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Stock Market Brushfire; Will there be a run on the banks?
Monday, 13 August 2007 23:30
by Mike Whitney
On Friday, the Dow Jones clawed its way back from a 200 point deficit to a mere 31 point loss after the Federal Reserve injected $38 billion into the banking system. The Fed had already pumped $24 billion into the system a day earlier after the Dow plummeted 387 points. That brings the Fed’s total commitment to a whopping $62 billion. By some estimates, $326.3 billion has now been added to the G-7 Nations’ intra-banking system to prevent a breakdown. That amount will steadily rise in the weeks ahead as the situation continues to deteriorate. Some readers may remember that on Tuesday, August 7, the Fed announced that it was NOT planning to bail out the market. My, how quickly things change. So far, the economic pundits and CEOs have applauded the Fed’s intervention as a “constructive” way of staving off an impending credit crisis.

Are these the same “experts” who always sing the praises of unregulated “free markets” while condemning any government intervention?


The investment banks and fund mangers love “free markets” when it means eliminating the rules that prevent them from gaming the system. But they don’t like it so much when their shabby Ponzi-rackets start to unravel. Then they’re the first in line to beg for a bailout.

That’s what’s happening right now. The Fed is keeping the stock market afloat by increasing liquidity at the banks. If it wasn’t for Bernanke’s billions of dollars of low interest credit — the banking system and stock market would collapse in a heap. The Fed’s “not-so-invisible hand” is the only thing holding the whole dilapidated system in place.

Is that the way it’s supposed to work in a free market system — with the Fed acting as the nation’s Economic Central Planner intervening whenever it suits the interests of its wealthiest constituents?

Sounds more like a Financial Politburo, doesn’t it?

In truth, the “free market” means nothing to the men who run the system. It’s just a public relations scam designed to dupe investors into plunking their money into a system that’s rigged for the carnivores at the top of the economic food-chain.

Does anyone really believe that the market-commissars would allow the system to operate according to the arbitrary swings in investor confidence and random speculation?

This is THEIR SYSTEM and they run it THEIR WAY. The only time that changes is when their twisted schemes go haywire and they need a handout from the taxpayer. In the present case, they are asking Big Brother Bernanke to bail them out on trillions of dollars of non-performing subprime garbage-loans which masquerade as securities in the secondary market. The Fed has already indicated that it will do whatever it can to help.

But what good will it do?

Known and very popular cialis coupon which gives all the chance to receive a discount for a preparation which has to be available and exactly cialis coupons has been found in the distant room of this big house about which wood-grouses in the houses tell.

The banks are currently holding (roughly) $300 billion in collateralized debt obligations (CDOs) and another $225 billion in collateralized loan obligations (CLOs) More than one-half trillion dollars in debt which is essentially “illiquid” and has no clear market value. It could be worthless for all we know.

That hasn’t stopped the Fed riding to the rescue, buying up many of these toxic CDOs and increasing banking reserves so the great fractional banking con-game can continue unabated. This is what one astute observer called “alchemy finance”.

Central banks around the world have opened up the liquidity spigots to avoid a global credit meltdown. But their efforts are bound to fail. The banks are sitting on huge losses from assets that they can’t move through the pipeline and which have gobbled up their reserves. Bloomberg News summed it up like this: “The $2 trillion market for mortgages not backed by government-sponsored agencies is at a standstill”.The same is true of the corporate bond market. As the Wall Street Journal reported last week:

“The investment grade corporate bond market HAS GROUND TO A HALT, making it difficult for companies to access capital and hard for investors to find a place to put their money to work. ….The problems in the primary market could, if they persist, throw a wrench in the workings of corporate America, making it tougher for companies to finance, among other things, investments, buyouts and equity buybacks….For July, corporate bond issuance was down 77% from June.” (“Corporate Bond Market has come to a Standstill”, Wall Street Journal)

The mighty wheels of commerce have rusted in place. Nothing is moving. Trillions of dollars poisonous CDOs need to unwind, but the banks cannot put them up for bid for fear that they’ll only get pennies on the dollar. It’s like watching a slow-motion train-wreck. The Fed’s cheap credit won’t help either. At best, it’ll just buy a little time before the true value of these bonds is established and trillions of dollars in market capitalization vanish into cyber-space. Banks, equities, hedge funds, insurance companies and pension funds are all in line to suffer major losses.

Last week BNP Paribas suspended three funds because they couldn’t get bids on the CDOs they own. When securities have no fixed market-value; who is going to buy them?

No one. Besides being complex and opaque, real estate CDOs have become the global pariah — “leper equities” that no one will touch. That’s why no transactions are taking place and the system is freezing up. If Paribas shuttered its doors; there must be many other funds close behind.

The Federal Reserve started this mess by lowering interest rates to 1% and flushing trillions of dollars into the economy. That cheap money created equity-bubbles in housing, credit, stocks and bonds which are now beginning to unwind. Expanding the money-supply might be a good short-term fix, but it’s dangerous, too. It just adds hyper-inflation to the long-list of existing problems.

