Archive for February, 2009

U.S. GDP Contracted 6.2% in Q4 Of 2008; Much Worse Than Originally Reported

February 28th, 2009 Comments off
The original estimate of GDP contraction in the American economy was bad enough; a preliminary forecast of 3.8% negative growth in the fourth quarter of 2008, according to the Commerce Department. Nearly every observer believed this figure was overly optimistic, and expected the updated 4th quarter number to hover above negative 5%. However, when the corrected results were finally released, they indicated that the United States economy in Q4 of 2008 actually contracted at a much worse than expected rate of negative 6.2%!

Not only did the statisticians of the U.S. government miss the true rate of economic descent in Q4 by a country mile; they were completely dislocated from the true rate of economic disintegration afflicting all strata of U.S. econometrics. Take for example exports, which supposedly showed some growth in the preliminary estimate, but are now shown in actuality to have been in decline. Ditto for inventory expansion. If anything, the corrected Q4 numbers tell us that the American economy is in free fall, and neither the public nor private sector analysts can give us a reliable appreciation of how severe the economic decline is in the United States in anything approaching a timely manner. In contrast, the Japanese government at least has been able to track its own economic implosion with much more accurate and timely numbers.

I point out the wide gap in the preliminary Q4 number and the corrected results because it is a reminder to be weary of the likely attempts by both government and Wall Street to downplay the American economic contraction while hyping the projected upside. The Obama administration has just unveiled a budget that projects a stratospheric deficit of $1.75 trillion dollars, a number equivalent to roughly 12% of the GDP. In their budget projections, Obama’s economic advisors are projecting a total GDP contraction in all of 2009 of just a little over one percent. Based on the revised Q4 contraction of negative 6.2%, how can the Obama administration believe the American economy will rebound in the middle of 2009 and sustain a modest decline in annual GDP? The answer is that President Obama’s economic team needs a GDP decline limited to just above 1% to keep the administration’s promise of cutting the gargantuan deficit in half by the end of its first term in office, at least on paper.

Political expediency may dictate how those in Washington deal with economic projections, however the Global Economic Crisis is not a respecter of political requirements. The U.S. is in a severe recession, and likely entering an economic depression. Any belief that the United States will halve its deficit while continuing with its accelerated public spending is pure fantasy.

As with the revised Q4 number on GDP, the unvarnished data that is yet to emerge throughout the course of 2009 will end up being far worse than is being currently forecast.



Japan Is Sinking; Obama Looks Inward

February 26th, 2009 Comments off

President Barack Obama may have the worst job in the world. He has inherited the mantles of power in what is still the world’s largest economy, at least on paper. Yet, that status has become largely irrelevant in the context of the raging Global Economic Crisis, which has crippled the economies of virtually every nation on the planet. The supposed “sole superpower” is mired in a severe recession that has all the characteristics of an emerging economic depression. In addition, the United States that Barack Obama now leads is fiscally insolvent, both in the public and private spheres. For that reason, perhaps the world expected too much when Obama addressed a joint session of Congress on the sole topic of the nation’s economic crisis on the evening of February 24.

To Obama’s credit, the speech he delivered at his presidential nomination on January 20 was sober and solemn, reflecting a touch of honesty that is atypical of American politicians. For that expression of intellectual integrity, President Obama was roundly criticized by the American media and political establishment for being too focussed on gloom and doom surrounding America’s economic predicament. What the establishment wanted was a message to the public that was more reassuring and expressive of hope for the future. For that reason, the Obama speech to Congress was designed for a strictly domestic audience, being a weave between recognition of the dire economic realities while offering enough Americana in the form of platitudes and expressions of optimism to satisfy the critics. For that reason, Obama’s speech was a disappointment, for it abdicated a unique opportunity to inform the American public that the emerging economic disaster is no longer an American crisis, but one that is truly global, requiring synchronized responses that are unprecedented.

