The November 2008 issue of the Statistical Supplement to the Federal Reserve Bulletin is now available online.at: http://www.federalreserve.gov/pubs/supplement/2008/default.htm . The bulletin provides the Fed’s estimates on industrial production and capacity use for the first two quarters of 2008 and compares them to the 2007 numbers.
If you look deeper into these numbers and compare them to historical data available in in Fed G.17 reports, available at http://www.federalreserve.gov/releases/g17/, you can discern the following:
Industrial Output: The Fed is using 2002 as its baseline for indexing growth and rates of growth in 2007 and 2008. 2002 was near the trough in the last recession, which only shows the Fed is scraping the bottom of the barrel in more ways than one.
In 2000, industrial output measured 116% of output in 1997.
In 2002, industrial output measured 110% of output in 1997.
In 2008, industrial output measured 111% of output in 2002, equivalent to 122% of 1997 output.
Industrial output in 2008 is approximately 4.5% greater than output in 2000.
2. Not Sweet
Now look at growth of industrial capacity.
First you will notice, unless you’re an economist or a hedge fund manager, that annual capacity growth increases averaged about 4.6% per year for 1997, 1998, 1999, 2000.
In 2001, capacity growth declines to 1.7 % above the 2000 mark.
In 2002, capacity growth declines to 1.1 % above the 2001 mark.
In 2003, capacity growth remains at 1.1% above the 2002 mark.
In 2004, capacity growth “improves” to 1.6% above the 2003 level.
In 2005, capacity growth remains 1.6% above the 2004 level.
Now comes the uptick with increased capital investment.
In 2006, industrial capacity grows 2.4 percent.
In 2007, the capacity growth rate falls to 1.8 percent.
In 2008, FRB estimates are that industrial capacity growth slows again to 1.6 percent.
Rates of return on capacity investment had peaked in 2006, and once again were showing themselves to be more cost than benefit to profits.
All in all, output increases approximately 4.5% between 2000-2008, while capacity increases amount to approximately 13.5 percent.
These are the circumstances of overproduction that Marx described in Volume 3 of Capital:
Overproduction of capital never signifies anything else but overproduction of means of production– means of production and necessities of life–which may serve as capital, that is serve for the exploitation of labor at a given degree of exploitation; for a fall in the intensity of exploitation below a certain point calls forth disturbances and stagnations in the process of capitalist production, crises, the destruction of capital…
…there is periodically a production of too many means of production and the necessities of life to permit of their serving as means of exploitation of the laborers at a certain rate of profit…
…there follows swindle and a general promotion of swindle by frenzied attempts at new methods of production, new investments of capital, new adventures, for the sake of securing some shred of extra profit, which shall be independent of the general average and above it.
3. And Down Low
It certainly is not the case that the “real economy” was/is healthy and that the disturbances are the result of speculation, overextension of credit, fictitious capital, irrational exuberance, excess leverage, poor savings by consumers, etc. etc. The condition and terms of finance are determined by the condition of the real terms of production.
With output and investment so restrained by the bourgeoisie after the 2000-2003 period, finance’s access to the revenue stream of industrial production through corporate lending, corporate bond underwriting, etc. was severely restricted.
If as Marx put it, overproduction is the overproduction of the means of production that cannot be deployed to exploit labor power at a required, sufficient, intensity, then finance capital’s focus on the securitization of consumer debts, of mortgage payments, of student loans, represents the attempt to divert revenue away from wages, from the V component of capitalist production; to in effect, reduce wages.
Finance capital represents, not a vampire feeding on the body of so-called real capital, but the attempt to generate a sufficient intensity of exploitation of labor by means other than increased output and capacity growth. Financialization proves itself the most modern expression of the most primitive expropriation of surplus value by demanding and instigating the absolute reduction in the value of wage-labor.
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1. Once was nowhere near enough. Giddy from their near death experience after letting Lehman Bros. sink, Ben and Hank couldn’t wait to play another round of What’s My [credit] Line? with the invisible hand around the throat of the capital markets.
They made a winning combination, like… well, like Merrill and Lynch, like Citi and Travelers, like Bear and Stearns, Martin and Lewis, Peaches and Herb, Bing and Bob, Fear and Greed, Barnum and Bailey, Tom and Jerry, Gerry and the Pacemakers, Pacemakers and Defibrillators, Widows and Orphans, Orphan and Annie, Mick and Keith, Burns and Allen, Fools and Money, and everybody’s favorite, Moose and Squirrel. Capitalism, incorporation, after all, was all about partners.
Ben, the student and scholar of the 1930s depression, knew exactly what went wrong then and was prepared to do exactly the wrong things differently this time.
Hank, the master of the credit derivative, was confident, always confident, that with the right vehicle, with the proper execution, his proposed reverse forward purchase convertible optioned collateralized repo swaps would lead, not all, but some, the important some, out of the wilderness and into the land of milk and honey. And if the milk was spiked with melamine? And if the bees had vanished from colony collapse syndrome? Hank would resecuritize that risk, too.
They were the best and the brightest. The were so smart and they were rich, too, so that proved it.
So on November 10, Hank announced that the Treasury would not purchase the asset backed securities, the super-heavy bad paper, the anti-money burning black holes in the banks’ already empty pockets.
Playing Bullwinkle the Moose to Ben’s Rocket J. Squirrel, Hank turned to his trusty sidekick and said, “Hey Rocky, watch me put a kill on this rabbit and then stuff him back into the hat.”
“Again?” said Rocky.
Again, indeed. Again the markets responded with fear, despair, and then panic.
And on the trading floors in New York, in the back offices, in pits, across desks, on Blackberrys and iPhones, a single thought, a new combination, a new favorite, was traded back and forth: “Moose and squirrel must die!” said 100,000 Borises to another 100,000 Natashas.
