Kevin Phillips, the conservative author who prophesied both the beginning and end of the right’s political reign, delivered a salient comment during that period defining what is now happening in financial meltdown land.”These people don’t really create anything,” Phillips lamented.
Phillips’ comment bore on what has happened to a once proud U.S. economy with a strong manufacturing base, maintaining a strong work force and generating strong sales. What has recently emerged is a propensity to substitute successful corporate management into a devil may care Las Vegas slot machine operation involving bubbles and financial sleight of hand.
The catastrophic mortgage blowout is one tragic example. In the never never land of specious credit reasonable value was substituted for the opportunity to achieve short term gain.
Another realm of specious economics is the sleight of hand activity known as credit default swaps. They have been defined on the CBSNews.com site as “private and largely undisclosed contracts that mortgage investors enters into to protect themselves against losses if the investments went bad.”Michael Greenberger, a law professor at the University of Maryland and a former director of trading and markets for the Commodities and Futures Trading Commission has noted that, while the perpetrators of swaps attempt to hide what is happening under a cocoon of complexity that such credit default swap contracts “are much simpler than they sound.”
Greenberger further explained that such a transaction “is a contract between two people, one of whom is giving insurance to the other that he will be paid in the event that a financial institution, or a financial instrument fails.”
By no coincidence the financial institutions selling credit default swaps constituted a who’s who of current defunct and badly troubled giants numbering Bear Stearns, Lehman Brothers, AIG and Citigroup.
Steve Kroft in a probing “60 Minutes” interview asked Frank Partnoy, a former derivatives broker and corporate securities attorney who now teaches law at the University of San Diego, asked the probing question of the size of the market for credit default swaps.
“Well, we really don’t know,” Partnoy replied, “There’s this voluntary survey that claims that the market is in the range of 50 to 60 or so trillion dollars…. I know it seems incredible. It’s four times the size of the U.S. debt.”
The Partnoy estimate coincides with that of Mark O’Byrne writing in the October 13 edition of “The Market Oracle.” O’Byrne refers to a “massive $62 trillion worth of credit default swaps.”
This crisis embodies a Wall Street shadow market that could be as large as six times the staggering U.S. debt.
This was a market largely unregulated. How revealing it is to see how the voodoo “free market” world of wild and wooly deregulation of the likes of Alan Greenspan and his guru Ayn Rand along with mainstays such as Milton Friedman and disciple Ronald Reagan had impacted on America, resulting in a crushing economic collapse of which we have sadly seen only the beginning.
Ripple effects exist in the economic sphere. Outrageous policies result in severe ripples.