The volatility in the stock market has diverted attention from the problems facing the banking system. The banks have been originating loans and bundling them off to Wall Street to avoid the normal reserve requirements. Now they’ve been “caught short” and don’t have adequate funding to cover their bets. If the Fed doesn’t help out, we’ll see at least one or two major bank closures.

This is a story that won’t appear in the media. Bank-runs are the beginning of the end — financial Armageddon.

The problems facing the stock market are serious but not catastrophic. If the market corrects more than 10 or 15%, the massive overleveraged hedge fund industry will cave in taking (potentially) $1.7 trillion down a black hole. This may explain why the market has behaved so erratically lately. There’ve several late-day rallies with no good news to support the soaring equities prices. Is the market being micro-managed behind the scenes to keep it above a certain level?

Many people think so. A number of articles have been written recently about the activities of the Plunge Protection Team; the secretive group (comprised of the SEC, US Treasury, Federal Reserve, and Investment Banks) which allegedly buys futures to forestall violent sell-offs in the market. The Fed’s desperate infusions of credit into the banking system will only reinforce growing suspicions of market manipulation.


Banks routinely hedge against adverse moves in the market by purchasing various types of insurance in the form of derivatives contracts. Derivatives trading has skyrocketed in the last few years and the “British Bankers Association estimated last fall that by the end of 2006, the market for all credit derivatives was $20 trillion and expected to be $33 trillion by the end of 2008.”These relatively new instruments are about to be put to the test by worsening market conditions. “Hedge funds may account for as much as 30% of such credit protection” but that is little solace for the banks “because hedge funds that are losing money but also selling credit insurance may not be able to honor their commitments, rendering the protection worthless.” (“Insuring against Credit Risk can carry risks of its own” Henny Sender, Wall Street Journal)

Credit insurance in the form of credit default swaps have created a false sense of security that may prove to be unfounded. In fact, the Credit insurance business has probably encouraged lenders to make shakier and shakier loans believing that they were protected from risk. But that doesn’t appear to be the case. For example, Bear Stearns tried to soothe investor’s fears during the collapse of its two hedge funds by pointing to its derivatives coverage.

“Bear executives repeatedly referred to their dependence on hedges, including credit derivatives, to offset their losses on subprime mortgages and loans to poorly rated companies, stating that such hedges would offset losses.” (Ibid, H. Sender, Wall Street Journal)

We all know how that story ended up.

Derivatives have been celebrated as a critical part of the “new architecture of the financial markets”. Now we can see that they are poor-performers under real-life conditions and liable to trigger an even greater disaster. If the stock market stumbles, we can expect a major breakdown in credit insurance-trading with trillions of dollars in derivatives disappearing overnight.

The abstruse world of derivatives trading will suddenly explode onto the headlines of newspapers across the country.


The contamination from the massive real estate bubble has now infected nearly every area of the broader market. The swindle which began at the Federal Reserve — with cheap, low interest credit — has spread through the entire system and is threatening to wreak financial havoc across the planet. The Fed’s multi-billion dollar bailout will do nothing to contain the brushfire they started or avert the catastrophe that lies ahead. Greenspan opened Pandora’s Box and we’ll all have to live with the consequences.
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Comments (11)add comment

a guest said:

Observer of the News !
For God sakes Buy SILVER and GOLD . Silver FIRST because its the best kept secret there is . Its value is going to skyrocket . And Gold NEVER EVER will its appeal and thus its value .
August 15, 2007 | url
Votes: +0

a guest said:

Silver and gold no answer
It's obvious that the US is bankrupt. If the banking system melts down silver and gold will be thrown into the streets as millions upon tens of millions of people try to find food, and stuff to survive upon. Economic Armageddon is exactly what we are facing. The entire world will be affected catastrophicly.
August 15, 2007 | url
Votes: +0

a guest said:

Get a grip - metals will get you nothing -
Who do you thinnk will have money to VALUE OR BUY your metals even IF they rise??? When everyone is broke - values mean nothing and the rise of metals is just as much a facade - they simply buy much less as the dolar collapses. When food is at 2000% inflation - see how your silver helps you friend.
August 15, 2007
Votes: +0

a guest said:

I thought derivatives were pretty well discredited...
Back when Orange County lost its shirt in derivatives trading?
August 15, 2007
Votes: +0

a guest said:


useless paper will be exactly that. a piece of paper which it already is.
ehhhhhhhhh when HAS gold,silver,platinum had NO value ?
and NO use for survival ?
even diamonds,precious gems etc have been bartered,some poor nations you would see people swapping jeans,thommi hillfiggger etc for something else.
August 16, 2007
Votes: +0

a guest said:

Look up!
While I hear many comments from so called "experts" why these are turbulent times for the market, I chose to convert everything into the only thing that holds value since the beginning of time- gold and silver. Those that stand on the table and shout out denials about the conditions of the market and do nothing, set their own table for their "feast". Good luck to you and don't expect me to buy into your "privatize the profits and socialize the losses" mentality!!!
August 16, 2007
Votes: +0

a guest said:

King Midas died of Hunger
In times without crisis, gold and silver always look like solid investments that will hold their value even should the world turn upside down.

But, when a full blown crisis, such as a war, famine, or pestilence occur, that gold and silver is as much good as paper money.

Sure, people will trade food or medicine for gold or silver, but the cost will be astronomical.

So what's the point of hording metals? They get you through the worst, but when the crisis is over, the people who sold you the food are richer, and you don't have anything.
August 18, 2007 | url
Votes: +0

a guest said:

gold and silver
It won't mean a thing. Millions upon millions of people looking for food and sustenance will make gold and silver a fool's castle.
August 22, 2007 | url
Votes: +0

a guest said:

Country living
I believe the financial market HAS to collapse for us all to wake up to the fact that we have been duped.
It doesn't matter what the value of gold, silver or 'Promissory notes'.
I will be investing in carrots, potatoes, and peas because these are the TRUE currency of this planet and "You know what?" the planet gives us this bounty free.

If yo truly wish to survive any financial Armageddon move OUT of the CITIES and into the countryside and start growing 'REAL FOOD'.

For those who are not sure stay in the cities and try to grow bread or burgers or prepackaged food. Your MASTERS have been doing it for quite some time but when the time comes YOU will be the ones to suffer NOT them.
September 07, 2007 | url
Votes: +0

a guest said:

Game is Rigged by Large Institutions
I totally agree. There exists an oligarchy of financiers
calling the shots and it must stop. Alan Greenspan tenure
at the Fed created this mess. Both politcial parties sucked
up to Greenspan, and Greenspan reciprocated by providing his "DRUG OF CHOIC", cheap credit. Hopefully, Bernanke will put an end to these bubbles, even if it causes pain
September 11, 2007
Votes: +0

VABarber7@hotmail.com said:

think deeper
If you disagree with my opion please e-mail me, as you may be able to tell me something that will increase my level of knowledge. If you do agree tell as many people as you can so positive things can be done to help our economy, please e-mail me also, to let me know that some people agree.

Instead of arguing about America instead of arguing about what your going to do when the US economy "crashes" we all should talk with an open mind try to prevent this from happening. in order to prevent it you should try to think of some of the things that would cause an economy to decline, because if there was only one cause it would be easily preventable. REMEMBER money is just a representation of the gold and other precious metals held in American Depositories. So printing more money only makes the value of the dollar decrease because the new dollar does not replace the precious metals, it just lowers the value of that dollar because it just divides the value of that gold between more bills.

Some things that I believe would cause an economy to decline;

-Money leaving the country without being returned

-------Some things that would cause money to leave the country without being replaced.

-Drug dealers
Their activities, including the drugs they sell, harm the econmy and society directly. Most drugs come from foreign countries. They are bought by a Large American distributer, who pays the foreign supplier large amounts (millions) of american dollars for large amounts (multiple tons). The foreigner brings that money (representation of american gold) back to his country and puts the money into his pocket and a small amount into his society (paying for construction on mansions, etc.) The Large American distributer then sells large amounts (100-5000 kilograms) to a smaller distributor. The smaller distrubitor sells smaller amounts (20-1000 kilograms) to an even smaller distributor. That distributor sells a smaller amount (about 10-100 kilograms) to an even smaller distrubtor. That distributor sells a smaller amount (1-10 kilograms) to an even smaller distributor, who sells a smaller amount (1/4 pound-1000 grams)to an even smaller distributor, who then sells a smaller amount (1 ounce-1 kilogram)to an even smaller distributor, who then sells a smaller amount (1 gram-1 ounce) to the majority of the actual drug users. each time the drug trades hands the value of it increases greatly as it goes through multiple middle men. by the time all of the drugs from the initiall large shipment are sold more drugs are shipped in and the cycle begins again.

-CERTAIN illegal immigrants
This applies to some but not all illegal immigrants. Because the value of the dollar is worth so much more than that of the Mexican peso SOME immigrants will come and work for cheap (1-4.50 dollars an hour) until they make a certain amount ($1,000-up) and then return to their country, were this small amount of american money is very valuable.

-Taxes on American buisnesses
Many US companies go to foreign countries to get their labor done to avoid rediculous taxes that the US Government puts in place that make it alot more expensive to have their products made in america. If taxes were eased on large buisness (which can potentially supply alot of jobs to americans). Since it cost alot of money to make it would obviously cost alot of money to buy. The low price is why many americans buy products made in foreign countries.

-Foreign companies
Buying through american companies that employ americans is smarter because when you buy through an american company you get a good product, and your money goes to a company that will have to pay american workers, more american taxes (redicuolous amounts).
February 28, 2008
Votes: +0

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