2. Stupidity, like everything else is a learned art, a historical category, called forth on the historical stage at just the right time that is itself the wrong time, to give full voice, full faith and credit, to the temporal nature, the limits and inadequacy of the bourgeoisie’s intelligence. Being really stupid requires an education, and timing.
If Bush is, in fact, the stupidest president in US history, he is, at his stupidest, no more stupid, and no less, than all those previous and future presidents serving the interests of their class [with the exception that proves the rule of Abraham Lincoln].
They served, and will serve, the needs of a specific moment of capital with the resources at their command. Their brilliance and stupidity, and each is organized in the other, depends precisely on those resources, and those specific needs.
In his belligerent ignorance, Bush represented more than the belligerent ignorance of that nexus of the petroleum and finance capitalists, he represented everything capital required at that moment. And if today, Bush is isolated, despised, and disregarded, it is not because he represents an isolated, despised, and disregarded nexus of the bourgeoisie. It is because all of capital requires something else. At this moment.
Paulson is no more stupid, and no less, than Rubin, his predecessor at both Goldman Sachs and Treasury. Bernanke is no more stupid now than Greenspan was prior to 2006 during the “salad days” of securitization . As a matter of fact, if Lincoln represents one exception to the rule, representing more than the bourgeoisie at more than their best, Greenspan represents another exception– being legitimately, chronically, pathetically, stupid and shallow even at more than his best, never knowing better, no matter how much he pretends to know.
Paulson represents no different wing or section of the ruling class than did Rubin. He represents, in all his stupidity, his missteps, the changing need of capital– the need for drastic devaluation of all values.
The reproduction of stupidity is not at all limited to the United States and the US bourgeoisie, although given the centrality of the US financial networks, the stupidity here sure gets more air time.
Before the G20 conference, Sarkozy, confident in having Gordon Brown behind him (talk about stupidity) ran around the world stage like a ferret on crystal meth proclaiming the the era of laissez–faire capitalism was over, the dictatorship of a single currency was finished, that a new collective strength of Europe and whatever support it could gather from the BRIC countries would replace the US domination of the financial markets.
As he spoke, of course, the US Fed had to extend unlimited currency swap lines to European central banks to prevent the collapse of the EU’s capital markets; while he spoke, euros were being exchanged for dollars so that European investors could move their money into the safe haven of US government debt instruments; while he spoke spreads between French sovereign debt and German and US debt widened as the bond markets were not quite so confident in Sarkozy’s dream of the DeGaulle Monetary Fund/Pompidou Bank for Reconstruction and Development.
At the conference itself, Merkel leaned over to Brown and whispered, in English, “Shut that man up before he ruins everything.”
3. The last time the bourgeoisie had dot.conned themselves out of much less money, in 2000-2001, their theoreticians of the purse, the economists, had identified the speculators, the criminals, the con-artists, all those who had out-bourgeoisied the bourgeoisie, who had found those pots of gold called the bigger fool at the end of rainbow.
Never trust an economist to have any insight into the economy.
The source then, as is the source now, of capital’s contraction are the very terms of its previous expansion, which like smart people gone stupid, turns accumulation, value, asset into decomposition, devaluation, loss.
Demanding improved and improving rates of extraction of value, of surplus value, from the wage-worker, the bourgeoisie invested back then considerable amounts in the means and methods that could reproduce the workers own wages in less, and less again time. Between 1993 and 2000, annual amounts of capital investment in US manufacturing increased 45 percent. Each increase in investment produced an incremental increase in rates of surplus value, reducing the time required for wages to be reproduced, but not always enough to improve overall rates of return on total investment in production.
The US Commerce Department’s Annual Survey of Manufacturing contains data on production workers’ wages, production workers’ hours, total costs of materials consumed in production, total value added, and capital expenditure. When examined for years 1998, and 2000-2006 provides a glimpse into the genius of capital self-deconstruction.
Annual amounts of capital investment had increased more than 40% between 1993 and 1998, but between 1998 and 2000, the increase was less than 2 percent. The mass and the rate of surplus value extraction, the time it took for the worker to reproduce a value equivalent his/her own wage was incrementally improved, so that the worker reproduced the daily wage within the first 1.48 hours of labor. However, the accumulated investment in production and the costs of expanded production reduced the ratio of the mass of surplus value, the “value added” as the annual survey categorizes it, to total value of the products produced.
In 1998, that ratio of value added to total value measured 48.5 percent.
In 2000, the ratio declined to 46.9 percent.
In 2001, despite reduced capital investment, reduced production worker wages and wage rates, reduced costs of materials in production, the ratio declined again to 46.6 percent.
By 2002, yearly capital investment amounts were 21% below the 2000 peak, wage rates were 6.32 percent above the 2000 mark, but the total wage expenditure was 9% below that of 2000. The rate of surplus value extraction had improved so that the hourly wage was reproduced in 1.42 hours. The value added ratio improved to 48.2 percent.
The bourgeoisie thought had found an answer and it made them look, and feel smart. Reduce investment, control costs, hoard cash.
In 2003, yearly capital investment again declined and was now 28% below its 2000 peak. Total wage costs declined again. Wage reproduction rates improved again that the day’s wage was reproduced in 1.38 hours of labor. With the rising cost of petroleum, fuels, and energy used in production, however, the value added ratio declined to 47.9 percent. The bourgeoisie were smart and had the answer. The mass of value added increased and approached the previous peak of 2000.
In this reciprocating compensation of mass for rate, and rate for mass, the bourgeoisie sought comfort, and the love that only money can buy.
In 2004, the steady decline in production workers and production hours offset the minor increase in total wage costs. The daily wage was reproduced in the first 1.3 hours of work. Again costs of materials in production increased and reduced the value added ratio to 47.3 percent.
