US financial system on brink of collapse
#1
September 23, 2:02 pm
US financial system on brink of collapse
On September 20, US Congress announced that it was working to push through the recent measures approved by the Bush Administration to save Wall Street from a financial meltdown and the worst crisis since the 1929 Crash. The US Treasury has been given unprecedented powers to buy bad debt from financial institutions after a month - September - which saw the collapse of the Lehman Brothers, the administration's decision to nationalize the two mortgage finance giants, Fannie Mae and Freddie Mac, and a rescue package for the nation's largest insurance company, American International Group (AIG).
The announcement by the US government that it would seize control of Fannie Mae and Freddie Mac revealed that these ailing financial institutions sustained losses that were more than $14 billion because millions of homeowners had defaulted on their mortgage repayments.
At the beginning, many buyers felt encouraged by low mortgage rates. However, their position became unsustainable when the interest rates increased. According to experts, the bailout of these two companies will cost up to $200 billion dollars.
Lehman Brothers, the fourth largest bank in the country, sank due to the accumulation of bad assets, mainly related to real-estate, that are now worth only a small part of their original value. US officials say Lehman will now be sold off piecemeal. The collapse of the oldest investment bank in the country could strongly undermine the whole US financial system and increase the credit crisis.
In contrast, the US Federal Reserve decided to intervene by lending $85 billion to save AIG. This move will give the US federal government an 80 percent stake in the company, which is believed to be filing for bankruptcy in the coming weeks.
The US President George W. Bush has admitted that confidence in the US economy has been shaken and has pledged more tax dollars to rescue Wall Street from collapse.
"Confidence in our financial system and in its institutions is essential to the smooth operation of our economy, and recently that confidence has been shaken," Bush said. The government plans to provide half a trillion dollars to the financial markets. The Bush Administration hopes that this massive injection of funds will able to save Wall Street institutions, which are now on the brink of bankruptcy.
The urgency of these measures was highlighted by the Senate Banking Committee chairman Chris Dodd, who warned that the US might be days away from a complete catastrophic meltdown of its financial system.
Former US presidential candidate Pat Buchanan claims that "the Crash of 2008, which is now wiping out trillions of dollars of our people's wealth, is, like the Crash of 1929, likely to mark the end of one era and the onset of another. The new era will see a more sober and much diminished America. The 'Omni power' and 'Indispensable Nation' we heard about following our Cold War victory is history."
However, critics have accused the Bush Administration of trying to save the system and institutions by transferring their losses to the American taxpayers, who will have to pay billions of dollars to write off debts that will never be repaid.
"It (the bailout) flagrantly violates the US Federal Constitution, which specifically defines the general welfare as the law of the land. This bailout of speculators, at the expense of current and future taxpayers, is illegal," Lyndon LaRouche, editor of the Executive Intelligence Review, said.
He added that the US government has committed itself to shifting the risks taken by big financial institutions, no matter how irrationally speculative and incompetent they were, onto the backs of US taxpayers. The rapid decision of the US government to rush in support of Wall Street and the financial elite contrasts to its indifference and passivity with regard to the situation of millions of American workers, who are now facing a dramatic increase of home foreclosures, layoffs and a fall in the standard of living.
There won't be relief for the majority of homeowners who are fighting to pay their mortgages each month.
In a recent article US journalist Amy Goodman quoted Michael Hudson, professor of economics at the University of Missouri, Kansas City, and an economic adviser to Rep. Dennis Kucinich, as saying that the government should think of "saving these 4 million homeowners from defaulting and being kicked out of their houses. Now they are going to be kicked out of the houses. The houses will be vacant. The cities are going to lose property taxes, they are going to have to cut back local expenditures, local infrastructure. The economy is being sacrificed to pay the gamblers."
Apart from a tiny group of the super-rich, the rest of the Americans can hardly get by. Millions are so close to the edge that any increase in a mortgage payment can disrupt a household budget. Salaries have stagnated. Year after year the buying power of working families has dwindled.
Some now fear that the current crisis will be used to justify another assault on basic social programs, including Medicaid or Medicare. However, the US Administration is unwilling to stop its useless wars in Iraq and Afghanistan or reduce the country's huge military budget, which exceeds that of the rest of the world combined.
The American people will clearly suffer from the bailout of Wall Street because this move will require a rise of taxes and will further weaken the dollar in the coming years. It will also increase government budget deficits and the US debt, which will further erode the credibility of the United States in the world.
The US administration today is unable to finance its ordinary operations and depends on foreigners to acquire its bonds. The US is by far the planet's largest debtor country. Its current account deficit, which reaches $800 billion, is financed by an inflow of $1 trillion of foreign investment each year.
However, US economists now fear that foreign investors will start to flee from US markets. New York Mayor Michael Bloomberg has warned that the 'next wave' of the crisis might come from overseas if foreign entities stop purchasing US debt. "It's not clear who is going to be buying our debt," said Bloomberg. "It may very well be that the next wave is going to come back and bite us."
In this regard, The New York Times said that "Asia's savings have, in essence, bankrolled American spending for decades (but) Asian interest in American assets is wilting, a trend that seems to have started over the summer." In July alone, foreign investors pulled out $92.9 billion out of the United States.
Lawrence Vevel wrote in commondreams.org that the reality is that the United States is currently confronting a crisis of its model of capitalism. "This is not merely a matter of the huge losses and meltdowns that have taken place and have threatened to bring down the whole system with them. It is also a matter of the failure of a culture, a culture that has grown and grown since the sainted Reagan introduced the twin pillars of his morning in America: unchecked greed and militarism... The heads of major firms have likewise fallen, as their houses of cards collapsed. The fall of titans represents a horrid, economy-threatening failure of the culture of greed, dishonesty and unchecked capitalism, the culture which has been pushed on us by conservative intellectuals, politicians and mainstream media since Reagan took office in 1981."
For a long period, the 'free market' became a secular religion in the United States. This period led to the plundering of the country's wealth and the dismantling of the industrial issue of the American economy, which cost millions of jobs and lowered the living standards of the majority of Americans. The operations of big corporations were deregulated and a huge amount of wealth was transferred to the hands of a tiny financial elite.
The next administration, which will enter office under the strongest economic pressure in history, will have to confront this difficult reality. The irresponsibility of the financial elite and US administrations has led the US economy to the brink of collapse. The unprecedented bailouts will not solve the deep structural problems that have developed over the preceding two decades. The new administration should shift the flow of investment capital out of speculative transactions and back into the productive economy in order to satisfy the material needs of US society.
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