March 23, 2020 in Columnists, News by RBN Staff


By Harley Schlanger

March 20 — The neoliberal model of economy and finance, which has increasingly dominated the world since August 15, 1971, from its centers in the City of London and Wall Street, is heading toward a nasty implosion.  This is the only conclusion one can reach from reviewing the recent actions of central bankers, particularly at the U.S. Federal Reserve, which reflect heightened panic and hysteria, especially among bankers and traders.  Since its rare Sunday announcement on March 15, when the Fed said it will purchase $500 billion in Treasury securities and $200 billion in mortgage-backed securities, it has introduced a series of bailout measures, all designed to protect a failed system.  The Sunday measures were enacted following the inability by traders and banks to sell an offering of 30-year Treasuries last week, as few buyers came forward.
The measures announced by the Fed include:
1. Lowering the rate on short-term emergency loans at its discount window from 1.75% to .15%;
2. $700 billion in a new “Quantitative Easing” program;
3. An additional $1.5 trillion infusion in repo lending, in overnight and 14-day loans;
4. Another $1 trillion in repo lending;
5. The Fed will begin buying commercial paper;
6. It will allow primary dealers to park assets, including stocks, in exychange for short-term credit;
7. It opened Euro-dollar swaps, which are a signal that systemically-important banks in Europe are in trouble.  This will provide them dollars to loan to overseas corporations and other borrowers, to “prevent disruptions” in overseas dollar-funding markets;
8. Indicated another cut in the prime interest rate will come next week, following the .5% cut the previous week.
9. Set up a Primary Dealer Credit Facility, through which the New York Fed will offer 90-day loans directly to primary dealer banks.  This means such banks — that is, bank holding companies, and their investment banking, trading and brokerage units — can access loans using as collateral financial instruments including corporate debt securities, commercial paper, municipal securities, mortgage-backed securities and common stocks — in other words, nearly all financial instruments, with no attempt made to ascertain their real value.
Further, the Fed provided close to $200 billion in overnight and two-week repo loans — which was still short of the demand for liquidity — plus $37 billion in Quantitative Easing funds, above the $60 billion monthly offering it is providing, and is mooting that it may soon accept corporate debt and other securities as collateral for loans.  This was endorsed in a March 18 op ed in the {Financial Times} written by former Federal Reserve chairmen Ben Bernanke and Janet Yellen, who argued that Congress must change the law to allow this, as this is necessary to reduce “long-term damage from coronavirus.”  They wrote that the European Central Bank and the Bank of England already do this, and this would “restrat that part of the corporate debt market, which is under significant stress.”
Bernanke and Yellen oversaw the Fed’s bailout of bankrupt financial institutions following the 2008 crash.  Under their stewardship, working with the Obama administration, not only were bankrupt financial institutions protected, but the worthless assets which had been inflated by the Mortgage-Backed Security bubble, which they had on their books, were backed by new flows of liquidity, while those holding them — including “shadow banking” institutions — continued to trade them.  Thus, the “housing bubble” which popped in 2008 was replaced by what some have called the “Everything bubble”, which is rapidly deflating now.
Yet this swirl of the bailout funds unleashed by the Fed has done nothing to calm speculators’ fears, which was apparent the next day, on March 16, when the Dow fell nearly 3,000 points, and is now down over 30% from its all-time high on February 14, just over a month ago.  While opening the liquidity floodgates led to a bounce on the 17th, the overall volatility has continued unabated, and is both a sign of deepening panic, and a desperate search for short-term profits.

While the Fed is engaged in this wild funny money creation scheme, the European Central Bank announced that it will buy up to 750 billion Euros worth of financial assets.  This continues the approach of its former chairman, Mario Draghi, whose mantra was to do “whatever it takes.”  Exemplifying the same foolish retreat from reality, current ECB head Lagarde tweeted that “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro.”
What is lost in these astounding numbers is that the liquidity, which is being introduced in the short term, to stave off an immediate full-scale depression collapse, will not solve the problem it is supposedly addressing, of “restoring investor and consumer confidence”, to cause an upturn in spending.  This is because a.) consumers are over their heads in debt, and increasingly falling behind in credit card debt payments, as well as in auto, home and student loan repayments; and b.) most of the liquidity will flow into new, speculative gambles by shadow banking operations and strapped corporatioins, which will only increase the amount of debt due in the future, without generating the means to increase real wealth production to cover the new debt.  This latest plunge into liquidity insanity by the Fed is a return to the approach taken after the 2008 crash, of bailing out the financial institutions which caused the crash — including the Too Big to Fail banks, insurance companies, and “shadow banking” operations — while withholding credit from the producers which are part of the real, physical economy.
The post-2008 explosion of liquidity has driven total corporate debt from $48 trillion in 2009 to over $75 trillion in 2019.  A portion of that growth is in purchases of corporate bonds, including those rated at BBB, a notch above junk levels.  In 2011, BBB-rated bonds accounted for 1/3 of the market; by 2020, it is now 1/2 the market.  Private equity funds, hedge funds and other shadow banking institutions have been loading up on these riskier bonds and other high-risk instruments, seeking higher returns than they can get from purchasing government bonds, which have low-interest rates.  The huge volumes of overnight lending in repo markets are needed by borrowers, as they are not earning enough profit to cover the servicing costs of their debt.
Now, with the “recession” likely in sectors such as energy, auto and hospitality/travel, driven to some extent by the effects of the Corona Virus, many of the corporations will default, threatening a domino-style collapse of the whole system.  Lotfi Karoui, the chief credit strategist at Goldman Sachs, warned in a report to its clients, “Default and downgrade risks have increased to their highest levels since the start of the current business cycle.”  The IMF reported that, in a recent stress test, it found that 40% of all corporate debt is at risk of default in case of a “downturn”, which is now, in fact, underway.
The neoliberal model of globalization, with its just-in-time economy and other austerity measures, combined with banking deregulation and bank bailouts, outsourcing and deindustrialization, has failed miserably, just as Lyndon LaRouche forecast it would in his comments on Nixon’s decision to end the Bretton Woods system on August 15, 1971.  This decision was imposed on a panicked Nixon, who was advised by monetarists such as former Fed chair Arthur Burns, future Fed chair Paul Volcker, and free market/austerity fanatic George Shultz, who warned him that the dollar would collapse unless it was decoupled from the gold reserve standard, and that the fixed exchange rate system — which had allowed unprecedented levels of growth in the post-war advanced sector economies — must be replaced by a floating exchange rate system.  It is the floating exchange rate system that opened the door for speculators to introduce increasingly wild forms of “financialization” and “securitization.”  By pushing through a series of banking deregulation measures, beginning during Volcker’s time at the Fed, banks were able to use their client’s deposits as a basis for increasing leverage, which produced one bubble after another, all of which collapsed, beginning with the stock market crash of 1987, and continuing with the popping of the Asia bubble in 1997 (in which George Soros played a leading role), the Russian bond/LTCM bust of 1998, and the bubble, which blew up in 2000.
When the next bubble, that triggered by speculation in mortgage-backed securities, popped in 2008, LaRouche pushed for a return to Glass Steagall bank separation.  Glass Steagall, was passed in 1933 as part of President Franklin Roosevelt’s “100 Days” anti-Depression legislative package.  It served the nation well, preventing speculators from grabbing savings and deposits in the nation’s banks and savings and loans, by establishing an iron wall of separation between commercial banks, savings and loans, and investment banks.  It was targeted for elimination by Wall Street after 1971, was weakened by neoliberal ideologues in the 1980s and 1990s, and finally repealed in 1999, which set the stage for the speculative frenzy of the post-9/11 G.W. Bush years, ending with a bang in 2008.  Instead of listening to LaRouche then, the neolibs again had their way, as Obama, both parties in Congress, and the Fed rejected LaRouche’s call for a return to the American system, with a Hamiltonian credit policy and directed credit to the real physical economy, with a special emphasis on infusions of funds for science driver projects.  Instead,  they chose to save the speculators, with a massive bailout — a choice made once again by panicked Fed officials on March 15, with the Ides of March bailout.
Given the high degree of dysfunctional thinking, typified by these measures, it should not be surprising that the efforts to introduce “fiscal measures”, i.e., governmental policies to back up saving of the financial system, are directed at the consumer and service economy.  Some of the so-called stimulus measures are essential, and life saving, such as short-term moratoria on home foreclosures and evictions, and sending out checks of up to $1,000 to cash-strapped families, facing unemployment and income loss from shorter hours.  But such measures fail to address the real problem, which was created by the shift in the Transatlantic region from an emphasis on wealth production through science-and-technology driven progress in manufacturing, agriculture and infrastructure development, to a post-industrial consumer economy, dependent on cheap goods produced by corporations which moved their operations to poorer countries, to take advantage of cheap labor and lower costs.
While such “fiscal measures” are being debated in the U.S. Congress, a competent solution was presented by Helga Zepp LaRouche, with her call for a suspension in trading, the closing down of financial markets, to allow for an immediate restoration of banking separation.  When combined with a return to Hamiltonian “directed” credit measures, this would lead to a full reversal of the failed neoliberal paradigm, and open the way for western nations to cooperate with China, in making its Belt-and-Road Initiative into a true World Landbridge.  Nothing short of this will succeed.
The attempt to save the system with ever-larger bailouts, is equivalent to trying to revive a corpse with massive blood transfusions.  It were better to bury the corpse, and finally proceed with the reforms proposed by Lyndon LaRouche.