By Michael Feltham FCEA, ACPA, FSPA. Axis Exclusive!
Editor's Note: In our correspondence and in his articles, 4 years ago, Axis of Logic columnist, Michael C. Feltham predicted the financial crisis we've all been witnessing during the recent months and weeks. Watch for more of his forcasts in our section, "Feltham on the Economy".
- Axis Editors
At present, I am on vacation in Northern France. Vacation notwithstanding, it proved impossible to escape the mounting furor and panic in global capital markets as the meltdown which I have repeatedly forecast now for five or so years gets into gear.
There is more, much more bad news still to come, I fear, as Bush’s out-of-control apology of a government and the fed vainly attempt to prop up a failed financial system, itself, the author of its own demise; the cause? Greed ... that and myopia!
Whilst this inevitable debacle has been building, such regulation as exists from the Federal Reserve and such as the SEC has proven woefully inadequate: lack of focus on Derivative Products and what are termed, “Off balance sheet Transactions” (which by their title fall neatly outside the compass of any current regulatory remit), and particularly Securitisation, has caused this crisis. Plus, of course, the abuse of position and influence exercised by senior bankers who ought to know better: much, much better!
As I warned four years ago on Axis of Logic, (Dominoes Anyone?) banks lending to banks via the global Money Market was out of control and would, inevitably lead to these events, feared by such sane and restrained bankers as Paul Volcker, head of the mighty Fed many years ago: The Domino Effect. This is where credibility panic sets in and all lenders into the system, call their funds in fear. As one bank in the chain falls over then the rest follow suit.
The causal drivers are firstly the practice of Fractional Reserve Banking, allied to the massive growth in the global Interbank money markets: instead of sourcing funds from traditional depositors, such as the public, for too many years, banks have accessed increasingly insane obligations from the money markets. This has caused them to abandon probity and break the primary rule of safe banking: one never ever borrows short to lend long! i.e. borrows short term and lends long term.
What Treasury Secretary Paulson and Fed Chair Bernank are trying to do currently, is not rescue the US currency.
They are trying to create a continuum of a flawed, dangerous and fundamentally insane financial system which allows the devious and those of criminal lack of responsibility to personally amass vast and obscene wealth, at the expense of every US citizen who is then called upon, vicariously, to bail-out the sinking ship.
Since the so-called Sub-Prime crisis started, the fed has pumped probably $300-400 Billion into the system in the cause of creating greater liquidity. In addition, they have agreed to purchase $100 billion of stock in Freddie Mac and Fannie May. Also, they will warrant $25 billion in their loans: except, of course, these two institutions jointly account for over $5 trillion in debt or 50% of the US nation’s mortgages!
Not far enough?
So the Fed has now bailed out AIG to the tune of a further $85 Billion and change!
In order to prop up this engine of greed and malfeasance the U.S. government has probably increased the national debt from circa $10 trillion to circa $10.25 trillion!
So, who pays? Well, Joe Public of course!
If the Fed’s shopping spree has been funded from reserves, which it clearly hasn’t (as it did not have that much), then much of this capital has been monetized: in other words, the old dollar bill printing press has been running 24/7!
At a time in global finance and banking the US dollar, a fiat and thus basically worthless national currency, relies heavily on the underpinning of a strong US economy and fiscal and financial stability to maintain value. To dilute this core unit of value so dramatically means that those who are funding this vast deficit (mainly Arab petro states and Asia), will look upon continuing their support with a heavily jaundiced eye.
Once it is realised how worthless many paper guarantees issued by Derivative Products are in reality, then the Domino Effect could start toppling many more banks and financial institutions.
It aint all over till the fat lady sings: and she is still making up in her dressing room, I fear!
Hold onto your hats!
© Copyright 2008 by AxisofLogic.com
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READ THE BIO AND ADDITIONAL ESSAYS BY THE AUTHOR
AT AXIS OF LOGIC'S FEATURED SERIES
FELTHAM ON THE ECONOMY