Retail sales fell in
March as soaring job losses and tighter credit conditions forced consumers to
cut back sharply on discretionary spending.
Nearly every sector
saw declines including electronics, restaurants, furniture, sporting goods and
building materials. Auto sales continued their historic nosedive despite
aggressive promotions on new vehicles and $13 billion of aid from the federal
government. The crash in housing, which began in July 2006, accelerated on the
downside in March, falling 19 percent year-over-year, signaling more pain
ahead. Mortgage defaults are rising and foreclosures in 2009 are estimated to
be in the 2.1 million range, an uptick of 400,000 from 2008. Consumer spending
is down, housing is in a shambles, and industrial output dropped at an annual
rate of 20 percent, the largest quarterly decrease since VE Day. The system-wide
contraction continues unabated with no sign of letting up.
Conditions in the
broader economy are now vastly different than those on Wall Street, where the
S&P 500 and the Dow Jones Industrials have rallied for five weeks straight
regaining more than 25 percent of earlier losses. Fed chief Ben Bernanke�s $13
trillion in monetary stimulus has triggered a rebound in the stock market while
Main Street continues to languish on life-support waiting for Obama�s $787
billion fiscal stimulus to kick in and compensate for falling demand and rising
unemployment. The rally on Wall Street indicates that Bernanke�s flood of
liquidity is creating a bubble in stocks since present values do not reflect
underlying conditions in the economy. The fundamentals haven�t been this bad
since the 1930s.
The financial media
is abuzz with talk of a recovery as equities inch their way higher every week.
CNBC�s Jim Cramer,
the hyperventilating ringleader of �Fast Money,� announced last week, �I am
pronouncing the depression is over.�
Cramer and his
clatter of media cheerleaders ignore the fact that every sector of the
financial system is now propped up with Fed loans and T-Bills without which the
fictive free market would collapse in a heap. For 19 months, Bernanke has kept
a steady stream of liquidity flowing from the vault at the US Treasury to the
NYSE in lower Manhattan. The Fed has recapitalized financial institutions via
its low interest rates, its multitrillion dollar lending facilities, and its
direct purchase of US sovereign debt and Fannie Mae mortgage-backed securities.
(Monetization) The Fed�s balance sheet has become a dumping ground for all
manner of toxic waste and putrid debt-instruments for which there is no active
market. When foreign central banks and investors realize that US currency is
backed by dodgy subprime collateral, there will be a run on the dollar followed
by a stampede out of US equities. Even so, Bernanke assures his critics that
�the foundations of our economy are strong.�
As for the recovery,
market analyst Edward Harrison sums it up like this: �This is a fake recovery
because the underlying systemic issues in the financial sector are being
papered over through various mechanisms designed to surreptitiously
recapitalize banks while monetary and fiscal stimulus induces a rebound before
many banks� inherent insolvency becomes a problem. This means the banking
system will remain weak even after recovery takes hold. The likely result of
the weak system will be a relapse into a depression-like circumstance once the
temporary salve of stimulus has worn off. Note that this does not preclude
stocks from large rallies or a new bull market from forming because as unsustainable
as the recovery may be, it will be a recovery nonetheless.� (Edward Harrison,
�The Fake Recovery,� Credit Writedowns)
The rally in the
stock market will not fix the banking system, slow the crash in housing,
patch-together tattered household balance sheets, repair failing industries or
reverse the precipitous decline in consumer confidence. The rising stock market
merely indicates that profit-driven speculators are back in business taking
advantage of the Fed�s lavish capital injections which are propelling equities
into the stratosphere. Meanwhile, the unemployment lines continue to swell, the
food banks continue to run dry and the homeless shelters continue to burst at
the seams. So far, $12 trillion has been pumped into the financial system while
less than $450 billion fiscal stimulus has gone to the �real� economy where
workers are struggling just to keep food on the table. The Fed�s priorities are
directed at the investor class not the average working Joe. Bernanke is trying
to keep Wall Street happy by goosing asset values with cheap capital, but the
increases to the money supply are putting more downward pressure on the dollar.
The Fed chief has also begun purchasing US Treasuries, which is the equivalent
of writing a check to oneself to cover an overdraft in one�s own account. This
is the kind of gibberish that passes as sound economic policy. The Fed is
incapable of fixing the problem because the Fed is the problem.
