to only buy a month's supply of food and oil and attempting to stall payments to Saudi Arabia for the 100,000 barrels of oil per day it provides to the country. Under President Musharraf, who left office in the nick of time, Pakistan's currency lost 25 percent of its value, its inflation running at 25 percent.
Meanwhile energy costs had soared, with oil reaching a peak of almost $150 per barrel in the summer. The costs were immediately passed on to the already spent homeowner, in rising heating and fuel, transport and manufacturing costs.
Yet 30 percent of the cost of a barrel of oil was based upon Wall Street speculators, climbing to 60 percent as a speculative fear factor during the summer months. As soon as the financial crisis hit, suddenly oil prices slid down, slicing oil costs to $61 from a high of $147 in June and proving that the 60 percent speculation factor was far more accurate.
This sudden decline also revealed OPEC's lack of control over spiralling prices during the past few years, almost squarely laid on the shoulders of Saudi Arabia alone. When OPEC, in September, sought to maintain higher prices by cutting production, it was Saudi Arabia who voted against such a move at the expense of its own revenue.
Europe then decided that no more would it be ruined by the excess of America. 'Old Europe' may have had enough of being dictated to by the United States, who refused to compromise on loans lent to their own broken nations after WWII.
On October the 13th, the once divided EU nations unilaterally agreed to an emergency rescue plan totaling $2.3 trillion. It was more than three times greater than the US package for a catastrophe America alone had created.
By mid October, the Dow, NASDAQ and S&P 500 had erased all the gains they made over the previous decade.
Greenspan's pyramid scheme of easy money from nothing resulted in a massive overextension of credit, inflated housing prices, and incredible stock valuations, achieved because investors would never withdraw their money all at once.
But now it was crashing at break-neck speed and no solution in sight. President Bush said that people ought not to worry at all because "America is the most attractive destination for investors around the globe."
Those who will hurt the most are the very men and women who grew the country after WWII, and saved their pensions for retirement due now. They had built the country during the war production years, making its weapons and arms for global conflict.
USA: No Longer Powerful
| No longer will these nations continue to support the dollar as the world's currency. |
During the Cold War the USSR, former Soviet Union, was the ever-present enemy and thus the military industrial complex continued to grow. Only when there is a war does America profit.
Russia will not tolerate a new cold war build-up of ballistic missiles. And the Middle East has seen its historical ally turn into its worst nightmare, be it militarily or economically.
No longer will these nations continue to support the dollar as the world's currency. The world's economy is no longer America's to control and the United States is now indebted to the rest of the world.
No more will the United States be able to demand its largest Middle Eastern oil supplier open up its banking books so as to be transparent and free from corruption and terrorist connections lest there be consequences — the biggest act of criminal corruption in history has just been perpetrated by the United States.
It was the best con game in town: get paid well for selling vast amounts of risk, fail, and then have governments fix the problem at the expense of the taxpayers who never saw a penny of shared wealth to begin with.
There is no easy solution to this crisis, its effects multiplying like an infectious disease.
Islamic Banks
| "Although the Islamic banking sector is also part of the global economy, the impact of direct exposure to sub-prime asset investments has been low." |
Ironically, least affected by the crisis are Islamic banks. They have largely been immune to the collapse because Islamic banking prohibits the acquisition of wealth via gambling (or alcohol, tobacco, pornography, or stocks in armaments companies), and forbids the buying and selling of a debt as well as usury.
Additionally, Shari'ah banking laws forbid investing in any company with debts that exceed thirty percent.
"Islamic banking institutions have not failed per se as they deal in tangible assets and assume the risk" said Dr. Mohammed Ramady, Professor of Economics at King Fahd University of Petroleum and Minerals.
"Although the Islamic banking sector is also part of the global economy, the impact of direct exposure to sub-prime asset investments has been low" he continued. "The liquidity slowdown has especially affected Dubai, with its heavy international borrowing. The most negative effect has been a loss of confidence in the regional stock markets."
Instead, said Dr. Ramady, oil surplus Arab nations are "reconsidering overseas investments in financial assets" and speeding up their own domestic projects.
Eight years ago, in May 2000, Saudi Islamic banker His Highness Dr. Nayef bin Fawaaz ibn Sha'alan publicly gave a series of economic lectures in Gulf states. At the time his research showed that Arab investments in the United States, to the tune of $1.5 trillion, were effectively being held hostage and he recommended they be pulled out and reinvested in the tangibles of the Arab and Islamic markets.
"Not in stocks however because the stock market could be manipulated remotely, as we have seen in the last couple of years in the Arab market where trillions of dollars evaporated" he said.
He warned then that it was a certainty that the US economic system was on the verge of collapse because of its cumulative debts, ever-increasing deficit and the interest on that debt. "When the debts and deficits come due, they just issue new Treasury bonds to cover the old bonds due, with their interest and the new deficit too."
The cycle cannot be stopped or the debt cancelled because the United States would no longer be able to borrow. The consequence of relieving this cycle would be a total collapse of their economic system as opposed to the partial, albeit massive, crash of 2008.
"Islamic banking", said Dr. Al-Sha'alan, "always protects the individuals' wealth while putting a cap on selfishness and greed. It has the best of capitalism—filtering out its negatives — and the best of socialism—filtering out its negatives too." Both systems inevitably had to fail.
Additionally, Europe and Japan did not need to be held accountable and indebted to America anymore for protection against the Soviets.
"The essential difference between the Islamic economic system and the capitalist system", he continued "is that in Islam wealth belongs to God - the individual being only its manager. It is a means, not a goal. In capitalism, it is the reverse: money belongs to the individual, and is a goal in and of itself. In America especially, money is worshipped like God."
USA Now
| Its increased creative financing deluded its people into a false sense of security, and now looks like the failure of capitalism altogether. |
In sum, the crash of the entire global economic system is a result of America's fiscal arrogance based upon one set of rules for itself and another for the rest of the world. Its increased creative financing deluded its people into a false sense of security, and now looks like the failure of capitalism altogether.
The whole exercise in democracy by force against Arab Muslim nations has almost bankrupted the United States. The Cold War is over and the United States has nothing to offer: no exports, no production, few natural resources, and no service sector economy.
The very markets that resisted US economic policies the most, having curbed foreign direct investments into America, are those who will fare best and come out ahead.
But not before having paid a very high price.
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* The article is republished with the kind permission of Global Research.ca
Tanya Cariina Hsu is a political researcher and analyst focusing on Saudi Arabian and US relations. She was among the first to break the barrier against public discussion of the Israeli influence upon US foreign policy decision making. A Clean Break" Symposium in Washington D.C. in 2004.
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