In 2005, unable to remain comfortable with increased costs of the material, the fuels, the energy absorbed in production, the bourgeoisie found an old answer waiting for them– boosting the rate of surplus value extraction through increased capital expenditures. The capital spending amount increased by 13 percent. Wage reproduction was accomplished within 1.23 hours of work. The mass of value added shot up by 10% over the year earlier, exceeding the increases of the 90s. The bourgeoisie had their answer. The ratio of added value at 46.6 percent, was a question put off for another year.
In 2006, capital investment increased by another 10 percent. It had to as only increased rates of production created the possibility for the mass of value to compensate for the fall in its rate of reproduction. With total wage costs still 6% below those of 2000, with a surplus value rate of 6.65 to 1, where the daily wage was replaced in 1.2 hours of work, with total value added 15.8% above the 2000 mark, the rate of added value reproduction fell again to 45.6 percent.
The bourgeoisie were out of answers, and with the increasing costs of production and transportation driven by the price of oil, with the price of oil driving the bourgeoisie into greater capital expenditures to increase the rate of surplus value; with oil undermining growth in the mass and rate of value added– manufacturing, hidden beneath all the noise and clamor of Wall Street, of all the investment bankers at all the trading desks slapping themselves on the back with each new deal– manufacturing had all ready rung the closing bell.
Those who didn’t hear it, couldn’t hear it. They were too smart. They were too stupid.
The only answer left for capitalism was/is the destruction of assets.
4. With so many special purpose vehicles, new credit facilities, capital injections, bailouts and buyouts all in the market, taking up space where money used to be made, The Wolf Report offers its own concrete practical program for rescuing the economy:
The Wolf Report will deposit with the Federal Reserve System for distribution to all member banks, all primary dealers, all money market funds, all asset-backed commercial paper issuers, 24 dollars in trinkets, in exchange for which all such bankers and dealers agree to immediately leave the island of Manhattan.
November 26, 2008
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Economics is the most dismal of dismal sciences. It is always and forever about the same thing– justifying somebody else’s immiseration. It is a dismal science, in part, precisely because it imagines itself to be a science– a precise, objective calculation, when in reality it is a pseudo-science with its pseudo-scientists practicing their dismal mathematics, applying their dismal algorithms, all of which are variations on the single governing truth of capital: garbage in, garbage out.
But so much for historical considerations. Hank and Ben knew what they were doing. The next day, meeting inside the infectious disease ward previously known as the New York Federal Reserve Bank, Hank and Ben walked over to the room occupied by the Lehman Bros. First Ben placed a sign on the door to the room, “Nothing By Mouth,” it read. Hank placed a second sign, written in bold– Do Not Resuscitate. Then, together, they took a pillow, and carefully, quietly, forcefully, pushed it down onto the face of the barely breathing brothers. And held it there.
“That’s done,” said Hank, rubbing his hands.
“Easier than I thought it would be,” said Ben, stroking his beard.
“Now what?” said Hank.
Neither had the slightest idea.
4. Wednesday’s Children
On Wednesday, October 1, the Fed’s first order of business was to remove the enforcement action that it had had in place since 2006 against Mitsubishi UFJ bank for violations of anti-money laundering requirements. It seemed a little churlish of the Fed to maintain the action when, after all, it, the Fed was in the midst of the greatest money laundering scheme in history. Besides, maintaining the action might have been embarrassing after Mistubishi had agreed to purchase 25% of the newest member of the Federal Reserve System, Morgan Stanley.
On Friday, October 3, the Congress approved the Treasury’s bail out program. Bush promised to sign the legislation as soon as it reach his desk.
‘God bless our brave investment bankers,” said Hank.
Quoting Conrad’s Nostromo, Ben replied, “Ah yes, we must comfort our friends….the speculators.”
On October 7, the Fed announced the creation of another special purpose vehicle, the Commercial Paper Funding Facility. The CPFF was authorized to purchase unsecured and asset backed commercial paper with maturities of 3 months directly from the issuers. The FRB in essence was absorbing all default risk in the commercial paper markets. God bless our brave investment bankers.
Wednesday came around again all too soon. The FRB cut its funds rate 1.5 percent, in a concert with actions by the Bank of England, the European Central Bank, the Swiss National Bank, the Bank of Canada to defibrillate the bank lending markets. Ah yes, we must comfort our friends…the speculators.
But the real news of Wednesday’s children was the new news from the past that emerged from the Fed’s release its review of the Shared National Credit program.
In 1997, the Fed established the Shared National Credit program in concert with the FDIC and the Office of the Comptroller of the Currency. In 2001, the Office of Thrift Supervision was co-opted into the program as an assisting agency. The stated purpose of the program is to provide an “efficient and consistent review and classification of shared national credits.” The program rates the quality of the credit, the loans and loan commitments extended by supervised institutions and their affiliates for lines of credit, loans, commitments in amounts that exceed $20 million per transaction and that are shared by three or more unaffiliated supervised issuers, or where portions of the original transaction are sold to two or more unaffiliated institutions, with each purchaser assuming a proportional share of the extended credit.
On October 8, this Wednesday’s child, the SNC report, the assessed the outstanding credit as of December 31, 2007. The volume of extended credit rose by more than 22% from the previous report, reaching $2.8 trillion. The SNC employes two categories to identify changes in total portfolio credit quality. Classified credits are those issues that are “substandard,” “doubtful,” and “loss.” Classified credits have well defined potential for loss including default. Criticized credit incudes all classified credits and includes credits that require “special mention.” Special mention credits have potential weaknesses that may move them into the classified category if corrective actions are not initiated.
Wednesday’s child reported that the volume of critcized credit issues expanded to $373 billion, or 13.4% of the credit portfolio as against 5% of the portfolio in the previous year. Classified credits measured 5.8% of the portfolio, growing from 3.1% the prior year.
The volume of classified credits doubled for US banks, foreign banks, and non-bank financial institutions. Although representing only 1/5 of the total shared credit portfolio, the non-bank institutions hold the largest share of the classified loans.