Last week, the
market shot up on news that Wells Fargo�s first quarter net income rose 50
percent to $3 billion, pushing the stock up 30 percent in one session. The
financial media celebrated the triumph in typical manner by congratulating
everyone on set and announcing that a market �bottom� had been reached. The
news on Wells Fargo was repeated ad nauseam for two days even though everyone
knows that the big banks are holding hundreds of billions in mortgage-backed
assets which are marked way above their true value and that gigantic losses are
forthcoming. Naturally, the skeptics were kept off-camera or lambasted by
toothy anchors as doomsayers and Cassandras. Regretably, creative accounting
and media spin can only work for so long. Eventually the banks will have to
write down their losses and raise more capital. Wells Fargo slipped the noose
this time, but next time it might not be so lucky.
Here�s how Bloomberg
sums up wells situation: �Wells Fargo & Co., the second biggest U.S. home
lender, may need $50 billion to pay back the federal government and cover loan
losses as the economic slump deepens, according to KBW Inc.�s Frederick Cannon.
�KBW expects $120
billion of �stress� losses at Wells Fargo, assuming the recession continues
through the first quarter of 2010 and unemployment reaches 12 percent, Cannon
wrote today in a report. The San Francisco-based bank may need to raise $25
billion on top of the $25 billion it owes the U.S. Treasury for the industry
bailout plan, he wrote.
scarce and we believe that much of the positive news in the preliminary results
had to do with merger accounting, revised accounting standards and mortgage
default moratoriums, rather than underlying trends,� wrote Cannon, who
downgraded the shares to �underperform� from �market perform.� �We expect
earnings and capital to be under pressure due to continued economic weakness.��
What happened to all
those nonperforming loans and garbage MBS? Did they simply vanish into the New
York ether? Could Wells� sudden good fortune have something to do with the
recent FASB changes to accounting guidelines on �mark to market� which allow
banks greater flexibility in assigning a value to their assets? Also, Judging
by the charts on the Internet, Wells appears to have the smallest �ratio of loan loss
reserves� of the four biggest banks. That�s hardly reassuring.
Paul Krugman takes
an equally skeptical view of the Wells report: �About those great numbers from
Wells Fargo. . . . remember, reported profits aren�t a hard number; they
involve a lot of assumptions. And at least some analysts are saying that the
Wells assumptions about loan losses look, um, odd. Maybe, maybe not; but you do
have to say that it would be awfully convenient for banks to sound the all
clear right now, just when the question of how tough the Obama administration
will really get is hanging in the balance.�
The banks are all
playing the same game of hide-n-seek, trying to hoodwink the public into
thinking they are in a stronger capital position than they really are. It�s
just more Wall Street chicanery papered over with vapid media propaganda. The
giant brokerage houses and the financial media are two spokes on the same wheel
gliding along in perfect harmony. Unfortunately, media fanfare and massaging
the numbers won�t pull the economy out of its downward spiral or bring about a
long-term recovery. That will take fiscal policy, jobs programs, debt relief,
mortgage writedowns and a progressive plan to rebuild the nation�s economy on a
solid foundation of productivity and regular wage increases. So far, the Obama
administration has focused all its attention and resources on the financial
system rather than working people. That won�t fix the problem.
latched on to the economy like a pit bull on a pork chop. Food and fuel prices
fell in March by 0.1 percent while unemployment continued its upward spiral
towards 10 percent. Wholesale prices fell by the most in the last 12 months
since 1950. According to MarketWatch, �Industrial production is down 13.3%
since the recession began in December 2007, the largest percentage decline
since the end of World War II.� . . . The capacity utilization rate for total
industry fell further to 69.3 percent, a historical low for this series, which
begins in 1967. (Federal Reserve) The persistent fall in housing prices (30
percent) and losses in home equity only add to deflationary pressures. The wind
is exiting the humongous credit bubble in one great gust.
Obama�s $787 billion
stimulus is too small to take up the slack in a $14 trillion per year economy
where manufacturing and industrial capacity have slipped to record lows and
unemployment is rising at 650,000 per month. High unemployment is lethal to an
economy where consumer spending is 72 percent of GDP. Without debt relief and
mortgage cram-downs, consumption will sputter and corporate profits will
continue to shrink. S&P 500 companies have already seen a 37 percent drop
in corporate profits. Unless the underlying issues of debt relief and wages are
dealt with, the present trends will persist. Growth is impossible when workers
are broke and can�t afford to buy the things they make.
