Mitch Feierstein is the Chief Executive of the Glacier Environmental Fund and author of Planet Ponzi. Planet Ponzi offers readers his decades of experience, deep insider knowledge of economics and the financial world to describe how we got into this mess, what happens next and what we need to do to protect ourselves.
Chris Menon: In Planet Ponzi you’ve written about the huge debt bubble that was created over the past 30 years. For those who haven’t read your book, how did it happen?
Mitch Feierstein: My book goes into detailed analysis of the credit crisis and how we got into the mess we’re in today. I think it’s important that everybody realises what precipitated the crisis, what got us here. It’s impossible to describe what I’ve written about in 406 pages in a brief interview but I can give you what I think are key take-aways and bullet points.
I think too much credit and too much leverage got us into this problem. I don’t have a problem with debt because I think debt is a good thing – debt leads to construction projects, infrastructure spending and capital expenditure. The problem I have is with the structures of all these debt time-bombs with leverage of 100 or in some cases 500-1. We saw one of them blow up in the form of Fannie mae and Freddie mac, with the sub-prime housing bust. Now the US Government (read taxpayer) owns 94+% of mortgage loans.
The thing that got us into this problem is the reckless abandon with which a lot of the banks and the financial system have taken on these ridiculous securitized structures and the leverage that goes into them, which all started out back in the late 90s when Glass-Steagall was abolished by Bill Clinton at Larry Summers insistence. That opened the door to create massive tools of leverage aka weapons of mass financial destruction; a massive build-up of an unregulated highly leveraged derivatives products market.
Of course, now what they have done is the politicians and the bankers have refined the dialogue and the narrative, so they come out and say one thing that soothes the public but the reality of what they do is 180 degree opposite. For example, Dodd Frank was implemented to reign in the reckless leverage and credit and the too big to fail banks but if you look at the reality of what has happened since the credit crisis, too big to fail banks have gotten much bigger. You have banks like Deutsche Bank who have on balance sheet derivative exposures of US$75 trillion and JP Morgan $70 trillion, not including off-balance sheet exposures! So that leaves us with significant problems that have to be addressed as regulators are clueless as to the size of the notional global derivatives markets some estimates are in the 900 trillion Dollar range – I think it’s significantly higher – nearly 20 times greater than global GDP.
Europe hasn’t de-leveraged at all. I think Mario Draghi, who is ex-Goldman and Mark Carney, who is also ex-Goldman and runs the bank of England, are going to come up with a new programme to bundle more securitized, leveraged assets, which will create a problem that’s exponentially larger than current exposures. More leverage is not a solution for insolvency.
If you look at where the French 10-year is trading, about 40 basis points above Germany, and if you look at where Italy is trading relative to the US, it is trading about 40 basis points above the US for 10-year financing. If you also look at Spain, Spain is about 30 basis points over the US. Ireland’s debt is trading below the US. Does it mean they are less risky?
These bond yield numbers, where these countries can borrow money, is a prime example of not only of ‘irrational exuberance’, but it points out the biggest misallocation of capital in financial history due to ‘temporary’ central bank initiatives such as quantitative easing and money printing. 6 years later these programs have had little if any success as GDP remains grim, debt, credit leverage hit historic new highs and too big to fail is bigger.
If you take Italy, for example, their debt-to-GDP ratio is the second highest behind Greece, it is 140%. Greece is probably around 180%, Portugal is 129%, Ireland 125%, Spain near 100%, France around 95%. But the limit in the EU is 60%.
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