Henry M. Seggerman,
president of International Investment Advisers |
By Henry M. Seggerman
President of International Investment Advisers
Karl Marx predicted 140 years ago, among other things, that Capitalism bore the seeds of its own destruction, which the unfettered pursuit of financial gain would eventually destroy capitalist economies.
Certainly, the Industrial Revolution and rapid growth of the financial industry in the years that followed, up until 1929, did nothing to disprove this.
Lack of ``socialist'' (if you will) regulation during rampant Wall Street speculation in the 1920s resulted in an asset bubble which crashed in 1929 and triggered the Great Depression.
A Democratic administration elected in 1932 launched a New Deal providing relief to poverty and unemployment, measures that were widely decried as ``socialist'' by conservatives. It also enforced and strengthened financial industry oversight made necessary by the 1929 Crash. Asset-backed securities were prohibited in this era.
Before capitalist economies had a chance to fully regain strength, the world descended into a period of what was essentially imperial conflict. Frustrated by centuries of success of England, France, Spain, and Portugal in dominating Africa, Asia, and South America ― and reaping vast economic rewards from those empires ― Germany, Japan and Italy set out to create their own empires.
The expansion of capitalism was subordinated in this massive conflict between rival nations, each seeking to hold onto or expand its lucrative empire.
When the 20th century imperial ambitions of Germany, Japan and Italy failed to displace the existing Western European empires, there was little relief from global conflict.
This was because the Soviet Union took the opportunity to add numerous Baltic and Eastern European territories ― some very wealthy ones ― to those like the Ukraine and in Central Asia, over which it had gained control since czarist times.
So again, the expansion of capitalism was subordinated in another conflict between rival nations, each seeking to hold onto or expand its lucrative empire.
Perhaps no economic model can be permanent, and the Soviet one certainly was not. Faced with Ronald Reagan's poker bluff anti-ballistic missile program, the Strategic Defense Initiative, the Soviet Union collapsed in 1989, making the United States and its capitalist system into ``the world's sole superpower."
China's Cultural Revolution suggested that its brand of Marxism was far more ideologically pure than the sluggish Soviet bureaucracy had been.
However, as soon as the Soviet Union collapsed, China set itself on a course to become the most capitalistic nation in the history of capitalism, where the pursuit of absolute economic growth is the central focus of the nation.
Today, China exports more to the U.S. than to any other country, and has loaned more money to the U.S. than any other country. In order to achieve this, China's command-economy ministries have the same view of labor, safety, and environmental issues as the Triangle Shirtwaist Company.
During this era, Reaganomics relaxed many of the regulations controlling business in the U.S. Reagan let his buddies in the Hollywood studios gain control over movie theatres again, which had been disallowed in the 1940's.
Relaxation of constraints on the financial industry was also a key element in Reaganomics. Around this time, the prohibition against asset-backed securities disappeared.
Now, unfettered by regulations, and no longer subordinated to vast imperial conflicts, the great capitalist impulses, championed by ``the world's sole superpower," could take over, like a powerful aphrodisiac.
Capitalism's only competition, communism, had been replaced by the rapacious, oligarchic capitalist model in Russia, and the rapacious, indentured servitude model in China. Imagine a German Shepherd flanked by two pit bulls, and you get the idea.
Economic theory dictates that debt is more efficient than equity. For this reason, it is beneficial for homeowners to get mortgages and use the cash freed up to buy goods and services, and also for governments to allow mortgage interest to be written off, both which serve to boost economic growth.
Turning mortgages into asset-backed securities, including collateralized mortgage obligations (CMOs) is not inherently dangerous. There is certainly a logic to shifting mortgage debt from commercial banks to financial institutions and diversifying them into packages containing many mortgages.
If turning mortgages into CMOs is logical, then why not package multiple CMOs into even larger collateralized debt obligations (CDOs)? It is just a straightforward extension of the same reasonable concepts of diversification and relying on larger and more stable financial institutions.
The CMOs and CDOs all got AAA ratings from the ratings agencies. While it's true that the ratings agencies were very friendly with the institutions that underwrote the securities, no rules were actually broken.
These securities, unlike companies or governments, arguably are fully diversified and collateralized. And, for further protection, financial institutions investing in these securities got them insured, just in case.
But, somewhere along the way, something went terribly wrong. Because they could make more money and nobody was telling them not to, mortgage lenders began granting subprime loans to home buyers who don't have enough income or assets to pay them back and also began granting second mortgages covering up to 100 percent of the down payment, allowing houses to be sold for no money down.
Because they could make more money and nobody was telling them not to, financial institutions making investments, including into asset-backed securities, began using maximum leverage all the time.
And to expedite payment of their gains, the insurance policy of choice was the Credit Default Swap, conveniently arranged with other brokerages, rather than with traditional insurance companies.
Each element in this system, alone, when functioning in its basic mode, does best in a rising real estate market, but still works during a real estate correction.
However, when these elements have been re-engineered for maximum gain to financial institutions, they only work in a rising real estate market. When real estate values fall like they are falling today, the whole system collapses like a house of cards.
Just a few months ago, the IMF predicted $945 billion in losses tied to U.S. loans and securitized assets. By two weeks ago, their prediction had risen to $1.3 trillion. On Tuesday, it was $1.4 trillion. There appears to be no end in sight.
If we want to come up with a realistic prediction of the extent of these losses, we should calculate it relative to the Credit Default Swap market, which covers a vast range of financial institution investments. That market is $60 trillion in size. So, we cannot at this point rule out further bad news.
We are living in a far different financial world today than we lived in only a few months ago. The independent brokerages, which ruled that financial world for decades are gone. They either went bankrupt, were bought by commercial banks, or converted into government-regulated commercial banks.
The government now owns America's biggest insurance company, its biggest mortgage lenders, has equity stakes in big commercial banks, and is owed hundreds of billions of dollars by various financial institutions. America's banking system is as close to a socialist one as it ever has been.
If Karl Marx were ever tempted to say, ``I told you so,'' now is certainly a good time.
|
'600만명 학살 지휘' 잔인한 인물의 뒷얘기 공개