A sign of how irrelevant the cheering in the halls of Congress was on the night of the Obama speech is reflected in the news that emerged almost simultaneously from Japan. The world’s second largest economy, which had recently reported that its GDP has contracted at an annual rate of 12.7 %, revealed that in January its exports had declined by 45.7 % from a year ago. As exports are the center of gravity in the multi-trillion dollar Japanese economy, the revelation that this most important indicator of Japanese economic activity had fallen by nearly half is further confirmation that this national economy is in free fall collapse. Yet, no mention was made by Obama of the catastrophic economic news emerging from Japan, or the U.K., or Eurozone, or China where in the last few months 20 million migrant workers have lost their jobs.

For better or worse, the United States bought into the globalization of the world’s economy. What this means in practical terms is that the U.S. is deprived of the option of a national answer to its grave economic crisis. It exported its financial crisis to the world through the engineering of securitized mortgages that were transformed into toxic assets on the balance sheets of banks and financial institutions across the globe. And the world is now subjecting the United States to blowback; the rampant demand destruction throughout the world is creating its own negative feedback loop that is buzz-sawing the American economy and its narrowing opportunities for recovery. Yet, President Obama and the Congressional Democrats are talking about this crisis as though it is exclusively American. The Republicans are even more insular and dichotomized from reality, advocating more deficit-driven tax cuts for those Americans still in the ranks of the wealthy, while ignoring all the evidence that proclaims this disaster as being a global financial and economic crisis that is inoculated against recovery attempts that are strictly national in character.

While Barack Obama talked about America’s love affair with the automobile to demonstrate his bonifides as the protector of U.S. jobs affiliated with the Detroit manufacturers, he ignored completely the fact that a growing proportion of automotive jobs in America are found in factories and assembly plants owned by Toyota, Honda, Nissan and Subaru. If Japanese exports, of which automobiles constitute a significant proportion, are cut almost in half, what incentive do the Japanese car producers have to retain their manufacturing presence in the United States, when they are under pressure to preserve jobs in Japan? It may be that Tokyo is a more important center than Detroit in determining if the car building business will survive in the U.S., but one would not realize that from Obama’s discourse on the automotive problem in America.

Amid all the positive polling data and glowing reviews that were celebrated in the American media after President Obama’s speech before Congress, more enlightened observers will recognize that this is just another demonstration that the political establishment in the United States is disconnected from the brutal reality of the Global Economic Crisis. As the rhetoric is made sweeter and the public debt grows exponentially, the race towards a synchronized global depression continues unimpeded.



Fed Chairman Ben Bernanke Resides In An Alternative Universe

February 25th, 2009 Comments off
Not so long ago, Bernanke’s predecessor as Chairman of the U.S. Federal reserve was regarded as the infallible Pope of Global Finance; His Excellency Alan Greenspan. Today, amid the volatility of the Global Economic Crisis, we now know better. The laissez-faire monetary policies of Greenspan, the fanatical easing of credit combined with a blind trust in de-regulation, led to the sub-prime mortgage disaster in the United States financial system. The contagion spread its toxicity globally, and now all that reside on this planet are experiencing the early stages of what promises to be a global depression that will stagger all economies, big and small.

What about the man now at the helm of the Fed, the professorial Ben Bernanke? His record from the time more savvy economists such as Nouriel Roubini were warning that a sub-prime disaster would cripple the global financial system unless policy-makers enacted decisive and coherent responses, has been dismal. History will ultimately judge Bernanke’s stewardship of the Federal Reserve as harshly as it currently does Alan Greenspan, now that all the collective rose-tinted spectacles have been removed. The past year has been a confusion of ad hoc improvisations at the Fed, clearly reflective of a man who has been overtaken by seismic financial and economic events.

Yet, Wall Street is still willing to be fooled again. Ben Bernanke testifies before Congress and the Senate Banking Committee, dropping hints that just “maybe” the recession will end in 2009 and recovery begin in 2010, and by the way the calamitously-managed U.S. major banks will not require nationalization, and a sizeable “sucker’s rally” is sparked on Wall Street. The Chairman of the Federal Reserve also offered this rhetorical sweetener, sure to warm the cockles of the hearts of the corporate tycoons who ran their major banks and financial institutions up the creek; the nation, says Bernanke, “ought not abstain from saving the financial system just because it rewards people who erred”. In other words, the vastly over-compensated and reckless engineers of our global financial demise need not fear the cessation of further bailouts and backstops from the U.S. taxpayers, on top of the trillions already placed on the line.

