We're
in the Eye of a Global Financial Hurricane
The only "growth" we're experiencing are the
financial cancers of systemic risk and
financialization's soaring wealth/income inequality.
By Charles Hugh Smith
The
Keynesian god of growth has failed.
The
Keynesian god of borrowing from the future to
fund today's consumption has failed.
The
Keynesian god of monetary stimulus /
financialization has failed.
Every
major central bank and state worships these
Keynesian idols:
1. Growth.
(Never mind the cost or what kind of growth--all
growth is good, even the financial equivalent of
aggressive cancer).
2.
Borrowing from the future to fund today's keg
party, worthless college diploma, particle board
bookcase, stock buy-back, etc. (oops, I mean
"investment")--a.k.a.deficit
spending which is a polite way of saying
this unsavory truth: stealing
from our children and grandchildren to fund our
lifestyles today.
3.
Monetary stimulus / financialization. If private
investment sags (because there are few
attractive investments at today's nosebleed
valuations and few attractive investments in a
global economy burdened with massive
over-production and over-capacity), drop
interest rates to zero (or below zero) to
"stimulate" new borrowing... for whatever:
global carry trades, bat guano derivatives, etc.
Here is my
definition of Financialization:
Financialization is the mass commodification of
debt and debt-based financial instruments
collaterized by previously low-risk assets, a
pyramiding of risk and speculative gains that is
only possible in a massive expansion of low-cost
credit and leverage.
That is a
mouthful, so let's break it into bite-sized
chunks.
Home
mortgages are a good example of how
financialization increases financial profits by
jacking up risk and distributing it to suckers
who don't recognize the potential for staggering
losses.
In the
good old days, home mortgages were safe and
dull: banks and savings and loans institutions
issued the mortgages and kept the loans on their
books, earning a stable return for the 30 years
of the mortgage's term.
Then the financialization machine
revolutionized the home mortgage business to
increase profits. The
first step was to generate entire new types of
mortgages with higher profit margins than
conventional mortgages. These included no-down
payment mortgages (liar loans),
no-interest-for-the-first-few-years mortgages,
adjustable-rate mortgages, home equity lines of
credit, and so on.
This
broadening of options (and risks) greatly
expanded the pool of people who qualified for a
mortgage. In the old days, only those with
sterling credit qualified for a home mortgage.
In the financialized realm, almost anyone with a
pulse could qualify for an exotic mortgage.
The
interest rate, risk and profit margins were all
much higher for the originators. What's not to
like? Well,
the risk of default is a problem. Defaults
trigger losses.
Financialization's solution:
package the risk in safe-looking securities and
offload the risk onto suckers and marks. Securitizing
mortgages enabled loan originators to skim the
origination fees and profits up front and then
offload the risk of default and loss onto buyers
of the mortgage securities.
Securitization was tailor-made for hiding risk
deep inside apparently low-risk pools of
mortgages and rigging the tranches to maximize
profits for the packagers at the expense of the
unwary buyers, who bought high-risk securities
under the false premise that they were "safe
home mortgages."
Financialization-- which
can only expand to dominate an economy if it is
supported by a central bank bent on expanding
credit--has
two inevitable and highly toxic consequences:
-- Risk
seeps into every nook and cranny of the
financial system, greatly increasing the
odds of a systemic domino reaction in financial
meltdowns. This is precisely what we saw in the
2008-09 Global Financial Meltdown (GFM):
supposedly "contained" subprime mortgages
toppled dominoes left and right, bringing the
entire risk-saturated system to its knees.
-- Extraordinary
wealth and income inequality, as those
closest to the central bank money/credit spigots
can scoop up income-producing assets first at
much lower costs than Mom and Pop Main Street
investors.
The rising anger of the masses
left behind by the central bank /
financialization wealth harvesting machine is
the direct result of Keynesian monetary
stimulus that rewards
debt-based speculative gambles by those closest
to the cheap-credit spigots.
As I
explain in my book Why
Our Status Quo Failed and Is Beyond Reform, the
only possible output of central bank monetary
stimulus is financialization, and the only
possible output of financialization is
unprecedented wealth and income inequality.
The global financial system is in
the eye of an unprecedented hurricane. While
central bankers are congratulating themselves on
their god-like mastery of Nature, and secretly
praying to the idols of the Keynesian Cargo Cult
every night, the
inevitable consequence of borrowing from the
future, the obsession with "growth" at any cost
and financialization /monetary stimulus, a.k.a. the
rich get richer thanks to central banks is
systemic collapse.
Don't fall for the mainstream media and
politicos' shuck-and-jive that all is well and
"growth" will return any day now. The
only "growth" we're experiencing are the
financial cancers of systemic risk and
financialization's soaring wealth/income
inequality.
Charles
Hugh Smith : Oftwominds.com #7 in CNBC's top
alternative financial sites |
