I have been carefully reading the Wall Street Journal as well as the CounterPunch coverage of these issues since mid-summer 2007, supplemented by Doug Noland’s postings, Doug Henwood’s Left Business Observer and other sources. I have reached the limit of the time I can give to it, but still don’t feel I understand some of the basics; so what must Americans with more limited time and information resources be thinking, & going through? It would be enormously useful, to some extent but by no means solely in connection with the current presidential campaign, to have a short narrative to explain to non-experts just what has been and is going down and present alternatives, both to ameliorate the harm to individuals and households and to minimize the severity and duration of the recession/Depression now underway.

As I write, it’s unclear, at least to me, whether the steps taken recently by the Fed and others may have headed off the worst-case scenario they were designed to address, the immediate continuation of the cascading crisis; was the reflation successful, at least in its own terms? Doug Noland thinks it has bought some time, and that the ultimate cataclysm will be worse.

Whether it "works" or not, Michael Hudson (and others) have written that what the feds have done is a trillion-dollar giveaway to Wall Street; that the “system” the trillion-dollar bailout may have saved is only the money-making system of private entities, not a financial structure whose survival is of more general concern; and more generally, regarding the looming battle over whether and how to impose regulation on the presently unregulated financial system that at the very least, led us to the brink of serious disaster, that there is no such thing as an unregulated economy, because the economy will be regulated either by public or by private power (the implication I take from this being, so why not at least try to regulate it in the public interest?). See Michael Hudson, Nothing for Families and Retirees: A Trillion-Dollar Rescue for Wall Street Gamblers (April 14, 2008), and "Packaging deregulation as new, more efficient regulation," part two of his Resurrecting Greenspan: Hillary Joins the Vast, Rightwing Financial Conspiracy (April 17, 2008).

To my knowledge, the mainstream media have been little or no help and appear to have made their usual contributions to mis- and dis-information. Here is my own most recent attempt to summarize the issues briefly:

Right now what is being done in Washington DC and proposed on the campaign trail has been called either an outright gift to Wall Street (the Paulson proposals and the Fed’s actions) or ameliorative projects unlikely to do much good (the best of the Democratic proposals including the stimulus package).

The situation is complex, and as I see it has two main dimensions: the so-called credit crunch that hit bigtime last summer and that has been playing out on Wall Street ever since, and the decimation of the underlying real economy that is an even more fundamental problem and contributes to making the prevention of a long and deep recession, or worse, so difficult. My “Imminent Intersecting Crises” draft (attached) leaves off in mid-January but explains much of the basics, and much of what is missing has been front-page news, such as the Bear Stearns near-implosion and the various proposals to prevent a total system meltdown (though I think I agree with Michael Hudson that the latter are essentially gifts to Wall Street that relate to Main Street only in placing a trillion dollars of our money at risk).

Bottom line, the Bernanke actions (basically allocating a trillion dollars to bail out Wall Street), the Bush-Congressional stimulus package, etc., appear for the moment as if they might just head off meltdown of the financial system and a long and deep recession, or worse; but for reasons outlined here, I’m pessimistic (and so, of course, is Doug Noland, who said recently he thought the stage has simply been set for Stage Two; he has new postings every Friday night so far). I understand Noland has been called a pessimist, but he marshalls considerable data (and perspectives from the global business press, e.g., Financial Times of London) as background to his views.

Where to begin? The problem has many dimensions but they all are so interrelated as to seem a seamless web. So maybe starting anywhere is as good as anywhere else, and will lead to the full picture.

For example, there was a sharp reaction to the recent announcement of GE’s earnings. “GE’s Surprise Sends Dow Off 256.56 Points” and “GE’s Results Pull Plug on Wall Street” were the headlines of the page 1 article in the 4/12-13/08 (Weekend edition) Wall Street Journal. “GE’s results ... raised doubts about Wall Street’s belief that big, multinational conglomerates are shielded from a U.S. slowdown by strength in overseas markets. GE’s international results were strong, but not enough to offset problems in the U.S. The news slammed other Dow multinationals such as 3M and United Technologies.

"It’s evidence that you can’t offset declining U.S. earnings by having operations in the rest of the world,’ said Sherry Cooper, global economic strategist at BMO Financial Group. "Analysts unaccustomed to being surprised by the industrial, financial and media conglomerate were rattled by the magnitude and breadth of the decline.” Eugene, Oregon Register-Guard, 4/12/08, p. D5.