No matter how dire a situation is, or immense its complexities, an ultimate solution requires more than a “plan” or a “program.” It demands leadership from individuals of impeccable character, intuition, judgement and integrity. In other words, individuals count in this Global Economic Crisis. Ben Bernanke may mean well, however, his being a pivotal (and unelected) decision-maker in determining whether or not the United States and the whole global economy emerges from our current march towards calamity does not inspire confidence about our future.

In word and thought, Bernanke reflects a man detached from the real world consequences of his ineptitude and faulty analysis of the Global Economic Crisis. He must be residing in an alternative  universe, since his policy responses and verbalizations are remote from the human affliction being created by this man-made global economic and financial disaster.

While Bernanke was delivering his congressional testimony with his typical studied and stilted cadence, the most recent S&P/Case Shiller house price index was released, indicating that the price of a single-family dwelling had fallen 18.5% in December, compared with the same month in 2007, the largest recorded decline since the index was created 21 years ago.

As has been said before, the path to hell is paved with good intentions. And no doubt with good intentions, Fed Chairman Ben Bernanke is leading us all into an economic inferno that may ultimately consume whatever sinews of economic recovery still exist.











George Soros: Global Financial System Has Disintegrated!

February 23rd, 2009 Comments off
At a recent private dinner held at Columbia University, two of the most high profile players on the global financial scene expressed opinions that are certain to arouse the most spine-tingling of chills. Currency speculator and billionaire investor George Soros said to his no doubt discomforted dinner colleagues that the world financial system has, in effect, “disintegrated.” He went on to relay his view that the resulting financial and economic turbulence was more severe than the levels experienced during the Great Depression.

“We witnessed the collapse of the financial system…it was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom,” stated Mr. Soros with emphasis. Not to be outdone, fellow participant at this nifty dinner pow-wow at Columbia University, former Fed Chairman and current senior advisor to President Barack Obama, the illustrious Paul Volcker, added the morose observation that, “I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.”

When men as astute and intimately connected to global finance as Paul Volcker and George Soros are openly talking about the Global Economic Crisis as being “worse than the Great Depression” and having brought about the “disintegration” of the global financial architecture, it is clear that the most dire forecasts for the global economy can no longer be treated as uninformed hyperbole. The most knowledgeable and well-connected financiers on the planet are already preaching the gospel of economic and financial Armageddon.

Soros has also written in the Huffington Post a reflection based on simple math that outlines why the Global Economic Crisis, at least in the United States, will have an economically destructive impact that eclipses the Great Depression. He points out that at the time of the stock market crash on Wall Street in 1929, outstanding credit represented 160% of the U.S. GDP; this figure grew to 260% in 1932 as GDP contracted. Soros, however, writes that America “…entered into the Crash of 2008 at 365 percent, which is bound to rise to 500 percent or more by the time the full effect is felt.”

How should we interpret the musings of Soros and Volcker? In my view, we ignore their informed observations at our peril. Their stated views are not uninformed speculation, but rather a reflection from those in the eye of the storm of this global economic tsunami. Furthermore, despite continued happy talk from the inept political actors across the globe, those who inhabit the rarefied world of high finance, observing the Global Economic Crisis unfold from the pinnacle of power, do not harbor in the least a hint of optimism-or illusion.



Nouriel Roubini Predicts Global Economic Crisis May “Crack” Sovereign Bank

February 20th, 2009 Comments off
When NYU economics professor Nouriel Roubini offers his prophetic visions of economic gloom, the world of finance has learned at great cost the wisdom of not ignoring him. A year ago, Roubini went beyond warning about the looming catastrophe stemming from the sub-prime mortgage meltdown in the United States. He envisioned the financial world being brought to the edge of total systemic collapse, and in which the model that enabled five investment banks to exist in the U.S. would become absolutely dysfunctional. The credit crunch implosion that occurred in the fall of 2008, preceded by the extinction of all the American I banks, either through bankruptcy, shot-gun absorption or transformation into bank holding companies, cemented Nouriel Roubini’s reputation as the preeminent analyst on the unfolding global financial and economic crisis. Now, “Dr. Doom” is at it again.

