22 September, 2008

What does it take for the corporate media to speak the truth about the economic meltdown? Take the BBC Website for example: It has a page titled ‘Q&A: Financial crisis and you’ where you would expect to find an explanation of this, the latest crisis of capital. Dream on folks, dream on.

Actually the best place to look (aside from this and many other progressive sites) is the press that serves the interests of capital (don’t bullshit a bullshitter as the saying goes):

“As we get to the other side of this, the dollar will get crushed,” said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world’s biggest currency hedge-fund firm, which manages about $15 billion.

“The dollar fell against 14 of the world’s most-traded currencies on Sept. 19, including the euro, as Paulson unveiled the plan, while the Standard & Poor’s 500 Index rose 4 percent. The plan may end the rally that began in June and drove the U.S. currency up 10 percent versus the euro, 2 percent against the yen and almost 13 percent compared with Brazil’s real, strategists said.”

/…/

“The downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis,” said David Woo, London-based global head of foreign-exchange strategy at Barclays, the third- biggest currency trader, according to a 2008 survey by Euromoney Institutional Investor Plc.” — ‘Dollar May Get `Crushed’ as Traders Weigh Up Bailout (Update3)’, Bloomberg, 22 September, 2008.

But all of a sudden the ‘popular’ press is all gung ho to tell the public what ‘short selling’ is, but they balk at actually unpacking the mechanisms that make it all possible. The BBC has a page that allegedly explains what short selling is called predictably, ‘Q&A: What exactly is short-selling?’ where we read:

“It is a technique that sees investors borrow an asset, such as shares, currencies or oil contracts, from another investor and then sell that asset in the relevant market hoping the price will fall.

“The aim is to buy back the asset at a lower price and return it to its owner, pocketing the difference.

“The same effect can be achieved without even borrowing the shares at all, but simply by using derivatives contracts – glorified bets.”

It goes on to tell us that:

“This practice may have been to blame for the slump in the shares of HBOS after it announced plans to raise £4bn through a rights issue back in April, and contributed to further huge falls in its shares in the three days before its takeover was announced.” — ‘So what is short-selling?’, BBC News Website, 22 September, 2008.

And finally, excuses the entire disaster by telling us:

“Are short sellers solely to blame for the slump in HBOS shares?

“Many analysts say no.” (ibid)

Well nobody is saying that short selling is the sole cause but it is definitely part of an entire package of speculations in shares, currency values and interest rates. Short sellers have been made the culprits (with the help of the BBC) but they are only one example of what happens when you have a completely unregulated capitalism (and in any case, as with with insider trading, it’s virtually impossible to stop, see below).

And of course you’ll still have to know what a ‘derivative’ is. Not surprisingly, the BBC doesn’t have a page entitled ‘So what is a derivative?’ but elsewhere, business mavens are less circumspect in their explanation of a derivative:

“One of the conclusions of this paper is that the sheer magnitude of derivative instruments combined with the principle of credit risk or assumed credit risk makes for a potentially devastating banking crisis.” — ‘Derivatives 101 – Big Bets’ By Chris Laird, 17 May, 2004.

The same article explains:

“A derivative contract is basically a contract between two parties that is linked to interest rates, currency exchange rates or indexes. The derivative contract links the holder of the contract to the risk and rewards of holding or owning a financial instrument, but without actually holding the instrument. It has tremendous leveraging effects.” (ibid)

Laird’s kicker is:

“In fact…derivatives are basically big bets made with heretofore unattainable leverage, and in amounts that are simply astounding, even to financially savvy mindsets. They expose not only the holders of the derivatives contracts to the risk, but the dealer banks as well if the holders default, (counter-party risk).”

/…/

One of the principles of derivatives is that the risks are managed, but only to the extent that things are foreseen in the model. UNEXPECTED events are highly dangerous as a result.” (ibid)

Whoa, tell me about it! And this article was written in 2004! Note the use of the term ‘model’. These are complex algorithms that pretend to fathom the working of the betting shop, sorry, the stock exchange.

The piece ends with the following, well, warning:

“If any one party defaults, a cascade of time dependent defaults follows. Since the amounts involved are so huge, any weak link is a major risk to the system. As of today, interest rates are moving. So, since the majority of derivatives are tied to interest rates, and interest rates are in flux right now, this is a time of higher risk than we have seen in recent years.”(ibid)

But all derivatives hold one thing in common: Hedging (one’s bet), dealing and speculating, and of course, the interest rate which like shares and currencies is also subject to speculation, betting on its value at some point in the future, whether up or down.

Ultimately it’s a pyramid scheme of astounding, nay, mind-numbing size, in fact tens of trillions of dollars have not only been stolen, but worse, it uses fictional money (as is the case with all pyramid schemes, large and small). Fictional because all the trading in futures, derivatives, hedge funds, call them what you will, relies on the involvement of the central banks and government in the scam, not only in printing the money to keep the fraud going, but by making it legal to setup these pyramid schemes in the first place. It’s called ‘de-regulation’.

The people and institutions who end up with the moola are those who set them up in the first place (as is the case with all pyramid schemes) when they sold their bits of paper to people and institutions like banks and insurance companies just as greedy as they are.

The wealth is real but it’s been siphoned off as part of the gigantic paper trading schemes that goes on between hedge funds, insurance companies, banks, and investment corporations, with each one raking off a pecentage, a fee or charges resulting from insuring (and re-insuring, even re-re-insuring) the transactions, all of which are really bad debts as no real wealth has been created.

For the real values of all the pyramid selling are not what the bits of paper say they are, so sooner or later those at the bottom of the pyramid—that’s the great majority of us and who never asked to be part of the pyramid—are paying the price, that’s what the ‘bailout’ is all about. That’s what nationalizing the big financial corps is all about. When capitalism fails, the state, using our money, steps in. But it doesn’t end here as governments will have to borrow the money to shore up capitalism, thus look forward to greater cuts in social spending and rising taxes.

The panic is palpable as the recent decision to ban all short trading (until January 2009) reveals but it will do nothing to halt the slide, it’s much too late for that, and more to the point it looks good in the corporate media, apparently dissing all those greedy traders. The reality is something else as:

“While the SEC measure will prohibit small investors from profiting on the downturn, big investors have a very easy way around this.

“They will simply go short [sell] on complete indexes like the Dow Top 30, FTSE 100 or S&P 500 and will then go long, i.e. buy, all single stocks in that index that are not the ones they want to target. The net effect is a short position on the targeted financials only.

“It will take a day or two for large hedge funds to set this up effectively and reprogram their computers to automate the process. Then the financial stocks will sink again as is appropriate.

“The SEC would have to prohibit all index option trading to prevent this, but that would freeze and ruin lots of investors like pension funds that have done nothing wrong.” — ‘How To Still Short Financials’, – Moon of Alabama.

What all of this reveals is the total chaos of capitalist economics, made all the more fragile by the interconnectedness of hundreds of ‘national’ economies, that have little or no control over the international nature of capitalism.