Archive for July, 2009

U.S. Treasury Sweating Bullets Over Financing Swelling Deficits

July 30th, 2009 Comments off
A Treasury auction earlier in the week for two-year debt drew a lacklustre response, setting the stage for what followed a couple of days later, when an auction for five-year debt was conducted. To say that the results were below expectation would be a severe understatement. To convey the importance of what occurred , take the words of William O’Donnell, who heads  U.S. Treasury strategy at RBS Securities in Greenwich Connecticut: “It was just a horrendous result, it was the weakest bid-to-cover since September 2008, and by my numbers it was the biggest tail since February 1993. It was just a very, very weak result.”
The auction sold $39 billion in 5-year debt at yields far above what had been anticipated, in the process sinking the value of Treasury bonds. This occurrence is a harbinger of the growing fiscal dangers that are now a full component of the ongoing Global Economic Crisis.

The warning is crystal clear. Before the onset of the current financial and economic crisis, the U.S. had structural deficits measured in the hundreds of billions of dollars. Now, however, the fiscally toxic combination of Wall Street bailouts and economic stimulus programs requiring massive public borrowing have created the unprecedented phenomenon of multi-trillion dollar deficits, equal to 15% or more of the entire United States GDP. If would be bad enough if only the U.S. was engaged in such staggeringly high levels of public borrowing. However, virtually every major economy on the globe, including China and Japan, America’s two largest creditors, are also engaging in large deficit-financed stimulus programs. At a time when the U.S. requirement for credit is ballooning, its traditional sources of such largesse are under fiscal pressures of their own. Only by elevating yields on its Treasury bills will the United States be able to attract interest in its ever-expanding menu of Treasury auctions.

Raising yields on Treasuries will greatly increase the cost of public borrowing, thus adding to the fiscal imbalance confronting Washington. The growing unease regarding the size of the U.S. deficit by both sovereign wealth funds and private investors, and the real possibility that Washington will lose its coveted AAA status, has implications beyond Treasury yields. Policy decisions that address the nation’s fiscal imbalance may become essential in order to maintain interest in purchasing U.S. public debt instruments. This would mean budget cuts and tax increases, which would greatly increase the likelihood of a double-dip recession.

Given the track record of the U.S. political establishment, I suspect that they will delay a serious  deliberation on the fast-developing fiscal crisis confronting the public finances of the federal budget until it is too late to avoid the most critical consequences. What the recent Treasury auction demonstrated is that Washington may be fast approaching a situation where  insufficient demand exists to satisfy the government’s appetite for borrowed money. What happens then? The most likely result would be monetization of the debt by the Federal Reserve. In effect, the Fed would conjure money out of thin air, and use this newly printed stack of greenbacks to purchase Treasuries that are left behind by global investors and sovereign wealth funds. Should that unhappy day arrive, you can lay the U.S. dollar to rest, for it will not be worth the paper it is printed on.



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Obama Versus JFK on Corporate Greed: The Comparison is Not Flattering

July 26th, 2009 Comments off

Amid the surreal and boastful bonuses the Wall Street tycoons have been paying themselves after being  rescued by the American taxpayer from their own reckless follies, there is an eerie silence from the Obama administration. That this “they can eat cake” mentality flourishes among the financial elites while the economic catastrophe they engineered through their unmitigated and reckless greed sends the U.S. unemployment rate into double digits is an immoral affront to basic human decency. Yet, except for an occasional sermon on corporate excess in a time of profound economic crisis, President Barack Obama has thus far failed to exercise decisive leadership and put a line in the sand on this defining question. To paraphrase a former Republican presidential candidate, where is the outrage?

In 1962 President John F. Kennedy was also confronted with corporate greed and excess. However, in sharp contrast with Obama, he demonstrated both moral outrage and decisive leadership. Does anyone remember when JFK took on the excess greed of the U.S. steel industry? It is instructive to look back nearly half a century ago.