In his latest blog posting, Roubini offered the following dire pronouncement: “The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign…at some point a sovereign bank may crack, in which case the ability of the governments to credibly commit to act as a backstop for the financial system-including deposit guarantees-could come unglued.”

If what Nouriel Roubini has prophesized is in fact about to occur, the inevitable consequence will be global financial and economic Armageddon, a danger that I have also warned about on this blog. However, let’s put Roubini’s gloomy warning in context.

Last fall, the world’s financial system did indeed come to the brink of total systemic meltdown. The Libor rates and Ted Spreads were at sky-high levels, reflecting a global financial architecture that had just entered the Ice Age. The arteries of global finance simply froze solid, leading to U.S. Treasury Secretary Hank Paulson demanding that Congress grant him $700 billion virtually within hours, no strings attached, or witness the global economy implode. Even after the TARP Wall Street bailout was approved, Roubini warned that it was not nearly enough to stave off disaster. Apparently, only the intervention of the treasuries and central banks of the U.K., Eurozone, China and Japan, combined with the American TARP, prevented the world financial order from falling off a cliff. This was done through a variety of extraordinary means, including direct taxpayer injections of cash into virtually insolvent banks, quantitative easing, monetary policies that brought central bank prime rates to historic lows and raising the level of sovereign guarantees for depositor’s insurance. In effect, governments in the major economies acted as a backstop, putting their sovereign credit potential on the line to preserve a measure of confidence necessary to prevent a total run on the banks and unsustainable levels of deleveraging.

All the steps outlined above have the appearance of panic-driven improvisation. As this crisis has already proven, improvisation in never a substitute for thoughtful and strategic policy response. It appears, based on what Roubini is now suggesting, that in the year 2009 we will witness the futility of the debt-driven mania to socialize the losses incurred by private risk-takers. If a sovereign bank does indeed crack wide open, Nouriel Roubini seems to be suggesting that this may be the final nail in the coffin of a mindless policy whereby governments offer virtually unlimited financial backstops to cover the losses of banks that accumulated massive quantities of toxic assets on their balance sheets.

Which sovereign bank may crack? At this point, Roubini is not saying, however it seems clear that it must be a significant institution to have the potential of generating the apocalyptic ramifications being suggested. There are undoubtedly many candidates. To take just one example, Royal Bank of Scotland has already accumulated $40 billion in losses in just the past year, and has only been kept alive through a 70% equity stake being funded by the British taxpayer. Yet, the worst is still to come in the U.K. economy, which must certainly bring further massive losses to RBS as well as other British banks. It may be that the losses to come will be of such a stratospheric character, not even the deficit-crazed politicians will be able to cobble together the promissory notes required to avoid bankruptcy.

As the Global Economic Crisis worsens, comparisons with the Great Depression of the 1930s are being made more frequently. What must be remembered about our last great global economic disaster is that while the stock market crash of 1929 precipitated the Great Depression, it was the collapse of a single bank, the Kreditanstalt of Austria in 1931,that began a chain reaction that crippled the global financial world. It was that bank collapse which made the depression of the 1930s the Great Depression, leading to systemic economic collapse, massive GDP contraction and previously inconceivable levels of unemployment.

As with his previous warnings, Professor Roubini again provides us with a glimpse into the future, and it is indeed filled with gloom and doom.


For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, 




Stimulus Madness: The Inheritance Of Insolvency

February 19th, 2009 Comments off
A one-year anniversary passed days ago, without any fanfare. The Economic Stimulus Act of 2008 was enacted into law after its passage by Congress, on February 13, 2008. How soon we forget.
With the first inklings that the “strong fundamentals” of the American economy may have been somewhat unhinged by the sub-prime meltdown, the Republican and Democratic political establishment, joined by the Federal Reserve and Treasury Department, happily approved an extra dose of borrowing added to an already deficit-ridden federal budget. The sum of $152 billion would be borrowed from the children and grandchildren of America, and in a reverse form of inheritance, sent in the form of tax rebate checks to the current adults of the United States. The hope was that American consumers would dash off to the shopping malls as soon as they opened the envelopes with the U.S. government checks enclosed.

