I guess news outlets are still pushing the line that the S&P debt downgrade is what has driven the stock market volatility over the past week or so. They have to neglect that the market was falling before the downgrade to come up with this rationale, but no matter, I guess.
In planet reality, there are two plausible explanations for the market crash. One concerns Europe:
The most obvious alternative explanation for the plunge in the market is the risk that the euro could break up as the debt crisis spread from relatively countries like Greece and Ireland, to the euro zone giants, Spain and Italy. The prospect of a euro zone break-up raises a real risk of a Lehman-type freeze up of the world financial system. It is far more plausible that this prospect led to the plunge in the stock market than the downgrade by one of three major credit rating agencies.
While the ECB intervention in the bond markets seems to have stabilized, for the moment, debt yields in Italy and Spain, the attention has now turned to French banks, in particular Société Générale, which rumors of financial difficulties and exposure to sovereign debt sent plummeting. Of course, you have interconnectedness between all these banks, which have only gotten bigger since Lehman. So a drop in any part of the financial system has implications for all of it. I have no idea why France is considering further austerity measures to respond to a bank crisis; maybe they’re just making room for the inevitable bailout.
But there’s another reason here, one that’s also very familiar. Look at the list of 30 stocks that make up the Dow. You may notice JPMorgan Chase and Bank of America. We know that Bank of America has been hammered recently, losing 36% of its stock value in three weeks. We’ve put them on a death watch. Extreme volatility in one of the 30 Dow stocks is going to ripple throughout the whole market.
And we do have a notion of why this is happening. New York Attorney General Eric Schneiderman’s intervention in the Bank of America settlement, where they were trying to get away with resolving all their Countrywide legacy MBS issues and chain of title problems for three cents on the dollar, finally pushed to the forefront the legal argument about improper conveyance of mortgages into the trusts that created the securities. This blows the whistle on the failure to properly create the MBS in the first place, exposing BofA to charges that that MBS they issued aren’t even real. Within a couple days, AIG was suing BofA (now there’s a lawsuit with no public rooting interest) for 35% of the face value of the MBS.
BofA has tried very hard to rid themselves of their liabilities on their mortgage loans, and between private actors, investors, judges and state law enforcement officials, they haven’t been able to do it. And the market has noticed just how vulnerable they are. So have regulators; the Financial Stability Oversight Council held a meeting on BofA just this week. And of course you have interconnectedness there as well.
In that sense, you’re basically talking about the same problem of over-exposure to bad mortgages that characterized the financial crisis. It never ended; the toxic assets were never taken from the books, the too big to fail banks never had their balance sheets resolved. Daniel Indiviglio catches this:
In fact, this entire problem is just a continuation of the toxic mortgage security disaster that led to the first financial crisis. At that time, Treasury Secretary Hank Paulson conceived of a bailout plan through which the Treasury would purchase troubled mortgage securities to sort of suck the poison out of the financial system. Unfortunately, the former CEO of Goldman Sachs couldn’t figure out a way to implement this strategy quickly enough to respond to the growing crisis. So instead, he threw money at the banks until the market relaxed, assuming that the government wouldn’t let any fail.
But if he had managed to get these mortgage securities off of the balance sheets of banks and investors, then we might not be worrying about this problem right now. Instead, the government would own the bulk of these securities and probably wouldn’t be going after the banks so aggressively to cover its losses. After all, the entire purpose of a bailout is to rescue banks, not try to squeeze as much money out of them as possible.
Instead, these toxic securities continue to plague the financial system. And now that their disease is back, with home prices continuing to give way, investors are trying to push them back to the banks. If the market can’t come to a quick, tidy solution itself over the next couple of months to end this problem for good, then the government may have to intervene again — if it can.
Analysts are kidding themselves by saying that banks are better equipped to handle the financial crisis this time. In a worst-case scenario, the accumulated exposure from MBS will wipe out whatever capital reserves BofA is holding, and it’s impossible to protect the rest of the system from a giant failure like that.
So this is not the next financial crisis; it’s the same one. And it’s a result of a huge failure on the part of the banking system going back a decade, a failure for which they are resisting paying the price.
…I don’t want to discount the fact that the economy is shitty and there’s no real hope that policymakers will act to do anything about it. But you can just layer that on top of the European situation, and the same financial crisis.





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Thank you for a terrific insight. Hank’s bank yank stank then and the same screw you continues today.
This article makes good points but is incomplete.
Europe is also blowing up.
So this is not just a Jon Stewart clusterfuck; rather it is a compound clusterfuck.
SAME banksters
There’s too much leverage everywhere. That’s why we keep lurching from one debt crisis to another. Sooner or later we’ll lurch into a crisis the the asshole politicians and central bankers can’t control.
