Archive

Posts Tagged ‘financial crisis’

Hank Paulson Fleeced the American Taxpayers in Order to Save Them

July 17th, 2009 Comments off

Hank Paulson is deeply empathetic about the American people’s plight; absorbing  intergenerational levels of debt to cover the costs of unbridled greed and recklessness on the part of Wall Street. Thus, while being raked over the coals at a congressional hearing for his role in the near destruction of the global financial system last fall, and the $700 billion TARP Wall Street bailout package he was able to pull through a terrified Congress as the price of avoiding financial Armageddon, the former Treasury Secretary had this to say about the plight of the American people: “The tragedy is they didn’t create the problem. But they would be the ones that would pay the greatest penalty if there was a collapse.”

Paulson’s statement, while superficially sympathetic to the injustice of the collective innocent paying for the sins of the few, is in substance the manifestation of a disdain for the broad masses that borders on contempt. In effect, he is reiterating a posture that has been consistently maintained by the “masters of the universe” since the onset of the global financial and economic crisis; privatize the profits (especially after radical deregulation) but socialize all losses.

Since last fall, trillions of dollars have been added to the U.S. national debt through TARP, fiscal stimulus packages made necessary by the financial collapse, and other forms of direct and indirect government and Federal Reserve aid to the financial sector. All in the name, we are told, of the American people who, it is claimed, would be subjected to even greater debt and future taxation if Wall Street is not bailed out. The old concept of “moral hazard,” still in force when Paulson allowed Lehman Brothers, a competitor  of his former stomping ground Goldman Sachs to die, was swiftly ejected when AIG faced bankruptcy.

Now Goldman Sachs is declaring a record quarterly profit, and arrogantly boasting of the billions of dollars of bonus payments that will be dished out to its employees. What the firm that Paulson used to lead as Chairman won’t divulge is how much of its profit was due to $13 billion it received in payment from the U.S. taxpayer, using AIG as a pass-through for the payment. Neither will this Wall Street entity make public the impact of tens of billions of dollars in low-interest, taxpayer subsidized loans it now has access to, once Hank Paulson and Fed Chairman Ben Bernanke changed the rules, and allowed investment banks such as Goldman Sachs to magically transform themselves into bank holding companies.

If Hank Paulson symbolizes the incestuous relationship between Wall Street and government, his attitude reflects how insignificant the general public has become in the minds of those calling the shots and making the critical policy decisions in the wake of the worst economic crisis to afflict the American people since the Great Depression. But when those who caused the disaster are spared the ravages of the unwashed masses who are now being corralled into ever-growing unemployment lines, and instead are basking in the illumination of near record bonus payments, their callousness can at least be understood.

The question that Hank Paulson and his ilk may ultimately be compelled to answer is why should the American people be eternally grateful for their “noblesse oblige” when it becomes crystal clear to them that they have been dispossessed of much of their future as  the price for  bailing out Wall Street and its  architects of our current economic and financial doom.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

Commercial Real Estate Crash Would Cripple U.S. Banks

July 15th, 2009 Comments off

“Commercial real estate is the next shoe to drop.”

James Helsel, Treasurer of the U.S. National Association of Realtors

 
Pennsylvania realtor and U.S. National Association of Realtors official James Helsel joined with other concerned parties in meeting with a congressional committee last week, conveying a collective message that was saturated with gloom and doom. A commercial real estate implosion has been predicted for months by many observers, including this writer. There is now mounting evidence that this sector of the economy is indeed in the grips of a severe contraction, with all indicators pointing to an accelerating price deflation spiral over a period that may extend to several years.

It has all happened before. In the early 1990s speculators drove the valuations on commercial space far beyond the bounds of prudence. When reality caught up, the worst crash in real estate prices ensued. It now seems increasingly clear that this early 90`s disaster is about to be eclipsed by the commercial real estate crash of the current Global Economic Crisis. In fact, commercial real estate prices have already fallen from their 2007 peak valuation by a greater figure than that which has crippled the U.S. residential housing market. As with the housing market, the commercial real estate contraction will adversely affect the balance sheets of the nation’s banks. However, the dynamics of that impact will be qualitatively different.