In retrospect, this so-called “economic stimulus” was sheer political gimmickry. As we now know, it did nothing to enhance the American economy, while almost doubling the projected deficit. Yet, we were all assured by President Bush’s press secretary that we absolutely had to borrow this money from our descendants, so as to ensure we left them a “strong economy.” No wonder our memories are so short, as we pass the one-year anniversary of this $152 billion boondoggle without a microsecond’s worth of notice.

Since that first stimulus, we have been through the implosion of the U.S. economy, the onset of the Global Economic Crisis, followed by the near collapse of the world’s financial system. This was followed by another deficit-driven expenditure, supposedly necessary to rescue the American economy; the $700 billion TARP program to prop up the nation’s insolvent, ineptly managed banks and financial institutions. Not to be outdone, TARP is now eclipsed by the $787 billion “American Economic Recovery Plan,” the gargantuan stimulus package enacted by the new Obama administration. Yet, this is not the end. It may only be the beginning of stimulus madness.

President Obama has already indicated he may be back for another stimulus program. Some economists have suggested that in a year’s time we may see a $2 trillion stimulus plan. In addition, TARP has been proven to be ineffective in facilitating a rescue of the largely insolvent banking sector of the United States.

President Obama and his team have paid lip service to the need to return to “fiscal discipline” once the economic crisis is in the past. Several optimists in the political establishment have even suggested that the U.S. budget will be balanced by 2012. Don’t believe it; we have all been down this economic make-believe road before.

Beginning with The Economic Stimulus Act of 2008, the U.S. political and financial elites have embarked on the most catastrophic addiction with debt in the entire history of human civilization. Despite the pompous rationalizations that are offered for the leveraging of America’s finances to an extent that is unsustainable, there is no rational elaboration that can be offered for this insane and inane fiscal policy. Rather than cure the U.S. and global economic crisis, these stimulus fantasies are only assured of one outcome: we will leave for our children and their children the inheritance of insolvency.



Japan’s Economy In Depression: Q4 Contraction At Annual Rate of Negative 12.7%

February 17th, 2009 Comments off
The numbers make chilling reading. According to official Japanese government tabulations, in the last quarter of 2008 the second largest economy in the world contracted at an annual rate of 12.7 %. This is not a recession; those morbid numbers reflect an economy in free fall collapse. If this is not an economic depression, I don’t know what is. No wonder that the Japanese finance minister appeared drunk at a news conference at the G7 meeting in Rome. Sobriety does bring along the uncomfortable affliction of having to face reality.

Much reference is made to the L shaped Japanese recession of the 1990s, and the mistakes supposedly committed by Tokyo in its policy response to that prolonged period of stagnation, as justification for the frenzied pump-priming and corporate bailouts being enacted by frantic policy makers. Yet the Q4 figures from Japan are far worse than the quantitative measurements that reflected the dismal economic performance in Japan during the 1990s. Most importantly, Japan did not have the banking quandaries and low savings rate that precipitated the current Global Economic Crisis in the United States, which has now spread throughout the world. It appears that there is much more to the Japanese economic contraction now and in the 1990s than the sound bites being proffered by politicians and technocrats as justification for their wild orgy of deficit spending.

The truth about the Japanese stagnation of the 1990s is that it stemmed from massive asset bubbles, particularly in the real estate sector, as well as with Japanese equities. Though policy makers in the U.S. U.K. and Eurozone make reference to a lack of vigorous response by Tokyo in that period, the fact is that the Japanese government engaged in massive deficit spending in a futile measure to stimulate a stagnant economy. Ultimately, what little growth eventually returned to Japan’s economy stemmed from a rise in exports, fed by growth in other major economies. All the massive Japanese deficit spending accomplished was to drive up the national debt, though unlike the United States, the Japanese are a nation of individual savers. This meant that Japan had much more flexibility to engage in fiscal stimulus spending, in comparison to the U.S. with its negative savings rate.

