Monday, August 1, 2011

The Real Debt Crisis

While Obama plays electoral politics with the Tea Party and Congress over the "debt ceiling," the real movement of capital continues its precipitous course.

Toxic Waste Dumps for Credit

Robert Kurz

Anyone retaining a bit of memory capacity might be wondering where the enormous mass of unrecoverable credit finally ended up. After the financial crisis of 2008, the most inconspicuous resting place was found for it. These debts were never payed for; on the contrary, every imaginable form of debt continued to grow. The game of pretending to pay off old loans with new ones, and the new ones with newer ones, ended long ago in the private sector. And, because of their enormous magnitude, the famous "toxic assets" couldn't be written off entirely (with the exception of some cosmetic operations by the banks). In the finance gurus' own words, this would have caused the "nuclear meltdown" of the global financial system. For accounting purposes the banks were allowed to jettison their toxic waste. But nothing was said about the "bad banks," which had to rely on state guarantees to temporarily offset the collapse of the shadow banking system after the housing bubble burst.

The official hope and expectation was that state guarantees could quickly restore "confidence" so that the long-worthless bonds could once again fetch a reasonably decent price. The condition was that the US housing sector, where the wave of crashes began, would recover strongly. Nothing need be said about this. But the guarantees of the State weren't payable. This simply couldn't happen, because the "nuclear meltdown" would have happened in the State's budget. So where did the highly toxic effluvia of the financial system go? They ended up in a final repository: the central banks. As everyone knows, these banks are presently flooding the world with dollars, euros, etc. in order to keep the clinically dead world economy on the respirator. While they're not yet throwing money from helicopters, they're extending credit to commercial banks at low interest rates, or even at no interest. Just as with any loan, the banks must provide "guarantees." And where are these? In these same toxic paper piles, which the central banks accept gladly, as if they were crown jewels.

Not even three years have passed since the crash of the financial markets, and now the public finances of an increasing number of countries are up in the air after being overburdened by anti-crisis policies. Basically, what happened to private financial bonds is now happening to sovereign debt holdings. A hard-to-control and growing portion of debt has been transferred to shadow budgets. As happened previously with home mortgages, more and more sovereign debt holdings are being turned into toxic waste. And the central banks eagerly buy these, too. So the Asian banks are buying fewer treasury bonds from the US? It doesn't matter, since the American Federal Reserve itself is hoarding them like grain in time of famine. In addition, the European sovereign debt crisis would have worsened despite all the rescue packages, if the European Central Bank hadn't begun snatching up piles of worthless bonds from the countries in crisis. Ironically, the central banks, the supposed guardians of financial stability, have become toxic waste dumps for the global financial system. This is the final home for these assets, their final resting place, because no entity lies behind the central banks to free them from this burden. The façade of normality erected after 2008 rests on a political adventurism that creates money from "guarantees" based on unpayable debt.