Weekend reading about the financial crisis

The new continues to flow in.  At least we’re spared more of the “Dude, where’s my recession” idiocy.  Unfortunately, the damage this recession will do will echo for years to come.

  1. Doomed From the Start“, Boris Kagarlitsky, Moscow Times, 20 November 2008 — We can say three things with certainty regarding reforms to international financial structures: They are necessary, inevitable and doomed to fail.
  2. Biotech funding down to last drops“, Chicago Tribune, 23 November 2008 — “Investments for medical breakthroughs in jeopardy”
  3. Foreclosures, delinquencies skyrocketing among ‘prime’ borrowers“, Los Angeles Times, 24 November 2008 — “Nationwide, 3.07% of prime mortgages were in foreclosure or at least 60 days late in the second quarter of this year, easily topping the previous record of 1.97% set in 1985.”

Some other grim tidings; no excerpts provided:

Excerpts

Doomed From the Start“, Boris Kagarlitsky, Moscow Times, 20 November 2008 — Excerpt:

The Group of 20 summit held in Washington was destined to fail from the start because the participants held such widely divergent interpretations of the problem. It was also doomed because nobody had a solution plan that was clear or concrete enough.

The only thing that the G20 members could agree upon is the date of their next summit. Ideally, the participants would have become acquainted with each other’s positions as a first step toward unified action. But even that would not have been enough because even if the participants had agreed on all of the issues and even if a coordinated solution had been developed, nothing useful would have come of it.

The old financial system is falling apart before our eyes, and it is impossible to build a new one its place. But no matter how hard the politicians and experts might try, a new and effective international financial model can be built only after the world’s most developed countries institute radical social and economic reforms.

That new system would institutionalize on a global level the new principles guiding the lives of its member states. But none of today’s world leaders is proposing any fundamental changes to their societies. What’s more, politicians never address such questions at summits and conferences.

At the end of World War II, the Bretton Woods agreement reflected the economic conditions in Europe and the United States at the time. The unbridled free market economy was subjected to new government regulation, and the domination of the bourgeoisie was replaced by a historical compromise between labor and capital. It was no coincidence that the chief architect of the Bretton Woods agreement was the eminent British economist John Maynard Keynes, whose name is connected with the era of mixed economy and the welfare state.

By the end of the 1980s, however, neoliberalism had replaced Keynesianism as the dominant economic model in Western countries. This paradigm was also adopted at leading international institutions, such as the International Monetary Fund and the World Bank, whose origins date back to the Bretton Woods era. If their initial task had been to regulate markets, stop reckless financial speculation and promote socially responsible government policies, by the end of the 20th century the IMF and the World Bank had largely become libertarian tools for deregulation and privatization.

At the same time, these institutions underwent a radical and seemingly irreversible transformation. Although in a formal sense, they remain a part of the public sector and exist on funds from their founding member states, in reality they are becoming instruments of the global financial oligarchy. Most central banks have become independent of their respective governments, and they have shown more loyalty to the directors of private banks.

Therefore, until each country reforms its own central bank, it will be pointless to even discuss the emergence of a new international financial architecture. Over the past 20 years, the public sector has been destroyed and privatized. If that situation does not undergo radical changes, trying to reform the global financial system is a useless endeavor.

It is not the world’s financial structures that needs to be reformed but society. If this were to ever happen, however, it would remove the need of having most of today’s international institutions. In addition, the leaders who gather at the G20 and other global summits would become irrelevant as well.

Boris Kagarlitsky is the director of the Institute of Globalization Studies (description, Russian website)

Biotech funding down to last drops“, Chicago Tribune, 23 November 2008 — “Investments for medical breakthroughs in jeopardy.”  Excerpt:

Across the country, dozens of biotech companies are running out of cash to fund their business operations, leaving promising treatments for such disorders as heart disease, cancer, Alzheimer’s and diabetes to sit longer in labs. Some biotech start-ups can’t even get off the ground.

This slowing of money into the biotech industry has the potential to deal a major setback to medical innovation. Biotech companies are seen as pioneers in medicine, seeking to develop new drugs and devices that large pharmaceutical companies often view see as financially too risky, leaving the investment in early research to smaller players.

In the U.S., where the bulk of biotech innovation occurs, 91 companies are operating with less than six months of cash remaining, and 140 of 370 public biotechs have less than one year’s cash on hand, including Evanston-based Northfield Laboratories Inc., according to the Biotechnology Industry Organization.

Foreclosures, delinquencies skyrocketing among ‘prime’ borrowers“, Los Angeles Times, 24 November 2008 — Excerpt:

Although soaring defaults on subprime loans and other dicey mortgages are a well-known cause of the country’s financial crisis, delinquencies and foreclosures now are skyrocketing among “prime” borrowers — people with good credit histories who documented their incomes when applying for their relatively straightforward mortgages. Nationwide, 3.07% of prime mortgages were in foreclosure or at least 60 days late in the second quarter of this year, the latest period for which the Mortgage Bankers Assn. has figures, easily topping the previous record of 1.97% set in 1985.

In California, with a jobless rate topping 8% and home prices down more than 40% from their peak and falling, the situation is significantly worse, with 4.15% of prime loans seriously delinquent. That far exceeded peaks of about 2.6% reached in the recessions of the 1980s and 1990s.

The epidemic of bad loans and lost homes among prime borrowers has only worsened since the second quarter ended, according to other, more recent data. … And as home prices continue to fall, delinquent borrowers are more likely than ever to end up in foreclosure.

… In August, more than 43% of subprime loans nationally were in foreclosure or at least 60 days late in paying, a rate nearly double that of August 2007, according to First American CoreLogic’s LoanPerformance unit, which tracks 82% of all U.S. loans.

But problems with prime loans are increasing as fast or faster. About 7.5% of prime jumbo mortgages — high-quality home loans too large to be sold to government-backed Fannie Mae and Freddie Mac — were at least 60 days late or in foreclosure, according to LoanPerformance. That was more than three times the level of a year earlier.

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3 thoughts on “Weekend reading about the financial crisis

  1. You can’t make this stuff up, as the Reserve Bank of Zimbabwe commends the US and UK for following Its lead. From the “FIRST QUARTER MONETARY POLICY STATEMENT”, DR G GONO (GOVERNOR), RESERVE BANK OF ZIMBABWE: — Hat tip to Naked Capitalism. Excerpt (bold in the original):

    As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

    That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.

    Yet there are telling examples of the path we have…For instance, when the USA economy was recently confronted by the devastating effects of Hurricanes Katrina and Rita, as well as the Iraq war, their Central Bank stepped in and injected life-boat schemes in the form of billions of dollars that were printed and pumped into the American economy.

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    Fabius Maximus replies: This is sad because it is correct.

  2. From the FHA article linked above:

    In April 2007, Goldman Sachs (GS) purchased a controlling stake in Senderra Funding, a former subprime lender in Fort Mill, S.C. Goldman, which has received $10 billion in direct federal rescue money, converted Senderra into an FHA lender and refinance organization. The strategy appears likely to produce hefty margins. In September, Goldman paid 63¢ on the dollar in a $760 million deal with Equity One (EQY), a unit of Banco Popular (BPOP), for a batch of subprime mortgage and auto loans. Through Senderra, Goldman plans to refinance at least some of the mortgages into FHA-backed loans. Because of the government guarantee, it can then sell those loans to other financial firms for as much as 90¢ on the dollar, according to people familiar with the mortgage market. That’s a profit margin of more than 40%.

    This is a great example of how so-called ‘private’ sector uses so-called ‘public-sector’ to make profits. This is not ‘free market’ capitalism at all. Kagarlitsky is 100% correct when he states in his conclusion that a reform of society is necessary for any true reform to take place. It ain’t gonna happen, at least not yet.

  3. One aspect of the financial crisis which will take some time to materialize but – if economic predictions are even half correct are sure to happen is the adverse social and psychological impact on current college students – particularly those attending Ivy and other elite institutions.

    The academic pressures to get into these institutions has been intense and demanded from these students enormous personal sacrifices in terms of time and effort. These students have not been polishing their resumes for the love of it; they demand an ROI.

    And for large numbers, this ROI will not materialize.

    And this is no sob story for historically it has been from frustrated members of an elite that serious trouble arises. These students would fit this profile.

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