The subprime debacle in the housing market overwhelmingly impacted the largest U.S. banks and financial institutions. With commercial real estate, however, the pyramid becomes inverted. The bulk of the exposure to commercial real estate mortgages is held by financial institutions of small to medium size. Deutsche Bank real estate analyst Richard Parkus told the same congressional committee addressed by James Helsel that the four largest American banks have an average exposure of 2 percent to commercial real estate on their balance sheets. In contrast, the banking institutions that ranked between 30 to 100 in order of size had on average a 12 percent exposure to commercial real estate mortgages. What these figures suggest is that a massive collapse in the U.S. commercial real estate market will cripple a large number of regional and community banks, in comparison to a few “too large to fail“  institutions stricken by the subprime housing disaster.

Though publicly quiet on this gathering storm, behind the scenes the economic policymakers in the Obama administration are deeply worried by this growing danger of a wider banking crisis brought on by a massive collapse in commercial real estate. The Federal Reserve is also in a state of high anxiety, for the same reasons. By June of this year, there were already 5,315 commercial properties in default, a figure that is more than double the number of commercial real estate defaults in all of 2008.

 

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com

 

 

Many loans initiated when the prices of commercial properties were at their peak will be coming due over the next 3 years, including $400 billion by the end of 2009, and nearly $2 trillion by 2012. With unemployment skyrocketing, real disposable income shrinking and nearly 7% of income now being saved by the chastened American consumer, it is a foregone conclusion that a greater proportion of these loans will become non-performing. In the current economic climate, there are simply no options available in terms of refinancing and securitization. As with housing, a glut of foreclosed commercial properties will further depress prices, creating a vicious concentric circle of financial doom.

Ultimately, the coming collapse in the U.S. commercial real estate market is not only inevitable; it is round two of the banking crisis. Having barely escaped alive from the consequences of the subprime housing collapse due to trillions of dollars in taxpayer aid and quantitative easing from the Federal Reserve, combined with Timothy Geithner’s stage-managed “Stress Test,“ it is difficult to see an escape route for the American banking sector once the ravages of the commercial real estate storm have hit with gale force. That must be what the Obama administration and the Fed are frantically consulting on behind the scenes, hoping against hope that they have a TARP 2 ready in time. In the final analysis, a very large number of small to medium sized banks in trouble can pose just as great a systemic risk to the global financial system as was the case with a small number of banking giants. What happens to the concept of “too big to fail“  in that scenario?

UK Economy Sinking Amid Worst British Financial Crisis Since Great Depression

April 24th, 2009 Comments off
When Gordon Brown was Britain’s Chancellor of the Exchequer under Labour Prime Minister Tony Blair, he relished boasting in the House of Commons on the efficacy of his stewardship of the UK’s economy. However, now that the Global Economic Crisis has impacted the United Kingdom with particular severity, Prime Minister Gordon Brown is being seen as ineffectual as both a politician and economic manager. The British economy is plunging into the depths of its most severe contraction since the 1930s, with all the macroeconomic indicators pointing south.
The response to this financial meltdown has been happy talk, at times bordering on the ridiculous. At one point, Brown even claimed that his spendthrift ways had “saved” the global economy. As recently as last November, Chancellor of the Exchequer Alistair Darling claimed that in 2009 the UK economy would contract be a mere 1%, a fantasy calculation that even the Labour government now concedes. Yet in the supposedly more realistic budget just tabled by the Chancellor of the Exchequer, imagination still takes precedence over reality. The UK government now projects a decline in the nation’s economy of 3.5% in 2009, with a return to growth in 2010. However, the International Monetary Fund released its own estimate on the global economy shortly after the British budget was tabled, projecting a decline in the UK economy of 4.1 % in 2009 and likely a continued contraction in 2010. Interestingly, this number reflects growing pessimism by the IMF concerning the UK economy, as it had projected a decline of 2.9% back in January.
The imploding British economy has set off deflation in key asset classes, particularly real estate. Unemployment is skyrocketing, having reached an official figure of 6.7 %, or 2.1 million jobless. However, the opposition Conservative Party has claimed that the actual number of British unemployed stands at more than three million. Whatever the true number of unemployed is now, it will certainly rise substantially during the next two years.

