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New Bubbles Brewing in Shanghai and Wall StreetGary Dorsch Since the historic 1987 stock market crash, the Federal Reserve has responded to every recession in the US economy by slashing interest rates, and funneling massive amounts of money into the hands of Wall Street’s aristocracy, - the ruling class that dominates the two political parties in Washington. The Fed’s cash injections have usually found their way into assets, including commodities, stocks, and mortgage-backed securities, and often fueling speculative binges into stratospheric heights. But on March 12th, US President Barack Obama warned a group of chief executive officers of the Business Roundtable, that the Fed “can’t continue with its policies of endless cycles of bubble and bust, and instead, must build a new foundation for future economic growth.” Obama blamed the lingering banking crisis on “reckless speculation and spending beyond our means, on bad credit, inflated home prices, and over-leveraged banks. Such activity isn’t the creation of lasting wealth. It’s the illusion of prosperity, and it hurts us all in the end,” Obama warned. “We cannot settle for a return to the status quo. We must put an end to the reckless speculation, spending beyond our means; bad credit, over-leveraged banks, and the absence of oversight that condemns us to bubbles that inevitably bust,” Obama added. Yet only a few days earlier, Obama exerted maximum pressure on the Financial Accounting Standards Board (FASB) to let Wall Street bankers set their own prices for toxic assets in earnings reports, regardless of market prices. By suspending the so-called “mark to market” accounting rules, concerning the value of toxic securities they hold, FASB’s new guidance would allow American banks to value assets using their own internal “mark-to-myth” models.This is, in fact, is the creation of a loophole allowing bankers to conceal their true losses and cook their financial books. By allowing the banks to claim their assets as fundamentally sound, the ruling elite expect the panic selling in the stock market will subside, banks will start lending again, and the US-economy will gradually recover. So far, all the measures taken by Obama’s economic team in response to the financial crisis, have pointed their aim at protecting the wealth of the Wall Street aristocrats.Treasury Secretary Geithner announced a scheme to enable the banks to offload their toxic assets by subsidizing hedge-funds and private-equity firms to purchase them at inflated prices, using hundreds of billions of taxpayer money to cover any losses, and insure double-digit profits for the speculators.
The masters of Wall Street erupted into great euphoria and jubilation over the death of FASB #157, and Geithner’s scheme to loot taxpayer funds and offload the toxic assets of the financial oligarchs, - creating illusions of new found wealth. Obama himself went a step further to reassure the Wall Street titans, by quietly killing a bill passed by the House of Representatives that would have taxed 90% of the bonuses of wealthy executives and traders at AIG and other bailed-out firms. By obscuring the accuracy of bank balance sheets, mixed with the Fed’s zero-percent interest rate policy, and the hallucinogenic “Quantitative Easing” drug, traders are taking collective leave of their senses, succumbing to delusions of ever-expanding wealth, and actively participating in the creation of new bubbles. And by definition, market bubbles can expand much farther than most traders can imagine. Nobody bothered to ask how Wells Fargo (WFC) could post a record $3-billion profit in the first quarter, at a time when one in eight US-homeowners with mortgages, are behind on their loan payments, or in the foreclosure process as job losses intensifies, and California home prices are 40% below their peak levels. Instead, operating under the illusions of “mark-to-myth” accounting, and the hallucinogenic “QE-drug,” administered by the Fed, hedge-fund traders accepted the WFC earnings report at face value, bidding its share price 30% higher. Former Fed chief “Easy” Al Greenspan and his prototype, Ben “Bubbles” Bernanke, hold the view that deliberate bubble-bursting is something between impossible and dangerous, and thus, is best avoided. The Fed is inherently opposed to hiking interest rates, to prevent bubbles from arising in the first place. Instead, the Fed allows stock market bubbles to inflate into the stratosphere, and patiently waits for the bubbles to burst under their own weight. Afterwards, the Fed moves to cushion the meltdown, by slashing interest rates and flooding the banking system with liquidity, - the infamous Bernanke / Greenspan Put. The Fed operates under the belief that wealth in an asset-based economy is created by massively inflating the money supply and pumping-up the value of financial or tangible assets. Today, the Fed has joined the Bank of England and the Bank of Japan in printing trillionsof British pounds, yen, and US-dollars in part, under the radical “Quantitative Easing” framework, designed to monetize their respective government’s debt, which in part, is used to bail-out the financial aristocracy.
Central bankers inflate bubbles in order to give households a fresh sense of wealth, encouraging them to borrow and spend more, and businesses to boost investments. The strategy is built around the massive expansion of the money supply. There are generally two types of bubbles, firstly, speculative excesses fueled by irresponsible bank lending. The second type of asset bubble is one in which bank lending plays a minor or no role at all, - usually related to the introduction of new technology or rapid industrialization that promises untold riches. The Nasdaq high-tech stock bubble is an example of this second type. So was the spectacular run-up in the Shanghai red-chip index, which soared four-fold in 2007, mirroring China’s rapid accession as the world’s third largest industrial power and the biggest exporter. China’s vast manufacturing sector employs tens of millions of workers and functions as the cheap labor workshop for Asian and Western companies, and is the biggest customer for Australian and Brazilian miners. But it’s the first type of bubble which Beijing is busy inflating right now, - with the ruling Politburo ordering its state-owned banks to lend yuan aggressively. China’s central bank said on April 12th, it will ensure massive liquidity to sustain economic growth, squashing speculation that regulators might try to restrain bank lending that could lead to bad debts and asset bubbles. Chinese banks extended 1.9-trillion yuan in local currency loans in March, bringing the first-quarter total to 4.6-trillion yuan, ($585-billion), larger in size than Beijing’s 4-trillion fiscal spending plans. In turn, explosive lending in China has fueled the explosive expansion of the Chinese M2 money supply, now standing +25.5% higher than a year ago, its fastest growth rate in 12-years. With the blessing of Beijing, much of this money is funneled into Shanghai equities and the property markets, thereby inflating prices. The combined fiscal and monetary stimulus, equaling about 30% of China’s GDP, is widely expected to lift the local economy out of its deep slump, through the traditional strategy of inflating market bubbles and indirectly boosting household wealth. To read the rest of this article, click on the link below: http://www.sirchartsalot.com/article.php?id=108 Apr 14, 2009 321gold Ltd |
