"The Federal Reserve is a key mechanism for
perpetuating this whole filthy system, in which
"Wall Street rules."
the depression is already
here for most of us below the super-rich!
Trump and the GOP created a fake
economic boom on our collective credit card: The equivalent of
maxing out your credit cards and saying look how good I'm doing right
now.
Trump criticized
Dimon in 2013 for supposedly contributing to the country’s
economic downturn. “I’m not Jamie Dimon, who pays $13 billion
to settle a case and then pays $11 billion to settle a case and who I
think is the worst banker in the United States,” he told reporters.
"One of the premier institutions
of big business, JP Morgan Chase, issued an internal report on
the eve of the 10th anniversary of the 2008 crash, which warned that
another “great liquidity crisis” was possible, and that a
government bailout on the scale of that effected by Bush and Obama
will produce social unrest, “in light of the potential impact
of central bank actions in driving inequality between
asset owners and labor."
"Overall,
the reaction to the decision points to the underlying fragility of
financial markets, which have become a house of cards as a result of the
massive inflows of money from the Fed and other central banks, and are now
extremely susceptible to even a small tightening in financial
conditions."
"It
is significant that what the Financial
Times described as a “tsunami of money”—estimated to reach $1
trillion for the year—has failed to prevent what could be the worst year for
stock markets since the global financial crisis."
"A decade ago, as the financial
crisis raged, America’s banks were in ruins. Lehman Brothers, the storied
158-year-old investment house, collapsed into bankruptcy in mid-September
2008. Six months earlier, Bear Stearns, its competitor, had required a
government-engineered rescue to avert the same outcome. By October, two of
the nation’s largest commercial banks, Citigroup and Bank of America,
needed their own government-tailored bailouts to escape failure. Smaller
but still-sizable banks, such as Washington Mutual and IndyMac,
died."
The
GOP said the "Tax Cuts and Jobs Act" would reduce deficits and
supercharge the economy (and stocks and wages). The White House says
things are working as planned, but one year on--the numbers mostly
suggest otherwise.
As global economy enters synchronised
slowdown US Federal Reserve starts
“quantitative easing forever”
Two actions by US financial authorities this week indicate that the United States will respond to a looming downturn in the global economy by providing, once again, unlimited amounts of cash to financial markets.
On Wednesday, the Federal Reserve began an operation, lasting at least six months, to purchase around $60 billion of Treasury bills a month in response to sharp spikes in interest rates in overnight markets. The following day, in a separate action, the New York Federal Reserve injected $104.15 billion into financial markets to boost liquidity.
Federal Reserve Building on Constitution Avenue in Washington [Credit: AP Photo/J. Scott Applewhite, file]
Together with the Fed’s decisions to twice cut interest rates, with the prospect of another cut at the end of this month, these moves make clear that, in conditions characterised by the International Monetary Fund as a “synchronised” global slowdown, any efforts to “normalize” monetary policy are well and truly over.
The European Central Bank has reversed its plan to end financial asset purchases and lowered its base interest rate further into negative territory, while the Bank of Japan continues to be the virtual sole purchaser of government debt and a major buyer of corporate shares.
In other words, the policy of the world’s major central banks, acting on behalf of a global financial oligarchy, is quantitative easing ad infinitum.
After the crash of 2008, the Fed and other central banks handed out trillions of dollars to the banks and finance houses whose actions had precipitated the crisis. This money did not go into the real economy but passed straight into the coffers of the financial oligarchs. Now, more unlimited cash is to be made available to the financial elites as they seek to slash the wages and conditions of workers.
The historic crisis of the global capitalist economy driving this program is exemplified in reports issued by the IMF for its semi-annual meeting Washington this week.
The most significant feature of the IMF’s World Economic Outlook report, which charts global growth, was not the cutting of growth projections for this year and the next, important as that was. It was the analysis that no significant upturn for the “big four” economies—the US, Japan, the eurozone and China—could be expected for the next five years.
At the end of 2017 and leading into 2018, the IMF and other global institutions were pointing to an upturn in global growth. This was taken as an indication that, at last, after the passage of almost a decade, the world economy was finally experiencing something of a revival.
The upturn proved to be remarkably short-lived. By the middle of 2018, the trend had turned down—a situation that has continued into 2019. As the latest IMF report makes clear, ongoing stagnation, with the increasing threat of outright recession, is now the “new normal.”
At the same time, the so-called “unconventional monetary policies” of the world’s major central banks—the lowering of interest rates to record historical lows and the pumping of trillions of dollars into the global financial system through the purchase of government bonds and other financial assets—have created the conditions for a new financial crisis, potentially even more devastating than that of 2008.
The rationale for these policies was that they would eventually bring about an economic expansion after the deepest recession since the 1930s. The resumption of economic growth would then see a return to a more “normal” monetary policy.
Nothing of the sort has taken place. Instead, the financial system has become so dependent upon and addicted to the endless supply of cheap money that even the slightest move to reduce it threatens to set off a crisis.
“Unconventional monetary policies” and the ongoing economic stagnation now operate in a vicious circle. Falling growth has meant that instead of inducing investors to place the money made available to them in the real economy, they have channelled it into ever riskier financial assets in order to expand their capital. However, such assets are the most likely to experience a collapse in any significant economic downturn, the signs of which are becoming increasingly apparent.
Such a prospect was set out in the IMF’s Global Financial Stability report produced for this week’s meeting.
“In a material economic slowdown scenario, half as severe as the global financial crisis,” it said, “corporate debt-at-risk [debt owed by firms that are unable to cover their interest payments with their earnings] could rise to $19 trillion—or nearly 40 percent of total corporate debt in major economies—above crisis levels.”
