- Look around. The evidence of a withering economy is everywhere.
In "good times" consumers shun the canned meat aisle altogether,
but no more. Today, Spam sales are soaring; grocery stores can't keep it
on the shelves. Everyone is looking for cheaper ways to feed their families.
The Labor Dept. assures us that core-inflation is only 4 per cent, but
everybody knows it's load of malarkey. Food prices are going through the
roof. White bread is up 13 percent, bacon is up 7 percent and peanut butter
is up 9 percent. Inflation is rampant and there's no end in sight. The
dollar is closing in on the peso and working people are struggling
just to get by. The bottom line is that more and more people in "the
richest country on earth" are now surviving on processed pig-meat.
That says it all.
- In Santa Barbara parking lots are being converted into
hostels so that families that lost their homes in the subprime fiasco can
sleep in their cars and not be hassled by the cops. The same is true in
LA where tent cities have sprung up around the railroad yards to accommodate
the growing number of people who've lost their jobs or can't afford to
rent a room on service-industry wages. It's tragic. Everywhere people are
feeling the pinch; that's why 9 out of 10 Americans now believe the country
is now headed in the wrong direction and that's why consumer confidence
is at its lowest ebb since the Great Depression. This is the great triumph
of Reagan's free trade "trickle down" Voodoo economics; whole
families living out of their cars waiting for the pawn shop to open.
- The economy is on life-support. The rest of the world
would be doing us all a favor if they decided to chuck the dollar and boycott
US financial products altogether. That would put an end to Wall Street's
chicanery once and for all. Foreign investors should be demanding restitution
and impounding American assets to compensate for the trillions of dollars
they lost in the subprime/securitization swindle. Litigate, litigate, litigate;
that's the only way to make the guilty parties pay for their crimes. Either
that or set up a gallows on Wall Street and get down to business.
- The pundits on the business channel are telling us that
the "worst is over"; that the Force 5 hurricane in the financial
markets has weakened to a squall. Don't believe it. The corporate
bond market is still frozen, housing is in free fall, and the banking system
is buckling from the overload of bad investments. The FDIC is even trying
to lure former employees out of retirement to deal with the tsunami of
bank failures set to touch down later in 2008. Corporate defaults
are on the rise and and commercial real estate is crashing.
- "Commercial property prices in the US in February
saw their sharpest decline since records began nearly 15 years ago as sources
of finance for deals has dried up, according to data from Standard &
Poor's out yesterday. Sales of commercial properties were down 71 per cent
in the first quarter compared with a year earlier." (Financial Times)
Commercial real estate is following the same downward trajectory as residential
housing. They're both headed for the bottom of the fish-tank. Any slump
in CRE will send unemployment skyrocketing while adding to the solvency
problems facing the banks.
- We're not out of the woods by a long shot, and won't
be for years to come. According to Bloomberg News, soaring raw material
costs have caused a sharp rise in costs to producers that they won't be
able to pass on to cash-strapped consumers. That means that corporate profits
will fall and stock values will plunge.
- Last week, Oppenheimer analyst Meredith Whitney announced
- "The real harrowing days of the credit crisis are
still ahead of us and will prove more widespread in effect than anything
yet seen. Just as strained liquidity pushed so many small and mid-sized
specialty finance companies to the brink, we believe it will do the same
to the US consumer. We believe losses will only accelerate further and
far worse than the most draconian estimates."
- Whitney has been one of the few consistently accurate
analysts of the current market meltdown.
- The fate of the larger investment banks is just as uncertain
as the smaller "depository" banks. Carlyle Group Chairman David
Rubenstein summed it up like this last week, "US and European banks
and financial institutions have enormous losses from from bad loans they
haven't yet recognized and may have a harder time wooing sovereign fund
rescuers. Based on information I see, it will take at least a year before
all losses are realized, and some financial institutions may fail. Many
financial institutions aren't going to be able to survive as independent
- That means there will be greater consolidation and more
formidable banking monopolies, all of which is bad for the consumer.