In the year of study, credit classified as substandard grew 122% and now exceeds the substandard amounts of the recession years 2002, 2003. “Doubtful” credit increased 373% and “loss” expand 231% although volumes in both categories are below those of the recession years.
Criticized credits (watch and worry) concentrated in services, commodities, and manufacturing sectors. Classified (cover your eyes, it’s almost too late to worry) concentrated in service, manufacturing, financial, and real estate sectors.
Wednesday’s children full of woe.
5. Stormy Monday
The shock wave from the Lehman Bros. assisted suicide was, as the song says, so wide can’t get around it, so high can’t get over it, so low you can’t get under it. Ignorant of anything and everything that couldn’t fit, that they couldn’t learn on their flat screens, the Fed and the Treasury had relied on algorithms instead of homework. They powerpointed the world financial markets right into shutdown.
Simple homework would have told Hank and Ben that killing Lehman would be nearly cataclysmic for the tissue thin financial networks. Lehman Bros. alone accounted for 1 of every 8 trades conducted on the London Stock Exchange. After Lehman filed for protection under bankruptcy law, 97 administrators were put to work across the globe trying to unwind Lehman’s trades, settle its accounts, organize claims for and against, and, in short, simply find the money.
On October 13, the Fed, again attempting to mitigate the damage from this action, announced that it would make take joint actions with the Bank of England, Bank of Japan, European Central Bank, and the Swiss National Bank in their 7, 28, and 84 day auctions of US dollars. Said the Fed, in what must be one of the most restrained confessions of desperation:
Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction. Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded.
The next day, Tuesday’s are just as bad, the Fed announced that swap lines to the Bank of Japan will be increased to accommodate any amount required.
One week later, Tuesday’s were still just as bad. The Fed announced the-soon-to-be-created special purpose vehicle, the Money Market Investor Funding Facility. The MMIFF, when and if ever functional was designed to directly purchase certificates of deposit and commercial paper, having maturities between 7 and 90 days, issued by “highly rated financial institutions.” Total dollar limitations on purchases by the MMIFF were not identified.
As the month closed, Wednesday came around again. The Fed announced it was establishing currency swap lines with the central banks of Mexico, Brazil, Korea, and the Monetary Authority of Singapore. Each line measured $30 billion dollars.
Mexico, Brazil, Korea, Singapore, Japan, the ECB, Canada, Switzerland– 1 year, 2 years ago these were part of the advancing wave of countries that would replace the United States in a “new epoch” with China, of course, at the head of the advance. These were some of the countries running trade surpluses with United States, supposedly accruing declining US currency and grossly overvalued US debt instruments, supposedly forced to “subsidize” the parasitic US economy, supposedly providing it with goods and services in exchange for paper crumbs from the imperial table.
In 2007, the US racked up a $3 billion deficit in merchandise trade with Brazil, a $12 billion deficit with the Republic of Korea, an $117 billion deficit with the European Union, an $87 billion deficit with Japan, $69 billion with Canada, $76 billion deficit with Mexico. Japan was the largest holder of US debt instruments. Russia, Brazil, Korea, had increased their foreign exchange reserves since the dark days of 1998 and 2000.
Why now was the Fed extending unlimited temporary currency swaps with these countries?
First and foremost, because the banks and financial institutions within those countries would not or could not extend credit to importers or exporters to facilitate shipment or delivery of goods. Banks and financial institutions wouldn’t lend to each other. They would not place themselves on the hook for the full value of an export or import contract. When the central bank of Brazil reduced the reserve requirements for the country’s banks in order to facilitate lending to business, the banks turned around and used the released funds to invest in high yield government securities.
But secondly, these central banks do not own the dollar reserves and those US debt instruments, just as in fact the US does not really run a trade deficit with most of those countries. The international trade of the US is essentially one of export and reimport. Imports from related parties, subsidiaries of US companies abroad, account for almost half of total US imports. Once trade is adjusted for this, the US trade deficit declines by 75 percent. For 2006, the adjust trade deficit declines to $226 billion and that amount is accounted for by the increased prices for a single imported commodity– petroleum.
The US debt instruments held by international central banks are made up in part of just those revenues from US related party trades. The instruments represent in part the profits of those countries’ domestic businesses trading with the US and other countries. The instruments represent in part the currency obtained and required for participating in the US security markets. The instruments represent the importance of US and Western European banks, of dollar denominated debt, in the economies of all countries. These instruments do not represent any latent economic power of Japan, Brazil, India, the EU, China, Canada, Mexico, or Russia over the United States. These instruments do not, in essence, belong to any of those countries. Those countries do not own the revenue stream that is tapped, and trapped, by the instruments.
Much has been made of Russia’s stabilization fund, fed by revenue from oil and gas sales. Between 1999 and 2008, Russian pushed approximately $565 billion into that vehicle. What has not been publicized is that during that same period, Russia increased its indebtedness to US and Western European banks by $490 billion.
August, September, October, and November have made whole what was before only revealed in part by the declining exchange value of the dollar after 2003; by the importance of US financial markets to the profitability of the world’s banks– that the idiots, bumblers, fools at the head of the US financial system are in fact geniuses dancing on the world’s grave. They are the best representatives their class, the US bourgeoisie, could ever have.
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Next: PMA 3– Roots, Rates, Returns
1. Short Timers
It was just a short time, barely two months into finance capital’s Great Escape, with Wild Ben Bernanke and Ranger “Hank” Paulson betting the ranch on the Troubled Assets Relief Program (TARP), that is to say, betting the ranch on the growing number of foreclosed ranch houses, that Ben and Hank pulled up on the reins, stopping their twin greenbacked ponies, “T” and “Bill” dead midstream. Swinging around in his saddle, said Hank to Ben, “Let’s change horses.” Ben looked to the bank behind them. No horse there, just a half-dead elephant packing his trunk. Hank looked to the bank ahead of them. There were horses there all right. Old gray mules with names like Volcker, Rubin, and Summers that weren’t what they used to be, but then again, nothing was what it used to be.
