Sick Machines
Even in the midst of massive state-based intervention the liberal myth of the self-generating natural and organic body of free markets, which have “self-healing tendencies,” persists. This is a layering of phantasies which starts with the corporate and bodily analogy of the markets as a singular body and compounds the phantasy by figuring the disease as similar to a viral infection that can be isolated and cured.
The “deleveraging” diagnosed in the Wall Street Journal article below is problably closer to a symptom than cause of the current problem which appears to be tied up in insurance instruments being traded in accelerating circulation while consultants and finance managers took a fee or cut every time these ‘products’ passed by. All good while more refinancing credit was forthcoming but the piling up of devalued sub-prime mortgages started the unravelling of the complex threads that these financial derivatives were bound in to.
Capitalism in its Neoliberal form has been content to present itself as a machine while it accelerates and takes off. Interesting then that the metaphors of the sick body and the invasive disease are rolled out when state intervention is demanded. If Wall Street was a sick machine, an old Holden for example, would we have any problem with reconditioning the engine, replacing the coil springs, putting some pollution control on? Or maybe we should design a new car!
Worst Crisis Since ’30s, With No End Yet in Sight
Jon Hilsenrath, Serena Ng and Damian Paletta
Wall Street Journal 18 Sept, 2008
The U.S. financial system resembles a patient in intensive care. The body is trying to fight off a disease that is spreading, and as it does so, the body convulses, settles for a time and then convulses again. The illness seems to be overwhelming the self-healing tendencies of markets. The doctors in charge are resorting to ever-more invasive treatment, and are now experimenting with remedies that have never before been applied. Fed Chairman Bernanke and Treasury Secretary Henry Paulson, walking into a hastily arranged meeting with congressional leaders Tuesday night to brief them on the government’s unprecedented rescue of AIG, looked like exhausted surgeons delivering grim news to the family.
Fed and Treasury officials have identified the disease. It’s called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can’t pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.
At least three things need to happen to bring the deleveraging process to an end, and they’re hard to do at once. Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money. They need to pay off debt. Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets.
But many of the distressed assets are hard to value and there are few if any buyers. Deleveraging also feeds on itself in a way that can create a downward spiral: Trying to sell assets pushes down the assets’ prices, which makes them harder to sell and leads firms to try to sell more assets. That, in turn, suppresses these firms’ share prices and makes it harder for them to sell new shares to raise capital. Mr. Bernanke, as an academic, dubbed this self-feeding loop a “financial accelerator.”Many of the CEO types weren’t willing…to take these losses, and say, ‘I accept the fact that I’m selling these way below fundamental value,’” said Anil Kashyap, a University of Chicago Business School economics professor. “The ones that had the biggest exposure, they’ve all died.”
Deleveraging started with securities tied to subprime mortgages, where defaults started rising rapidly in 2006. But the deleveraging process has now spread well beyond, to commercial real estate and auto loans to the short-term commitments on which investment banks rely to fund themselves. In the first quarter, financial-sector borrowing slowed to a 5.1% growth rate, about half of the average from 2002 to 2007. Household borrowing has slowed even more, to a 3.5% pace.
