The Crash of 2008: An Update
Interview with Peter Chojnowski, Ph.D.
Note: The following interview was conducted on October 11, 2008 (with a final question added on October 14). It is a follow up on two recent articles about the economic meltdown published by Dr. Chojnowski in Catholic Family News.
“My guess would be that the world is going through a ‘controlled’ systemic meltdown right now, but the corporate media is supporting their corporate financial masters by focusing solely on the day to day ‘rallies’ and ‘runs’.”
CFN: In the July Catholic Family News, you published the
PC: Yes. I would like to thank CFN for
giving me this opportunity to provide an update to the articles written this
summer, which tried to outline the causes and the consequences of the implosion
of the financial system that could be foreseen earlier this year. So much has
changed since that the first article, “America Foreclosed” was written in June.
Talk about a financial implosion due to the credit and mortgage crisis and the
popping of the housing bubble has gone from the “fringe” to the halls of
Congress and the main stream media. In fact, where can you go today where you
don’t hear everyday people speaking about “the Fed,” “depression,” asking “How
many hundreds of points did the market fall today?” To hear public school
teen-agers speaking about the origin of the Federal Reserve at an athletic
facility, as I did yesterday, is truly an exceptional and new experience. Only
four months ago, this was unthinkable. To date, nothing stated in “America
Foreclosed” has to be taken back, with one exception. The “decoupling” of
Europe and Asia from the
In the “America Foreclosed” article, I tried to trace the origins of the sub-prime housing crisis that was then very much in the news. Much of the present crisis can be traced to the action of Richard Nixon taking the
As an example, in the year 2001, interest rates were cut 11 times in the year 2001. This followed huge liquidity injections of at least 200 billion dollars in the months leading up to the Y2K non-event. This amounted to a 14% yearly increase in the money supply. Easy credit and an abundant supply of money created the biggest financial bubbles that the globe has ever seen. The dot.com bubble was transformed into a stock market equity bubble, which became a housing bubble, which itself became a home-equity credit bubble. These financial bubbles, while wildly exaggerating the worth of Internet companies, stocks, and houses, also, drove the American people into a chasm of debt. The
CFN: Would you do the same for your September CFN article, “The Fall of the Phantom Assets: Economic Autumn 2008”?
PC: In this second article, written
in August of 2008,  I tried to
present the details of the “New Economy” and, what I called, “Win/Win
Capitalism,” which, in the two months since, has ceased to exist or, rather,
has shown itself to be the illusion that it always was. According to “Phantom
Assets,” what is “Win/Win Capitalism”? “Win-Win Capitalism” is an economic form
in which speculative risk has been eliminated. This is actually the most
proximate cause of the present financial meltdown. Even though, according to
Charles Morris in his Trillion Dollar Meltdown, American Capitalism has
always tried to minimize risk by establishing various domestic monopolies, it
was only beginning in the 80s under Reagan, intensifying in the 90s under
Clinton, and, finally, reaching absurd heights of recklessness under Bush in
the years 2003-2007, that there has been a New Economy conceived of in which
financial speculators and banks can eliminate risk, or so they thought, by
“packaging” and “securitizing” debt. If the mortgage-issuing bank could sell
the debt to Fannie Mae or Freddie Mac and, in the process, gain all relevant
fees for initiating the loan, it had made money and was free of any worries
concerning defaults on the loans they issued. The loan-initiating bankers were
willing to issue loans to any and all, since they benefited by the initial fees
taken and did not have to worry about the new “homeowners” defaulting. Masses
of mortgages were packaged up into CMOs (collateralized mortgage obligations)
and sold to investors who believed that they were investing in risk-free
securities since the mortgage investment “packages” were tranched so that
high-yield, but high-risk, “junk bonds” were supported by low-yield but
“investment” grade “secure” bonds.
Everyone was going to make money or have the house of your dreams and
every one was financially “safe”. Risk had been eliminated.
All variety of derivative contracts, also, “hedged” investments so that they seemed relatively-risk free. To quote derivative specialist Satyajit Das, “CDO [Collateralized Debt Obligation] tranching is the black art of dissimulation. Investors are told that they are getting access to a ‘diversified’ portfolio of credit risk and are promised highly customized credit risk. It is very clever spin.” Options, Puts, futures contracts, credit-default swaps, were all ways of hedging risk by either “swapping” debt liability (thereby providing a kind of insurance against the risk of default) or “betting” on the rise or fall of stocks — or even, financially betting on the state of the weather! There was a derivative contract for every taste. Such was the “financial economy” that was estimated to be, before the crash that is, worth 1,000x the “real economy” (i.e., the one that actually produces goods and services). It was a huge inverted pyramid of debt and financial claims upon debt, with a question mark where the asset capstone was supposed to be.
