The 17th of this month resulted in an American financial "Black
September", but contrary to what happened during the financial crisis
of 1929, when America took four years until 1933 to face it, after the
banks had already closed their doors and emptied their coffers, this time, the
American government has taken one year to realize the magnitude of the crisis.
This crisis will enter history through the widest of doors, as it has blown out the flame of capitalism and the free market, and made the huge institutions of Wall Street rush to Washington to scrounge for rescue.
On that day that shook the earth, American banks, financial companies, insurance companies, and the Treasury discovered that regular American citizens put all their savings in safe deposit boxes. Money Market Funds (in investment companies) found their liquidity greatly reduced, and the financial companies drawing interest off these monies began to fear the collapse and closing of the banks.
Indeed the amount of savings in "deposit funds" amounts to $3.4 trillion, with $154 billion drawn in one day. These savings funds work to finance the short-term loans for factories and companies, car loans, and credit cards.
After the panic and huge money withdrawal of Sept. 17, the American government was troubled by the likelihood of people withdrawing their funds, which would stop loans and subsequently lead to company and factory closures and job losses. This tightening circle shook the American government, in particular Treasury Secretary Henry Paulson, so the decisive intervention came.
Two weeks before that, the government nationalized the two largest mortgage companies Fannie Mae and Freddie Mac, with assets of $5.5 trillion between them. After this climax, the largest insurance company in the world (AIG), with a trillion dollars' worth of holdings, was nationalized.
What sparked the government's panic was that, for some financial assets, no buyer could be found for any price, due to fear and ruin, so the government was forced to set up a new agency to buy the toxic loans at a cost of $700 billion.
This crisis began with the war in Iraq. At that time, the US budget deficit was around $150 billion, with the expectation that the war would cost $80 billion. But the cost of war so far has reached $700 billion and has led to increased oil prices. (Before the war, the price per barrel was $25.) This year's budget deficit will reach $400 billion, adding to this the interest rate reduction. And the government's running up a massive debt is reflected in the average American, who has taken out a second home mortgage and resorted to using credit cards, all of which has caused difficult-to-pay debts.
For their part and at the same time, the banks turned these debts into investment funds and kept a large portion of them in their budgets while issuing another portion to the world. Thus America has become a global exporter not only of goods, but also debt, financial risk, and increased greed in the real estate and banking sectors.
On Sept. 17, Japanese, Chinese, and Arab foreign investors lost their confidence in America.
"Bubbles result in madness, where sharply rising prices are followed by the madness of greed, and the collapse of prices is accompanied by the madness of panic," the economist "Hakim" said. "Real estate losses so far are at $550 billion, but eventually, when all the files have been opened, the losses will reach into the trillions."
And he points out that "the worldwide value of losses in shares, bonds, and real estate sectors this year, since the beginning of the crisis, amount to $17
trillion, and among the factors worrying the American government are
the losses suffered by foreign investors in American banksJapan's
$800 billion, China's $400 billionand the rescue plan calls for giving them a sense of confidence." But, the economist adds, "There is nowhere else for them to invest their money, as the American market is still the largest in the world."
On Sept. 17, the Bush administration announced the downfall of the laissez-faire formula, and proposed that the only way to restore the stability of the financial system was for the government to buy all the real-estate loans which the banks had converted to packaged bonds, some of which were sold and some kept on their balance-sheets.
Indeed the rescue plan will increase the debts of the Federal government. When President Bush came to power, the US debt was $5 trillion. Now, after pumping in $700 billion to rescue the financial system, the government's debt will come to $11.3 trillion. This means an increase in loans and growing costs for the American government, companies, and ordinary citizens, plus increased American dependence on foreign capital, prompting rising inflation and the erosion of more US economic policy. The government will borrow, and will increase taxes or reduce expenditure (or both), and the rising debt and loans
will affect economic growth as happened in Japan and Italy, so that the entire world will enter into a period of very slow economic growth.
This crisis will produce strict controls, and will lead to American government intervention. According to those in the know, from today onwards, these institutions and administrations and heads will be vulnerable to fines and punishment, as there will be punishment awaiting the administrations of those banks that relied on risky financial policies. Some American banks and financial institutions used to offer loans for investments without knowing their nature, and the Bush administration made a mistake when for four years it permitted banks to borrow $30 against every dollar they had, prompting risk-taking
and greed. Previously, they were permitted to borrow $12 per dollar.
According to The Economist, the theories or ideas that say that the best path to prosperity is to let the hand of the financial markets steer capital, take risks, enjoy profits, and absorb losses are over.
This crisis has finally quashed the theory that markets correct themselves. President Bush might have come with a theory: Leave the free market. After all, during his term and under his administration, the American government nationalized institutions worth $6.5 trillion, and this is happening not in a socialist or communist country.
So the party has ended, after two failed wars, at the doors of an unprecedented financial crisis, and after two terms of Republican rule.