Ben thought for a short time, the water rising around him, “We need a special purpose vehicle,” said Wild Ben.
“Right,” responded Ranger Hank after a short time, “A special purpose vehicle! My kingdom for a horse. My horse for a special purpose vehicle!” he cried.
It was a short time, barely two months after placing Fannie Mae and Freddie Mac into conservatorship, barely one month after the Great Escape Redux with the US Treasury injecting, granting, bestowing $160 billion to banks mostly large, and some less large, through direct share purchase that Ranger and Ben decided to junk the asset and relief parts of the TARP, leaving just a troubled program.
The junking was pre-figured by extending and revising the terms of the deal bailing out AIG. The new deal, with cards dealt from the bottom of the deck, was a thing of wonderment. First, the US Treasury exchanged $25 billion of AIG’s debt for 40 billion dollars worth of senior preferred shares of stock, thereby diluting the “value” (purely notional) of its original 79.9% portion of AIG’s equity. Secondly, the Treasury reduced the rate of interest on AIG’s outstanding debt from the 3 month LIBOR rate plus 850 basis points (8.5%) to the 3 month LIBOR plus 300 basis points (3%). The terms of the loan were extended to five years. The rate on portions of the loan not drawn upon would be reduced from the LIBOR + 8.5% to LIBOR +.75%
But wait. There’s more. Two new special purpose vehicles were formed. One was called the Residential Mortgage Backed Security Facility (RMBSF for short?). Organized as a limited liability company with a $22.5 billion loan from the Fed, and $1 billion from AIG, the was designed to, in the Fed’s words, “return all cash collateral posted for securities loans outstanding under AIG’s U.S. securities lending program. As a result, the $37.8 billion securities lending facility established by the New York Fed on October 8, 2008, will be repaid and terminated.”
The second vehicle, the Collateralized Debt Obligations Facility, was the big news, a real thing of beauty, bringing smiles, for a short time, to the faces of bankers everywhere. With $30 billion from the FRB and $5 billion from AIG, that is to say with $35 billion from the Fed, the CDOF would purchase the credit default swap contracts that AIG issued insuring debt instruments, the structured investment vehicles, bought (and issued) of, for, and by…..the banks. And insurance companies. And hedge funds. The CDOF will purchase the underlying CDOs at market value (approximately 50% of original face value), while the banks will be allowed to keep the collateral that AIG had to supply when the face values declined. The banks will be made whole. “Now that’s what I call banking,” said Andy Fastow, not a short-timer, a bit wistfully, from his prison cell.
Meanwhile, T and Bill paddled on gamely, going nowhere. Excess liquidity has its downside.
It was clear why Ben and Hank had decided to jettison their plans for the TARP. They had in fact already established the TARP by another name. Ben and Hank had turned the entire public treasury into a special purpose vehicle.
2. Black September
Eliot wrote that “April was the cruelest month.” What did he know? Purveyor of structured banality, sterile verse, a bad poet, and obviously not a banker. September is the cruelest month. Ask any of the Lehman Bros. And October is just as bad.
Following hard on the takeover/collapse of Freddie and Fannie, the FRB initiated a series of actions broad in scope and substantial in depth to maintain “liquidity” in the credit markets. Broad and substantial and always a day late, and no matter how many billions were made available, always a dollar short.
On September 14, Wild Ben relaxed the rules on the securities that could be pledged as collateral by investment banks for Fed funds at the Primary Dealers’s Credit Facility. The new rules accepted as collateral securities that were generally accepted as collateral by the two major clearing banks in New York. Prior to this change, only investment grade securities was accepted as collateral by the PDCF.
The Fed also relaxed the requirements on collateral at the Term Securities Lending Facility. The new rules allowed all investment grade securities to be utilized as collateral. Previously only US Treasury instruments and AAA rate asset-backed securities were accepted.
On September 16, the Fed issued a statement fully endorsing the actions and decisions of the US Treasury to 1) let Lehman Bros, with a balance sheet of $630 billion in “assets,” meaning debt exposure, collapse with the thud heard ’round the world; 2) initiate Rescue Plan 1 for AIG, involving an $85 billion dollar dedicated loan facility, and the initial 79.9% equity stake.
It is this date that marks the end of the “stabilization” focus of the Fed, the ECB, the US Treasury, the Bank of England. This date marks the beginning of the “desperation” focus. What followed upon the heels of the decision to let Lehman Bros. sink was, and remains, nothing short of a dash for cash, and if, as a European banker put it, “you don’t have dollars, you’re screwed.”
On September 18, the dash for cash had become so acute that,in order to increase dollar liquidity in the lending markets abroad, the Fed authorized expanding its reciprocal currency arrangements (swap lines) by $247 billion with the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the Bank of Canada.
On September 19, the Fed announced the creation of another special purpose vehicle, the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). The AMLF was intended to increase liquidity in the money markets by loaning money to depository institutions and bank holding companies to buy asset backed commercial paper from money-market mutual funds. The AMLF would make the loan and the Fed would indemnify the bank purchasing the ABCP against any loss of value of the ABCP until its maturity.
At the same time, the Fed announced it would purchase the short term debt instruments of the FNMA and FMAC for the “primary dealers” with which it conducted its business.
Two days later, Goldman Sachs and Morgan Stanley, having caught a glimpse of its own mortality in the death agony of Lehman Bros., decided to seek protection under the Fed’s spread, and increasingly threadbare wings, by reincorporating themselves as bank holding companies. The Fed accepted the applications and also authorized loans to the London operations of Goldman Sachs, Morgan Stanley, and Merrill Lynch which, the stronger chick in the nest, had been rescued by Bank of America at the same time as Lehman Bros. was fed to the cat.