In the second year of his administration, President Kennedy faced two wars, just as Obama reminds us constantly he is currently confronted with. True, only one was hot, in Southeast Asia, while the other conflict was referred to as the Cold War. Yet the Cold War posed a serious threat to the United States of nuclear extinction, a danger that came perilously close to reality later that year during the Cuban missile crisis. Prior to that, the danger of a military confrontation with the Soviet Union over Berlin was very real. All these factors required compulsory military service for hundreds of thousands of Americans, and  vast expenditures on national defence. This was all occurring at a time of economic crisis, requiring the Kennedy administration to confront both recessionary and  inflationary pressures.  To prevent prices from spiralling out of  control, the President sought the cooperation of both labor and management in key areas of the U.S. economy in order to keep the lid on prices. This was important both in terms of preserving the American standard of living at home, while promoting U.S. exports abroad. A major test case for the Kennedy administration was the U.S. steel industry, where large price increases, should they occur, would have a highly negative ripple effect throughout the U.S. economy.

President Kennedy personally intervened in the question over price hikes for steel. His first step was to obtain concessions from the steel unions. He was successful in winning agreement for a new union contract that would have no effect on steel prices, taking into account both wages and productivity. Kennedy expected  management to now do its part. Instead, first U.S. Steel, the nation’s largest steel producer, followed by its competitors, announced a substantial rise in steel prices. This action, if left unchallenged, would clearly have unleashed  a damaging bout of inflationary pressures throughout the economy.

JFK was outraged. He decided to take action, and bring his voice on the importance of the issue directly to the American  people. He conducted a news conference, and in his opening statement he did not mince words. Kennedy said:


“Simultaneous and identical actions of United States Steel and other leading steel corporations increasing steel prices by some $6 a ton constitute a wholly unjustifiable and irresponsible defiance of the public interest. In this serious hour in our nation’s history when we are confronted with grave crises in Berlin and Southeast Asia, when we are devoting our energies to economic recovery and stability, when we are asking reservists to leave their homes and their families for months on end and servicemen to risk their lives–and four were killed in the last two days in Vietnam– and asking union members to hold down their wage requests at a time when restraint and sacrifice are being asked of every citizen, the American people will find it hard, as I do, to accept a situation in which a tiny handful of steel executives whose pursuit of private power and profit exceeds their sense of public responsibility can show such utter contempt for the interests of 185 million Americans. If this rise in the cost of steel is imitated by the rest of the industry, instead of rescinded, it would increase the cost of homes, autos, appliances, and most other items for every American family. It would increase the cost of machinery and tools to every American businessman and farmer. It would seriously handicap our efforts to prevent an inflationary spiral from eating up the pensions of our older citizens, and our new gains in purchasing power…The Steelworkers Union can be proud that it abided by its responsibilities in this agreement, and this Government also has responsibilities which we intend to meet. The Department of Justice and the Federal Trade Commission are examining the significance of this action in a free, competitive economy. The Department of Defence and other agencies are reviewing its impact on their policies of procurement. And I am informed that steps are underway by those members of the Congress who plan appropriate inquiries into how these price decisions are so quickly made and reached and what legislative safeguards may be needed to protect the public interest. Price and wage decisions in this country, except for a very limited restriction in the case of monopolies and national emergency strikes, are and ought to be freely and privately made. But the American people have a right to expect, in return for that freedom, a higher sense of business responsibility for the welfare of their country than has been shown in the last 2 days. Some time ago I asked each American to consider what he would do for his country and I asked the steel companies. In the last 24 hours we had their answer.”


The leadership Kennedy demonstrated back in 1962 shamed the senior executives of the steel industry, leading them to rescind their unwarranted price increase. Afterwards, JFK is said to have remarked, “my father told me businessmen were SOBs. I didn’t believe him, until now.”

In the past six months, President Obama has revealed his towering intellect, basic decency and sophisticated world view. However, we have yet to observe the toughness and passion required to take on the forces that drove the U.S. and global economy into a ditch. Except for periodic and overly-mild rebukes, we have witnessed excessive conciliation that is underserved. I hope I will be proven wrong, but despite initial hopes by many that President Obama would become the “Black Kennedy,” more and more I am reminded of what the late Senator Lloyd Bentsen once told Senator Quayle during the Vice Presidential debate back in 1988: “You’re no John Kennedy.”


