The Raft of the Medusa....all aboard!
by Toni Solo
So there you have it then. Gordon Brown, incumbent of Number 10 Gin Lane, gets his old-fashioned-credit-boom
come-uppance. Rumsfeld's New Europe begs Old Europe for a dime - but Old Europe is bust too. A new Great Decider rises
up out of Washington's whited sepulchre. Stuck on a zero-interest rate tide, for lack of credit derivative winds the
sails droop on his surely-they-must-be-worth-something?-dollar-laden galleons. In North America and Europe, the galley
slaves can't-pay-won't-pay the mortgage on their rowing places.
Central banks and governments of countries not-so-rich-now have flooded financial markets with liquidity in order to
bail out their accomplices in the imperialist globalization cartel - the major corporate finance debt-creators. The
purpose has been to try and recapitalise these lenders, reactivating debt markets using public funds to make good
widespread corporate insolvency. The logic seems to be that if similar, government-corporate finance-central bank
liaison worked to reinflate markets after the dot.com bust and elongate the credit boom via asset-price bubbles - why
not now?
From 2006 to 2008, one strand of that global State-corporate finance-central bank cartel's activity was a policy of
managed dollar devaluation. The policy encouraged a steady increase in commodity prices, especially oil. Those prices
began to spike once the shadow banking system began to fall apart in July 2007 with the failure of two hedge funds of
the now defunct and unlamented Bear Stearns finance house. As the ghastly implications of the bust in property asset
prices dawned, money fled into commodities. With hindsight, it seems likely an important component of the commodities
boom was an effort by major corporate finance players to get hold quickly of vast oodles of cash to try and fatten up
the asset side of their balance sheets.
By mid-2008, once the insolvency of major corporate financial players became clear with the effective nationalization of
US government sponsored enterprises, money flooded out of commodities into US government bonds. It was a flight to the
safety of reserve currency instruments yielding zero or worse than zero - hopeful souls climbing aboard the Raft of the
Medusa thinking they might somehow be safe. The desperation of the Treasury-Wall Street-Federal Reserve rescue plan
fronted by Henry Paulson and its successor fronted by Timothy Geithner seems fundamentally to stem from Wall Street's
fear of being eaten by competitors for available financial resources - the people of the United States, for example.
The scale, abruptness and speed of the deflationary forces that took hold from July 2008 onwards were stunning. The US
government acknowledged as much when they suddenly and humilatingly reversed policy to save American Insurance Group
after letting Lehman Brothers collapse. That moment confirmed the truly insolvent state of leading players in
international finance markets, not just in the US but in Europe too, where the European Union's unsavoury political
elite of corporate gangsters, confidence tricksters and smug narcissists flounder hopelessly now. They are just as
unwilling as their colleagues in the US to accept the need to wipe out major bank's shareholders, change both management
and its current culture, and nationalise large chunks of their financial system.
One now largely forgotten news item from July was the decision by the Financial Accounting Standards Board to postpone
for a year a new requirement for companies to bring off-balance sheet liabilities onto their balance sheets. Why should
anyone care about some arcane accounting rule? Well, as Alan and Ian Katz put it in a Bloomberg article of October 30th
2008,"Today, a road snakes from the foreclosed homes of California and Ohio to the capital cities of Europe, where
politicians and bankers have struggled to contain a widening credit crisis by pumping hundreds of billions of euros into
the financial system. The road was paved with decisions like ones by FASB that allowed banks to keep shifting assets
into blind spots outside the view of shareholders and industry overseers."
Many commentators have noted that the major banks in the US are now indeed lending, albeit much more tightly than
before. But they are also hoarding their government bailout cash well above the capital requirement limits stipulated by
regulators. Clearly, one of the main reasons they are doing so is to be prepared for the huge increase in their
liabilities once all their off-balance sheet liabilities are eventually reinstated. It seems obvious that, for example,
when companies do finally have to admit off-balance sheet liabilities onto their balance sheets, another round of
massive bailouts will be more than likely.
The huge amounts of liquidity unleashed by the United States and European monetary authorities look unlikely to prevent
continuing economic contraction. Acute analysts across the political spectrum agree it is crazy to prop up asset prices
trying to sustain the culture of debt when the debt needs writing off. They also agree that if the major corporate
finance houses and banks are insolvent they should be wound up now rather than allowed to beef up the asset side of
their balance sheet in vain for a while by feeding off healthy smaller banks.
Perhaps State-corporate finance-central bank collaboration - through management of interest rates, bond markets, repo
markets and ancillary mechanisms - will be smart and resilient enough to prevent a dollar collapse and cope with
external pressure or shocks that may provoke a feint at one. The truth will be clear enough within the year. Other
global actors are not waiting to find out. If there is one fundamental change in the global economy that is absolutely
certain, it is that countries outside North America and Europe will make alternative arrangements to free themselves of
dependence on the Western Bloc dominated financial system.
The leaders of the Bolivarian Alternative for the Americas, Bolivia's Evo Morales, Venezuela's Hugo Chavez, Cuba's Raul
Castro and Nicaragua's Daniel Ortega all visited Russia in 2008. One of the things they were all discussing was the
development of ALBA's system of complementary, solidarity-based trade. It is a system that in many transactions obviates
the need for Wall Street finance, for currency exchange, for lines of credit.
That is one of the fundamental reasons why the US government and its European allies loath Venezuela's President Hugo
Chavez. When Dmitri Medvedev, Russia's President visited Venezuela at the end of November, his visit just happened to
coincide with an ALBA country summit meeting. It is very clear that the rest of the world is unlikely meekly to wait
while Western Bloc imperialist countries put their finance system back as it was.
As the huge US and European bailouts accumulate and continue to fail to boost output and consumption through 2009 and
into 2010, pressure for policy changes are likely to accumulate proportionately. As government tax revenue diminishes
and budget deficits balloon far out of control, very serious political conflict is likely to break out over public
spending priorities. For example, why waste billions in Afghanistan while local government cannot fund education budgets
or mend roads? If the US and European governments try solving their budget deficits and policy conflicts by getting
central banks to monetize debt even more than they are already, events on the Western Bloc Raft of the Medusa may well
make Géricault's nightmare vision look tame.
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Toni writes for www.tortillaconsal.com