Crisis on Wall Street

Sep 16, 2008 Editorial

It would appear that over the past fourteen months, Wall Street has been stuck in an endemic crisis that has its origin in the subprime mortgage debt accumulated by the housing industry in the US.

Dubious practices by mortgage brokers in extending mortgages to homebuyers that were patently going to be in trouble to meet their monthly payments were the most visible signal.

Those practices were facilitated and made possible by far more dubious practices by the financial investment houses that “bundled” those mortgages for resale to institutional investors the world over.

These investment bankers made billions and possibly trillions of dollars in profits before the house of cards began tumbling down.

The millions of homeowners who have had to face foreclosure and lose their homes represent the human face of the tragedy; the filing of bankruptcy by Lehman Brothers (US$60 billion bad debts) and the bargain-basement sale of Merrill Lynch to Bank of America represent the latest institutional face.

One could possibly understand the gullibility of potential homeowners taking on unwieldy debts to realise the “American Dream” of owning their own homes.

However, what but greed and an untethering of moneymaking from any system of morality could explain the case of “financial derivatives gone wrong” that brought down the mega firms?

In the past year, the US government has had to step into the crisis on several instances in an evidently vain attempt to stem the financial haemorrhaging that could threaten its entire financial system.

Earlier this year, the US government bailed out the investors of Bear Stearns when it agreed to stand behind the more uncertain debts of the firm, as it arranged its sale to another financial house, JPMorgan Chase.

Everyone came out with their fattened wallets intact as the US taxpayer assumed ultimate responsibility for losses down the road.

The same scenario played out when the government bailed out the mortgage giants nicknamed Fannie Mae and Freddie Mac, holding US$5 trillion of debt.

In the latest eruption over the weekend, the US government finally balked at standing behind the debts of Lehman and what we are witnessing is a near-term fire-sale of its assets to the remaining financial houses and banks.

Losses from yesterday’s financial crisis have already reached $500 billion – and it is certainly not over. Fears of the crisis spreading has persuaded a global consortium of banks, working alongside government officials in New York, to put together a US$70 billion pool of funds to lend to troubled financial companies.

American International Group (AIG) the world’s largest insurer is tottering as it scrambles to borrow some fifty billion dollars to stem its losses.

While it might appear to some that the crisis in the US financial markets is a bit remote from us in Guyana, a moment’s reflection should disabuse us of this notion. For one, most of the US$400 million we collected in remittances last year originated from the US.

The continuing grim economic news will most definitely have a dampening effect on the individuals who dip into their pockets to send those remittances. We can certainly expect that this year’s infusion will be severely curtailed.

Then in a globalised world, especially one where the financial markets are so seamlessly interwoven, the crisis will certainly spread even in the face of governmental institutions and banks to head it off.

Fundamentally, at the base of the crisis is the trade deficit of the US which is hovering around some US$800 billion annually.

In effect, this is the free ride that the rest of the world, especially China, is willing to extend to it by accepting its paper dollars for merchandise manufactured and shipped. This state of affairs will have to be readjusted but it may mean a world recession.

And it is this readjustment that will be pretty much out of our hands because of the extreme financial liberalisation that we have had to institutionalise because of the World Bank/IMF conditionalities.

In addition to the demands of the EPA agreement, the creeping world financial crisis induced by the meltdown in Wall Street should signal to our policymakers that we need to get serious about a new lean and mean National Development Strategy.

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