[The
Telegraph, U.K.]
Financial Times Deutschland,
Germany
Global Capitalism:
Ready for the 'Shrink or Sink'
"Here's one way to look at the
financial crises: out of the five major U.S. investment banks, only two remain.
That's capitalism. A major crash follows the biggest financial boom. … So is
the adjustment over? It's probably just the beginning. This crisis will
probably bring to a close an entire phase of capitalist development."
By Lucas Zeise
Translated By James Jacobson and Ulf Behncke
September 16, 2008
Germany
- Financial Times Deutschland - Original Article (German)
The U.S. Central Bank [the
Federal Reserve] did the right thing by commencing a correction of the finance
sector with the Lehman bankruptcy. The world doesn't need as many large
investment banks like Merrill Lynch and Lehman.
Here's one way to look at the
financial crises: out of the five major U.S. investment banks, only two remain.
That's capitalism. A major crash follows the biggest financial boom. The
institutions that drove the boom - a good deal of the time - go over the Wupper - or over the Hudson. [In German, an
expression for "going bankrupt" is to "go over the Wupper," which is a river in Germany]. So is
the adjustment over? It's probably just the beginning.
The bankruptcy of Lehman
Brothers; the acquisition of what was the largest American broker, Merrill
Lynch, by the Bank of America; and the way the once greatest insurer on earth -
AIG - has had to beg the U.S. Federal Reserve for help; and the nationalization
of mortgage financiers Fannie Mae and Freddie Mac - all of these dramatic
events within the shortest possible time, herald the second phase of this great
financial crisis. It is now clear that this crisis, which began with problems
in the subprime mortgage sector, will probably bring to a close an entire phase
of capitalist development.
[Het Parool, The Netherlands]
This period began with the collapse
of the Bretton Woods system of fixed exchange 
at the beginning of the seventies during the
last century. Its essential characteristic is the ever-greater mobility of
capital transactions, which ultimately became a cornerstone of the European
Union. With this phase, the finance sector bloomed in unprecedented fashion. As
crisis came and went, what economists describe reassuringly as growth in the tertiary
sector [or the service sector] accelerated much faster than the real
economy.
[Editor's Note: The tertiary
sector of economy (also known as the service sector meaning intangible goods)
is one of the three economic sectors, the others being the secondary sector
(approximately manufacturing) and the primary sector (extraction such as
mining, agriculture and fishing)].
THE POSITIVE SIDE OF BLACK
SUNDAY
Toward the end of
the 1990s, the expansion of the financial sector accelerated. It was the time
of asset price bubbles, which have now become so familiar to us. The
appreciation of portfolio value became the most important objective of economic
activity. Investment banks and various other financial institutions, such as
hedge funds and private equity funds, have had the goal of achieving equity
yields of 40 to 50 percent using the simple tool of highly-leveraged debt. The
most obvious sign of crisis was the fact that not only was such behavior acceptable,
it was considered normal.
The fact that this bloated
financial sector needs to "shrink or sink" is self-evident. The
interesting question is who will disappear and who will survive. From this
point of view, the message of "Black Sunday" is quite positive: If
Lehman Brothers and Merrill Lynch, two of the largest dealers of securities and
investment banks, disappear from the market, the "sink or shrink" is
occurring in exactly the right place. The world no longer needs so many large
and numerous investment banks.
The U.S. Central
Bank [The FED] seems to have learned this. If - as it did in the case of Bear
Sterns - the FED had found a prospective buyer for Lehman Brothers, it would
have had to offer a guarantee against future risk. Back then, it had to add a
sweetener of $29 billion to make it even more enticing for JP Morgan Chase to
go through with an already-cheap acquisition of Bear Stearns. Incidentally, the
reality is that without such guarantees, no bank was prepared to take over
Lehman - and the view of Deutsche Bank boss Josef Ackermann that the crisis
will soon be over is not widely-shared in the industry.
ON THE SHIRT: 'Markets'
CAPTION: 'Don’t Panic!'
[Het Parool, The Netherlands]
Of course, every
bank crash involves the risk that the bank's creditors and other opponents will
trigger a chain reaction due to inability to cover its debts. However, since
Lehman staggered for some time before its fall, it can be assumed that the
majority of its business partners had already gotten out of harms way. The FED had enough time to assess the
consequences of the bankruptcy. This time it was prepared to take the risk.
Posted by WORLDMEETS.US
The circumstances surrounding Lehman were completely different than
those of Fannie Mae and Freddie Mac. These two mortgage giants had to be
preserved. With liabilities totaling $5.5 trillion, they were indeed too large
to fail. Moreover, their government-funded business model consisted of
guaranteeing cheap debt with implicit government guarantees. A portion of this
benefit was then passed on to private U.S. mortgage lenders, with the remainder
credited to the accounts of shareholders and their state-appointed managers.
Given its implicit guarantee in the case of need, it would have been
inconceivable for the U.S. government not to pick up the bill.
The second phase of the
financial crisis is expected to involve payment defaults by previously healthy
enterprises. Above all, the banks will be especially affected by the forced
abandonment of "locusts" and hedge funds. The state funds [Fannie and
Freddie], unlike over the past twelve months, will attract less enthusiastic
capital inflows. With commodity prices dropping, money will become increasingly
scarce even for them.
The Carry-Trade - the borrowing
of low interest [Japanese] yen in order to invest in highly-profitable markets
in the rest of the world - will disappear. After the FED's
moves and in light of the rapidly deteriorating real economy in Euroland, even the usually reticent European Central Bank
won't be able to avoid significant cuts in interest rates. When money elsewhere
is as cheap as in Japan - yet no other financial products are being bought
apart from state bonds, then we may have reached the bottom of this crisis.
Once governments cease bailing out collapsing banks and refrain from
deregulating - and instead begin to more tightly-control the financial sector
or fund the real economy themselves, then the crisis will have been
productively overcome.
Posted by WORLDMEETS.US
Pardon this flight of the
imagination. The financial markets are far from reaching that state. Investment banks like Merrill Lynch are still
worth a good deal of money and investors still believe that this is only
a small dip in a winning cycle that will rise again. The Lehman bankruptcy was
interpreted on Monday by some hopefuls as not only the bottom but the turning
point in this crisis. I don't believe it was.
*Lucas Zeise
is financial columnist of the FTD. He writes every other Tuesday in this place.
CLICK
HERE FOR GERMAN VERSION
[Posted by WORLDMEETS.US
September 18, 11:59am]