- The banks and financial institutions have never been
in worse shape. They've already written down $344 billion since the credit
crisis began last August and they'll write down another $200 billion next
year. By the time the crisis is over, they will have racked up an estimated
$1 trillion in losses. That represents a $3 trillion contraction in loans
to consumers and businesses. Also, these estimates don't take into account
the losses of revenue from the slowdown in consumer spending, shrinking
GDP, and massive business failures; all of which will wreak further havoc
on the financial sector.
- The amount of stress on the banking system is unprecedented.
The Fed is loaning out money hand-over-fist just to keep the scaffolding
in place. Take a look at what is going on at the Fed's so-called "auction
facilities" where the Fed is providing loans and US Treasuries for
"unsellable" mortgage-backed junk and other toxic bonds. The
numbers are staggering.
- According to the Seattle Times:
- "The Federal Reserve's emergency loans to banks
climbed to the highest level on record even as Wall Street investment companies
scaled back their borrowing....Banks stepped up their borrowing, according
to the Fed report. They averaged $15.95 billion in daily borrowing for
the week ending May 28, compared with $13.5 billion for the previous week,
and the total was a record. The previous high of $14.4 billion came in
the week ending May 14...In the broadest use of the central bank's lending
power since the 1930s, the Fed in March scrambled to avert a market meltdown
by giving investment houses a place to go for emergency overnight loans....The
Fed also announced Thursday it will make a fresh batch of short-term cash
loans available to banks as part of an effort to ease stressed credit markets...The
Fed said it will conduct three auctions in June; each will offer $75 billion
in short-term cash loans. It would mark the latest round in a program that
the Fed launched in December to help banks overcome credit problems so
they will keep lending to customers." ("Banks step up Fed loans,
investment firms scale back", Seattle Times)
- Another $225 billion?!?
- The Fed is trashing its balance sheet--to the tune of
$225 billion--when the money could be used to provide free college tuition
and universal health care. What a waste. Instead, the money is being used
to throw a lifeline to dodgy speculators would were trying to snooker foreign
investors with garbage securities. At the same time, the Fed's emergency
facilities have done nothing to restore trust between the individual banks
who are more reluctant to lend to each other than ever. The ongoing scandal
surrounding Libor (the interest rate that banks charge each other and which
determines the rates on $3 trillion of financial products including mortgages)
strongly suggests that the banks are lying about the true rate they are
paying so the public doesn't find out how battered they really are.
- Bloomberg News: "Banks routinely misstated borrowing
costs to the British Bankers' Association to avoid the perception they
faced difficulty raising funds as credit markets seized up."
- Consumer spending is sluggish too, since lending standards
have tightened and home equity continues to vanish. Subprime problems have
migrated from Wall Street to Main Street as credit trends appear to be
getting worse. Consumers are maxed-out on their credit cards, student loans,
mortgages and car loans. The lack of personal savings is not the result
of a profligate lifestyle (as the right wing media likes to opine) but
30 years of stagnant wages and class warfare waged via big business and
the federal tax code. None of the baby boomers are counting on Social Security
to pay the bills when they retire but, still, that doesn't justify the
money being ripped-off from their paychecks every week and slipped into
the general fund where it is used to pave roads and purchase cluster-bombs.
Social security is nothing but a flat tax for paupers. (The rich get a
free-ride after the first $87,000 income) These are some of the factors
that are bearing down on an American economy like a Daisy Cutter. 2009
is looking is looking more and more like a chapter out of Revelation.
- An article is this week's The Economist summarizes the
malaise in housing in particularly apocalyptic terms:
- "America's house prices are falling even faster
than during the Great Depression. As house prices in America continue their
rapid descent, market-watchers are having to cast back ever further for
gloomy comparisons. The latest S&P/Case-Shiller national house-price
index, published this week, showed a slump of 14.1% in the year to the
first quarter, the worst since the index began 20 years ago. Now Robert
Shiller, an economist at Yale University and co-inventor of the index,
has compiled a version that stretches back over a century. This shows that
the latest fall in nominal prices is already much bigger than the 10.5%
drop in 1932, the worst point of the Depression. And things are even worse
than they look. In the deflationary 1930s house prices declined less in
real terms. Today inflation is running at a brisk pace, so property prices
have fallen by a staggering 18% in real terms over the past year."