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Fed Chairman Bernanke to Congress: I Don’t Know To Whom We Gave Half a Trillion Dollars

July 24th, 2009 Comments off

Alan Grayson is a Democratic Congressman  representing Florida’s 8th congressional district. He was elected in 2008, having beaten the 4-term Republican incumbent. Despite his freshman status, Grayson is already developing a reputation as a fierce advocate for taxpayer interests in the wake of massive bailouts of the financial sector that have been orchestrated by the Treasury Department and Federal Reserve. Serving on the Financial Services Committee and subcommittee that deals with capital markets, the congressman, having been a successful entrepreneur, clearly knows how to read a balance sheet and ask relevant questions. Thus, the stage was set when the Florida congressman had the opportunity to question Fed Chairman Ben Bernanke when the latter appeared before Congress to present an update on the economic crisis gripping America and much of the world.

Congressman  Grayson demanded details from Bernanke on a half trillion dollars in  liquidity swaps to foreign central banks undertaken by the Federal Reserve, apparently under the radar and in the dead of night. Demonstrating that he and his staff had done their fact-checking, Grayson noted that in 2007 these swaps with overseas central banks were a mere $24 billion, but had swelled to a staggering $553 billion in 2008 with the onset of the Global Economic Crisis.
The exchange between Grayson and Bernanke appears almost Kafkaesque in its reality-defying character, conveyed in the following, as a clearly uncomfortable Fed Chairman provides a tortured explanation regarding this half  trillion dollar transaction:

Bernanke: “Those are swaps that were done with foreign central banks…”
Grayson: “So who got the money?”
Bernanke: “Financial institutions in Europe and other countries…”
Grayson: “Which ones?”
Bernanke: “I don’t know.”
Grayson: “Half a trillion dollars and you don’t know who got the money?”
Bernanke: “Um, um, the loans go to the central banks and they then put them out to their institutions…”
Half a trillion dollars is a number so grandiose, it defies comprehension unless it is reduced to its ultimate simplicity. These credit swaps that exchanged American dollars for various foreign currencies were done without any consultation with elected officials, and amount to more than $1,800 for every man, woman and child residing in the United States. Under section 14 of the Federal Reserve Act, according to Chairman Bernanke, the Fed’s Open Market Committee (FOMC) can engage in swapping U.S. dollars with foreign central banks without any limitations, at any time, without any requirement for congressional scrutiny. In other words,  “Congressman Grayson, why are you wasting my valuable time with these irrelevant questions,” Bernanke seemed to be implying through his frosty demeanour. Never mind that the Federal Reserve Act was originally passed in 1913, nearly a century ago.

“Is it safe to say that nobody in 1913 contemplated that a small little group of people would decide to hand out half a trillion dollars to foreigners,” Grayson pointed out. He raised as an example New Zealand, which received $9 billion from the Federal Reserve, an amount equal to $3,000 for every one of that nation’s citizens.

The congressman from Florida’s 8th district is to be commended for his focussed inquiries directed at the Fed Chairman, and steadfastness in the face of Bernanke’s evasiveness. More importantly, Grayson raises anew serious questions regarding the unlimited power placed in the hands of the Federal Reserve. The defenders of the Fed’s current position of fiscal omnipotence maintain that its independence from political influence must be preserved. However, the historical record, especially in the last 20 years, clearly shows that the Federal Reserve is influenced politically, either through the executive branch and the power of the President to reappoint the Fed Chairman, or through the large financial institutions on Wall Street, which have a level of access to Fed decision-making not available to any other category of citizens. More importantly, since the onset of the current financial and economic crisis, the Federal Reserve and its chairman have proven to be highly fallible, having made many errors in judgment, not the least being their original overly-optimistic pronouncements when the first tremors from the subprime meltdown arose.

Congressman Grayson’s penetrating inquiry serves as a reminder that the ultimate systemic risk to America’s financial system and economic superstructure stems from allowing a small, fallible clique to make speedy decisions involving incalculable sums of public money without any consultation with or checks and balances from the nation’s elected representatives. This is not only fiscal tyranny by any other name; it is a recipe for unintended and disastrous consequences.


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Nouriel Roubini Speaks Truth to Power

July 21st, 2009 Comments off

When media reports surfaced last week claiming that the prophet of doom of the Global Economic Crisis, NYU economics professor Nouriel Roubini, had  “improved” upon his previously gloomy economic forecast and predicted the recession would end by the close of 2009, a stock market rally was ignited. It seems it does not take much to facilitate a bear market sucker’s rally on Wall Street at this time of global economic distress, including false rumours. To his credit, Roubini swiftly set the record straight with the following comment on his blog:

“It has been widely reported today that I have stated that the recession will be over ‘this year’ and that I have ‘improved’ my economic outlook. Despite those reports – however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.”