Those statements caught my eye because they suggest turning the U.S. into a Third World country, as the multinationals have been doing with the so-called FTAs (“Free [sic: Unfair] Trade Agreements”) like NAFTA, CAFTA, the new proposed deal with Colombia and the rest, has not turned out to be good for business. In bygone days it was considered essential to maintain a strong middle class so as to have a market for goods and services. Henry Ford said he wanted to pay his workers enough so they could afford to buy one of his cars. More recently, I think at least some thinking has been that as markets develop in other countries, they can compensate for declining markets in the U.S. caused by the decline of the middle class here.

Better results from other multinationals in the following couple of days turned Wall Street back into a herd of optimists again for the moment. Then the WSJ wrote of some big companies that appear for the moment to be riding out the storm by virtue of sales to other companies or business outside the U.S. Either way, the working and middle classes have been under serious pressure for some time and their/our living standards now appear to be poised for decline.

The conventional wisdom is that we’re entering a recession and we need to revive the economy. My concern is that the underlying real economy is in dire straits due to the decline of manufacturing, the shift to service jobs with less income and benefits, and the increasing scarcity of jobs in general, all augmented by the FTAs. I’m afraid this is so whether it turns out that at least for the moment, some U.S. multinationals can still make enough profits overseas to compensate for the domestic shortfall, or the GE experience turns out to be the norm so that the decline of the domestic middle class is bad for big business, as well as people, after all.

Real wages have been stagnating or declining for decades, ever since the business offensive that followed the Vietnam War era began decimating unions and tax policy began to accelerate and exacerbate the concentration of wealth and income at the top (especially the very top). The resulting inequality has grown to staggering dimensions, and is an important part of the story. Recent attempts to head off recession by decreasing interest rates and similar maneuvers have had at least temporary and limited success, but the economy remains fragile both because people are too deep in debt and because the real economy that such measures seek to revive has been undermined by the decline of the manufacturing base and with it, the middle class.

Working families tried to compensate for declining real wages, first by working longer hours and then by having more women enter the workforce (with negative results for children and families, which is not to say that only women should raise kids; but kids do better with the attention of at least one parent than without any). More recently, as those ploys played out and people continued finding it ever harder to keep up, working families sought to maintain their lifestyle with debt: mortgages and successive refinancings and home equity loans; they’re now moving through home-equity lines of credit and maxing out their credit cards.

"While tighter lending standards have cut off all but the most credit-worthy borrowers from auto loans and home loans, many people are turning to credit cards and home-equity lines of credit to dig themselves in deeper. Major credit bureaus ... say their own analyses of credit files show that more consumers are turning to credit cards.... [T]otal credit-card balances increased 4.8% in the fourth quarter to $1,694 per user from the third quarter—more than double the growth [of] prior years over the same period—with the steepest increases in states that have been hit hard by the credit crisis, such as Florida, Nevada and California." Wall Street Journal, 4/10/08.

The impact on the economy of the "trade" deals that have outsourced U.S. jobs is told with persuasive numbers by Paul Craig Roberts, assistant Treasury secretary in the Reagan administration, in several articles on the CounterPunch website. See, e.g., his Government Is The Largest Employer: The Fading American Economy (April 8, 2008) and American Economy: R.I.P (September 12, 2007).

There are stories that the Democrats may be willing to compromise on the Colombia FTA in return for funds for job retraining for workers displaced by the deal. But such retraining is beside the point when there are no jobs for those workers. The U.S. has become a services economy, with not enough capital and workers making things anymore. Our manufacturing base has been substantially dismantled, with family-wage jobs being replaced by lower-paying service jobs without comparable benefits.

That and the inequality between increasingly super-rich and increasingly impoverished are much of what I mean by the Third Worldization of the United States, in process and already considerably far along. For further background on how the so-called free trade agreements have undermined American workers and the U.S. economy, see many other articles by Mr. Roberts on the CounterPunch website, and for a very brief broader outline of the issues, see Mark Engler, The Broken Promises of Neoliberalism: Trade Politics and the Battle for the Soul of the Democratic Party (April 24, 2008), excerpted from Engler’s book, How to Rule the World: The Coming Battle Over the Global Economy, new last month from Nation Books.