- The country is undergoing a collapsing real estate market
that surpasses the Great Depression and former Fed-chief Alan Greenspan's
book is still on the New York Times Best Seller list. How's that for irony?
- Regrettably, there's no sign of a bottom yet in housing.
Some markets have already dropped by 30% costing the states (like California
and Florida) billions in tax revenue and triggering a steep increase in
foreclosures. In California, sales are not only down by roughly 50 per
cent, but 40 per cent of new sales are sales of foreclosed homes. The pool
of potential buyers has dried up. Now the vultures are circling and picking
up homes for $.50 on the dollar. The losses are enormous. If the downward
trend continues, (as many now expect) and housing prices drop 30 per cent
nationwide; the market will shed $6.5 trillion in aggregate value and lower
household spending by $300 billion. That means GDP will shrink at least
another full percentage point.
- The crisis in the financial markets won't be resolved
until housing prices stabilize, that's why the Fed and Congress are scrambling
to put together a plan (Hope Now) that will slow the rate of foreclosures.
Trillions of dollars in complex bonds and mortgage-backed securities will
continue to be downgraded until investors see that it is safe to "dip
their toes in the water" again and reinvest in a (currently) moribund
market. So far, Congress has made little headway in keeping homeowners
from defaulting on their mortgages. Credit Suisse predicts that foreclosures
will be somewhere north of 6.5 million homeowners over the next few years.
It is the equivalent of Hurricane Katrina sweeping from one side of the
country to the other.
- The next administration---whether it's McCain or Obama---will
be forced to restore the Resolution Trust Corp., which was created in 1989
to dispose of assets of insolvent savings and loan banks. The RTC would
create a government-owned management company that would buy distressed
MBS from banks and liquidate them via auction. The state would pay less
than full-value for the bonds (The Fed currently pays 85 per cent face-value
on MBS) and then take a loss on their liquidation. "According to Joseph
Stiglitz in his book, Towards a New Paradigm in Monetary Economics, the
real reason behind the need of this company was to allow the US government
to subsidize the banking sector in a way that wasn't very transparent and
therefore avoid the possible resistance."
- There it is; a taxpayer-funded bailout of Biblical proportions
looming on the horizon, possibly as soon as 2009. Ultimately, it is the
only sure-fire way to stabilize the crumbling banking system and put a
floor under housing prices. The effects on the dollar, however, will be
catastrophic. Don't expect the greenback to survive as the world's "reserve
currency". Those days are about over.
- The troubles in the financial markets will be with us
for some time. The massive expansion of credit has created numerous equity
bubbles that are unwinding at an unpredictable pace. Author James Howard
Kunstler calls the present process "the remorseless algebra of a deflationary
death spiral". That's about as close to a perfect description as imaginable.
There's bound to be considerable disagreement about the origins of the
bubble and who is to blame. Was it the Fed's "low interest "
policy following the dot.com bust in 2000, or the lack of government regulation
in the securitzation process, or was it just the natural corollary of a
political system which invariably bows and scrapes to Wall Street?
- The real origin of the problem is ideological. It's rooted
in the prevailing "trickle down" orthodoxy which opposes any
increases in wages or benefits for working people. Henry Ford realized
what today's captains of industry and finance refuse to accept; that if
workers aren't adequately paid for their labor---and wages do not keep
pace with production---then the economy cannot grow because consumers do
not have the money to buy the things they make. It's just that simple.
Greenspan and his ilk believed that they could prosecute the class war
and make up the difference by relaxing lending standards, changing bankruptcy
laws, and by creating a nearly endless array of exotic financial products
that expanded credit. But shifting wealth from one class to another has
its costs. By crushing the worker the Friedmanites have killed the golden
goose. The world's most prosperous consumer society is in terminal distress
and no amount of "free market" gibberish will keep it from crashing.
- Mike Whitney is a frequent contributor to Global Research.