Face it, the “prosperity” of the last 30 years was an illusion created by a huge credit bubble that enriched the wealthy and their whores in the political class.
could someone please help
my post DIDNT post
http://my.firedoglake.com/sadlyyes/2011/08/11/this-is-the-dean-scream-we-need/
After WW2 we made the decision to accept lousy trade agreements to help allies and potential allies, the process going out of control with Reagan and his decision to finance his deficit with foreign funds owned by others because of the debt, giving them in 1983 an incentive of not paying taxes on the interest paid on those bonds.
But in the case of the country that we sort of ran at the time whose economy was in trouble, we watched as they, Japan, in June 1952, put in effect the “Basic Policy for the Introduction of Foreign Investment into Japan’s Passenger Car Industry” which placed quotas, tariffs and commodity taxes on imports that closed the Japanese automobile market to American manufacturers for nearly two decades, while also making use of licensing agreements which would transfer foreign technology to Japan in exchange for limited market access. China now demands that technology access/co-ownership for technology and of the subsidiary firm set up in China for firms that want to use China’s low cost labor market.
Perhaps folks were hoping that we would have some “change we can believe in” in trade, and go back to the modest protection we used for the first 120 years. Then when they saw that Obama was serious about his 3 trade treaties (one blogger thinks Obama wants to push US wages down 30% to make us competitive), they noted this was just further destruction to help the rich pick up the pieces, and they sold?
Indeed there are many reasons, many Obama actions and in-actions, to chose from.
Probably would have been better to give the $700 Billion to the American people so they could pay off any debt they owed to the Banksters.
Traders have seized on today’s lower unemployment numbers as their latest “green shoots”. I guess ignoring discouraged workers makes them optimistic.
If the markets are like this in August, what will they look like in October when (1) there is a budget fight and government shutdown, (2) US state austerity and federal austerity both start to kick in, (3) third quarter corporate reports do not show any increase in deman, (4) the consequences for Bank of America and Bank of New York are clearer to investors, (5) Europe is still thrashing around, and (6) the posturing over the Joint Committee (they could use a few) is ramping up.
The economy is in the toilet and not soon to climb out of it. Will investors in their six-month time horizon realize that? Will it occur all at once? Are we heading for a Black Monday or Black Thursday?
“Face it, the “prosperity” of the last 30 years was an illusion created by a huge credit bubble”
___
I would have to agree. The increasing recursive leveraged flipping of paper masked the real decline in actual sustainable economic growth here.
Is there a chance this clusterfuckery could all be by grand design to make someone an assload of money? Wall Street came out pretty good after the last bailout with bonuses and all. Sorry for the cynicism, but I don’t trust any of them. They run the world.
But then that would be “socialism”, wouldn’t it?
Yep, you could have had a whole lot of people pay off their mortgages completely with $700 billion, completely unwinding the credit default swap mess instead of perpetuating it. If only the opportunity for “moral hazard” for little people were not more important than the actual moral hazard of investment banks.
But some folks made gazillions of dollars on this and then got bailouts on top of that!
We have morphed into a culture that subsidizes the risk that an elite group chooses to takes, does not hold them accountable for paying the public back for these subsidies, AND THEN GIVES THESE SAME ELITE MASSIVE TAX BREAKS TOO!
obama now fully owns much of this – we are in deep doo-doo folks, because “I am a better thief than the repug thieves” is not a winning message.
It appears to be all we get from national Dem leadership.
What prosperity? Ah yes, you did put it in quotes.
During that “Morning in America” a whole bunch of folks began getting drunk and did not stop until they passed out in 2008. And now it’s the morning after the “Morning in America”. Even Poppy Bush said it was voodoo economics. Others called it “smoke and mirrors”. We knew it was an illusion at the time. And on October 19. 1987, the first mirror broke. On August 1, 1988, Rush Limbaugh hit the airwaves, having been recruited by ABC Radio President Edward F. McLauglin. His show debuted after the Democratic National Convention and before the Republican National Convention. And Americans started going on one huge bender.
Just look at 2010 – repugs ran an insane pair at the top of their ticket.
The the hopey-changey guy filled his admin with rahm and bansters. Now we know that banksters underwrote his campaign.
It doesn’t look good and your assessment, while I cannot “prove” beyond a reasonable doubt, certainly has enough merit to be on the table.
I never listen to rush limpdick, but hear clips from time to time. He voice is totally shot and it just hurts to listen to him try to rant now, becoming like fingers on chalkboard.
Years and years of yelling hate into the microphone has taken its toll. It amazes me that anyone in msm still thinks he has credibility or the voice to be their mouthpiece.
But then it was propaganda from the get-go and his success was fully manufactured to “catapult” lies. The stations that broadcast him have decided those media assets are worth more as propaganda vehicles than as legit news/business models.