Of course the impact of the agreements goes beyond economics. U.S. Rep. Peter DeFazio has been a consistent opponent of the FTAs and his press releases are one quick source of background; others include Public Citizen’s Trade Watch; and see, e.g., David Macaray, Memo to the Clinton Campaign: They Are Still Murdering Labor Unionists In Colombia (April 22, 2008); US Labor and Education in the Americas Project, https://usleap.org; and MADRE, The U.S. Colombia Unfair Trade Agreement: Just Say No (April 2, 2008).

Other recent articles analyze the Paulson-Bernanke actions and proposals, and/or propose more constructive possibilities. The old regulatory system put in place after the last Depression was finally dismantled with the repeal of Glass-Steagall by the Clinton administration. Reregulation seems to be clearly called for and it appears the Paulson program is an attempt to head that off. "Too Big To Bail: The Fed’s Wall Street Dilemma (March 17, 2008) by Pam Martens, who worked for 21 years on Wall Street, contains useful analysis and proposals for reform.

Others have appeared in Dollars & Sense and other periodicals. One way of looking at what’s happened recently is that the Fed has substantially nationalized, or socialized, a trillion dollars’ worth of credit and risk without so much as a by-your-leave to Congress (and without so much as a peep from Congress, last I heard). If we’re all going to be on the hook for Wall Street’s losses, it’s hard to see why we shouldn’t also call some of the tunes, have the option of turning down the volume, and in other ways influence the rules of the casino whose activities affect us so directly.

Herewith some further tidbits, culled from Doug Noland’s Credit Bubble Bulletin:

April 17 - Forbes (Joshua Zumbrun and Maurna Desmond): “Touted as a savior in the housing crisis by Congress and the White House, the Federal Housing Administration is being turned into a bank’s best friend. Major U.S. lenders are again aggressively enticing risky borrowers, offering FHA-backed mortgages with attractive terms and as little as 3% down. Meanwhile, the agency watches as its liabilities balloon. As a result, the nation’s mortgage market is quietly undergoing a radical and potentially risky transformation that shifts liability for hundreds of billions of dollars on to the government’s books… Bill Glavin, special assistant to FHA Commissioner Brian Montgomery, says the FHA has been ‘inundated’ with requests by business-strapped banks to become FHA-certified lenders. He expects the FHA to increase loan volume by 168.2% in fiscal year 2008 (ended September 30), insuring 1.14 million loans, up from 425,000 in 2007. The agency expects to guarantee $224 billion worth of loans in 2008. On Thursday, Ginnie Mae--a government-owned company with more than two-thirds of its securities portfolio comprised of FHA-backed loans--announced a 114% surge in volume. They issued $39.1 billion in the first quarter of 2008, up from $18.3 billion during the same period last year. The company also expects its total portfolio of outstanding securities to grow to more than $600 billion by the end of the year, reflecting a 35.2% increase…”

April 15 – Financial Times (Aline van Duyn): “The US government’s need to provide financial backing to the state-sponsored mortgage financiers that dominate the US housing market could pose a risk to the country’s triple-A credit rating, Standard & Poor’s, the credit rating agency, said… In the event of a deep and prolonged US recession, S&P said the potential costs of propping up government-sponsored enterprises like Fannie Mae and Freddie Mac, which have implicit government backing, could cost the US government up to 10% of GDP. The costs of supporting broker-dealers like Bear Stearns in a dire economic situation would be much lower, at below 3% of GDP, S&P said. ‘The size of GSEs, coupled with their current level of common equity, could create a material fiscal burden to the government that would lead to downward pressure on its rating,’ the S&P report said… Policymakers are pushing for Fannie Mae, and Freddie Mac and the lesser-known Federal Home Loan Banks to pump liquidity into the US mortgage market… In the second half of 2007, about 90% of new mortgage funding was provided by GSEs. They have about $6,300bn of public debt and mortgage securities outstanding, more than the $5,100bn of outstanding US government debt. Fannie Mae and Freddie Mac have no formal state guarantees but investors believe the US government would step in if the system got into trouble. This allows the agencies to raise funds at very low rates…in spite of high levels of leverage.”

