Sunday, October 26, 2008

Economic Meltdown Next

Alan Greenspan now says nobody could’ve predicted the scale of the current banking meltdown. Meanwhile, the Maestro, as he once was called, who guided the economy with a “magic touch” during his long tenure blithely ignored every indicator that trouble was brewing. He is correct, of course; nothing like this has happened since 1929, and moreover, probably wouldn’t have happened if the banking reforms put into place in response to that calamity hadn’t been eviscerated ten years ago under Clinton’s watch.

For certain, everybody who didn’t have a personal vested interest in being optimistic, was pointing out extreme imbalances and deficiencies in the economy that were likely to have serious, if not necessarily catastrophic, consequences. People involved in reporting on and opining about the business news invariably own stocks and are totally sold into the conventional wisdom so unconsciously project optimism in their reporting. You know: “All we need is a few trillion dollars to bail out the banks and they’ll start trusting each other and then they’ll start lending as before and people will be borrowing just as in the past and in a couple of quarters the world economy will be back on track.”

They also assure us that we can’t have another Great Depression because we ‘responded’ quickly with huge bailouts and because there are now programs in place to protect individuals from the extreme deprivations of the thirties. As to the latter: Thank God for small miracles; people will at least have something, small as it may be – I get $600 month in Social Security; how far will that get you in America? - to help negotiate the hard times.

The bailout may have led bankers to feel a lot better about themselves and the security of their exorbitant pay, but even if it was enough to get them loaning money again, not many will want to borrow.

Let’s face it, anybody with half a working brain cell who isn’t part of the wealthy elite, is hoarding their resources, saving for a rainy day, learning how to get by on less (if not yet, then soon). That being the case, industrial production will plummet, housing construction will grind to a halt, any business that depends on discretionary spending - restaurants, etc – will see their profit margins reduced to the bone, governments will be starved for revenue and be forced to cut back on services… you get the picture.

There’s no going back to bubble-like days of prosperity predicated on figmentary money created out of whole cloth or based on borrowing from the future. Recent precipitous falls on world stock markets show that investors are catching on that this is not a temporary detour on a strong upward economic path; a mere glitch in the endless growth paradigm.

This is going to hurt, as well it should. Americans, amongst all the world’s rich peoples, have been living beyond their means and the ability of the earth to provide for their insatiable appetites. It had to come to an end. For sure, it would’ve been a lot smarter and easier and more sensible to gradually transition to a more stable, sustainable lifestyle, but there’s nothing in the world, that is, no amount of reason or logic, that could’ve stopped this juggernaut from destroying itself in an orgy of excessiveness and exuberant irrationality.

Thankfully the entire neo-con, unfettered free market, trickle down economic regime is crashing and burning after a long and bruising binge… while also leaving a hangover that has created a monumental headache for the world.

Europe is closer to getting the message than the US. When the former bought stakes in tottering banks they took voting power, in some cases, voting control of the institutions. America purposely took no voting rights: I guess that would be too much like socialism to take control over institutions that you’ve just showered with Joe Sixpack’s money. Bush and the Democratic Congress wanted to preserve the ‘Free Market’.

The American economy is going to languish in the doldrums for a long time. I’m hoping against hope it’ll emerge in an entirely new and sustainable context. With oil prices hitting rock bottom this is our last chance to convert at a reasonable cost. Petroleum won’t stay cheap for long. World population is growing along with their aspirations. If China’s growth slows to half last year’s pace there’ll still be millions of new cars on their roads every year. Electricity demand in lowly Cambodia, currently supplied 90% by fossil fuel, is growing at 25% a year in spite of 80% of its people not even being connected yet.

There’ll need to be massive New Deal type public works programs and welfare – that dirty word - for the destitute and people simply experiencing hard times. There’ll need to be a sharing of available private-sector jobs else unemployment really will approach Depression era levels. There’ll need to be publicly financed mortgages for low income people. And there’ll need to be higher taxes on everyone but the poorest else public debt become an unsustainable burden and public works be impossible to finance. Let’s not forget that America experienced some of its most prosperous times during the fifties and sixties when income tax rates on the wealthy stood at 91%.