CFN: You were well aware
of what would happen and sounded a warning. Why, in your opinion, did the
First, they believe in the system as a substitute religious
faith. How can such a gigantic and all-encompassing reality fail? Just as we
believe that God has all the wherewithal within Himself to triumph in any
situation, no matter how adverse to His cause, so too these men and women hold
that the system that they have served so faithfully had all the wherewithal,
within itself, to smooth out any “bumps in the road.” Think about it. What if I
had said in my summer articles that in September we would have the chairman of
the Senate finance committee Chris Dodd on Good Morning America saying
that he had been informed by the Secretary of the Treasury and the Federal
Reserve Chairman that the
CFN: What do you think of the government’s explanation of the crisis?
PC: The explanation of the politicians, that
this is due to the greed of financiers, is tainted by hypocrisy, since it was
the administrations of both parties that enabled the financiers to engage in
this wildly profitable orgy of “risk-free” capitalism. They are, also, the
beneficiaries of political donations from the banking industry to the tune of
hundreds of millions of dollars. Listen, the reason for the present collapse of
the stock market (as of October 10th, 2008, the DOW has lost 40% of its value
since its height exactly one year ago) is simple. In a very real way, nothing
has changed. What we are now realizing, however, is that risk avoidance is a
two-headed coin, it made for the boom and it is making for the bust. According
to investor and New York University professor Nouriel Roubini, “The world is
experiencing the simultaneous bursting of housing, equity, bond, credit,
commodity, hedge fund and private equity bubbles ...The financial system is
breaking down, panic and lack of confidence in any counterparty is sharply
rising and investors have totally lost faith in the ability of policy
authorities to control the meltdown.” 
In their continued attempt to avoid risk, investors and banks are no longer investing in derivative contracts and “financial instruments” or loaning to everyone and anyone with “don’t ask, don’t tell” loans, rather they are hoarding cash and refusing to loan to anyone. This is why the bond markets and credit markets have frozen up. According to David Wyss, chief economist at Standard & Poor’s in
CFN: What is your opinion of the $700 billion dollar bailout?
PC: I was outraged from the first that the
taxpayer should pick up these bonds and mortgages just when they have ceased to
be profitable, while the major investment banks made an incredible amount of
money when these bonds were “high-risk” and “high-yield.” Secondly, it does not
address the real problem. The system is awash in debt and there is no way of
paying it back.
There is, in any commercially advanced country, three layers of debt, governmental debt, the debt of banks and businesses, and finally, private consumer debt (e.g., your mortgage). This legislation simply would transfer the debt problem from the second to the first tier. It does nothing to alleviate the debt problem fastened on to the backs of the American people. It is the sinking fortunes of the American people which is causing the implosion of the House of Usury that is currently shaking the world. It was exciting when the House Republicans defeated the measure. It was disgusting when, with added pork for all, the bailout was so easily passed. Most of the money for this bailout will be going to only a few banks, such as Goldman Sachs, Morgan Stanley, and J.P. Morgan. If this bailout was, as the politicians said, meant to “prop up the market,” it failed dismally. Why did the House pass the resubmitted bailout when Senate passage produced a several hundred point drop in the Dow. It is very likely, that the national governments will not be able to handle this crisis. It will be quickly sent up to the international level and some international solution will be imposed, which may or may not work. Indeed, yesterday (October 10th), Silvio Berlusconi, premier of Italy, after a cabinet meeting, said that the leaders of the world might close down the markets and then “rewrite the rules of international finance” (i.e., change the current world system in a fundamental way). The White House immediately denied it had plans to close down the markets, but it is must be noted that this “solution” is on the minds of world leaders.
CFN: Since the meltdown hit, we have seen some people driven to despair rather quickly. A British millionaire in his 40s (with a wife and young son) committed suicide by throwing himself in front of a moving train; a 90-year-old woman in Ohio twice shot herself in the stomach when she was threatened with foreclosure eviction (she lived and the bank then said she could keep her home); a man in California murdered his entire family and then killed himself because he could not find work; a 60-year-old frustrated investor in Stamford, CT walked into a bank and threatened to blow it up. As a Catholic professor, specializing in Ethics, could you comment on this? What does this say about modern society when it comes to facing suffering and hardship?
most people in our own civilization do not understand St. Augustine’s famous prayer that, “Thou
hast made us for Thyself, and our hearts are restless until they rest in Thee,
PC: I really think that this economic crash
will hit our world even harder than did the 1929 Crash. That is saying a lot,
but I cannot avoid thinking it. If you have had a people who have been taught
for generations that the essence of life is the fulfillment of the “American
Dream,” a purely secular fulfillment, then we wonder how these people can
maintain their equilibrium when that “Dream,” which for the past 40 years or so
has depended upon cheaper and cheaper credit, begins to resemble a nightmare.
