Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

The Alchemy of Finance is one of the greatest financial books ever written. In this 1988 classic, George Soros developed his thesis of how finance and the markets operate and then tested his analytical framework in real life market circumstances....
...last week appeared to provide another critical global crisis inflection point. In particular, escalating market tumult and contagion effects afflicted the "developing" currencies and bond markets. To that point, they'd been fairly resilient. Yet global de-risking/de-leveraging dynamics seemed to lurch forward - and ever closer to the point of turning uncontrollable....
The consensus view holds that the developing economies and credit systems are robust and, as such, will prove resilient in the face of developed-world structural financial and economic woes. I fear that the "developing" systems have themselves become acutely vulnerable to the downside of bubble dynamics.

Fasten your seat belts: 2011 was far worse than expected. Our earlier predictions for America’s Worst Decade just got worse....So here’s an update of the 10 predictions of a chain reaction of events that are building to a critical mass....

As 2011 slithers to its end, none of the major problems that led to the crisis point three years ago have really been solved. Bank balance sheets still reek. Europe day by day becomes a financial black hole, with matter from the periphery being sucked toward the center until the vortex itself collapses. The Street and its ministries of propaganda have fallen back on a Big Lie as old as capitalism itself: that all that has gone wrong has been government’s fault. This time, however, I don’t think the argument that “Washington ate my homework” is going to work. This time, a firestorm is going to explode about the Street’s head—and about time, too.

It’s funny; the Big Lie has a long pedigree. A year or so ago, I was leafing through Ron Chernow’s indispensable history of the Morgan financial interests, and found this interesting exchange between FDR and Russell Leffingwell, a Morgan partner and Washington fixer, a sort of Robert Strauss of his day. It dates from the summer of 1932, with FDR not yet in office:

“You and I know,” wrote Leffingwell, “that we cannot cure the present deflation and depression by punishing the villains, real or imaginary, of the first post war decade, and that when it comes down to the day of reckoning nobody gets very far with all this prohibition and regulation stuff.” To which FDR replied: “I wish we could get from the bankers themselves an admission that in the 1927 to 1929 period there were grave abuses and that the bankers themselves now support wholeheartedly methods to prevent recurrence thereof. Can’t bankers see their own advantage in such a course?” And then Leffingwell again: “The bankers were not in fact responsible for 1927–29 and the politicians were. Why then should the bankers make a false confession?”

This time, I fear, the public anger will not be deflected. Confessions, not false, will be exacted. Occupy Wall Street has set the snowball rolling; you may not think much of OWS—I have my own reservations, although none are philosophical or moral—but it has made America aware of a sinister, usurious process by which wealth has systematically been funneled into fewer and fewer hands. A process in which Washington played a useful supporting role, but no more than that.

MetLife, the country’s largest insurance company, is closing its $20 billion mortgage operations and firing 4,300 employees. The mortgage division was closed after MetLife was unable to find a buyer for the business, according to Bloomberg.

Article

The biggest nightmare in the minds of many bankers became a realty this week and many have been a deciding factor in MetLife’s decision to exit the mortgage business.  The new Consumer Financial Protection Bureau (CFPB) went into full operation with the controversial recess appointment of Richard Cordray to head the Bureau.

The CFPB operates without congressional oversight or budgetary approval.  Funding for the CFPB comes directly from the Federal Reserve.  Many banks are worried that aggressive implementation of a burdensome new regulatory apparatus for mortgage lending will result in higher costs and reduced profits.

While consumer advocates welcome the CFPB as a powerful protector of the public interest, critics of the new bureau worry about the scope of its powers.

Sen. Bob Corker, R (TN) said that “Instead of working in a productive way with Congress, the administration has chosen to undermine any attempt to bring accountability and balance to the bureau.”

Echoing Sen. Corker, Senate Richard Shelby of Alabama, said a recess appointment will produce an “unaccountable bureaucrat who will have immense power over the economy.”

While protecting the financial interests of the public is an important goal, the idea of an entrenched bureaucracy, accountable to no one, seems contrary to democratic principles.  Lord Acton, English historian and writer, summed it up best – “Power tends to corrupt, and absolute power corrupts absolutely.”

It’s funny; the Big Lie has a long pedigree. A year or so ago, I was leafing through Ron Chernow’s indispensable history of the Morgan financial interests, and found this interesting exchange between FDR and Russell Leffingwell, a Morgan partner and Washington fixer, a sort of Robert Strauss of his day. It dates from the summer of 1932, with FDR not yet in office....

[b]A nationwide real estate downturn, stalling exports and declining consumer confidence have produced what a Chinese cabinet adviser...characterized as a “sharp slowdown in the economy.” The most striking feature of the slowdown is that it extends beyond the coastal provinces, which depend on exports and are closely linked to the global economy, to the country’s far more insular interior, including cities like Xi’an here in northwestern China....
China’s unexpected economic difficulties are starting to unnerve investors in world markets, especially commodity markets, as China is the world’s largest consumer of most raw materials and the second-largest consumer of oil....
A deepening slowdown would ripple across the world economy....
“Clearly the economy is much, much weaker than most people thought until recently....They have a real mess on their hands.”