April 8 – Financial Times (John Plender): “Income inequality in the US is at its highest since that most doom-laden of years: 1929. Throughout the main English-speaking economies, earnings disparities have reached extremes not seen since the age of The Great Gatsby. Much like this decade, the 1920s were a period of strong corporate profits growth and increasing household debt. Awash with easy money, Wall Street became hooked on what the economist J.K. Galbraith in that subsequent seminal work on the period - The Great Crash - called ‘the magic of leverage’: the ability to increase returns through borrowing. Investment trusts provided the vehicle for this financial merry-go-round, in which one investment trust would ‘sponsor’ another investment trust, which would in turn sponsor a further investment trust. This paper-shuffling multiplication of risk bears a remarkable resemblance to the slicing and dicing of risk in highly leveraged structured credit markets today. In the 1930s, it ended with bank failures and the Great Depression. Now, after decades of ‘financialisation’ in the US and other Anglophone economies, whereby financial services have increased their share of gross domestic product, banks are being bailed out - using public money - in an effort to ensure the same does not happen again. From a political perspective the notable feature of the inegalitarian, free-market era that began in the 1980s is how little backlash there has been against the stagnation of ordinary people’s earnings… Yet there are signs that the mix of policies and economic circumstances that gave a protracted laisser-passer to the rich and to business is coming to an end. This is potentially dangerous territory.”

April 9 – Bloomberg (Courtney Schlisserman): “The difference in incomes between the richest and poorest U.S. families has widened since 1998 as unemployment failed to decline to prior lows and tax cuts benefited the wealthy, a private study showed. Average incomes for the bottom fifth, adjusted for inflation, dropped 2.5% in the eight years that ended in 2006, compared with a 9.1% gain for the top group, according to…the Economic Policy Institute…”

April 15 – Financial Times (Krishna Guha): “The credit crisis represents nothing less than a loss of confidence in the financial system, Federal Reserve governor Kevin Warsh said yesterday, warning that the healing process ‘is unlikely to be swift or smooth’. ‘Market participants now seem to be questioning the financial architecture itself,’ he said. The fragility in short-term credit markets was ‘a manifestation of that loss of confidence’… He warned ‘public liquidity is an imperfect substitute for private liquidity’. The markets would return to normal only when private sector institutions were willing again to lend each other money and make markets in financial securities.”

April 15 – Bloomberg (Dan Levy): “U.S. foreclosure filings jumped 57% and bank repossessions more than doubled in March from a year earlier as adjustable mortgages increased and more owners gave up their homes to lenders. More than 234,000 properties were in some stage of foreclosure, or one in every 538 U.S. households…RealtyTrac…said… Nevada, California and Florida had the highest foreclosure rates. Filings rose 5% from February. About $460 billion of adjustable-rate loans are scheduled to reset this year… Auction notices rose 32% from a year ago, a sign that more defaulting homeowners are ‘simply walking away and deeding their properties back to the foreclosing lender’ rather than letting the home be auctioned, RealtyTrac Chief Executive Officer James Saccacio said…”

April 13 – Financial Times (Chris Giles and Krishna Guha): “The subprime mortgage debacle was not a unique problem for the global economy but just one of many points at which an unsustainable global economic system could have shattered, Tommaso Padoa-Schioppa, Italy’s finance minister, told the Financial Times. …Mr Padoa-Schioppa insisted that the path of global economic growth had been unsustainable and the US was unlikely to be the main motor for growth over the coming decade. ‘If we think that solving, or emerging from, the crisis means going back to the configuration of growth before the crisis, we would be making a mistake because we were on an unsustainable path,” he said. Linking the subprime crisis to global imbalances that built up in years of low interest rates, high US consumer spending, lax lending standards and enormous trade deficits, Mr Padoa-Schioppa believes it is time to remind everyone that solving the present credit crisis will not solve the world’s economic problems. ‘We have been saying for years that an economy that has stopped generating savings needs a fundamental correction and it has taken the form of the subprime crisis…”

April 16 – Bloomberg (Abigail Moses): “The $62 trillion market for credit derivatives needs regulating to prevent a ‘calamitous chain’ of market failures, Credit Suisse Group’s head of investment banking, Paul Calello, said at the industry’s biggest gathering. ‘All sectors of the financial system need to act -- both regulators and industry,’ Calello told the International Swaps and Derivatives Association conference… ‘There will be new regulation, and there should be; voluntary efforts are not enough.’”


For more on a wide array of other topics, please visit the oftwominds.com weblog.