On September 24, again attempting to “unfreeze” the credit markets in Europe, the Fed authorized another $30 billion increase in its currency swap lines, this time extending the dollar funding to Australia, Denmark, Sweden, and Norway.
On September 26, the Fed added $10 billion to the swap lines with the ECB, and $3 billion to its line with the Swiss National Bank
The derivative world, the world of collateralized everything and nothing, was ending all right, with a bang, and a whimper. The decision to allow Lehman Bros. to seek bankruptcy protection while defending AIG was the worst move made in the assessment of the strength of real estate and finance since that of September 2001 cancelling the evacuation of the South Tower of the World Trade Center after the North Tower had been struck.
The collapse of Lehman Bros. was no less noisy, dirty, and terrifying to the world financial markets than of those 100 stories of concrete and steel.
Wild Ben and Ranger Hank had apparently forgotten that markets are their own special purpose vehicles, generating an “average rate of social profit” throughout the system of capital; transmitting the success, and failure, of the reproduction of value to every participant; consummating not just exchange, but transmission, interpenetration, and… infection. AIG was “rescued” because its exposure, its liabilities in the credit default swap market were so immense that its collapse threatened all of capital’s financial network. Yet, AIG’s exposure was based on the liabilities it had assumed on exactly the type of securities issued by Lehman Bros. Once Lehman Bros. collapsed, AIG could not be insulated from the collapse in market value of the securities it had insured for all issuers. The wheels began to fall off the special purpose vehicle.
Next: Pimp My Assets 2
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1. All, or almost all, are in agreement. Everyone from John McCain to Oprah Winfrey understands that the election of Barack Obama is an event of immense historical significance. Who can deny the pride, the achievement, the vindication, felt by African-Americans, after 450 years of discrimination, slavery, betrayed promises, Jim Crow, rapes, lynchings, assassination, police brutality, economic exploitation, in the victory of a man of their own color? In a man of intelligence, knowledge, insight so far superior to that of those, all those, opponents within his own party and within the Republican Party, that if, if, the US bourgeoisie chose their representatives on merit and by ability, the presidential election would have been declared no contest?
It is not, however, merit or ability that moves the bourgeoisie to accept, to bankroll, to embrace a candidate as their candidate. Sometimes, color, or more precisely, the lack of color is enough. And sometimes not. Whenever, whomever, the bourgeoisie embrace, whenever the bourgeoisie do anything, they are counting, and they are counting on their man, their candidate to reconstitute the mechanisms of accumulation. Nothing else matters to the bourgeoisie, or at least nothing else matters until that mechanism, that accumulation is restored.
2. All, almost all, will tell you that we live in an era filled with event of immense historical significance. The “terrain,” ideological and material, of capital has changed. So we’ve been told.
In the past twenty years, history has witnessed the disintegration of the USSR and its allied countries and their reconstitution as nodes of capitalist accumulation, changing the terrain
In the past ten years, history has recorded the emergence of the “newly industrializing economies” of Thailand, Taiwan, South Korea, Malaysia, Brazil, India, and of course, China, changing the terrain.
For the past nine years, the theorist/merchants of “peak oil” have flogged their particular brand of entropic apocalypse (for the third time, I might add, in lockstep with OPEC price spikes, as if the third time was the charm), changing the ideological terrain, not just for capitalism, but for any advanced economy.
For the past five years, the professional journalists and economists of capitalism have trumpeted China’s emergence as the new “superpower,” with its destiny one of replacing the United States as both the industrial and financial linchpin of the world markets. China’s “market socialism/state capitalism” was an event of immense significance, changing, levelling the uneven terrain of capital,
For the past four years, we have read about the “North-South” divide; the increase in “South-South” economic strength and independence from the behemoths of North America and the European Union. “Decoupling” was an event of immense significance, changing the terrain of capital.
For the past four years, we have watched the decline of the dollar/ascent of the euro, further evidence, we know, of an event of immense of significance, the decline of the United States .
For three years, until 2007, history recorded the immense significance of “risk management,” “mark to market valuation,” and tranching, parcelling of reward, changing the terrain for the accumulation of capital.
For a year and a half, we have witnessed the waning of capitalism’s paper moon, the debasement of all that was virtual, the destruction of assets.
For three months we have witnessed the events of immense historical significance as the bourgeoisie everywhere try to delay the immense and significant margin call of history, dumping money into the pits called banks, when the real event of immense historical significance is that money is no longer exchangeable with time.
3. All, or almost all, capitalists will tell you “time is money,” but we know that that is not exactly right. Money isn’t time, it is alienated, expropriated time. Time is not money, but money is the absolute loss of time, just ask anybody who works compulsory overtime.
Finance, the ability to finance, to supply credit, is generated in the expansion of capital as it realizes the labor time it has aggrandized with the purchase of wage-labor. Finance is generated in the metamorphoses, the circuits of capital, from money through commodities to mo’money.
From its point of initiation however, finance and credit, function in the hesitations, the interruptions, the lapse, the delays in that circuit of expansion. Credit and finance sustain reproduction in those interstitial moments when expanded value has not yet been realized.
Credit is supposed to buy time, or if not actually make the purchase, get a short term rental until realization of value catches up with extraction. And once the metamorphosis has occurred? As with everything else, as with all of capital, credit can only exist by starting all over again. Everything that has once been realized immediately disappears, becoming only a point on larger circle that must be traversed again. Finance is nothing. Refinancing is everything.
The assumption of debt amounts to not only a claim of future earnings, but embodies the extinction of all current values, as those values are insignificant when and if expanded reproduction does not occur. Collateral is damage.
