Big fat Greek yielding, or about the rise of a new form of capitalism

There is something fishy going on lately about international financial markets. Or are we just witnessing a new phenomena, yet to be contoured and named?

Last century crises struck about once in a decade and were mostly caused by economic misbalances in production or demand. As economies intensified and rapidly globalized and economic science developed, the recovery cycles lasted shorter and shorter, and have been nicely and sweetly called market corrections.

Everybody blamed then industrial capitalism and globalization.

But neither is actually as bad as something new emerging recently. Industrial capitalism and globalization now would seem just a natural course of historic evolution and rosy economic development compared to the current era of derivatives domination and vulnerable electronic markets, which have the potential to bring us into real chaos if no adequate measures are undertaken fast.

The beginning of the new phenomena was in August-September 2007, when the mortgage bubble showed signs that it wanted to blow for the first time. Previously government’s intervention mostly limited to adjustments of basic interest rate and other classic regulatory measures. This time it was not only interest rate decrease by FRS, but also a huge more than a hundred billion USD “rescue package” by the Bush administration to the very banks, the irresponsible behavior of which led to the huge mortgage bubble.

It stabilized the markets, but it didn’t defuse the ticking bomb. The rescue package rapidly dissipated in the various deep financial holes including bonuses for “good performance”. The money landed somewhere in the right place, because the main players seemed to like it so much that when the bomb did inevitably explode a year later, the rescue packages solution was repeated even more generously, up to a trillion dollars.

Was it the right thing to do? Probably yes, given the fact that the only other option would have been a total collapse of world’s leading banks, and that humanity seems not yet equipped with machinery to control global financial explosions. Probably yes, because otherwise it would have collapsed the US dollar, and since this is the blood of the the world economy (see my truth about Amero, written a year ago on this site), the consequences of such an event might have been cataclysmic.

After a very turbulent 2009, strong signs of recovery have emerged recently in US, through more than anticipated increase in consumer spending, through bigger than anticipated quarterly revenues, increased car sales, and though joblessness has yet remained high, the number of new hirings has also risen. French, German, British banks and companies have reported positive better than expected incomes, and biggest EU countries registered though slow and unsteady, but still signs of growth. Capital markets have become bullish again.

Hence, in spite of their questionable morality (saving those, who’ve foul played) the rescue packages did work well.

But was it the only thing to have been done? Definitely, not. First of all, in spite of calls to review the detrimental practice of rating agencies, who’ve played one of the leading role in the failure to avert the crisis, nothing has been done in reality. In spite of calls to strengthen international regulations on sovereign debts, on securities, especially derivatives’ flows and forex operations - yet again nothing has been done, but beautiful political declarations for the moment.

In this generally revival times, the Greek’s almost default seems to have come as a surprise out of the blue. Portugal, Spain, Italy are also posing the same default risks.

There is something essentially wrong in all this story, which raises the following serious question: How come that countries, which are EU member states for many years (Italy - a founding member, Greece - from 1981, Portugal and Spain - from 1986) and must have been very well tuned into the unified EU financial and fiscal policies, strictly controlled and monitored by all member states through European Commission, and by European Central Bank, since they are all part of Euro zone, have got into an almost default state of affairs?

The current Greek government itself provided one of the reasons, having declared last October that the previous administration had falsified the national accounts. Why they all waited from October until it almost blown up the whole European economy in April is also interesting, but for us a more important reality is that the Government of a leading European country has falsified national accounts in order to get on with sovereign financing.

I am not at all against any form of loans and sovereign financing, I am both hands up for using any kind of financing economic activities; there is no rapid and extensive growth without borrowing! But obviously, politicians should be taking into account fundamental principles of financing growth of their economies: structural adjustments in time, precise forecasting and risks assessments, investments into real and modern sectors of the economy, sustainability and accountability, and so on.

However, in reality another chain of events: falsified accounts or bad forecast assumptions, wrong ratings by rating companies - huge internal loans for some bubbles, mostly eaten by consumption or to re-finance other loans - then massive public and sovereign debt to finance derivatives - then threats of default, followed by fat rescue packages from public’s money, used to save this very wrong chain, has become a pattern, which having been used in US in 2007-2009, repeated itself not only in Greece, but also can become reality in other states like Hungary, Romania, Spain and Portugal. Greece, artfully induced into crisis, made it possible that the sweet “rescue packages” for hundreds of billions of Euros have been also successfully thrown by European governments into the European banks that played the game with derivatives and over-lending. In the end, billions of toxic assets (read: misappropriation of funds) on both sides of the Atlantic have been cleared by public money.

There is a famous saying that since there are bank-notes circulating in the country, they have to land somewhere - and they are definitely landing somewhere in the chain above, because someone in the chain seems to get so much yields, that it produces enough power to keep it as an ongoing business. There is an impression that international capital markets are getting more and more detached from real economy, and are becoming a casino in itself - paper securities, derivatives, forexes are turned into a betting game, mostly sucking the money blood from the economies rather than stimulating them, and, what’s worse, deprive the people through budget cuts and social security reductions. The case of Greece became very special, because it showed that economic speculation has been boosted by political speculation of the previous government.

We are witnessing an emergence of a new form of capitalism - a speculative capitalism. Maybe later on economists will find a smoother definition for the current evolution stage, but so far absence of a rigid regulatory response mechanism to the rapid global manipulations of securities markets implies the fact that speculators rule. A recent “minor” electronic mistake at the NYSE displayed once again how vulnerable is such a system, which may drain billions of assets in a few minutes.

If nothing changes in the near future, such speculation games may turn into a business on its own and develop into a totally independent and uncontrollable phenomena, which potentially will threaten the global economic order, and every human being in the end.

P.S. While writing this, news came that President Obama pushes for a reform bill this week, which will become a major overhaul of Wall Street rules since the 1930s.