The report noted that very low rates were prompting investors to search for yield by taking on “riskier and more illiquid assets to generate targeted returns.” The result is that “vulnerabilities among nonbank financial institutions are now elevated in 80 percent of economies with systemically important financial sectors”—a share similar to that “at the height of the global financial crisis.”
The crucial questions for the working class the world over are: what are the implications of this new stage in the capitalist breakdown and how must it respond?
The answers are to be found through an examination of the political economy of the past decade.
While the policies of the central banks after 2008 appeared to create wealth out of thin air, all financial assets are, in the final analysis, a claim on the surplus value extracted from the labour of the working class the world over in the process of capitalist production.
This is why the processes of quantitative easing—starting with the bailout of the banks and financial houses in 2008-9 and the vast expansion of financial assets that followed—have been accompanied by a restructuring of class relations.
In the US, the bailout of the auto companies GM and Chrysler in 2009 by the Obama administration, and supported to the hilt by the UAW bureaucracy, which was a major financial beneficiary, was the start of an offensive against wages and conditions across the board.
In Britain, the austerity drive initiated by the Labour government and continued under the Tories has resulted in the biggest attacks on wages and social conditions going back 200 years. In every country, the working class has experienced stagnant and falling real wages and the destruction of social conditions.
At the same time, social inequality has risen to historically unprecedented levels. Such conditions are incompatible with the maintenance of democratic rights. Accordingly, the vast transfer of wealth to the heights of society over the past decade has seen the development of ever more authoritarian forms of rule and the promotion by the highest levels of the state of ultraright-wing and fascist forces, of which the Trump presidency is only one expression.
Today, amid a deepening breakdown of their entire economic order, marked by deepening trade and military conflicts, and bereft of any program to alleviate it, the ruling classes are confronted with a rising tide of class struggle.
They have only one policy—the escalation to new heights of all the attacks they have carried out over the past decade.
Once again, the US auto industry is at the centre of this offensive. The central drive of General Motors, acting on behalf of Wall Street, is to establish new levels of even more intense exploitation in line with the methods developed by Amazon and firms in the so-called “gig” economy.
But after decades of suppression at the hands of the trade unions and social-democratic parties, the international working class is striving to break free of the straitjacket to which it has been confined and to assert its own independent interests.
The development of this movement depends above all on the recognition by workers that what they confront is not a series of problems that can be resolved by patchwork reforms, but the decay and crisis of an entire socioeconomic order, and that the way forward lies in the fight for political power on the basis of a program for the reconstruction of society on socialist foundations.
Repo
Madness: Fed Announces a Third Day of Emergency Funding
Spencer Platt/Getty Images
The Federal Reserve Bank of New
York announced Wednesday afternoon that it
would once again intervene in the repo market on Thursday, its third
consecutive day of supplying tens of billions of dollars to hold down interest
rates in the short term funding market.
Repo
Madness: Fed Announces a Third Day of Emergency Funding
18 Sep 201922
3:08
The Federal Reserve Bank of New
York announced Wednesday afternoon that it
would once again intervene in the repo market on Thursday, its third
consecutive day of supplying tens of billions of dollars to hold down interest
rates in the short term funding market.
The repo market is at the center of the U.S. financial system
but it is little understood even by most people working in finance.
Big Wall Street banks borrow cash to finance their securities
portfolios by selling securities and promising to buy them back the following
day. The cash comes from investors with lots of dollars looking to make a
little extra interest, such as money-market funds and government-sponsored
housing agencies such as Fannie Mae, Freddie Mac, and the Federal Home Loan
bank. Typically, the interest rate on repos falls within the Fed’s target range
for the fed funds rate, the rate banks pay to borrow reserves from each other.
Here’s how it works. Traders at the big Wall Street firms put in
bids to borrow cash overnight and cash investors accept bids, typically
striking deals by 10 a.m. The bids are promises to pay an interest rate and a
pledge to post securities as collateral. After the market closes at the end of
the day, the securities get allocated to the cash investors. The following day,
at 8:30 in the morning, the repos get unwound. The cash investors get their
cash back and the Wall Street banks get their securities back. Then it starts
all over again.
Why do the big Wall Street banks fund themselves this way? It’s
really just a more intense version of the basic model of banking: borrow
short-term, lend long-term, and make your profit on the difference between the
rates. In this case, however, the big banks are borrowing the cash overnight
and using it to buy longer-term bonds paying higher rates of interest. If
collateralizing a loan with securities that were purchased with the loan sounds
strange just remember that this is not really that much different than how a
car loan or a mortgage is collateralized.
Usually, the repo process is nearly seamless. Most of the
previous day’s trades just get rolled over into the next day’s repos, with a
slight tinkering of the rates and slight shifts in the collateral. But
this week has been unusual.
At the start of the week, the repo rate unexpectedly jumped
higher, indicating that there was a shortage of dollars compared with demand.
On Tuesday, the Fed stepped into the market by supplying $53 billion of cash in
exchange for securities. On Wednesday, the Fed supplied $75 billion of cash–and
said it had bids for an additional $5 billion of repos.
On Wednesday afternoon, the New York Fed announced that it would
once again supply cash to the repo market on Thursday morning.
It’s not clear what has caused the cash crunch. On Monday,
several investors pointed to developments in Saudi Arabia and the due date for
corporate tax payments causing an unusual surge in demand for cash. But the
stress has continued even as those events have receded.
Fed chair Jerome Powell was
asked about the crunch at his press conference Wednesday but offered little by
way of explanation. So the mystery continues alongside the New York Fed’s
emergency funding.
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