The Raft of the Medusa....all aboard!

by toni solo

So there you have it then. Gordon Brown, incumbent of Number 10 Gin Lane, gets his old-fashioned-credit-boom come-uppance. Rumsfeld's New Europe begs Old Europe for a dime - but Old Europe is bust too. A new Great Decider rises up out of Washington's whited sepulchre. Stuck on a zero-interest rate tide, for lack of credit derivative winds the sails droop on his surely-they-must-be-worth-something?-dollar-laden galleons. In North America and Europe, the galley slaves can't-pay-won't-pay the mortgage on their rowing places.

Central banks and governments of countries not-so-rich-now have flooded financial markets with liquidity in order to bail out their accomplices in the imperialist globalization cartel - the major corporate finance debt-creators. The purpose has been to try and recapitalise these lenders, reactivating debt markets using public funds to make good widespread corporate insolvency. The logic seems to be that if similar, government-corporate finance-central bank liaison worked to reinflate markets after the dot.com bust and elongate the credit boom via asset-price bubbles - why not now?

From 2006 to 2008, one strand of that global State-corporate finance-central bank cartel's activity was a policy of managed dollar devaluation. The policy encouraged a steady increase in commodity prices, especially oil. Those prices began to spike once the shadow banking system began to fall apart in July 2007 with the failure of two hedge funds of the now defunct and unlamented Bear Stearns finance house. As the ghastly implications of the bust in property asset prices dawned, money fled into commodities. With hindsight, it seems likely an important component of the commodities boom was an effort by major corporate finance players to get hold quickly of vast oodles of cash to try and fatten up the asset side of their balance sheets.

By mid-2008, once the insolvency of major corporate financial players became clear with the effective nationalization of US government sponsored enterprises, money flooded out of commodities into US government bonds. It was a flight to the safety of reserve currency instruments yielding zero or worse than zero - hopeful souls climbing aboard the Raft of the Medusa thinking they might somehow be safe. The desperation of the Treasury-Wall Street-Federal Reserve rescue plan fronted by Henry Paulson and its successor fronted by Timothy Geithner seems fundamentally to stem from Wall Street's fear of being eaten by competitors for available financial resources - the people of the United States, for example.

The scale, abruptness and speed of the deflationary forces that took hold from July 2008 onwards were stunning. The US government acknowledged as much when they suddenly and humiliatingly reversed policy to save American Insurance Group after letting Lehman Brothers collapse. That moment confirmed the truly insolvent state of leading players in international finance markets, not just in the US but in Europe too, where the European Union's unsavoury political elite of corporate gangsters, confidence tricksters and smug narcissists flounder hopelessly now. They are just as unwilling as their colleagues in the US to accept the need to wipe out major banks' shareholders, change both their management and current culture, and nationalize large chunks of their financial system.

One now largely forgotten news item from July was the decision by the Financial Accounting Standards Board to postpone for a year a new requirement for companies to bring off-balance sheet liabilities onto their balance sheets. Why should anyone care about some arcane accounting rule? Well, as Alan and Ian Katz put it in a Bloomberg article of October 30th 2008,"Today, a road snakes from the foreclosed homes of California and Ohio to the capital cities of Europe, where politicians and bankers have struggled to contain a widening credit crisis by pumping hundreds of billions of euros into the financial system. The road was paved with decisions like ones by FASB that allowed banks to keep shifting assets into blind spots outside the view of shareholders and industry overseers."

Many commentators have noted that the major banks in the US are now indeed lending, albeit much more tightly than before. But they are also hoarding their government bailout cash well above the capital requirement limits stipulated by regulators. Clearly, one of the main reasons they are doing so is to be prepared for the huge increase in their liabilities once all their off-balance sheet liabilities are eventually reinstated. It seems obvious that, for example when companies do finally have to admit off-balance sheet liabilities onto their balance sheets, another round of massive bailouts will be more than likely.

The huge amounts of liquidity unleashed by the United States and European monetary authorities look unlikely to prevent continuing economic contraction. Acute analysts across the political spectrum agree it is crazy to prop up asset prices trying to sustain the culture of debt when the debt needs writing off. They also agree that if the major corporate finance houses and banks are insolvent they should be wound up now rather than allowed to beef up the asset side of their balance sheet in vain for a while by feeding off healthy smaller banks.

Perhaps State-corporate finance-central bank collaboration - through management of interest rates, bond markets, repo markets and ancillary mechanisms - will be smart and resilient enough to prevent a dollar collapse and cope with external pressure or shocks that may provoke a feint at one. The truth will be clear enough within the year. Other global actors are not waiting to find out. If there is one fundamental change in the global economy that is absolutely certain, it is that countries outside North America and Europe will make alternative arrangements to free themselves of dependence on the Western Bloc dominated financial system.

The leaders of the Bolivarian Alternative for the Americas, Bolivia's Evo Morales, Venezuela's Hugo Chavez, Cuba's Raul Castro and Nicaragua's Daniel Ortega all visited Russia in 2008. One of the things they were all discussing was the development of ALBA's system of complementary, solidarity-based trade. It is a system that in many transactions obviates the need for Wall Street finance, for currency exchange, for lines of credit.

That is one of the fundamental reasons why the US government and its European allies loath Venezuela's President Hugo Chavez. When Dmitri Medvedev, Russia's President visited Venezuela at the end of November, his visit just happened to coincide with an ALBA country summit meeting. It is very clear that the rest of the world is unlikely meekly to wait while Western Bloc imperialist countries put their finance system back as it was.

As the huge US and European bailouts accumulate and continue to fail to boost output and consumption through 2009 and into 2010, pressure for policy changes are likely to accumulate proportionately. As government tax revenue diminishes and budget deficits balloon far out of control, very serious political conflict is likely to break out over public spending priorities. For example, why waste billions in Afghanistan while local government cannot fund education budgets or mend roads? If the US and European governments try solving their budget deficits and policy conflicts by getting central banks to monetize debt even more than they are already, events on the Western Bloc Raft of the Medusa may well make Géricault's nightmare vision look tame.

toni writes for tortillaconsal.com