We are now, however, experiencing massive global demand destruction stemming from the worldwide economic crisis. The second largest economy in the world is so highly dependent on exports, a major contraction in global demand inevitably will cripple it with a vengeance. The contraction is occurring so rapidly and dramatically, it negates any option of replacing export shrinkage with higher domestic demand. As in the 1990s, all the deficit spending in the world Tokyo may engage in will fail to arrest the grave economic crisis that has now gripped the Japanese economy.

If Japan is in depression, how can the United States be only in a recession? If past deficit spending failed to reverse macroeconomic trends in Japan stemming from irrational asset bubbles, how can replication of such an ineffective fiscal response reverse the Global Economic Crisis, especially in regards to the United States? It seems that the policy makers in Washington have drawn all the wrong conclusions from the Japanese experience of the 1990s, and appear doomed to follow Tokyo’s lead into massive economic contraction at levels that are clearly symptomatic of a severe, protracted economic depression.


Global Financial Crisis Agonistes

February 15th, 2009 Comments off
At the G7 meeting of finance ministers in Rome, representing most of the world’s major economies (but excluding China), there was an outpouring of Keynesian conformity. Already engaging in fiscal policies in most G7 countries that represent major structural deficits, the finance ministers in unison pledged even more massive deficit spending as a panacea for demand destruction and rising unemployment. However, even if massive stimulus spending were the correct policy response in a normal recession, in this economic crisis such a course is doomed to failure. The current Global Economic Crisis began with a global financial crisis that is still very much with us. The banking and financial system in the major economies is struck with paralysis, resulting in a credit crunch that has debilitated a growing proportion of the world’s primary economic activities. Without a solution to the global banking and credit crisis, all the debt spending in the world will accomplish nothing save international insolvency.

Right now, frightening proportions of the banks of the major economies are either insolvent, close to insolvent or in otherwise poor condition. Though the major economies have already poured trillions of dollars of largely borrowed money into shoring up the balance sheets of failing banks, it has been a case of good money after bad. There may simply not be enough money available in the world to “fix” all the banks, which are rotting with the disease of toxic assets. Yet, without some form of effective, coordinated policy response on a strategic level to the financial component of this global crisis, all the other conversations ongoing in Rome with these illustrious finance ministers represents nothing more than side-talk on the decks of the Titanic.

U.S. Treasury Secretary Timothy Geithner and his G7 colleagues are pontificating about their robust stimulus deficit spending and pledges to avoid protectionism, while paying lip service to the catastrophic disintegration of much of the global financial architecture. As outlined on this blog in prior posts, almost the entire United States banking sector is insolvent; ditto for the United Kingdom. I have also drawn reference in another post to a leaked secret document from the European Commission, which seems to suggest that a large proportion of the Eurozone Banks are also infected with toxic assets to such a degree, they are also threatened with insolvency.

The financial cancer is spreading through the enfeebled limbs and arteries of the global credit and banking system. Time is running out for an effective and comprehensive solution. Yet, in imitation of Emperor Nero, the G7 finance ministers prefer to exercise their fiddles, accompanied by the lyrical singing of meaningless rhetoric, as the financial and economic world around them burns with agonizing ferocity.


Global Economic Crisis Top National Security Threat Facing U.S.

February 13th, 2009 Comments off
The Global Economic Crisis has now replaced international terrorism as the most menacing threat to the national security of the United States, according to testimony by Dennis Blair, Director of National Intelligence. He presented this chilling assessment to the Senate Select Committee on Intelligence, where he delivered an annual threat assessment, based on the consensus views of the 16 U.S. intelligence agencies, including the CIA. His sober presentation reflects the realistic comprehension by the American intelligence community of the geopolitical consequences likely to result from the Global Economic Crisis.

