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Wall Street executives cleverly enticed the world to leave their money in the United States in the name of decent returns. They then gave away that money as cheap credit to anyone and everyone who wanted it. U.S. citizens got hooked on purchasing new homes, renovating old homes and buying “goodies” like laptops, iPods, cell phones and LCD TVs, to name a few.
The list of those responsible should include a “who’s who” of Wall Street. The chairman of AIG, the chairman of Lehman Brothers, the head of the U.S. Securities and Exchange Commission, heads of mortgage giants, past and present chairmen of the Federal Reserve, U.S. Treasury officials and politicians who worked on Wall Street’s behalf, collectively undermined the United States’ financial health. Greed motivated them, and in their pursuit of personal enrichment, they forgot the rest of the country and the world.
Did you know that these “honchos” caused a run on commodities only six months back? Rice, wheat and corn tripled in price over a short period of time, leaving the world wondering why.
Rains in India and China in 2007-08 were good. These countries did not need extra grain. Africa and the rest of Asia missed a heartbeat when rice-exporting countries like India, unable to solve the mystery, refused to honor customary export contracts. In fact, it was Wall Street bankers with their huge hedge funds and derivatives who caused it, by buying out future contracts and starving the market’s supply, which drove prices up.
The same thing happened with minerals and metals. Gold prices doubled; copper prices tripled. Oil prices jumped from an average of US$40 a barrel to $147 a barrel in one year. The oil price increase was partly due to overly jealous exporters. Another part was due to hedge-fund managers getting out of control.
Today, the price of oil is fluctuating at around US$80 per barrel, a far cry from $147 per barrel only two months back. It will fall further as more and more hedge funds are withdrawn from the commodity market. In one way, this financial meltdown is a blessing in disguise for commodities; prices are finally stable and are searching for their natural baseline.
Over a period of three weeks, from the last week in September until early October, the United States’ total wealth suffered a significant drop exceeding US$2 trillion. Most losses were in very risky hedge funds, derivatives and other risky investments. Real estate had already been suffering for a year. A domino effect led to general losses in the stock values of all companies, which took a 30 percent tumble.
The crisis came to a head when banks, trapped with overvalued real estate assets, locked down the general credit. These banks were following the established liquidity principle. With huge non-performing assets, they could not borrow cash and hence could not lend to one another. Ultimately, small and large businesses alike began to feel the pinch. Credit-card holders were temporarily spared, but credit on house purchases, car loans and other large purchases was withdrawn. The United States was forced to begin living within its means.
The United States has no surplus cash. Taxes are not even enough to cover the country’s expenses; hence deficit financing is done through debt. Borrowed money from the rest of the world is incurring a huge debt that currently sits at about US$10 trillion. The export earnings of China, India, Japan, Taiwan and South Korea, among others, are kept in the United States under the pretext of good returns. This easy money is then used to finance the deficit, creating a trap for a rise in debt.
This extra cash from export earnings appeared a decade ago, when oil prices were stable at US$30 a barrel. Chinese, Japanese, Indian and South Korean exports to the United States were rising, and as per agreement, that money was left behind in the United States.
This money from export earnings amounts to US$400 to $600 billion per year, a considerably large chunk of cash. Housing in the United States was seen as one way to invest it, and that is when sub-prime loans were born and profitable mortgage-based securities began trading. Only a few bankers and CEOs had full knowledge of this scam. In the process, they pocketed billions of dollars in commissions over the course of a decade.
The biggest losers are middle-class citizens. With promises of high returns, Wall Street took their hard-earned retirement savings money. Their savings have been halved and some have lost almost all of their money. For someone who is 45 years old, there is time and the possibility of recovery; for retirees who lost half their pension money, it is unlikely they will recover.
The Wall Street we have known up until three months ago will soon cease to exist. It will no longer be a freewheeling marketplace; new rules and controls will have to be implemented. As closure to this meltdown, some of the millionaire executives will become paupers, teaching a lesson to others. If the United States was a Middle Eastern country or was ruled by the likes of Henry VIII, these CEOs would be charged today and lose their heads tomorrow.
However, there is a light at the end of the tunnel. The banks will be bailed out by the United States and Europe’s US$2 trillion package. Credit will start flowing again. Some relief on sub-prime loans to homeowners will come in the form of frozen payments. Retirees will have a one-time opportunity to withdraw cash tax-free.
All these factors will help stabilize the economy. Let us hope that the upcoming recession does not cancel out all the gains of the bailout package.
In short, banks and investment houses cannot be allowed to run freely as they did before; that would be a great injustice to the middle class, which has lost the most. Rather, it is the CEOs of errant Wall Street companies who should be penalized in the strongest possible way.
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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)