Debt, credit, bridge the periodicity of capital, and when reproduction staggers under the burden of accumulated capital values, it burns those bridges. The assumption of more debt under these conditions, the attempt to buy the time, extend the time, for expanded reproduction fails; either credit is withdrawn, or the compounded debt accelerates the destruction of preexisting values. Money can no longer buy time.
4. All, or almost all the events of immense historical significance, “changing the terrain of capital,” have fused the accumulation of capital, the buying of time, with the assumption of debt, with the destruction of assets, with the preservation, not the erosion, of the primacy of the United States in the capitalist network. What appears as capitalist expansion does not occur without preparing the destruction of the preexisting, and future, social assets.
So the Soviet Union’s productive apparatus is demolished with the economy reduced to monoline production, while life expectancies decline by twenty percent. The terrain for capitalist accumulation is restored.
So “peak oil” becomes one more argument of “supply and demand,” and profits soar for the oil bourgeoisie, as the price of oil drains profits from other corporations and into the oil companies. The terrain for capitalist accumulation is reconstituted.
So China, the new superpower, holds US debt instruments not as leverage over the US, but as an index to its own uneven development, its inability to fundamentally alter its gap between city and countryside, between agriculture and population. And in that gap, the mechanism for capitalist accumulation is reconstituted.
So with the dollar in decline, the US increases its capital equipment exports, its agricultural exports to new records. The terrain for its capitalist accumulation, its dominance of the world markets is restored.
So the asset-backed securities, which banks and bankers all over the world purchased as instruments, vehicles, for profit accretion, were in fact the products of simultaneous overproduction and reduced reproduction, and the debasement of the paper securities is only the mechanism for accumulation turning on itself as time runs out.
So that event of immense historical significance, with time running out, the election of Barak Obama, is the attempt to alter the terrain of capitalism, and find a way to reconstitute the mechanism of capitalist accumulation.
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Note to George Bush:
George, you fucked up so bad we had to allow the election of an African-American.
Bankers of America
1.(What it is) There were meetings in Washington, New York, Paris, Zurich, London, Berlin, Frankfurt, Milan; meetings in front of cameras and behind closed doors; meetings at which the giant teeny-weenies of the capitalist order– those central bankers, ministers prime and sub-prime, presidents, secretaries; meetings at which that cast of midgets and mumblers performed like fleas at a pocket circus, yoked together by a single thread, dragging in unison the wagons of the public treasury across the stage to the oohs and ahhs of journalists, columnists, experts; meetings where promises were made; meetings where the governments put the public money where the private mouths were, upturned, open, empty.
And after every meeting, after every agreement, the bourgeoisie found themselves right back where they started from: gripped, controlled, hounded by declining profits. Money, it turns out, is everything, or at least the image of everything. And for capital, image is everything.
Money, in its loss, represents the overproduction of capital; it represents, in its powerlessness, the overproduction of the means of production that eviscerates [1. verb trans.–disembowel. 2. verb trans.– bring out the innermost secrets. 3. verb trans.–elicit the essence of., OED] the rate of profit, that obstructs capital’s ability to maintain its own reproduction. It represents in its weakness the inability of private property to maintain the production for value. It represents the conflict at the heart of capital, between the means of production and the property relations that encapsulate them. Money represents all there is to the bourgeois order– and all there is is weakness, decline, devaluation.
2. (What it was) Overproduction of capital never signifies anything but overproduction of the means of production… Marx, Capital Vol. 3
Picking through the rubble of its 2001 recession, the U.S. bourgeoisie found life after dotcom digital death in the five pointed star of reduced factory employment, war, dollar devaluation, increased oil prices, and reduced capital spending. If expanded reproduction is the lifeblood of capital, then the US bourgeoisie decided that it was time to drink the blood, to intensify accumulation through increased, and unreplaced, capital consumption.
Annual real investment in manufacturing fixed assets had peaked in 1998 at $198.3 billion, and ended 2000 at the $198.1 billion mark. By 2003 the amount had fallen to $147 billion. That same year manufacturing profits began a spectacular recovery. By 2004, manufacturing profits where 12% above their 2000 peak according to the US Bureau of Economic Analysis. On a year-over-year basis, profits in 2005 increased 50 percent. In 2006, they grew another 24.4 percent.
Net capital investment did not increase to the amounts of the prior decade. Increased capital consumption limited net capital spending to amounts half, and three-quarters of the net amount invested in 2000. In fact the amount spent annually has remained below the 2000 mark for every year following. However, replacement and expansion of fixed assets, even on a restricted basis is essential to capitalism. Reduced net investment is accompanied by increasing gross investment, and so capital reproduces itself, it expands, on a reduced, but increasingly costly, basis.
The rate at which profits accumulated exceeded the rate at which capital investments were made, but as the capital investments continued the rate of growth of the rate of return on that investment slowed. Slowing from a growth in rates from 15.2% in 2004 to 20.6% 2005, the rates in 2006 and 2007 were 23.1% and 22.5% respectively. The more it expanded, even/particularly on the reduced basis, the more investment required in equipment and materials, the more capital overproduced itself and reduced the rate of growth of the return on its expenditures.
For capital, rate, speed, velocity time is everything. A deceleration in, not just the rate of return, but the growth in that rate, means that more and more time is being consumed between the extraction of value and its realization as profit.
And with money the mirror, the lens, the image of capital, it is in the money markets, in the exchanges of paper, that the merest slow down in the ability of money to turn its tricks of disappearing and reappearing bigger and stronger, is magnified, leveraged, into paralysis, freeze, collapse.
3. (What it’s not)
What it’s not is a problem of “underconsumption.” Consumption only exists as a “derivative” of capitalism’s need to simultaneously aggrandize and expel wage-labor from the process of production. Consumption exists only as an index to capital’s achieving expanded reproduction, sufficient profitability, and its success at exploiting wage-labor at an intensity sufficient to overcome the declining rate of return inherent in this reproduction, this profitability, this exploitation.
