Behind the Market Crash: The Smoke and Mirrors of Corporate Buybacks

Thursday, August 27, 2015
By Paul Martin

By Michael Hudson
Global Research
August 27, 2015

Sharmini Peries: The Dow Jones trading took a deep drive this week, dropping over 1,000 points in the first 20 minutes of trading. It is now slowly reversing itself, but it was the greatest loss in trading since the 2010 crash. Here to discuss all of this, we’re joined by Michael Hudson. Michael Hudson is a distinguished research professor of economics at the University of Missouri, Kansas City. His latest book, which we promise to unpack in detail very soon, is Killing the Host: How Financial Parasites and Debt Destroy Global Economy. You can get a digital download of it at CounterPunch. Michael, thank you so much for joining us.

Michael Hudson: Good to be here. And the hard print will be out in another two weeks from Amazon.

Peries: Look forward to it, Michael. So Michael, some mainstream news outlets are saying that this is the China contagion. They need someone to blame. What’s causing all of this?

Hudson: Not China. China’s simply back to the level that it was earlier in the year. One of the problems with the Chinese market that is quite different from the American and European market is that a lot of the big Chinese banks have lent to small lenders, sort of small wholesale lenders, that in turn have lent to retail people. And a lot of Chinese are trying to get ahead by borrowing money to buy real estate or to buy stocks. So there are these intermediaries, these non-bank intermediaries, sort of like real estate brokers, who borrowed big money from banks and lent it out to a lot of little people. And once the small people got in it’s like odd lot traders in the United States, small traders, you know that the boom is over.

What you’re having now is a lot of small speculators have lost their money. And that’s put the squeeze on the non-bank speculators. But that’s something almost unique in China. Most Americans and most European families don’t borrow to go into the market. Most of the market is indeed funded by debt, but it’s funded by bank lending and huge, huge leverage borrowings for all of this.

This is what most of the commentators don’t get. All this market run-up we’ve seen in the last year or two has been by the Federal Reserve making credit available to banks at about one-tenth of 1 percent. The banks have lent to big institutional traders and speculators thinking, well gee, if we can borrow at 1 percent and buy stocks that yield maybe 5 or 6 percent, then we can make the arbitrage. So they’ve made a 5 percent arbitrage by buying, but they’ve also now lost 10 percent, maybe 20 percent on the capital.

What we’re seeing is that short-term thinking really hasn’t taken into account the long run. And that’s why this is very much like the Long-Term Capital Management crash in 1997, when the two Nobel prize winners who calculated how the economy works and lives in the short term found out that all of a sudden the short term has to come back to the long term.

Now, it’s amazing how today’s press doesn’t get it. For instance, in theNew York Times Paul Krugman, who you can almost always depend to be wrong where money and credit are involved, said that the problem is a savings glut. People have too many savings. Well, we know that they don’t in America have too many savings. We’re in a debt deflation now. The 99
percent of the people are so busy paying off their debt that what is counted as savings here is just paying down the debt. That’s why they don’t have enough money to buy goods and services, and so sales are falling. That means that profits are falling. And people finally realized that wait a minute, with companies not making more profits they’re not going to be able to pay the dividends.

The Rest…HERE

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