The stimulus must be
increased to a size where it can do boost economic activity and create enough
jobs to get over the hump.
professor Robert Schiller makes the case for more stimulus in his Bloomberg
commentary last Tuesday: �In the Great Depression . . . the U.S. government had
a great deal of trouble maintaining its commitment to economic stimulus. �Pump-
priming� was talked about and tried, but not consistently. The Depression could
have been mostly prevented, but wasn�t. . . . In the face of a similar
Depression-era psychology today, we are in need of massive pump-priming again.
�It would be a shame
if we are so overwhelmed by anger at the unfairness of it all that we do not
take the positive measures needed to restore us to full employment. That would
not just be unfair to the U.S. taxpayer. That would be unfair to those who are
living in Hoovervilles . . . ; it would be unfair to those who are being
evicted from their homes, and can�t find new ones because they can�t find jobs.
That would be unfair to those who have to drop out of school because they, or
their parents, can�t find jobs.
�It is time to face
up to what needs to be done. The sticker shock involved will be large, but the
costs in terms of lost output of not meeting either the credit target or the
aggregate demand target will be yet larger.� (Robert Schiller, Depression Lurks
unless there�s more Stimulus, Bloomberg)
industrial production, manufacturing, retail and housing are in freefall, the
talk on Wall Street still focuses on the elusive recovery. The S&P 500
touched bottom at 666 on March 6 and has since retraced its steps to 852.
Clearly, Bernanke�s market-distorting capital injections have played a major
role in the turnabout.
Former Secretary of
Labor under Bill Clinton and economics professor at University of Cal.
Berekley, Robert Reich, explains it like this on his blog-site: �All of these
pieces of upbeat news are connected by one fact: the flood of money the Fed has
been releasing into the economy. . . . So much money is sloshing around the
economy that its price is bound to drop. And cheap money is bound to induce
some borrowing. The real question is whether this means an economic turnaround.
The answer is it doesn�t.
�Cheap money, you
may remember, got us into this mess. Six years ago, the Fed (Alan Greenspan et
al) lowered interest rates to 1 percent. . . . The large lenders did exactly
what they could be expected to do with free money -- get as much of it as
possible and then lent it out to anyone who could stand up straight (and many
who couldn�t). With no regulators looking over their shoulders, they got away
with the financial equivalent of murder.
�The only economic
fundamental that�s changed since then is that so many people got so badly
burned that the trust necessary for consumers, investors, and businesses to
repeat what they did then has vanished. . . . yes, some consumers will
refinance and use the extra money they extract from their homes to spend again.
But most will use the extra money to pay off debt and start saving again, as
they did years ago. . . .
�I admire cockeyed
optimism, and I understand why Wall Street and its spokespeople want to see a
return of the bull market. Hell, everyone with a stock portfolio wants to see
it grow again. But wishing for something is different from getting it. And
cockeyed optimism can wreak enormous damage on an economy. Haven�t we already
learned this? (Robert Reich�s Blog, �Why We�re Not at the Beginning of the End,
and Probably Not Even At the End of the Beginning�)
If the purpose of
Bernanke�s grand economics experiment was to create uneven inflation in the
equities markets and, thus, widen the chasm between the financials and the real
economy; he seems to have succeeded. But for how long? How long will it be
before foreign banks and investors realize that the Fed�s innocuous-sounding
�lending facilities� have released a wave of low interest speculative liquidity
into the capital markets? How else does one explain soaring stocks when
industrial capacity, manufacturing, exports, corporate profits, retail and
every other sector have been pounded into rubble? Liquidity is never inert. It
navigates the financial system like mercury in water darting elusively to the
area which offers the greatest opportunity for profit. That�s why the surge
popped up first in the stock market (so far). When it spills into commodities --
and oil and food prices rise -- Bernanke will realize his plan has backfired. .
rescue plan is a disaster. He should have spent a little less time with Milton
Friedman and a little more with Karl Marx. It was Marx who uncovered the root
of all financial crises. He summed it up like this: �The ultimate reason for
all real crises always remains the poverty and restricted consumption of the
masses as opposed to the drive of capitalist production to develop the
productive forces as though only the absolute consuming power of society
constituted their limit.� (Karl Marx, Capital, vol. 3, New York International
publishers, 1967; Thanks to Monthly review, John Bellamy Foster)
Bingo. Message to
Bernanke: Workers need debt-relief and a raise in pay not bigger bailouts for
chiseling fat cat banksters.
Whitney lives in Washington state. He can be reached at firstname.lastname@example.org.