But damn it – why does not superblog accept the role of leading a concensus for economic boycotts that are widespread, supported by progressive/liberals, and talked out in the open.
walmart (and all others) do not give a damn if we individuall choose not to shop there. But if this was organized and the public fully saw this was collective, they would be scared sh!tless.
The solution here isn’t that hard to figure out.
I certainly mention Europe. But importantly, Euro banks are so weak in the first place because of their exposure to the financial crisis.
I don’t quite agree – the Clinton years of 22 million new jobs and 3.7% average GDP growth with jobs in manufacturing increasing over when he took office to when he left (perhaps the first such increase over an 8 year term since the 70′s) with per person after tax income actually rising for the lower classes (again a reverse of the Reagan/Bush years) do not fit your generalization.
While it seems an FDL social requirement to pretend the prosperity of the Clinton years did not occur – or if you admit it occurred it was not because of Clinton because it was just some bubble – the facts seem to be that no bubble was involved. We just had good times – it really is possible. Indeed NAFTA even produced US jobs on a net basis prior to Bush taking over.
Amazing as it may seem, it is possible to run this country well.
But thank God Obama beat Hillary, although there is no difference between them (I think I got that down correctly)/s
Wait, that can’t be right. Everyone in America now owns a video game. Isn’t that prosperity?
I like this post DD. You have all the likely candidates here for the malaise we see. And it is just a continuation of 2008. Too bad we do not have really good economists and financial managers. All they can think to do is follow the road to austerity. After all, it’s working for Greece, I think? Anyway once government gets out of the way, we are told by O and the thugs that all will be well.
I haven’t set foot in a WalMart in years and have tried to persuade others to do the same. I’ve had damn few takers. They tell me WalMart has cheaper this or cheaper that, even after I’ve explained to them that they are subsidizing WalMart employees healthcare because they qualify for state aid via low wages. It doesn’t matter. Apathy, my friend, is the problem. And back to WalMart they go.
I agree 100%. The infamous “public debt, private profits” that Obama spoke of has not changed ONE BIT. He’s done NOTHING to effect these inequities in the financial market. He hasn’t really even tried. Much could have been doen in the first two years of his presidency besides DADT and HCR. Now, he AND the democratic party are part of the problem, NOT part of the solution.
I know Obama inherited a HUGE MESS. He and the democrats promised CHANGE. All we have gotten is a bulky healthcare program that most people don;t seem to want or like and government mired in politics and definately NOT promoting the general welfare and establishing the blessings of liberty for ourselves and our posterity. I know that for a fact because I was discussing this with the three homneless in left turn lane last night.
“I’ve explained to them that they are subsidizing WalMart employees healthcare because they qualify for state aid via low wages”
That seems like the wrong tack to take as it sounds like you are criticizing the existence of Medicaid and other such programs. Do you not think that low wage workers should get subsidized healthcare? I believe the answer is that you want low wage workers to be able to get subsidized healthcare, so you’re stepping on your own goals.
So what will the Tea Party controlled house do if we go into Lehman II?
Will they buck the mainstream Rethugs who will vote for a bailout? Teahadists were the biggest screamers of “NO!” last time around. How could anyone support a bailout given the current overdosed viagra-driven austerity screwing we’re getting from congress and the Tyrant (TOTUS)?
No the banks are doing what they are supposed to do, be greedy SOBs.
This is a failure of of government in general to regulate them.
Obama likes to think of himself as the adult in the room, but after the kids burnt down the barn he didn’t take the matches away, now they are playing in the house.
That may be what the US is doing as well
Clinton should not get all the credit you are giving him. First, the great employment number were caused by the Dot Com boom, not by government policy. Second, much deregulation of the financial industry occurred in the Clinton administration, but that takes time to blow up. He administration repealed, among other things, the Glass-Steagall Act. The crash which he helped by deregulation occurred when Bush took office. Lastly, the housing bubble was in a way promoted by him. His administration started the $250,000 tax free for a single, $500,000 tax free for a couple, policy when they sold a house. This started the house flipping. The house flipping and the repeal of the Glass-Steagall were major contributors to the 2008 crash.
Obama himself is playing with matches with his anti-stimulus pro-austerity drive
LIke your poists. You come up wioth some pretty good analogies sometimes…… Or is that a metaphor? I get those confused.
Is there an English teacher in the house?????
DDay are you really saying that the troublesome debt in European banks is subprime mortgage debt? I think you are stretching your framing here.
We know Italian banks did not plunge into subprime mortgage lending, directly or indirectly. Yet a few of the largest Italian banks (UniCredit, Intesa SanPaulo) are in deep trouble, primarily because they loaned so heavily to their own govt (sovereign debt). Same for Greek banks. French & German banks are deeply awash in Greek, Spanish, Portugese & Italian sovereign debt. But it’s not subprime mortgage debt, is it?