Clearly most people in our own civilization do not understand
More and more we are going to have to have mercy in our hearts and pity in our minds for the people around us as they suffer through the downfall of the phantasmagoric world that Wall Street has created. If times get tough, how will we cope? Most people have lost those survival skills, the self-sufficiency, and the familial and community ties necessary to continue on even when the system has ceased to function. One opinion I will venture here, we miss the point if we only focus on the obvious day to day unfolding of the economic implosion or the stock market crash. I believe that what we are going through is a “paradigm shift,” a changing of the “world-view” or philosophical, religious, and ideological scheme that has dominated our world since the Enlightenment. The change may be slow or very fast, but very soon we will realize that while we were watching the market crash on CNBC, the liberal system began to implode at near free-fall speed. We always knew that it would. As a Viennese wit would have it, “everything has an end, except the sausage, which has two”! What will replace the Liberal System? I really cannot even guess, other than to say that what ever it is, it will be more “real,” either in an enlivening way or in a very frightening way.
CFN: What stage are we now at in the Systemic Global Economic Crisis?
PC: With the collapse of Lehman Brothers on
September 15, 2008 (the Feast of Our Lady of Sorrows), the Systemic Global
Financial Crisis was upon us. Overlooking the fact that the National Debt Clock
temporarily ran out of digits, when the National Debt passed to $10.148
CFN: Would you hazard a prediction as to how this economic crisis will unfold in the coming months and what will be the consequences for the average American?
is, in any commercially advanced country, three layers of debt, governmental
debt, the debt of banks and businesses, and finally, private consumer debt
(e.g., your mortgage). The “bailout” legislation simply would transfer the debt
problem from the second to the first tier.
PC: Clearly we are not experiencing merely a
recession or a simple bear market. On October 11, 2008, the head of the IMF
(International Monetary Fund) Dominique Strauss-Kahn said, “Intensifying
solvency concerns about a number of the largest US-based and European
institutions have pushed the global financial system to the brink of systemic
meltdown.” Clearly, we cannot imagine the financial system returning to the way
it was before this present crisis in which $8.4 trillion has been lost in the
stock market. That stricken value must have an effect on the real economy. With
the British government planning to nationalize their banking system, beginning
with The Royal Bank of
The problem with the present situation is that the massive injections of liquidity, the nationalizations, and the transference of toxic debt from private banks to the government, is that the more the disappearance of trillions of dollars from the world economy and its inevitable effect on the real economy will simply increase the number of loan defaults, both on the personal and corporate levels, thus leading to further write-downs and the further evaporation of financial trust which is the glue holding together the system. According to Nouriel Roubini, “In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006-2007 (the height of the easy credit regime) this figure was a puny 0.6%....Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies.” These inevitable defaults will likely produce a vicious circle of losses, write-offs, credit contraction, forced liquidation, fire-sales of assets at below fundamental prices, and bankruptcies of businesses and banks who are suffocated by not having sufficient access to credit. My guess would be that the world is going through a “controlled” systemic meltdown right now, but the corporate media is supporting their corporate financial masters by focusing solely on the day to day “rallies” and “runs.” I still do not believe that people realize the implications of the Fall of the House of Usury.
CFN: One last question tacked on after the full interview was completed. Today, October 14, shows a rally in the Stock Market due to the bailout. By the time our readers read this in the November issue, no one really knows what state the Stock Market and the economy will be in. Would you comment on the present “rally”? And would you also deal with the question: Where does the billions of dollars of “bailout money” come from?
PC: The two days after the great Stock Market crash
of 1929 saw a rally of near 20%in the market. After the 1987 crash, the Market
rallied close to 20% in a similar two days time. The rally after the worst
weekly point drop in Dow Jones history only lasted one day. The next day
the stocks dropped again. Even the one day rally of October 13th was a
surprise. When the $700 billion dollar bailout was passed and signed by President
Bush, the market fell — completely failing to respond. Where does the bailout
money come from? It is going to be borrowed by the
1. “America Foreclosed: The 500 Trillion Dollar Debt Bubble Pops”, Peter Chojnwoski, Ph.D., Catholic Family News, July 2008.
2. “The Fall of Phantom Assests: Economic Autumn, 2008”, Peter Chojnwoski, Ph.D., Catholic Family News, September 2008. (Reprint # RP08097- 1102 available from CFN for $2.00 postpaid).
3. Kevin Hamlin, “Roubini warns of possible global depression,” Bloomberg, October 10, 2008.
4.. Cf. Yves Smith, The Naked Capitalist (blog), October 10, 2008.
5.. Nouriel Roubini, “The Risk of a Systemic Meltdown: The 12 Steps to Financial Meltdown” in Nouriel Roubini’s Global EconoMonitor, February 2008.
• Dr. Chojnowski's July 2008 CFN article: “America Foreclosed: The 500 Trillion Dollar Debt Bubble Pops”
• Dr. Chojnowski's September 2008 CFN article: "The Fall of Phantom Assests: Economic Autumn 2008":
• Conference on "The New World Order and the Economic Collapose"
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