Risks from where we are today

One of the main culprits for the economic collapse of 2008 was the combined speculation in so-called debt-backed bonds (CDOs) and the use of credit default swaps (CDS) to reduce the risk of investment for those who buy CDOs. Basically, here’s what happened.

CDOs are really a form of gambling. When a finance company or bank allows you to borrow money, they are taking direct financial risk. Will you pay back what you borrowed? For the borrower, the need for immediate money means that you agree to pay back additional money, interest, on top of what was lent to you. CDOs are bundled together as loan lots of all types of money that have been borrowed, from mortgages to credit card debt, car loans, student loans, etc., and then these lots are sold to investors (i.e. other financial companies or banks). ) who are betting that the amount coming from the debt payments plus interest will be greater than what was paid for the CDO to begin with. There is an alchemy here in that what would normally be seen as a potential liability (or risk) for any business making any kind of loan is now repackaged as an asset since another party is willing to buy it. . In other words, value is guaranteed – it’s turned into cash, credit, or both – getting more of the same.

If buying CDOs seems too risky, that risk can be offset with credit default swaps where another party is willing to accept responsibility for possible non-payment. If the CDO does not pay as promised, the party/company issuing the CDS is liable to pay what is due.

Since the 2020 pandemic, the Federal Reserve Bank has participated in its own small CDO action. In order to ensure that the housing market remains strong, the Fed has purchased what are called mortgage-backed securities (MBS) for a total of about $40 billion (as of the end of June 2021). MBS are a form of CDO in that mortgages are specifically packaged and sold as securities to investors, in this case the government as the Fed itself. Unlike CDOs of the past, MBS, as implied, work the same way but focus on home loans. The Fed justified the move by saying it helped keep interest rates low by ensuring there was a ready buyer for these MBS. In other words, the loans are canceled and the mortgage is redeemed to show confidence in “the market”.

The Fed has hinted that it may soon withdraw from the MBS market. It is believed that the private banking sector will take over as the housing market remains hot and demand high. But there’s also a line of thinking that the Fed’s exit could trigger concerns about rising interest rates, signaling a real estate reckoning day ahead.

Economists and analysts on Wall Street are divided on this. Some see a smooth transition, others don’t. But there is a more important political point to be made here. We still live under the illusion of a free market system where the forces of supply and demand, seller and buyer, determine what happens next. This is clearly not the case, and it was also not the case at the beginning of the 21st century when the government moved away from regulation, allowing the expansion of an economic bubble that finally burst in 2008. Not only is there a continued absence of regulation and control, but it is now the Fed that -even who takes over with regard to the purchase of MBS. With the expansion of sovereign wealth funds (SWFs) and the state developing its own economic interests to compete in the world of capitalism, here is the United States through the Federal Reserve Bank, in effect acting directly in the interest of capitalist investment to support the housing market in this country, regardless of securitized mortgages. It is certainly not free market capitalism, but closer to a version of corporatism where the political and economic interests of the state and private companies are merged into one. The United States falls on a continuum where there are states like China (with huge sovereign wealth funds) that directly compete with its own state-owned companies in places like Russia, where private companies are protected and developed through the ‘State aid. There are also other systems that belong to this spectrum, too numerous to name here.

There are politicians in the United States who repeatedly want to raise the specter of socialism and communism. And why not? Karl Marx spoke of this same ghost that haunted Europe two centuries ago. But there is a bigger story to tell. In the 1940s political economist Karl Polanyi said that a “pure” market economy had never existed before in human history and that trying to build such a thing was basically a mad rush because it is ultimately not sustainable. So why does the narrative of the free market as freedom persist when the real economy is far from resembling such a system where market relations determine everything? It can be argued that a true free market has always been an illusion, certainly in the post-WWII era. Government investments in militarism under the threat of the Cold War were hardly free market maneuvers, and space travel commitments all created a type of corporate welfare that benefited this what Dwight Eisenhower called a military-industrial complex. This system continues to this day, of course. It looks different, though. There is a kind of desperation in the air, a last ditch effort to salvage the good name of the free market as defined by demigod economist Milton Friedman, even if practically and realistically it does not exist. As this desperation grows, one wonders why it seems such a vital priority.

If there is one thing that all forms of capitalism seem determined to protect, it is the belief that economic growth is the key to the betterment of society. To succeed economically or politically, the economic system must develop. This is the key. As geographer David Harvey has said, the benchmark of 3% compound annual growth is the norm. We are, however, faced with a 21st reality of the century where a new metric must be found because almost all of the economic growth of the 19and early 21st centuries have relied on the use of cheap and abundant fossil fuels. These fuels – oil, coal and natural gas – will have to be abandoned if humanity is to avoid the worst of what is to come as the world heats up with increasing amounts of greenhouse atmospheric carbon. There have been many warning signs over the past few decades, perhaps none as dramatic as 40-50C temperatures in places like Portland, Seattle or Vancouver over the past week. We are burning the planet at what can only be described as an alarming rate. Yeah, it’s a four-alarm emergency.

One can bicker over the effectiveness of the Fed’s purchase of MBS or their transfer to the private sector. But think about why he does it and what he says about the messy priorities of working so desperately to make it all grow. Scale it up and you’ll be fine. There are those who see signs of an impending new Cold War involving the United States, now in a competitive triangle with Russia and China. In truth, these three countries have a lot in common. What they all share is what should worry us: a megalomaniacal commitment to greatness that is (unsurprisingly) equated with greatness. But there’s a new reality to face: we can’t keep growing the economy, and we can’t economically escape the pandemic by trying to get out of it. A different model is needed, one that considers the human scale of survival and sustenance.

We may be entering another era of understanding. We have to find it or we have to see it, and it has to give us priority. What is the place of ordinary people in the picture? What happened to this term, humanity? Why aren’t we allowed to be human?

1. “If the Federal Reserve Stopped Buying Mortgages,” Axios, https://www.axios.com/home-federal-reserve-mortgage-securities-ae25fb1c-9677-41c1-9d6c-10473797dd2f.html. Accessed June 30, 2021. ↑

2. Karl Polanyi, The great metamorphosis. Boston: Beacon, 1944. ↑

3.David Harvey. The enigma of capital. New York: Oxford University Press, 2011. ↑

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