Complicating the economic problems in the UK is its disastrous banking crisis, which rivals that of the United States. Much of Britain’s banking sector is insolvent, prompting a costly bailout by Gordon Brown’s government. With plunging tax revenues due to the nation’s economic contraction, the UK has been forced to borrow vast amounts of money to cover the cost of subsidizing the nation’s zombie banks. The combination of bank bailouts and stimulus spending has created staggering budgetary deficits, prompting the governor of the Bank of England, Mervyn King, to warn that further government indebtedness threatens the long-term stability of the UK’s finances.

The IMF actually challenged the official UK government estimate on the cost of taxpayer funded bank bailouts, presented in Darling’s budget at 60 billion pounds. When the IMF issued its own cost estimate of 200 billion pounds, Gordon Brown and his team went ballistic, forcing the International Monetary Fund to lower is projection to an earlier figure of “only” 130 billion pounds, still more than double the official UK estimate. However, strong-arming the IMF cannot alter the fact that the national debt of the UK is climbing at an astronomical rate. Alistair Darling is projecting that the UK will need to borrow more than $500 billion during the next two years, a sum that exceeds the cumulative borrowing of all previous British governments since the creation of the Bank of England more than three centuries ago, according to the leader of the official opposition, David Cameron.

The UK economy has been transformed, in effect, into a candle burning at both ends. Insolvent banks are consuming taxpayer funds at a rate that is intergenerational while the domestic economy tanks and unemployment soars .In the meantime, the national debt is exploding. Deflation is raging now, while the specter of hyperinflation hovers around the corner, as eroding financial fundamentals cripple the value of Britain’s currency. Amid the acute economic and financial crisis afflicting the UK, the nation’s political establishment offers only rosy projections. Tony Blair may have been called George W. Bush’s lap dog, but Gordon Brown is proving to be his economic disciple.

 

 

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com

 

 

 

 

 

U.S. Banks Doomed To Fail

April 22nd, 2009 Comments off
Within days after the legalized accounting fantasy masquerading as first quarter earnings for several of America’s largest banks and financial institutions were released, the markets began to catch on. After several days of a sucker’s rally on Wall Street, the Dow Jones went into retreat as more savvy investors caught on to the charade. That is when Timothy Geithner, U.S. Treasury Secretary, ran to the rescue, ready-made script in hand.
In advance of the so-called “stress test” that is supposed to establish the fiscal health of U.S. banks, Geithner released a sneak preview. “Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” boasted Obama’s Treasury Secretary. With Pavlovian instincts, the market bought Timothy Geithner’s fiscal fantasy, at least for a day.

A few weeks before these antics a more sober assessment of America’s banking health was delivered at the National Press Club in Washington by Dr. Martin D. Weiss, the head of Weiss Research, a global investment research firm. Previously, Weiss had accurately forecast the demise of Bear Stearns and the implosion of the U.S. investment-banking sector. However, at the National Press Club he offered a more chilling prediction: 1,568 U.S. banks and thrifts risk failure. Included in that number are several of the largest American banks, including J.P. Morgan Chase, Goldman Sachs, Citigroup, Wells Fargo, Sun Trust Bank and HSBC Bank USA. The numbers and depth of the banking problem highlighted by Dr. Weiss are far larger and much more ominous than has been portrayed by the Federal Reserve, Treasury Department and FDIC. He backed up his dire analysis with documentation and precise mathematical modeling. For example, he refers to the government’s justification for a hideously expensive taxpayer bailout of AIG, based on the firm’s exposure to the fragile investment vehicles known as Credit Default Swaps, or CDS. The policymakers maintain that AIG’s $2 trillion in CDS exposure represented an unacceptable systemic risk, meaning AIG was “too big to fail.” However, Weiss points out that Citigroup alone holds a portfolio of $2.9 trillion in Credit Default Swaps, while J.P. Morgan Chase possesses a staggering $9.2 trillion of these toxic instruments, about five times the exposure that led AIG to demand that the government rescue it, or see the global financial system implode.