Illustrating the quantitative and qualitative thinking that went into the annual threat review, Blair told the senators that, “statistical modeling shows that economic crises increase the risk of regime-threatening instability if they persist over a one to two year period.” In other words, many countries will be vulnerable to the fracturing of their social cohesion, some obviously more prone than others. The implications are clear; internal instability will induce external behaviors that are geopolitical destabilizing. Among the examples of such behavior cited by the Director of National Intelligence is the scourge of economic nationalism and protectionism that is likely to result from the prolongation of the Global Economic Crisis. Protectionism will exacerbate the economic and financial crisis while creating rivalries and tensions involving the United States and her allies.

Not specifically spelled out, but a clear menace understood by the U.S. intelligence community, is that major worldwide economic turmoil will multiply the danger of armed conflict between nation states. The Great Depression of the 1930s provided the context that led to the most destructive war in human history. In the first decade of the twenty-first century, with the scourge of nuclear proliferation a dire reality, the dangers pointed out by Dennis Blair are sobering in the extreme.

The Global Economic Crisis already poses, according to leading economic analyst Nassim Taleb, possibly the greatest challenge to the United States since the American Revolution. The essence of Blair’s threat assessment is that the Global Economic Crisis may represent the most threatening challenge to the preservation of world peace since the end of the Cold War. “Time is not on our side,” warns Blair. The Global Economic Crisis is now a strategic crisis, with dangers that go beyond the economic and financial meltdown of the planet.












European Banks Hold $24 Trillion In Toxic Assets

February 12th, 2009 Comments off
While Timothy Geithner, U.S. Treasury Secretary, continues his prevarication in Washington D.C., dancing around the issue of specificity as to what exactly President Obama plans to do about the financial insolvency of America’s banks, a document leaked to the British newspaper, The Daily Telegraph, suggests an even more frightening level of banking insolvency infecting the financial world.

The European Commission is the executive branch, based in Brussels, that rules over the 27 nations that constitute the European Union. In the confidential EC document perused by The Daily Telegraph, its authors revealed that European banks may be holding as much as 18.6 trillion euros in toxic assets, roughly equivalent to $24 trillion dollars. The secret document issues the stark though not surprising warning to the political leaders of the member states of the EU that the amount of money required to salvage the European banking system, which had only months ago received its own version of a TARP-style bailout, would defy the financial and political capabilities of those countries.

The language in the EC document states the cold facts with harsh simplicity: “estimates of total expected asset write-downs suggest that the budgetary costs-actual and contingent-of asset relief could be very large both in absolute terms and relative to GDP in member states.” This assessment recognizes that whatever portion of the $24 trillion dollars of toxic assets European banks have on their balance sheets that will need to be written off, and that proportion is clearly substantial, cannot be made good by the European Union. To put that $24 trillion figure in perspective, it exceeds by at least six trillion dollars the combined GDP of the entire EU, and dwarfs the GDP figure for the United States, which stands at $14 trillion.

With the growing recognition that the U.S. and U.K. banking systems are effectively insolvent, the secret report issued by the European Commission reveals that the Global Economic Crisis has metastasized to the point where the damage to the world’s financial system is even more egregious than earlier bleak estimates. As the costs to the public purse, meaning the taxpayers, multiplies exponentially, some policymakers are beginning to understand that infinite bailouts of insolvent banks are an unsustainable model for resolving the crisis. As the EC reports puts it, “it is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems…such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance.”

Alas, here is the contradiction. The degree of recapitalization essential for restoring a solvent and functional banking system far exceeds what policymakers in the U.S., U.K. and remainder of the EU have committed thus far. Yet, as the EC report makes clear, providing the required injection of new capital into the banking systems is not feasible for practical and political reasons. So what we are left with are still more costly bailouts that will overwhelm with debt generations of Americans and Europeans, while mummifying essentially moribund banks in a state of dysfunctional preservation.

Now that the banking collapse that has ensued during the Global Economic Crisis has spread from America to the European continent, are Asian banks immune to this contagion? Even if they have so far been spared the worst ravages, they should not feel overly secure. The rampant demand destruction sweeping the globalized economy will inevitably transform collateral held by Asian financial institutions into under-performing assets on their balance sheets. Once that happens, will any part of the globe retain a solvent, functional banking system?

As the news gets more bleak and dire, the time remaining for an effective policy response to the global banking collapse is rapidly approaching zero.