As most of you reading this I’m hopeful that Obama will rise to the occasion. That he will bring the country together in a way that takes the hardest edge off of hardscrabble times. In no manner will it be easy, but at least he won’t emulate Hoover saying giving food to hungry Americans will hurt their self-reliance.

For certain, dynamic and fascinating times are ahead.

Wednesday, October 15, 2008

Slavering at the Public Coffers

In the latest twist to the sordid saga of hat-in-hand bankers slavering at the public coffers, central banks in England, France and Germany, for starters, are now guaranteeing loans between banks. According to conventional economic wisdom - the very same ‘wisdom’ that got us into this mess, I might add – if banks can’t lend to each other, they won’t have the money to lend to Average Joe, or his corner candy store, so he and small business, will, in turn, suffer.

There’s good reason they won’t lend to each other; they’re deathly afraid of not getting paid back since they know how many of their compatriots are teetering at the brink of the chasm. If that’s the case, and we undoubtedly know it is, then the governments involved may be liable for immense losses. This also may encourage the banks - not noted for being prudent or responsible - to borrow recklessly, knowing Joe will foot the bill in case of default.

This all brings me back to the question: Then what the hell are they doing with my deposits? That isn’t money to lend? Well, best I can make of it, econ 101 style, is that to maximize profits money has to be constantly in use; no idle times are allowed. As a result, capital needs are calculated down to the minute, so they essentially need emergency loans the get through many a day. They may also have more business than they have capital for so borrow from other banks to maximize their portfolios.

So what if they can’t lend to each other. That will not have any impact on their solvency, only their profitability. They simply won’t have as much to lend and people will have to wait a bit or defer their borrowing. All of which brings this down to the second question: What’s the big deal if Joe has to save the money to buy that 60” digital TV? Or wait till he has a substantial down payment before he can buy a new car? Is that suffering? He’s already drowning in tidal waves of high interest, credit card debt. And it does, after all, cost a lot more when bought on credit.

As for small business, banks are not the only source of working capital. It would seem to me that anyone with a viable company ought to be able to get private short-term money to tide them over cash flow problems. If they have to cut back temporarily, well, nearly everybody will so no great hardship.

The endless growth machine is not going to be jump-started or even restarted and besides, it is long past time for a paradigm shift. The world is drowning in pollution from excessive consumption. It wouldn’t hurt a bit for Americans, for only one nation of many, to retrench and start saving for the things they want.

Ah but the frantic scrambling on the part of governments to bail the banks is also designed to “calm” and “provide stability” to the markets. Now that a majority of Americans, when Investment Retirement Accounts are included, own stocks, it becomes a government priority to prop up the stock markets.

But stock markets, however much we hope and pray and cross our fingers that they will always go up, are not supposed to be propped up. They are supposed to represent true value. In an overpriced market we should be applauding, and playing happy music when markets go down, not when they go up.

Latest word is the US treasury is going to take stakes in nine major US banks including the likes of Citibank and Bank of America. The list also includes Morgan Stanley, et al, latter day Mom and Pop banks which in their previous incarnation were investment banks designed exclusively to help the wealthy play with their money. Once they realized how bankrupt they were they begged the Fed to make them just like your average, corner, small town bank and thus be able to join the banker bread line when the public money started to flow.

It should be mentioned that banks were not allowed to cross state borders as late as the sixties. Moreover, banks in Manhattan were not even allowed in other parts of New York state. It was a mistake to let banks expand so exponentially and become so large. Local banks will survive this crisis in far better shape than their multinational counterparts. Maybe once those giant banks are nationalized they should be broken up into smaller units; in this case, able to serve the real needs of the economy rather than concentrate on lascivious speculation.

Once you go down the path of nationalizing banks you also own the bank’s bad debts. In this case, we could be talking about liabilities of catastrophic proportions. As mentioned previously, while the total housing market totals about 10 trillion dollars, the market in derivatives based on that market is 45 trillion dollars. Derivates have no direct connection to the real world they are based on, they are simply bets on what the real world will do. And housing is only a small part of the derivatives market.

Liabilities to the public could be nation bankrupting, as is happening in Iceland, whose banks brought in large amounts of money from around the world to bet on these toxic and inscrutable financial instruments.

There is one good that can come of public ownership of the banks: The public can dictate lending policy. If it deems low income housing important, it’ll get built. Today that money may well go to financing sweat shops in China.

The silver lining, however, will come at a very high price.

Monday, October 13, 2008

The Financial World is Going to Shit Before Our Very Eyes

And it’s all happening so fast. A spark ignited in the US has turned into a world-engulfing wildfire. I was surprised at the ferocity at which it attacked European banks, who I assumed were less insanely greedy while subject to greater public restraint, but it seems they either bought into America’s toxic assets directly or copied the same shenanigans. They’ve also been hit with declining property markets – 16 of the world’s developed nations still have overvalued real estate – resulting in far less equity than they had assumed and the need to hoard resources.

Rising property values create a lot of ready cash. Until the financial system recently began to unravel, largely from declining real estate values, Americans kept their economy humming by borrowing vast amounts of cash against their properties – many of which now have mortgages greater than their house’s value. It would seem totally legitimate to borrow against equity in order to make long-lasting improvements to the house, but a lot of people essentially took out 30 year mortgages for purchases like luxury vehicles that they expected to have a less than a decade lifespan. About five percent of all property changes hands each year so a lot of money is also created simply through a rising market.

Well now, that money spigot has completely dried up. And you can bet that even when the mortgage money does starts to flow again, borrowers will have to come up with hefty down payments; which is exactly as it should be. Obviously, it has ominous portents for the real economy, since Americans will have to live within their means and actually save to be able to consume. While some will say this retrenchment couldn’t come at a worse time, it’s never fun to pay off old debts or cut back on the “Good Life”.

One way or another recession, or the scary “d” word, depression is inevitable. The capitalists are manically, frantically rushing around trying to save their asses with public money, but while they may stave off paralysis or bankruptcy in the banking system, nothing is going to change the fundamentals: the old economy is screwed and finished.

The credit system is currently frozen, banks aren’t lending to each other because they don’t trust each other, they’re afraid they won’t be paid back. However, after six months maybe a year, the money will start to move again and a new economy created from the ashes of the old. Certainly, there’s no way it can ever be the same, at least not for generations.

Thankfully, the US Treasury is moving toward purchasing stakes in troubled banks, as the UK is planning to do, rather than carelessly throwing money at them. As long as they are in some way nationalized people will not fear for their deposits. That should keep most from going under which in the end would cost a lot more than keeping them alive.

Every day it seems a new rescue plan is announced which is supposed to restore confidence in the markets. Each one is touted as the magic bullet that will bring stability and the speedy return of growth and prosperity. Forget it: pure wishful thinking.

The one thing, above all, that needs to change is the endless growth mindset. The entire world economic system is in thrall to a theoretical impossibility. It is unadulterated fantasy which cannot possibly outlive reality. By any sustainable standard, people in the developed world, but especially Americans, have been consuming far too much. Now’s the perfect opportunity to give the planet a rest, to develop an economic philosophy capable of providing a comfortable, if much less profligate, lifestyle.

While I applaud this calamitous economic correction, I don’t in any way wish to downplay its significance for the lower rungs of society: this is going to hurt. But the poor have always suffered, so they will take it in their stride. They haven’t even had more than the barest representation in government for a long time: What politician would ever propose a War on Poverty today? Yet that will be their biggest challenge in the coming years. Increased unemployment benefits, food stamps, general welfare, make work programs: the new New Deal is inevitable.

Meanwhile, even according to a former community organizer, soon to be our next president, the middle class now goes all the way up to $250,000 per year – and need a tax cut in the midst of spectacular deficits. They won’t suffer in the same way but they sure will have their dreams and aspirations severely truncated, not to mention have difficulty supporting their mcmansions and long distance gas-guzzler commutes.

Falling energy prices will provide a little respite but not for long. Within a year or two, China, India and other developing world economies, which will continue to barrel ahead, albeit a bit more slowly, will replace the demand that’s currently dropping in the developed economies. It’s still a finite resource in an expanding world; a world in which growth-forever economics will remain the Gospel.

All in all, it’ll be fun to watch.

Thursday, October 2, 2008

Repugs Save the Day

I thought they were good for nothing, but here they’ve saved the Dems from their congenitally capitulative need to worship at the feet of the Bush.

Leading Democrat David Obey, in reference to the Repugs failure to back the bailout, summed up the problem thusly, “these guys would rather lose an economy than lose an election”. Within that little statement is a grand assumption – that the $700 billion will actually do the job – and a slap at Democracy – signifying how far the Dems have gotten from the real world.

Legislators are receiving mail against the giveaway in a ratio of 200:1 and higher. They could try to justify their vote against the wishes of their constituents by saying they are just citizens and really don’t know what’s good for them. They might also try to pass off their vote in favor by saying that Wall Street knows best what’s good for Wall Street: absolutely true and the very reason why the people are so solidly and vociferously against this plan.

The plan, after all, comes from Henry Paulson, former CEO of Goldman Sachs who earned hundreds of millions during his tenure there. Of course he would look at the health of Wall Street first. Where has he been while millions have been losing their homes? Or the Dems for that matter? The most they could come up with was a mortgage relief plan limited to helping a mere 5% of people facing foreclosure.

Ah but this is different, this is an emergency, a calamity waiting to happen and a bill must be passed ipso facto or the economy will grind to a halt and the taxpayer will suffer. Speaker of the House Nancy Pelosi tried to make it sound like the bill was designed to protect the taxpayer. Now I know that politics is all about spin and hype and bluster but that was risible: Borrowing $700 billion from the Chinese to give to the same fat cats who created this mess in the first place is all about Joe Taxpayer.

As far as saving the economy, the bailout is a total crap shoot, a Hail Mary pass with no grounding in reality. The $700 billion number was pulled out of a hat. They didn’t want to ask for anything less because it would have had a negligible effect. They couldn’t ask for a trillion, that would’ve boggled the mind.

If the legislation does pass it will be good money after bad: the toxic assets causing the problem are far in excess of the bailout number. Consider, while the total housing mortgage market is about $10 trillion, the derivative market based on housing is $45 trillion. How can that be? you ask. Well, it can’t, not in the real world, not in a financial system that actually made sense.

I’m not going to try to get into a long winded explanation of what derivatives are, except to say that they represent pure speculation: ultimately no different than casino gambling. To society they have no redeeming value. They are a means for high flying banks and hedge funds to play with money - the spectacular amount of money that’s been thrown at them through 30 years of neo-con policies of feed the rich.

The bigger problem than saving Wall Street’s ass is fixing the property market. If it isn’t stabilized first, the value of those assets is going to continue to tumble. And continue to bring down the system. If we take care of the little people then the banking system can begin to repair itself. If it seizes up, it won’t stay that way for long. If credit rules are tightened up as a result, then it’s about time. For a generation the American economy has been based on compulsive consumption by borrowing from the future. Any Econ 101 student will tell you that is not sustainable.

The Senate has just approved a tweaked version of the bailout rejected by the House. It includes raising deposit insurance from $100,000 to $250,000. I don’t know how stupid you can get to have more than $100,000 in one institution, but if you’ve got money in the bank then you deserve to get protection for your stupidity. On the other hand, if you are being kicked out of your house, whether through your own stupidity or the mendacity of mortgage lenders, well, in a free market there are winners and losers.

The revised bill also includes tax breaks for small business and the middle class. Great. We’re adding a trillion dollars to the national debt, so what we need is tax breaks for people who are already doing well, or at least well enough. How about a small transaction tax to help pay for the bailout and curb the rampant speculation that got us into this fix in the first place? Not a chance, Wall Street wouldn’t like that. How about a ban on derivatives, short selling and other market gambling, or at a minimum, a firm statement to the effect that institutions that indulge in such speculation are absolutely excluded from future government help?

No way. This is about feeding the rich, a easy purpose to accomplish. As for saving the economy, ostensibly the reason for this corporate welfare plan, if it does pass the House, look for a temporary uptick in the stock market and a bit less fear and panic, but don’t imagine that it’s actually going to solve any fundamental dysfunction in the system. At most, it’ll be a temporary respite in a long downward slide.

It took 25 years after the 1929 crash for the stock market to return to its former level. That’s what it’s going to take to fix the American economy and bring personal and public debt down to reasonable levels.