The essential point Dr. Weiss made at his press conference is that the degree of exposure U.S. banks have to a variety of toxic assets is beyond what the U.S. government and, by extension, the American taxpayer is financially capable of rescuing. Continued bailouts of insolvent banking institutions will not repair a broken financial order, but may very well cripple the overall economy.

Earlier, NYU economics professor Nouriel Roubini had already gone on record as declaring that much of the U.S. banking sector was functionally insolvent, and that bailing out zombie financial institutions would only replicate the Japanese “lost decade” of the 1990s, when Tokyo’s preference for keeping alive insolvent banks instead of closing them down led to a prolonged L-shaped recession. Roubini and other critics of both Bush and Obama administration policies on bank bailouts have looked to the Swedish model for resolving a profound banking crisis, which involved temporary short-term nationalization, closing down insolvent banks, while those banks that can be salvaged are cleaned up of their toxic assets, recapitalized and then sold back to the private sector. “You have to take them over and you have to split them up into three or four national banks, rather than having a humongous monster that is too big to fail,” Nouriel Roubini has argued.

According to the International Monetary Fund, the global financial and economic crisis has already created more than $4 trillion in credit losses due to toxic assets. If nothing else, the IMF estimate on the scale of the economic and financial disaster thus far should compel the Washington political establishment to face the painful yet necessary truths regarding America’s precarious situation. However, it appears that fantasy is preferred over reality within the corridors of power.

The procrastination of policymakers in Washington in facing dark reality, and preference to avoid any public takeover of troubled banking institutions while simultaneously subsidizing these financial dead men walking with almost unlimited taxpayer funds, at the same time maintaining the fiction, as Timothy Geithner has just done, that all is basically fine with the “vast majority” of U.S. banks, is to insure the inevitability of a systemic banking collapse in the United States. The conglomeration of reckless, greed-induced banking practices by the oligarchs of finance and inept, reality-denying policymakers is sending much of the American banking sector on a Wagnerian death ride into a financial apocalypse. Many of the U.S. banks are in fact doomed to fail, and no contrived stress test or Geithner speech can alter that outcome. And that isn’t even the worst part. For when mass banking failures occur in the United States and overseas, a global economic depression will be an irreversible outcome.

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

 

 

 

Singapore Economy In Free Fall Disaster

April 17th, 2009 Comments off
The city state of Singapore, Venice of the 21st century in terms of its mercantile prowess, has as its national anthem the refrain, “Onward, Singapore.” With the data that has recently emerged on the Q1 performance of Singapore’s economy, however, it may be time to change the national anthem to, “Backwards, Singapore.” The numbers are that bad.
This tiny Island republic, sitting at the tip of the Malay Peninsula, covers only 274 square miles, with a population of under five million. Yet through innovation, industriousness and the entrepreneurial environment facilitated by a pro-business if somewhat authoritarian government, Singapore has become a powerhouse within the global economy. Indeed, no less an authority than the World Bank has graded Singapore as the most business friendly economy in the world. However, amidst the tectonic shifts occurring as a result of the Global Economic Crisis, Singapore has discovered that it is an exceptionally vulnerable and fragile geopolitical space.

Global trade is the engine that drives the Singapore economy. The tiny nation has a vast manufacturing sector, which includes electronics, petrochemicals and engineering. With its small population, Singapore must export the products it manufactures. That export trade has led Singapore to being the fourth largest port in the world. The Global Economic Crisis, however, has sent international trade into a tailspin. All major exporters are hurting badly; Singapore is bleeding.

