Is the US Heading for Another Financial Meltdown?
Posted: under Current Affairs, Personal Notes.
Tags: American economy, British economy, budget cuts, conservatives, credit default swaps, David Cameron, double-dip, economic contagion, European economy, fiscal austerity, Great Recession, imports and exports, JPMorgan, politicians, regulators, Republicans, Spanish economy, synthetic credit obligations, Volker rule
Forces on both sides of the Atlantic seem hell-bent on plunging the world into a second Great Recession in five years.
In this country, Republicans and conservatives are continuing to demand cutbacks in government spending that will take still more money out of the liquidity-strapped US economy.
At the same time, at least one of the nation’s too-big-to-fail banks appears to be rushing to repeat the reckless financial maneuvers that caused the last recession. The two billion dollar loss reported by JPMorgan resulted from speculation in synthetic credit obligations, such as credit default swaps. It seems that politicians and regulators, bought and captured by the big banks, are too beholden and timid to take appropriate action to prevent such financial abuse. That means that despite JPMorgan’s set back, other big banks will probably choose to try their luck at the same gambling game. (Yesterday, in fact, the Guardian reported, Sen. Carl Levin charged that Wall Street has made “massive lobbying” efforts to modify the “Volker rule” that prohibits such trading.)
Meanwhile in Europe, politicians are trying to impose fiscal austerity on their nations, as the Republicans are in this country. In the UK, PM David Cameron has vowed to go ahead with budget cuts that began in the middle of last year. Despite his policy — or more likely because of it — the British economy contracted during last year’s fourth quarter and this year’s first quarter. Similar strategies throughout Europe are threatening to send the continent into the second part of a double-dip recession, and Spain’s economy has already fallen into the pit.
There is danger that the austerity-induced slide of Eurozone economies could spread across the ocean to the US. Europe imports around $300 billion in goods and services from American, and a good chunk of those sales could dry up as the result a European recession. Moreover, American banks are probably exposed to European debt. Indeed, it was perhaps to hedge its exposure to European borrowers, the Guardian said, that JPMorgan may have bought those failed credit default swaps. The strategy, however, did not work and caused the huge loss. The big bank’s maneuver exemplifies the mechanism where by financial collapse on the continent could jump across the Atlantic.
I thank God I’m not likely to be affected by such financial disruptions, and my son’s family seems secure. But my daughter and her husband live in Manhattan, and he is involved with Wall Street. They would have a hard time in a second recession.
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May 14 2012