Incidentally, the figures I saw last month suggested French & German banks could easily absorb 100% losses on their Greek bonds and probably on Portugese bonds, but I did not see separate figures for Italian or Spanish bonds. The shock to Societe’ Generale’s stock price did not result from its over-involvement in subprime mortgage lending, did it?
Thanks for the comment. But we disagree.
One hears about the great employment number being caused by the Dot Com boom, but those that say that refuse to look at the numbers that show the dot.coms never employed many folks – and indeed when the dot.coms folded and mass layoffs occurred and the NASDAQ dot.com prices caved, employment hardly changed and indeed kept going up by 200,000 or more each month for that month (of the NASDAQ crash) and the year after.
Folks say that much financial deregulation of the financial industry occurred in the Clinton administration, but they can’t point to anything that produced prosperity from that deregulation – indeed they can not point to the any actual deregulation beyond allowing mergers in Title 3 of the Digital bill and in the modification to Glass-Steagall. Indeed Bill added new regulation and more important enforced old regulations. Krugman has note that nothing that was done to Glass-Steagall had more than a minor effect on the 2007/8 financial meltdown. But the 2007/8 financial meltdown was indeed due to ending all regulation under the Fed – a independent Greenspan decision that let the investment banks and their derivatives go wild and cause the 2007/8 meltdown.
The CRAP that Clinton caused Bush’s crash is just that – crap. It is the same crap we heard in 96 that Clinton’s prosperity was caused by Reagan (making Reagan’s prosperity caused by Carter?). First no one can point to the deregulation that took 8 years or more to cause a crash – G-S is not it as Krugman and others have noted – hell G-S never regulated the investment banks – there were no G-S regs on investment banks and their derivatives before the change and none after because investment banks are solely under the Fed.
To blame the housing bubble on the Taxpayer Relief Act of 1997 (Public Law 105-34) is a bit over the top as all it did was to move the procedure for getting no tax – it went from filing a 1031 exemption to using the new law – not a big deal. I assume you were not in tax back then (I was rather deeply into it), but the $250,000 tax free for a single, $500,000 tax free for a couple, was a hit to the rich and indeed was the reason Bush in 2003 dropped the tax on the excess housing gain to 15%.
House flipping was a big deal because of Bush approval of liar loans – and there was no Clinton financial deregulation that led to the 2007/8 meltdown.
The need to take Clinton down was a Bush thing and then Obama had to defeat Hillary. The lies worked, the game is over. If you want to discuss real history we can get into the weeds of each regulation – including how Clinton’s Section 482 regulations forced companies to grow jobs in the US rather than sending them overseas.
I actually think the next crash to come, which is of course still part of the 1st, will wipe out the wealth of the elite and political classes. We, the little people, don’t have anymore wealth to wipe out and this whole exercise of bailouts and malign neglect was really just a bunch of short-sighted delaying measures to stave off the day when all of the wealthy fools who made the stupid bets and bad policies would have to pay the piper. As you show, the toxic assets were never dealt with. Most of the wealth these robber barons amassed is dependent upon the valuation of those toxic assets. As the market becomes ever more focused on those facts it becomes impossible for them to deny reality any longer. As I’ve said before, the rest of us won’t necessarily benefit or be made much worse, but those who have gleefully ignored our plight will be joining us quite soon.
When the next meltdown comes we are truly fucked. There was a chance when the shit hit the fan back in 2008 for real reforms to be made which would protect our system from future problems. Regulations on derivatives should have been forced through a Democratic-controlled congress along with prying the teeth of the TBTF banks off the public tit and allowing them to fail, thereby saving the trillions of dollars that were given to them while the rest of us are left to our own devices.
When it happens this time, and it’s closer than anyone will admit except for the people at zerohedge, there will not be any reserves left for more bailouts. The money that should be in the treasury is going to the top .1% of Americans in the form of the continued Bush tax cuts, to the war machine for the illegal wars we’re still involved in, and is being sent offshore by corporations that are avoiding taxes.
The bailout that is going to be needed this time will be larger than that which the GOP cried about last time and this time there will be no doubt about where the money’s coming from. It’s coming from those of us who have been forced to pay increased taxes into the Social Security system since 1983 for our retirement benefits.
Now we’re being depicted as greedy undeserving people. While the thieves in government drool over the chance they have to take our hard-earned money, everyone in the country who has paid into that system is about to be treated like unionized workers ever since the late 70s – we gave up wage increases for better health care plans and deferred retirement income. From that point on, corporations reneged on their pension obligations, leaving them for the government to cover, except the government agency that was designed to protect pensions was deliberately underfunded so that the impoverishment of the American working and middle classes was a fait accompli.