In the first quarter of 2009, Singapore’s GDP contracted at a catastrophic rate of 11.5%, much worse than expected. In March, non-petroleum exports declined by 17%, the eleventh consecutive monthly decline. Unemployment is rising while business confidence is plummeting. The once busy port of Singapore is now almost quiescent, a reflection not only of Singapore’s decline but also a window on how severely global trade has been impacted by the worldwide recession.

As in America and other major economies that have been decimated by the Global Economic Crisis, Singapore has its share of overly optimistic economists, analysts and media pundits who are trying to spin the bad news into glimmers of hope. Some have even suggested that the severity of the country’s Q1 economic statistics are “proof” that the recession has hit bottom and will soon begin to ease. However, such appalling macroeconomic data cannot wear a happy face under any circumstance; it is irrefutable proof that the synchronized global recession now shattering the worldwide economy is unprecedented in its depth and reach. I think the elder statesman of Singapore, former Prime Minister Lee Kuan Yew, was more aligned with reality when he recently suggested that it will take at least six years before Singapore recovers from the effects of the Global Economic Crisis.

Amid all the horrific economic news, Singapore can boast of an advantage denied the deficit-driven economies of Europe and the United States. During the good times, the Island nation prudently set aside substantial foreign exchange reserves. Even with a recent $20 billion stimulus package, Singapore still maintains a reserve fund of $170 billion. This will provide flexibility for policymakers to address the immediate ramifications of the severe economic contraction now occurring in their country. Nevertheless, there can be no doubt that once prosperous Singapore is facing many years of economic and financial hardship that will severely test the country’s capacity for entrepreneurial innovation and hard work.

If a nation that has been as prudent and fiscally responsible as Singapore is enduring a free fall meltdown in vital areas of its economy, what about the United States, which is also undergoing a significant economic contraction, but with a massive debt load instead of sizeable reserves?

 

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com

 

 

 

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, http://www.globaleconomiccrisis.com 

 

 

 

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.

 

 

 

 

 

 

 

 

Scary Data From China And The UK As Global Economic Crisis Worsens

January 24th, 2009 Comments off

While politicians have ceased denying what cannot be denied, that the world is enduring a crippling global financial and economic crisis, they still largely inhabit the land of make believe. What is more, they beckon their fellow citizens to enter blindly into their Alice in Wonderland construct for global economic salvation. Never mind that loose monetary policies enacted by central banks and massive deficit spending sustained by political actors lubricated the skids of this global economic disaster, we must accept on faith the prescription of the political establishment; even more public debt, compounded by near-zero interest central bank rates.

The latest macroeconomic data that has emerged from China and the UK should pour a bucket of cold water over even those most tolerant of political smoke-and-mirrors disguising itself as economic salvation. To say that the numbers were dismal would be an extreme understatement. Perhaps more poignantly, they are further markers on the highway to acute global economic meltdown.

China has for a decade been the primary engine of global economic growth. By becoming the factory for much of the consuming world, it accumulated huge savings, this cash pool being used to loan money to the United States, its major customer by a wide margin. As long as Americans bought Chinese products and kept the factory floors from Shanghai to Canton buzzing with full employment, the bosses in Beijing were quite content buying U.S. Treasury bills by the hundreds of billions of dollars. Now that consumer demand in the U.S. is contracting, however, along with other major markets, China will likely need to shift its accumulated savings towards financing its own deficit spending, as opposed to Washington’s stimulus credit needs. The official results for the 4th quarter GDP show a drastic reduction in growth, pointing to a sharp downturn in the Chinese economy.

A 4th quarter result of 6.8 % growth would seem like manna from heaven in comparison with other major economies. However, in the context of China’s massive labor pool this number is problematic, as double-digit growth has been essential for maintaining a level of employment satisfactory for sustaining social cohesion. Economist Nouriel Roubini points out, however, that this number is misleading. He believes that the Q4 in China brought no growth, perhaps even the beginnings of negative growth. Signs point to a recession in China during 2009, with disastrous consequences for the global economy.

