Where Fear Goes, Contagion Follows

by William Skink

It’s been an interesting couple of weeks for the global markets. While Greece has received much of the attention, the extreme measures China is taking to stabilize its stock market are worth paying closer attention to. In addition to QE (Quantitative Easing) type measures, tweaking interest rates, and forcing state institutions to buy back stock, stricter restrictions on selling have been implemented to keep the lemmings from leaping off the cliff:

Can pumping still more money into the economy to buy stocks offset the panic and urge to sell by investors? Will still more quantity of money injected into the markets really prove sufficient to offset the ‘fear factor’ of investors, as they try to salvage what they can, to take their money and run? Maybe not if those investors are mostly what are called ‘retail’ buyers—i.e. individuals rather than institutions—who are notoriously prone to herd mentality both in buying and selling stocks. And China’s stock buyers are reportedly 85% retail. So that’s a big problem, because once they panic, as they now have, measures to offset selling by encouraging more buying may not work very well. Indeed, may not work at all. Once it replaces ‘greed’, ‘fear’ of loss is a psychological mindset among retail investors that is difficult to turn around again.

That’s why China has also undertaken parallel measures to halt the selling of shares in the markets as well induce more buying. It has suspended sales of Initial Public Offerings (IPOs) for companies selling shares for the first time. It has taken action to check speculators, domestic and foreign finance capitalists, and stop them from ‘shorting’ stock prices, i.e. betting stock prices will decline which in effect only drives prices still lower. Another ‘stop-sell’ measure was announced by the China Securities Regulatory Commission, CSRA, on July 8. It ordered that holders of more than 5% of a company’s stock were henceforth barred from selling shares for the next six months. The government has also ordered more than 1500 companies on the China stock exchanges to suspend all selling of their stocks. Estimates are that between 50% to 70% of the China stock markets are thus ‘frozen’, with the majority of the companies prevented from trading their shares. So the precipitous decline in stock prices in recent weeks reflects maybe only a third of the companies at this point.

Combined, these measures expose China’s desperation, and that’s not good for jittery markets. Along with fear, at least for me, comes an increased propensity for paranoia. So when I heard about trading at the NYSE halting for over three hours because of a “computer glitch” I wondered what the hell might be actually going on? I’m certainly not the only one. Here’s a piece from Zerohedge about why the NYSE debacle matters. It’s an interesting read.

One of the realities that was never quite absorbed by the general public seven years ago when the markets melted down was just how insane the derivatives market had become. And in seven years post-crash, it’s gotten worse:

U.S. total public, personal, and corporate debt is now $60 trillion, and to a few cognoscenti, there is a palpable sense of teetering. Puerto Rico is running out of cash. Illinois struggles to pay pensioners while avoiding insolvency. Detroit is already in receivership. Irvington, Harrisburg, Oakland, Providence and a host of other municipalities are close behind.

But just where would a flock of black swans originate? Certainly Detroit is not going to tank the entire U.S. economy.

At the beginning of George Bush’s presidency, the total global derivatives market —credit default swaps, mortgage backed securities, forward contracts, currency swaps and their inscrutable mathematically murky cousins—amounted to $4 trillion. When Bush got finished with us, that is, when 8 million Americans lost their jobs and 3 million Americans lost their homes, the derivatives market had soared to $585 trillion. Kind of a jump and certainly a very lucrative gaming house.

When Obama took office, most thought he would bring these excesses under control and initiatives like Dodd-Frank or the Commodity Futures Trading Commission would shutter, or at least reign in, this egregious casino. Not so fast. The five leading “too big to fail banks” actually grew 28 percent bigger than when Obama took office. And the global derivatives market swelled to $1.5 quadrillion.

This is fucking madness. The mind boggles at these figures. How will this insane debt unwind? Will it take another World War?

No one can say. What’s obvious is this situation is not sustainable. Where do we go from here?

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About William Skink

I'm a poet and political cynic living and writing in Montana. You can contact me here: willskink at yahoo dot com
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11 Responses to Where Fear Goes, Contagion Follows

  1. JC says:

    One man’s debt is another man’s wealth. One company’s debt is a bank (and its shareholder’s) wealth. One country’s debt (think Greece) is another country’s wealth (think Germany). When wealth depends on another’s debt, the wealthy individual/bank/country will go to any length to protect it. And while the system is gamed, they will do all they can to accumulate more wealth to backstop what they already have, which of course is done by creating more debt.

    The era of wealth creation through productivity, hard work and innovation is over. Wealth now only accrues to those who are willing to use political power as a tool to transfer wealth/capital through the creation of debt.

    It’s a house of cards, and inevitably will come tumbling down. Pity the poor retail investor in China, the defaulted student loan borrower, the “homeowner” whose mortgage is for significantly more than the real value of their home (sorry Liz…), the country(s) who will never be able to pay back its loans and loses its sovereignty to another.

    It’s all just a confidence game, and when confidence goes out the window (as it is doing in China and Europe and did in the U.S. housing market bubble burst last decade — and will again) the next global depression will put the last Depression to shame.

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  2. steve kelly says:

    Depression? No problem, that’s when CME Group, Inc. makes piles of money “skating backwards.” Up or down doesn’t seem to matter, it’s movement that makes the wealthiest wealthier.

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  3. Big Swede says:

    Conterpunch’s author was quick to point out Bush’s role in the derivatives debacle when in fact you have to go further back in time to the cause of high risk lending, The Community Reinvestment Act.

    No risky loans no defaulted mortgages.

    But hey, no one calls Counterpuch on their lies because they hide behind a no comment policy.

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  4. JC says:

    “Where do we go from here?”

    John Pilger tackles the Greece debacle by exposing the Syriza lie for what it is — neoliberalism in radical chic. Then offers a bit of a solution and call to action:

    “This is not inevitable, a done deal, if we wake up from the long, postmodern coma and reject the myths and deceptions of those who claim to represent us, and fight.”

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    • In historical perspective, you might enjoy this exchange between Chomsky and Buckley, with Greece playing a role. In the immediate postwar era, Greece had a large and organized democratic movement, well organized, which the U.S. branded “communist” and destroyed. Buckley assumed that the U.S. had that right, while Chomsky makes the minor point that countries ought to be able to govern themselves. Not much has changed!

      (I am not sure if this is the debate that contained the Greece exchange, but cannot imagine Buckley had Chomsky on his show more than once.) (I cannot help myself here but to add that Buckley was CIA, recruited out of Yale, and who trained in Mexico City under David Atlee Phillips. I don’t know if that matters but it does not hurt to know it.)

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      • Greece pops up at 27 minutes in. Buckley tries to equate US intervention there with liberation of France from the Nazis, Chomsky points put the the Is intervened to put down a domestic movement, and not a foreign invasion. I think the seeds of rebellion crushed by the U.S. At that time are still scattered about Greece, and that among their labor unions and even coffee shops there is an intelligent and patriotic liberation movement still in existence. The U.S. May have to bomb them if EU fails to subdue them.

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  5. steve kelly says:

    “We will not return to a rational economy or restore democracy until these global speculators are stripped of power. This will happen only if the streets of major cities in Europe and the United States are convulsed with mass protests. The tyranny of these financial elites knows no limits. They will impose ever greater suffering and repression until we submit or revolt. I prefer the latter. But we don’t have much time.” – Chris Hedges http://www.informationclearinghouse.info/article42357.htm

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