How Bad Will the Next Recession Be?

By Scott Thill, AlterNet. Posted October 26, 2007.

"My rant was the rant heard around the world," CNBC personality and ex-hedge funder James Cramer told viewers of his cable show Mad Money, a talk-radio spectacle involving its host's over-the-top antics like hitting sound-effects buttons and giving stock advice at breakneck speed. The setting was 2007's fiscal third quarter, a highly volatile period in which the market nosedived on the heels of a subprime housing and credit meltdown.

In the rant, broadcast on the show Stop Trading! before becoming an online hit, Cramer aggressively screamed for a rate cut from the Fed for his "people [who] have been in this business for 25 years!" -- by which he meant, of course, the hedge funders whose deceptive bundling of mortgage-backed securities built on subprime loans and no oversight from the SEC whatsoever are finally getting their comeuppance.

Cramer, who ignored repeated requests for participation in this story and its predecessor, viewable on AlterNet here, made it pretty clear that his friends in the hedge fund industry manipulate the credit and housing markets for fat-ass paydays. But there he was a few days later, backtracking hard. He was even lucky enough to get on The Colbert Report to do some much-needed damage control, asserting that he was really defending the millions of suckered Americans about to lose their homes, thanks to highly leveraged loans manipulated by investment banks and private equity groups like Blackstone, KKR and Bear Stearns (now the target of a criminal investigation) into Kafkaesque packages called CDOs (collateralized debt obligations). Those labyrinthine Ponzi schemes allowed hedge fund managers and private equity groups to not only buy out big names like Sallie Mae, Hilton, Chrysler and more, but also skim huge percentages off the top for themselves, their wives, mistresses and mansions.

And here we are, after the subprime collapse and Cramer's rant hear 'round the world, teetering on a fourth quarter that is screwed without some help from the Federal Reserve Bank. In fact, we could be headed to the type of economic recession that the Los Angeles Times recently reported may swallow us all -- at least until 2009, if we're lucky. Others aren't so optimistic: Paul Krugman, a noted economist and caller of bullshit on fantasies financial and military, like the occupation of Iraq, wrote in an aptly titled New York Times op-ed called "Very Scary Things" that "what's been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up ... This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults ... Let's hope, then, that this crisis blows over as quickly as that of 1998. But I wouldn't count on it."

That was Krugman's take on Aug. 10. The 1998 crisis he's referring to? That would be total implosion of Long-Term Capital Management, a hedge fund made up of bond traders and Nobel Prize-winning economists that tanked billions and needed to be bailed out in order to avert an American recession under President Clinton. Hedge funds have the Midas touch, it seems, for making gold only for their shareholders, and few else, before needing a federal lifeboat.

Sure enough, in the days since Krugman's very scary thoughts, the situation has worsened. "Signs of progress have appeared," said Federal Reserve Chairman Ben Bernanke to a German conference on Sept. 11, "but ... most countries have only just begun to undertake the policy changes that will ultimately be needed ... in part because of the greater recent volatility in financial markets and investors' demands for increased compensation for risk-taking." Henry Paulson, current secretary of the treasury and former CEO and chairman of investment bank Goldman Sachs, a major beneficiary of the CDO bonanza and one bank that helped bail out Long-Term Capital Management, added that our current economic crisis will take longer to fix than the other major depressions of the last two decades, including the Russian default of the '90s and the Latin American debt nightmare of the '80s.

See more stories tagged with: economic recession, hedge funds, stock market, federal reserve, globalization, climate change, iran

Scott Thill runs the online mag Morphizm.com. His writing has appeared on Salon, XLR8R, All Music Guide, Wired and others.

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