The boom in the past decade in the Chinese economy also fueled economic expansion in much of Southeast Asia. Enterprises in South Korea, Taiwan, Thailand and Singapore, as well as other Southeast Asian nations, provided raw materials, products and services that were incorporated into the output of China’s vast economy. Contraction in China will be devastating to the economies on her periphery, while also diminishing her appetite to lend increasingly scarce savings to finance the profligacy of the U.S. federal budget.

In the UK, the 4th quarter GDP numbers, revealing a decline of 1.5%, magnified the apocalyptic news that has emerged from the carcass of its banking sector. As this is the second consecutive quarter of negative GDP growth in the UK, that country is now technically in a recession, hardly a startling revelation for the beleaguered British taxpayers. As with America, the political establishment offers only more tax-funded bailouts, even more massive deficit spending, garnished with historically low Bank of England fund rates.

In addition to the appalling quantitative data emerging from China and the UK, there is one other barometer of the cascading Global Economic Crisis, the obscure Baltic Dry Exchange Rate. In simple terms this is a measure of the cost of shipping raw materials to China by freighter. When the Chinese economy was humming, the demand for shipping dictated a high rate. That is now history; as the Baltic rate is sinking like a broken old rusty ship, reflecting collapsing demand by China for raw materials, as its factories shutter their doors. In essence, the current anemic Baltic rate attests to a process of virtual de-industrialization occurring on the planet on a titanic scale.

Though China and the UK have different economic characteristics and dynamics, they are both significant actors, along with the United States, in the global drama that is now unfolding. The examples I have sited are just another dose of empirical data pointing to the year 2009 as being one of economic extremis.

 

 

 

Why The Global Economic Crisis Will Be Worse Than The Great Depression

January 15th, 2009 Comments off
Eight decades ago the stock market crash of 1929 sparked the Great Depression, an economic crisis without parallel-until now. The 1930s were dark times of economic contraction, only alleviated to a modest degree in the United States by the New Deal of President Franklin D. Roosevelt. It would take the massive public works project known as World War II to bring the Great Depression to a close in the United States. The postwar economic boom in the U.S. ultimately revived the economies of Western Europe and Japan.
Now that the world is engulfed in a global economic crisis of staggering ferocity, does it mean another Great Depression is underway, and will it match the 1930s in its incessant demand destruction? The very bad news is that the Global Economic Crisis will ultimately prove far more devastating that the Great Depression. That is my projection, and I base it on a number of assumptions that appear to be supported by rapidly emerging macroeconomic data.

The American consumer has been the driver of the global economic expansion that impacted the Eurozone, the BRIC countries (Brazil, Russia, India and China), Southeast Asia and Japan and emerging markets. The capacity of Americans to consume was not based on intrinsic productivity but rather on debt from overseas creditors, further lubricated by irrationally loose monetary policies enacted by the U.S. Federal Reserve. The American consumer has been leveraged to a level that is unsustainable, and that bubble has burst.

The first symptoms were manifested in the sub-prime mortgage meltdown. A complex architecture of financial engineering exported toxic securitized paper investments based on these non-performing sub-prime loans. The result has been the virtual destruction of the financial world as we knew it, with the extinction of many of the largest American investment houses, some of which had been in existence for more than a century, having weathered the Great Depression.

While the financial world and now sovereign governments are currently inundated with the consequences inflicted by the sub-prime meltdown, which have cost trillions of dollars, much worse is about to be set loose on the global house of financial cards. There are other asset bubbles that will be popping with lethal force.

While sub-prime mortgages continue to devastate the American housing market, near-prime and prime mortgages are about to get hammered, as the over-leveraged American consumer becomes financially debilitated by rapidly rising unemployment rates, restricted access to credit and collapsing value of their retirement funds and household equity. Car loan delinquencies and credit card defaults will also accelerate, while consumer spending in the United States plummets, leading to the next asset bubble: commercial real estate. Retail trade declines will bring about a horde of commercial bankruptcies and foreclosures, creating vast square footage of vacant offices and storefronts. Shopping malls will become deserted, leading to unpaid commercial mortgages that will rival the sub-prime disaster in intensity.

