On Why The Wall Street Casino Has Already Saved A Special Place In The History Books For Its Creators

Tyler Durden's picture

In a starkly realistic report released by the United Nations Conference On Trade And Development (UNCTAD), the author minces no words, and while foregoing the opportunity of ever being invited on CNBC, presents the stark truth on an as is basis, something the American public has to increasingly look to non mainstream media sources and even foreign publications for.

Starting in the United States subprime mortgage market, the financial crisis spread quickly, infecting the entire United States financial system and, almost simultaneously, the financial markets of other developed countries. No market was spared, from the stock markets and real estate markets of a large number of developed and emerging-market economies, to currency markets and primary commodity markets. The credit crunch following the collapse or near collapse of major financial institutions affected activity in the real economy, which accelerated the fall in private demand, causing the greatest recession since the Great Depression. The crisis has affected most strongly companies, incomes and employment in the financial sector itself, but also in the construction, capital goods and durable consumer goods industries where demand depends largely on credit. In the first quarter of 2009 gross fixed capital formation and manufacturing output in most of the world’s major economies fell at double digit rates. Meanwhile problems with solvency in the  non-financial sector in many countries fed back into the financial system.

The likelihood of a recovery in the major developed countries that would be strong enough to bring the world economy back to its pre-crisis growth path in the coming years is quite low. This is because neither consumption nor investment growth can be expected to revive significantly due to very low capacity utilization and rising unemployment. In addition, banks need to be recapitalized and their balance sheets cleaned of toxic assets before they can be guided back to their traditional role as providers of credit to investors in fixed capital. Until this is achieved, and in order to halt the contraction of GDP, it will be necessary to maintain, or even further strengthen, the expansionary stance of monetary and fiscal policies. Against this background, global GDP growth may turn positive again in 2010, but it is unlikely to exceed 1.6 per cent.

Contrary to what the administration will have you believe, confidence does not come from ceaseless repetition on TV of what General Electric hopes the general public wants to hear, whether it is unfounded hope, unfounded optimism, or any other concept, with an "unfounded" adjective preceding it. Confidence comes from a sense that there is stability and order in a system, that currently is increasingly chaotic, and where even a regular Main Street resident is aware that the market and the economy have gotten fundamentally disjointed to a point where the latter is merely a speculative plaything operating in a vacuum, and run by an ever decreasing number of pathological gamblers.

Is optimism wrong then? No, but optimism without even trace amounts of reality is much more dangerous and insidious than pessimism, where while the latter will not make you rich, it will also not lead to a complete loss of all capital in the Wall Street-sponsored game of roulette, which incidentally has 35 instances of 00. 

The improvement of certain financial indicators from their lows reached in the first quarter of 2009 and falling interest rate spreads on emerging-market debt and corporate bonds, combined with the rebound of securities, commodity prices and the exchange rates of several emerging-market currencies by mid-2009, were quickly seen as “green shoots” of economic recovery. But the economic winter is far from over: tumbling profits in the real economy, previous overinvestment in real estate and rising unemployment will continue to constrain private consumption and investment for the foreseeable future. As the crisis is global, reliance on exports offers no easy way out, since trade is expected to decline by about 11 per cent in real terms and any new trade expansion requires a recovery of consumption and investment somewhere in the world.


Given the weakness in macroeconomic fundamentals, an upturn in financial indicators in the first half of 2009 is more likely to signal a temporary rebound from abnormally low levels of prices of financial assets and commodities following a downward overshooting that was as irrational as the previously bullish exuberance. They are not a reflection of strengthened macroeconomic  fundamentals but of a restored “risk appetite” among financial agents. Consequently, they could be reversed at short notice, depending on the pace of recovery and financial market sentiment.

The notice is even shorter, if one considers that the "market makers" controlling the natural bids can and will flip to offload their positions faster than the eye can blink when the conditions warrant it: unlike the evil market makers of old, these new guardians of "capital markets integrity" have, oddly enough, no requirement whatsoever to be present in moments of stress, and, more surprisingly, no risk parameters in which they operate: we have, as expected, learned nothing once again from the Lehman "lesson." But that is a topic for another thread. But back to speculation.

In the course of the crisis, financial distress spread directly across stock and bond markets and primary commodity markets, and put pressure on the exchange rates of some emerging-market currencies. The uniform behaviour of so many different markets that are not linked by economic fundamentals can be attributed to one common factor: the strong speculative forces operating in all these markets.

As participants in financial markets often seek speculative gains by moving before others do, these markets are always “ready for take-off”, and eventually interpret any “news” from this perspective. Indeed, they often tend to misread a situation as being driven by economic fundamentals when these are just mirages, such as perceived signs of economic recovery in certain economies or fears of forthcoming inflation. As long as prices are strongly influenced by speculative flows – with correlated positions moving in and out of risk – markets cannot function efficiently.

Recognizing the lack of economic logic of these markets is key to understanding the roots of the current crisis, and should be the basis for further policies and reforms aimed at stabilizing the financial system. However, so far an appropriate appraisal by policymakers has not been forthcoming. The policy approach to tackling the crisis is focused on better regulation of actors and markets at the national level, but does not address its impacts on currency and commodity markets and on the future of an open trading system.

It is, frankly, shocking that an organization so disconnected from finance and capital markets as the United Nations, can have such a solid grasp of the entire chain of events and risk players that have brought us to where we are now, and are perpetuating the same mistakes that the regulators and all other market participants hope are different this time, and will not result in the same outcome. Yet, the US market, being essentially self-regulated (the irony is amusing) by crony, manipulated, bribed and incompetent organizations such as FINRA, the CFTC and the SEC, is now facing just the same speculative challenges it did in the days before Lehman, in August of 2007 and at every other inflection point, where had there been some more insight of how to deal with asset bubbles, the current predicament may have been avoidable.

It is, unfortunately, hopeless, that both the market and its regulators will keep repeating the same mistakes over and over, as everyone's interests are unfortunately aligned at this point, not with an investing paradigm, but one where, because a trip to Las Vegas is seen as too expensive, is usually replaced by one to the nearest E-Trade terminal. And so on, until the next bubble implosion, whether it be in China or in downtown Manhattan. The threat - each subsequent bubble eventually has increasingly more dire repercussions, as more capital is used to reflate it. If the last pop resulted in the near-decimation of Wall Street, the next one will likely spell certain doom for capitalism as we know it. So those who are in power have the choice of proactively approaching this issue, and as the UNCTAD report warns, take appropriate measures, or alternatively, we can all bask blissfully ignorant in the glow of CNBC's scrolling ticker and Amanda Drury's increasingly exposed cleavage, until such time as no further propaganda from the MSM will be sufficient to change the simple fact that the economy is in the eye of the hurricane, that markets no longer reflect even a trace of reality, and the speculators have once again hijacked capital markets. And it is these same speculators that none other than John Maynard Keynes warned against when he said "When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."

Mr. President, Ms. Schapiro, Mr. Bernanke, with your actions, or more specifically, lack thereof, you have allowed the capital development of our country to become a by-product of the activities of a casino. You may be correct that by the time your respective terms end, the collapse will not be in full force yet, or you may be wrong, but rest assured that history will judge you appropriately and harshly, and will save a special Chapter for you in America's textbooks, so when future (massively indebted) generations look back upon the first decade of the 21st century and evaluate where it all went so horribly wrong, your names will be prominently featured.

Full UNCTAD report here: