DEPRESSION CLOAKS U. S.
Why mince words? The U. S. is in economic depression. Real unemployment is 22%, if not higher – more than twice the 9.6% alleged by the Bureau of Labor Statistics. Depression is here, and threatens to get worse in 2011 after tax increases and possible additional hurtful actions by ruling elite. Official denial is less justifiable now than in 1931.
Symptoms Worsen; Causes Persist
By Wayne Jett © September 8, 2010
2008 Versus 1929
The Crisis of 2008 has been far more traumatic for the nation than was the Crash of 1929. In 1929, stock and bond markets crashed sharply (48% on the Dow Industrials between September 3 and November 13, with most of the fall after October 21) before rallying weakly to year-end. But no major financial institution failed in 1929 and neither the Federal Reserve nor the U. S. Treasury was financially impaired.
Contrast 1929 with events which climaxed in October, 2008:
• collapse of U. S. housing industry commencing 2006
• collapse of the private home mortgage industry commencing 2007
• pressured by U. S. Treasury, Bear Stearns (fifth-largest U. S. investment bank) merged into J. P. Morgan Chase at liquidation price with financing/guarantees by Federal Reserve
• IndyMac (largest Los Angeles savings and loan, and seventh largest mortgage originator) seized by federal regulator and liquidated
• Fannie Mae and Freddie Mac (two multi-trillion-dollar government sponsored enterprises) seized by federal regulator and put in conservatorship with capital injected by Treasury
• Lehman Bros. (fourth-largest U. S. investment bank) filed largest bankruptcy in U. S. history
• Federal Reserve and U. S. Treasury seize world’s largest insurance company, AIG, guarantee its obligations and advance funds reaching $185 billion
• Merrill Lynch (third largest U. S. investment bank) merged into Bank of America to avoid insolvency
• Washington Mutual (largest U. S. savings and loan bank) seized by federal regulator and sold to J. P. Morgan Chase at liquidation price, again with financing and guarantees by Federal Reserve
• Wachovia Bank (fourth largest bank in terms of assets and third largest stock broker) ordered by FDIC to enter negotiations for buy-out by Citigroup, but accepted higher offer by Wells Fargo
• global economic growth collapsed as crude oil reached $147 per barrel and gasoline/diesel fuels topped $4 per gallon
• Treasury secretary Henry Paulson warned president and Congress global financial collapse required $700 billion to buy “troubled assets” and save homes from foreclosure, then invested funds in Wall Street banks
• private commercial paper market froze, Federal Reserve took over, bought $300 billion
• auto sales collapsed, three U. S. auto manufacturers declared crisis, requested federal aid to avoid bankruptcy, and two (General Motors and Chrysler) accepted emergency funds and federal control
Mere listing of these events blows away reluctance to treat the present crisis as below the historical significance of 1929. More recent events have made 2010 worse than 1931.
Two Years After
The Crash of 1929 occurred in Herbert Hoover’s first year as president. Hoover did nothing to stop financial fraud in the stock markets, signed the Smoot-Hawley Tariff Act into law in 1930, and then signed the largest tax increase in history in 1932. Unemployment approached 25% by year-end 1931 (two years after the Crash) and rose in 1932 as Franklin Roosevelt was elected by landslide.
Officially stated unemployment now is 9.6%. But, since the Clinton administration, anyone out of work longer than 12 months is not counted (they don’t want a job any longer). Add those people back in and the jobless rate is 22% - and rising, tracking the “great” depression pretty closely in this respect. Young workers trying to enter the work force for the first time likely remain uncounted because they have never been on a payroll and do not qualify for jobless benefits. Add self-employed persons with no work or income because customers evaporated and, almost certainly, unemployment exceeds 25% even now.
The Crisis of 2008 reached its climax in September and October, driving election of Barack Obama as U. S. president on November 4. Obama's declared support for higher tax rates and for universal health care steepened the economic downturn as his election became imminent, even before inauguration. During 2008 and not yet two years since, the Federal Reserve has created by far its largest and weakest balance sheet in history. The dollar has fallen to its lowest value relative to gold in history. Treasury has borrowed $3 trillion for deficit spending in two fiscal years.
Other nations rightly worry about holding Treasury securities as financial reserves. China reportedly wants to exchange $1 trillion in Treasuries for corporate equities now owned by Treasury (AIG, General Motors, Citigroup, and who else?). Treasury securities are in such disrepute within China’s leadership that false rumors spread of defection by a People’s Bank of China governor who supported investments in Treasuries. Though the rumors of defection were false, their occurrence assures Governor Zhou will ponder carefully before lending more money to the U. S. Treasury.
The U. S. government and the private-owned central bank, the Federal Reserve, are financially weaker than at any time in history. Their weakness was engendered by creating, borrowing and spending trillions of dollars to benefit the ruling elite of the U. S., Europe and Japan. Neither the Fed nor the federal government has done anything to address fundamental causes of the U. S. economic collapse, so real recovery remains impossible. The false recovery touted by so many was no more than numbers created by Fed and Treasury spending so wasteful and corrupt it is aptly called looting.
Conditions for Turnaround
Here is what must be done to enable real economic growth to resume:
• Stop manipulation and fraud in securities and energy trading
• Stabilize federal tax rates no higher than at 2008, and repeal all new taxes (they are substantial)
• Return federal spending to pre-crisis levels immediately, and repeal unspent “stimulus” appropriations
• Revoke Fed and FDIC implicit warnings to banks against lending to small business, and desist consolidation of small banks
Progress on the last three items is possible due to the approaching federal elections, but the first and most important (financial fraud) seems almost invulnerable.
Wall Street succeeded in diverting financial regulatory reform from its fraudulent profit centers, thanks to Democratic majority leadership and Republican filibuster votes. Banks will not lend and corporations will not invest capital when their access to financial markets is cut off by wholesale counterfeiting of their own shares. This remains the scandalous reality of U. S. financial markets today, where even financial insiders occasionally declare “the market … has degenerated into a joke.”
High-frequency-trading by computers which front-run every buy and sell order –out-bidding others by one-hundredths of a cent and “stuffing” the market with false bids to slow competition – is only the most talked about problem. Naked short selling remains a tool (both in HFT and otherwise) for driving down share prices of target companies. The targets may be destroyed or may be bought by “private equity funds.” In either case, naked short sellers win big. In such a market, sooner or later, trading skills and “private equity” were bound to be combined under the same roof. Note KKR’s bid for proprietary traders being spun off by Goldman Sachs.
The Federal Reserve intentionally increased unemployment in 2006-2008 and then enriched favored Wall Street banks in 2008 while jobless Americans lost their homes to foreclosure. Chairman Bernanke recently pledged to rescue the economy if “recovery” falters, but this means nothing if (as now) the ruling elite do not want recovery. Signs presently are they want no recovery, though they will try to convince the public otherwise before the election.
Keynesian economists obfuscate so well (see Paul Krugman’s frequent demands for more stimulus spending) even relatively clear-eyed Englishmen who reject such waste of resources are tricked into thinking U. S. economic deliverance can be bought with dollar devaluation (as if it has not been done in excess already). Financial insider Jim Rickard’s “golden bullet” idea that the Fed should buy gold until the price hits $2,000/oz so Americans will “dump dollars,” thus creating demand, proves truly bad thinking is available within America’s own shores. Bill Gross of PIMCO suggests lower down-payments for homes, though signs of housing recovery remain dismal.
Stop-gap fixes do no good, and do harm when they waste money, because basic policies put the nation into economic depression and those policies are being kept in place by the ruling elite. Reform and recovery will occur only if the working, productive class elects representatives with strength to overcome ruling class domination of political leadership. ~