Nouriel Roubini has consistently stated that he expected the current recession-by far the worst America has experienced since World War II- to terminate by the close of the year. This has been his longstanding forecast. Thus, when he repeated this consistent prediction of his, the media went wild with excitement, discarding the continuity of his forecast and presenting his belief that by the close of 2009 the recession would end as a surprise revelation. With business journalism like this, no wonder the Dow Jones is searching new highs even as employment numbers continue to plummet.

What is noteworthy about Roubini’s most recent insights on the economic situation are their increasingly gloomy tone related to the mid-term and long-term prospects for the American economy. This is largely predicated on the growing fiscal imbalance in connection with the public indebtedness of the United States. Though a supporter of the vast deficit-driven stimulus programs and expensive bailouts of the financial sector owing to his belief that to negate these policy responses would have resulted in the collapse of the global financial system and the free fall contraction of the U.S. economy, Roubini is not unmindful of the their consequences. In that sense, he parts company from other advocates of deficit-creating economic stimulus packages, including Paul Krugman, who prefer to discard the danger of the vastly-expanding debt of the federal government.

In addition to his concern about the ramifications of unprecedented levels of budget deficits, Roubini is also worried that the end of the recession he has long forecasted will now be only temporary, to be followed by a double dip recession during the latter half of 2010, interrupted by anaemic growth of less than 1%.

The forces contributing to what, at best, will be a weak recovery in 2010 are linked to the uniformly negative statistics on employment which, according to Professor Roubini, have a direct impact on an economy as highly dependent on consumer spending as America’s. According to Roubini, commenting on the latest employment numbers,  “these raw figures on job losses, bad as they are, actually understate the weakness in world labor markets. If you include partially employed workers and discouraged workers who left the U.S. labor force, for example, the unemployment rate is already 16.5 per cent. Monetary and fiscal stimulus in most countries has done little to slow down the rate of job losses. As a result, total labor income — the product of jobs times hours worked times average hourly wages — has fallen dramatically.”

In his recent observations on declining labor income and its relationship to the continuing financial and economic crisis, Roubini identifies how this factor will exacerbate several interlocking indices. Consumer loan defaults across the board-mortgages, students loans, credit card debt-will continue to increase, adding to the level of toxicity of assets on the balance sheets of banks, and extending the credit crunch. Government revenues will decline while the need to fund unemployment benefits and other social expenditures will grow, further increasing budgetary deficits. Professor Roubini summarizes the growing contradictions in utilizing fiscal and monetary policy responses as the primary sovereign means of countering the worst global economic disaster since the Great Depression as follows:
“The higher the unemployment rate goes, the wider budget deficits will become, as automatic stabilisers reduce revenue and increase spending (for example, on unemployment benefits). Thus, an already unsustainable U.S. fiscal path, with budget deficits above 10 per cent of GDP and public debt expected to double as a share of GDP by 2014, becomes even worse. This leads to a policy dilemma: rising unemployment rates are forcing politicians in the U.S. and other countries to consider additional fiscal stimulus programs to boost sagging demand and falling employment. But, despite persistent deflationary pressure through 2010, rising budget deficits, high financial-sector bailout costs, continued monetisation of deficits, and eventually unsustainable levels of public debt will ultimately lead to higher expected inflation — and thus to higher interest rates, which would stifle the recovery of private demand.”
This leads to what economists refer to as a “W” or double dip recession. In other words, the very policy responses politicians and their advocates claim are vital to restoring the economy may, by the end of 2010, become the principal enabler of forces that will unleash round two of the Global Economic Crisis.

Nouriel Roubini had warned for years that the subprime mortgage sector would bring about financial and economic calamity, and take down much of the investment banking industry. Today we would all be wise to listen carefully to Professor Roubini’s warnings on the growing danger of a double dip recession and the long-term implications of a fiscal roadmap being pursued by our politicians that, in Roubini’s prescient words, is “unsustainable.” Given his track record, we can only discard the truth of which Roubini speaks at our peril.


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Larry Summers in Winter

July 19th, 2009 Comments off

The speculation after the November presidential election was that Barack Obama originally wanted  Bill Clinton’s former Treasury Secretary, Larry Summers, to serve in the same capacity in his administration. When criticism arose within his own party due to Summers’ strong ties to Wall Street, Obama selected  Timothy Geithner as Treasury Secretary and appointed  Larry Summers to serve as Director of the National Economic Council. In essence, Summers is serving as the principal economic advisor to President Barack Obama. In that role, Summers was undoubtedly one of the principal architects of the Obama administration’s so-called Economic Recovery Act, the $787 billion deficit-driven stimulus package that was supposed to put the brakes on the free fall in employment numbers in the United States.

Increasingly, many critics, not all of them Republican, have raised serious doubts as to the efficacy of the Obama stimulus plan. However, the Obama team is not about  passivity and turning the other cheek in the  face of public doubts. They are pushing back, and taking the lead in connection with the stimulus plan has been Larry Summers.

Appearing before the Peterson Institute for International Economics, Larry Summers wanted to make the case that the Recovery Act was, in fact, working. One would expect a man with as brilliant an intellect as Mr. Summers is alleged to possess to offer convincing analysis based on solid macroeconomic data. However, if that was your expectation, you are out of luck. This is what President Obama’s lead economic advisor had to offer as irrefutable “proof” that the administration’s Recovery Act was functioning according to plan: the number of people conducting Google searches for the term “economic depression,” which had increased last fall in the wake of the demise of Lehman Brothers, was now “back to normal.”

Is Larry Summers serious? This is the strategic data point that the key actor within Obama’s team of economic advisors is fixated on? Google searches are now the leading indicator and most persuasive metric of what’s happening to the real economy? Well, Mr. Summers, last fall, when you noticed  a spike in Google searches related to an economic depression, I established a new website on the crisis, GlobalEconomicCrisis. Com.  During the first few weeks that the website existed, there was hardly any traffic. Now, months afterwards, the site receives hundreds of thousands of hits per month.  Is that indicative of economic trends? Of course not. But neither is Larry Summers’ “observation.”

A far more relevant indicator of what is occurring with the real economy is the unemployment rate. Contrary to the declarations of the Obama administration that passage of the Recovery Act would stem the tide of job layoffs and stabilize the official unemployment rate at 8%, this sobering statistic has now increased to 9.5%, excluding the long-term unemployed and underemployed unable to find full-time jobs. All indications are that this number will exceed double-digits by the end of the year.

The attempt by Larry Summers to utilize nonsensical data in defence of the core economic policy of the Obama administration in addressing the most severe economic contraction in American history since the Great Depression not only fails to reassure an increasingly uncertain public; it increases scepticism regarding the suitability of Larry Summers to serve as the White House point-person on the economy. Those who had pre-existing doubts regarding Summers due to his role in dismantling the  Glass- Steagall Act ( which eliminated the  longstanding separation between investment and retail banks, leading to the subprime implosion that sparked the current economic crisis) will see them reinforced by the bizarre rationalizations he is now  increasingly resorting to in defence of the Obama administration’s economic policies.

Perhaps we should not be surprised by the convoluted logic Summers invokes in support of  his view of reality. After all, a major factor in his fall from the presidency of Harvard University was his “explanation” for why females were grossly under-represented in tenured academic positions in the sciences and engineering: “the different availability of aptitude at the high end,” according to Summers.

Starting with Alan Greenspan as long-serving Fed chairman, and continuing with the likes of Rubin, Paulson, Bernanke, Geithner and now Summers, the public has been subjected to propaganda from the political establishment that presents those who have been selected to design our economic architecture as being brilliant beyond all measure. If we have learned anything over the past year, it is that these supposed geniuses of macroeconomic policy are in fact highly fallible. If nothing else, Larry Summers’ perplexing descent into meaningless trivialities suggests that this key economic policymaker is as detached from reality as most of his recent predecessors. Rather than being reassured by his reference to Google searches that bright rays of sunshine are about to dissipate the dark economic clouds hovering over the nation, I see Larry Summers’ ascendancy  in the economic policymaking hierarchy of the Obama administration as the harbinger of a long recessionary winter which still lies ahead.


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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.


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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.



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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?

Will China’s Economic Crisis Metastasize Due to Her Stimulus Spending?

July 12th, 2009 Comments off

With a growing consensus by many observers that massive  public borrowing by the U.S. and other major developed economies to fund  economic stimulus  programs has largely failed to stem the free fall in employment numbers and achieve its primary objective, it appears that the remaining hope of eternal optimists is China. In fact, the most hopeful projections of a return to global economic growth are based almost entirely on the Chinese economy. How ironic that the saviour of global capitalism is determined to be the largest Communist state still in existence. Indeed, the latest IMF forecast of a return to modest growth is predicated on the aggregate projected growth of the Chinese economy  being sufficient to lift the net global growth figures for 2010.

How realistic is this iconoclast faith in the capacity of China to lift the entire planet out of the doldrums of the  Global Economic Crisis? In all probability, about as grounded in reality as U.S. Federal Reserve Chairman Ben Bernanke’s gospel of green shoots sprouting from the muck of financial and economic decay.

We live in a surreal universe of economic analogies. Ben Bernanke has become a horticulturalist, preaching the botanical gospel of green shoots.  Wall Street cheerleaders have displaced economic modeling with astronomy, peering through an opaque telescopic lens in search of enigmatic glimmers of economic light amid the nocturnal darkness of outer space. Policymakers are reassuring  their anxious publics by becoming weathermen of financial forecasting, boasting of meteorological evidence that the economic storm clouds are abating. But strangest of all is the collective obsession of the economic establishment in much of the developed world with oriental soothsaying.  They are reading tea leaves and  breaking apart Chinese fortune cookies in order to fathom what direction China’s economic policy is headed, convinced that the old global economic order they are so desperate to revive and preserve depends on decisions being made in Beijing.

The single most important policy decision made by China’s ruling circles was to enact an economic stimulus program of their own, totalling nearly $600 billion dollars. At first, desperate American and European economists and investors were fearful that the Chinese deficit-driven response to the Global Economic Crisis was not substantial enough. However, it is now recognized that as a proportion of GDP, China’s economic stimulus is by far the largest in the world. It is far larger than the Obama stimulus package, for example, when calculated as a proportion of the total national GDP. Furthermore, the Chinese are executing their response to the synchronized global recession at a much faster pace than just about any other economy, including the United States.

On paper, the Chinese fiscal stimulus package appears to be bearing fruit. Projected growth rates for the Chinese economy in 2009 are currently predicted to exceed 7%. That figure alone is responsible for the overall negative global growth rate being forecasted by the World Bank not appearing even  more sombre. No wonder so many policymakers and private financiers are looking gleefully at China’s economy as the global restorer of capitalism.

When one looks beyond the manicured statistics, however, there appears a very dangerous side to China’s economic stimulus spending that may, in the long-term, make things much worse for China and the overall global economy. The Chinese economy was based on an economic model that is now exposed as fundamentally flawed. Essentially, China functions as the world’s factory, while its frugal citizens provided the savings that were transformed into credit that enabled U.S. consumers, in particular, to buy the output of China’s assembly plants. The financial tsunami and credit crunch that has afflicted the world has broken that model, reflected in the decline in Chinese exports from a year ago by 30%. In theory, the Chinese stimulus program is supposed to make up for the contraction in exports by boosting domestic demand, so as to arrest  the rise in unemployment. However, a different dynamic appears to be underway in China.

As dictated by the authorities in Beijing, staggering amounts of cash are being pumped into the economy. To illustrate the flow of capital being stimulated  by China’s fiscal policy measures, in the first half of 2009 Chinese banks loaned $1 trillion. By way of comparison, in all of 2008 only $600 billion was provided to borrowers by China’s banks and financial institutions. With credit now flowing so free and easy towards Chinese companies, they are responding not by engaging in enhancing production and employment, but in rash speculation.  In effect, the corporate sector in China is utilizing the stimulus money being doled out by Beijing to engage in speculation involving commodities, real estate and equities. In fact, Chinese companies are now establishing dedicated departments not focussed on the intricacies of marketing, sales, R & D and production, but on the sole task of speculating with the money being literally forced down their throats by China’s banks.


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Easy credit leading to speculation and asset bubbles seems to be the path China is embarked upon. Where have we seen this before? In the United States, as a result of the Alan Greenspan bubble, when the Fed set interest rates too low, setting the stage for the subprime mortgage collapse in the United States.

As with deficit-driven stimulus spending elsewhere, China’s fiscal response to the economic crisis is a stop-gap measure, and cannot be continued indefinitely. What happens when Beijing halts the pump-priming and slows down the printing presses? A strong possibility will be the mother of all asset bubble deflations.

The pundits who believe that China’s economic policies are the most important factor in the ultimate outcome of the current Global Economic Crisis may be correct, but in a manner that is an inversion of their hopes. Rather than rescue the global economy, China’s debt-induced credit fever may be setting the stage for an asset implosion of such severe intensity, it may be the final stage leading to an irreversible global depression.

Obama’s Economic Crisis Team is Full of Green Shoots

July 9th, 2009 Comments off

Larry Summers, Timothy Geithner and Ben Bernanke may be fated to go down in history as the three horsemen of the global financial and economic apocalypse. Though Fed Chairman Bernanke was inherited by the Obama administration, Geithner, Summers et al were the chosen economic team of the Obama administration. In effect, their selection was the single most important decision made by President Barack Obama  in response to the Global Economic Crisis. Regrettably, thus far their performance has been found wanting. Most disconcertingly, many of their public statements are Bush 43 redux, a smorgasbord of overly-optimistic platitudes utterly dichotomized from economic realities. Perhaps the one phrase that is most likely to haunt the Obama administration is one uttered originally by Ben Bernanke in the spring; those perennial “green shoots” that the Fed Chairman could see sprouting amid the recessionary quicksand engulfing the global economy.

Like a barbershop quartet, other senior Obama economic policymakers and advisors sang the happy melodies of these enigmatic green shoots. This happy talk was not without its effect; in large measure the bear market rally on Wall Street, what others have referred to as a “dead cat bounce,” was a by-product of investor optimism fuelled by the green shoots serenade flowing from the banks of the Potomac.

As Yogi Berra would say, “it’s déjà vu all over again.” George W. Bush’s economic team was also full of joyful verbiage, until the floor literally collapsed from under them with the disintegration of Lehman Brothers. In the case of the Obama economic crisis management team, however, this theory of hope triumphing over reality has been executed with even more creative dexterity. With all credible mathematical indicators revealing that most of the largest U.S. banks are functionally insolvent, the Treasury Department concocted a totally cosmetic set of so-called “stress tests” to “prove” that these insolvent banks were, actually, “solvent.” In addition, by forcing changes in the FASB rules through political intervention, some of these banks were even able to show a profit in their Q1 results.

The June unemployment numbers, however, are throwing a cold dose of reality in the direction of the pontificators of ephemeral green shoots. With the publicly released U3 Labor Department jobless report showing the level of U.S. unemployment having risen to 9.5%, and the less publicized but far more accurate U6 report showing actual unemployment and underemployment now at a staggering 16.5%, it is quite clear that the American economy, along with most of the planet, is still undergoing a painful contraction. The fact that one in six Americans is either unemployed or trapped in low-paying part-time employment due to the lack of full-time positions, is a far more significant economic indicator than short-term gyrations on Wall Street or periodic upward anomalies confronting an otherwise downward economic trend.

Amid all the green shoots fantasizing, it must be recalled that the United States economy depends on the spending of the U.S. consumer for more than 70% of its aggregate demand. The real significance of rising unemployment, exchanging full-time jobs for part-time employment and the fear factor inhibiting spending by those who think they may lose their jobs, is a radical contraction in consumer spending. It is this reality more than any other that is weighing heavily on the nation’s economic superstructure. Not only is joblessness rising. After years of American consumers spending more than they earned, they have now shifted radically towards a high level of savings. Transitioning from a negative savings rate, the U.S. wage earner now banks nearly 7% of his/her declining take- home pay, despite virtually zero interest being offered to savers due to the Federal Reserve’s zero interest monetary policy.

The American consumer is scared, and is not being seduced by talk of green shoots emanating from Washington. With consumer spending undergoing significant contraction not only in the United States but in virtually all major economies throughout the globe, increasing pressure will bear on securitized investments based on loan portfolios directly or indirectly linked to consumer spending. Retail and shopping mall mortgages will witness higher levels of defaults, in conjunction with the already virulent afflictions  hammering sub prime and prime residential mortgages, commercial office space mortgages, consumer loans and credit card debt.

The Obama administration apparently believed that the original $700 billion TARP Wall Street bailout passed by Congress in the last weeks of the Bush administration, and President Obama’s $800 billion stimulus spending bill, would suffice to stabilize the economy and put the brakes on the free fall in employment numbers. However, jobs are still being shredded each month by the hundreds of thousands, while banks still suffer from balance sheets saturated with toxic assets. The FDIC has already closed more U.S. banks this year than in all of 2008.

As I indicated in a recent piece, there is already serious discussion occurring in the corridors of power in Washington on the necessity of a second stimulus spending package. This is an acknowledgement that the Obama economic crisis team, thus far, has been an abject failure. However, with so much money already having been borrowed by the U.S. government on a variety of schemes supposedly aimed at saving the economy, further large doses of public debt bring along very dangerous negative implications of their own.

In a recent column in the Financial Times of London, Mohamed A. El-Erian, chief executive and co-chief investment officer of PIMCO, the world’s largest bond trading firm, offered the following observation:
“The bottom line is a simple yet powerful one. The global crisis is morphing again. Having already contaminated (in a sequential and cumulative manner) housing, finance and the consumer, it is now threatening the potency and credibility of the economic policy making apparatus. As far as I can see, there are no first best policy responses that are readily available and easy to implement. Instead, the economy will continue to struggle, navigating both the adverse implications of last year’s financial crisis and the unintended consequences of the experimental policy responses. Given the inevitable socio-political dimensions, this story will play out well beyond the realm of the economy, policymaking and markets.”

Mohamed El-Erian is not offering green shoots, but he does speak the truth. Unfortunately, the truth is so bitter, it is unlikely that President Obama’s principal economic advisors will face up to the harsh and even brutal realities of the Global Economic Crisis until it is far too late for any policy response to be effective.



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Michael Jackson Was No Beethoven

July 8th, 2009 Comments off

No more revealing metaphor can exist for the  distortion of mass culture than the  media-induced frenzy over the demise of Michael Jackson. One would  think there is no Global Economic Crisis, or unending wars in Iraq and Afghanistan, not to mention dangerous nuclear proliferation in North Korea and Iran, which could spark a world war. No, as far as the mass media of the planet, and especially corporate media in the United States are concerned, the death of the pop music icon, Michael Jackson, was an unheralded business opportunity. Though  the dead freak-show that was Michael Jackson is being proclaimed as the “King of Pop” by sycophants and marketers, this spectacle has nothing to do with high art and  musical culture.

The late Mr. Jackson was no doubt a talented musical artist. But no more so than many others  who are active in the music industry. His good fortune was to have had the marketing machine that created the Michael Jackson “brand,” in effect the commoditization of this tormented and unbalanced soul. However, even setting aside the peculiarities and accusations involving Michael Jackson, he was no Beethoven or Mozart. Neither would I rank him in the realm of Tchaikovsky or Dvorak. He in no way can even be remotely compared to the giants of music of the classical period. Even within the realm of 20th century music, Michael Jackson pales before the sheer genius of  Duke Ellington, Count Basie or the torrential musical perfection embodied by a Frank Sinatra. Yet, based on the  media frenzy, one would think he rivalled Ludwig van Beethoven as a seminal figure in musical historiography.

What we are witnessing is the fabrication of a celebrity legend, which will in effect become the new, post-death Michael Jackson brand. Necrophilia is an inseparable element of this rebranding process, witnessed by the ghoulish non-stop worldwide television coverage of the shrouded corpse of Michael Jackson being airlifted to the Los Angeles county morgue. However, this was merely the prelude to the global media circus that infused the public memorial for the deceased entertainer. His remains secured in a golden casket, celebrity upon celebrity heaped praise upon Jackson as though he was the most pivotal human being of the age.

There was a discordant Stalinist character to this contrived hero-worshipping of a man once indicted on a charge of child molestation. Here was the new cult of personality, whereby a flawed human being becomes the most perfect and consequential of mortals. We have seen and criticized this behaviour in North Korea, where the dictator, Kim Jong-Il, is proclaimed by state propaganda as an infallible genius worthy of mass adulation. How then is this media-manufactured hero worship of Michael Jackson any different?

At best, the media frenzy over the mortification of Michael Jackson is a severe distraction from the real and critical problems confronting the human race in the first decade of the twenty-first century. At worst, the obsequious tributes to this bizarre life now ended are a dark manifestation of a civilization anticipating its own implosive ending.


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