An American Government that is already consumed with mountains of debt may promise to bail out every American consumer and business, however this is just not possible in the real world. Yet, this is the course the incoming Obama administration seems determined to follow. And leading the charge will be Tim Geithner, Barack Obama’s nominee to succeed Hank Paulson as Treasury Secretary.

Paulson of the $700 billion TARP debacle, preceded by his numerous wrong assumptions about the direction of the U.S. and global economy, was clearly a disastrous Treasury Secretary for coping with the onset of the Global Economic Crisis. However, will Geithner be an improvement? A revelation just released raises disturbing doubts. It has now been disclosed that the man President-elect Obama wants to entrust the Treasury Department to, at a time of the gravest economic crisis, failed to pay $34,000 in back taxes. Failure to pay $34,000 in back taxes? This is the genius supposed to run the Treasury Department, which supervises the IRS, and strategize our way out the current global economic disaster? This leads to another signpost on the road to global economic catastrophe. When excellence in leadership is essential for coping with the Global Economic Crisis, throughout the world the political establishment is represented by mediocrities. Mister Thirty-Four-Thousand in back taxes is a metaphor for this failure by the global political elites to identify and select the most competent professionals to confront the world’s most chronic economic disaster.

When one aggregates the cumulative affects of the asset bubbles about to burst with incendiary destructiveness, factoring in mediocre decision makers, the case for a crisis as bad as the Great Depression is solidified. There remains another element that will make it much worse.

In the 1930s the world was not as financially interconnected as it is today. Globalization has massively increased the vulnerability of the world’s financial and economic system. To take one example, a corrupt stock or bond trader in Singapore or Paris can, by manipulating his computer, gamble away billions of dollars of his company’s assets, undiscovered until calamity has struck. Every day trillions of dollars is transacted at the speed of light, much of it unregulated, particularly with those mysterious entities known as hedge funds. The derivative products they have engineered have accrued to the stratospheric level of hundreds of trillions of dollars, unmonitored by any governmental authority. In essence, a vast global financial superstructure has been erected on a foundation of quicksand as fragile as the worst of the sub-prime securities. As the global economy sinks, hedge funds will begin to deleverage and liquidate, in effect multiplying the already catastrophic global economic downturn. The result: global economic Armageddon.

The Great Depression led to the most destructive war in the history of human civilization. Will the Global Economic Crisis so disrupt social stability and international relations that an even more terrible global conflict erupts? It may be that however calamitous the financial impact of the Global Economic Crisis becomes, it will be the inevitable geopolitical consequences that will exceed our worst nightmares.

 

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

 

 

 

 

American Economy In Freefall

December 12th, 2008 Comments off

What began as a financial crisis in the U.S. housing and mortgage market has metastasized as a virulent global economic cancer. The U.S. economy is imploding, and taking down much of the world with it. In a tsunami of financial panic, central banks across the globe have been slashing interest rates to virtual zero, while simultaneously borrowing and printing trillions of dollars, which are being injected into failing banking systems.

With global financial arteries clogged, the economies of the planet are now cratering, with the United States economy in particular imploding at an alarming rate. A concrete example of this is the impending bankruptcy of the American automobile industry, which directly and indirectly represents the core of what is left of the domestic manufacturing industry in the United States. Ford, Chrysler and especially GM have told the U.S. government and its elected representatives in no uncertain terms that unless the government injects untold tens of billions of dollars into their virtually empty coffers, those companies will go bankrupt in a matter of months. GM has even indicated it could be forced to shut down within weeks.

With a federal budget deficit that has grown from the hundreds of billions to the trillions of dollars, where is the U.S. Treasury going to get these vast funds for the industrial bailout requests that are now piling on? Perhaps soon the retail sector of the American economy will be coming to Capital Hill, hat in hand. However, an infinite series of bailouts is not a solution to the global economic crisis.