What it’s not is a problem of “fictitious capital.” Fraud, swindle, charlatanism are ever-present in the circuits and cycles of capital, and while these fine qualities are necessary for the conduct of capital’s daily business, these fine qualities are not sufficient. Fraud, swindle, charlatanism do not create, nor can they substitute for, the social relation that determines both capital’s ecstasy and its despair. Like every other bit of the circulation process, like every other market exchange, the dishonest exchanges are a zero-sum game. Nothing is created in exchanges real or fraudulent.
4. (What it will be).
Confronted with the overproduction which is, in fact, it’s essence, capital can do no more and no less than to debase the values it has spawned, attempt to destroy the means of production, and demand an increase the exploitation of wage-labor. The difficulty capital encounters in actualizing this process is not the encounters with various other and competing capitals, but with the human component of its mode of production. Class struggle is the only obstacle to a world of increased misery.
October 18, 2008
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1. When measuring an age by the size of its heroes, it’s important to keep in mind that heroes, like assets, like securities, have both a notational value and a mark-to-market value. In the discrepancy between those two, notational and market, values is everything we need to know about size, direction, and velocity, of the age and the heroes.
Measured by its heroes, and adjusted for the market vs. notational values, clearly this is an age of, not advanced capitalism, but advanced capitalist dwarfism.
So….. Alan Greenspan, once a genius, a colossus, a wizard, a fountainhead gets carried in the financiers’ books of positions on that notational value. Meanwhile the mark-to-market value shrinks; not just shrinks, evaporates, withers, disappears and finally Greenspan is “uncovered” in all senses.
Marked-to-market he’s back to being just another ugly face wobbling down the runway of riches-to-rags capitalism, flogging his faux erudition for the chance at another meal. “Will obscure, equivocate for food” says the blurb beneath his picture in the fashion/finance guide.
What else can we expect? What heroes can be produced by a system so venal, so petty, so miserable that it at its peak, that its peak, that its moments of greatest profit and power are measured not by the collective advance of the human species but in the reversal of those previous advances; that its moments of greatness are just that reversal? What can be expected where a “golden age in financial freedom” is accompanied, fed, sustained by another dark age in which all of science, art, humanity is politicized in the service of its own destruction?
2. So… in its plunge into the abyss of declining asset values, capitalism’s financial oracles, heroes of digital and analog media, propose a rescue that consists, on paper, of a single solution– “Don’t Look Down”– as if the acceleration of a falling body due to gravity, as if terminal velocity, depended on an orientation of the head.
Comedy, horror, unintended and intended, ripple through the despair of the traders, brokers, economists, bankers, like shivers in forensic chill of a morgue.
The Wall Street Journal advises that shotguns and canned goods are sound investments in times like these.
The Financial Times advises Lehman Bros. (before bankruptcy): “When seized by a panic attack, focus on breathing slowly and deeply.”
It reports on Washington Mutual: “The destruction of shareholder wealth in the US financial sector is relentless. Washington Mutual, which parted company with chief executive Kerry Killinger [great name, bet he chose it himself —s.a.] on Monday, is joining Lehman on the rack.”
It wonders out loud: “If propping up the banking system is not a socially useful role, what is?”
Finally! Finally the bourgeoisie, blubbering all the way home from the bank, grasp Marx’s analysis of capitalist commodity production as private property but realizable only in a social role.
Socially useful role? Obviously, the market is judging the social usefulness of the banks, and deciding that such usefulness has been grossly overvalued. Far too much time has been expended on the capitalist reproduction of value.
And finally, none other than the shaved head knight in a white Dodge Charger (dual quads, Hurst four speed, 6 miles to the gallon), Secretary of the Treasury Paulson, mutters aloud, channeling Stevie Wonder, “Heaven help us all.”
3. So…what distinguishes the present predicament of capitalism from previous predicaments? Why is this dark night different from all other dark nights in which all cats are black? In a word, nothing. In a word, everything. In a word, magnitude.
Global finanical instruments have been measured at 167 trillion dollars, almost 3 times world GDP. In 1980 world GDP and global financial instruments were approximately the same size.
Total global financial instruments were measured at 53 trillion in 1993.
Credit default swaps are at 62 trillion– that is to say the “bets” on defaults have a notational value far greater than the market values of the securities at risk of default. Homeowners have negative equity when the amount due on their mortgages exceeds the value of their homes. It makes more “economic sense” to walk away from the home. Credit default issuers are in exactly the same position except they want to run, not walk.
All eyes and sighs turn to the “lender of last resort,” that creator of windows, that builder of bridges, the Federal Reserve. And the Fed itself? After opening its windows, after accepting lower rated collateral, what about the doctor’s own health?
The FRB, which one year ago, had 90% of its assets in US Treasury Securities has undergone, with the opening of the Primary Dealer Credit Facility and other mechanisms, an inflation in the notational value of assets with a decline in the quality of such assets– to the point that now only 50% of the Fed’s assets are in US Treasury instruments. And the market value of the other assets? Nobody knows.
However, the source for this distress, the predicament in capital is not in the overleveraging of the capitalist economy, the reproduction of expanding debt levels designed to parse, to chop, and ration available profit. These are manifestations, appearances of the real predicament, the real conflict beween expanded capitalist reproduction and profit; between private property and the accumulation of capital.
Next: Of Hats and Rabbits, 3. Roots and Prospects
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1. No bailouts; immediate cancellation of residential mortgages on family units
2. immediate withdrawal from Iraq and Afghanistan; reductions in defense spending to be pooled into Social Security trust; universal single payer healthcare trust.
3. No export of capital; ban on US investors utilizing offshore shell companies; no US DFI by corporations, holding companies, trusts, banks,syndicates, etc. etc.
4. Seizure, without compensation, of all assets of financial institutions unable to meet market obligations, depositor demands.
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