Global Economic Crisis

In the meantime, senior executives were removed from five of Nigeria’s largest banks. Amid the turmoil, the government was forced to provide $2.6 billion in emergency recapitalization to these same banks, whose balance sheets have been eroded by toxic loans. There are allegations that chicanery was involved in the non-payment of bank loans, prompting the government to issue a series of ultimatums to supposedly deadbeat  tycoons to pay up or face prosecution.

Undoubtedly, the Nigerian banking imbroglio is still to be sorted out. In the meantime, a major oil exporting economy is in the grips of a banking crisis that is as severe as it is murky.

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Official figures just released reveal that Japan’s unemployment rate has increased to 5.7%, its highest level since the end of the Second World War. To put this number in perspective, the number of Japanese workers unemployed is more than one million higher than one year ago. In addition, consumer prices continue to fall, continuing Japan’s dangerous deflationary spiral. Deflation is particularly feared in Japan, as this destructive economic force was responsible for the prolonged L shaped Japanese recession of the 1990s.

The horrible economic news will undoubtedly be the kiss of death for the ruling Liberal Democratic Party, expected to go down to a humiliating landslide defeat in this weekend’s general election in Japan. However, it is doubtful if even a political transformation in Tokyo will bring quick relief to the Japanese economic crisis.

Under the tutelage of Chairman Ben Bernanke, the Federal Reserve system has achieved the heights of power, while simultaneously the economy it  presides over has descended to the depths of  despair. This Zen paradox sums of the inexplicable success of Ben Bernanke. Having ignored or mistakenly assessed all the warning signs that the American housing bubble had burst and was set to take down the Wall Street investment banks, the panicky and massive policy measures undertaken by Bernanke in the wake of the collapse of Lehman Brothers last year have made him the improbable hero of the global financial and economic crisis. With Bernanke set to be reappointed as Fed Chairman by President Barack Obama, it seems both he and the Federal Reserve have successfully consolidated their monetary and economic omnipotence.

Yet, some cracks in the foundations of the Fed’s  previously unassailable power have begun to emerge. Manhattan Chief U.S. District Judge Loretta Preska has issued a ruling in the case of Bloomberg LP v. Board of Governors of the Federal Reserve System that marks the first challenge to the virtual dictatorship on monetary policy that Bernanke has been able to impose on Congress and the media. The lawsuit had been filed by the Bloomberg news organization after the Federal Reserve refused to disclose the recipients of $2 trillion in emergency loans it provided to troubled banks. The rationalization used by the Federal Reserve for its refusal to follow the legal requirements of the Freedom of Information Act truly defines the meaning of arrogance. If the American taxpayers, who are ultimately on the line for the loans, were to know the identity of the banks receiving financial aid from the Federal Reserve, they would act irresponsibly and perpetuate a run on those very institutions, claim Bernanke‘s minions. In other words, Nixonian logic applied to the massive indebtedness of the American taxpayer, who is not entitled to know for whom the balance sheet of the Federal Reserve is being overloaded with toxic assets.

In its lawsuit, Bloomberg stated that disclosing the beneficiaries of the Federal Reserve‘s largesse is “central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”  However, Bernanke and company are not interested in illuminating the public in their understanding of the government’s role in the crisis, especially that of the Federal Reserve. Full disclosure might very well contradict the image being crafted by the Fed’s aggressive public relations program to portray Ben Bernanke as the saviour of the American economy and global financial system.

The Fed may still appeal Judge Preska’s ruling. However, if the ruling prevails and becomes precedent, it will mark a rare but important defeat for the Federal Reserve’s cone of silence and lack of transparency.

My prediction: this will not be the last time the OMB significantly hikes its projected deficits forecast.

The Obama administration will remove $250 billion for additional emergency funding for the financial system, and $78 billion for additional funds for Federal Deposit Insurance Corporation from the budget. That takes the projected deficit down to just below $1.6 trillion. Add those figures back in and the deficit would have been forecast at over $1.9 trillion, higher than the previous updated projection.

Of course, this is simply a bookkeeping exercise. With the FDIC shutting down insolvent banks at warp speed, and the global credit markets still largely frozen with toxic assets, who does the Obama administration think it is kidding?

In the New York Times the oracle of Omaha, billionaire investor Warrent Buffet, has written a powerful piece warning about the growing danger of America’s expanding debt to GDP ratio. While defending massive deficits in the short run as necessary to save the financial system from collapse and economy from imploding, Buffet warns that in the long term an answer must be found for America’s fiscal imbalance.

“Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress,” concludes Buffet in his piece.

If the fate of fiscal sanity lies with the same Congress that is spending money like a fleet of drunken sailors, what are the odds that America will avoid hyperinflation?

In the wake of last fall’s  $700 billion taxpayer funded bailout of the financial and banking sector, the so-called TARP program, the decision makers in Washington have been engaging in a fiscal masquerade. The objective: convince the public that America’s banks, with balance sheets choking on toxic assets, are actually well-capitalized and secure. This, despite clear evidence that at least $2 trillion in additional funding would be needed to clean up the nation’s problem banks. To convince U.S. citizens and global investors that all is well with the American banking system, Treasury Secretary Timothy Geithner concocted a misnamed “stress tests” to demonstrate the fiscal health of the country’s banks. Not surprisingly, the major banks “passed” the Geithner test, for the most part with flying colors. My readers will recall that I labelled the Geithner stress test a fraudulent exercise in deception. Now, it is reality that is casting its impartial verdict.

The Federal Deposit Insurance Corporation (FDIC),  over the past few days , closed several banks, including Alabama based Colonial Bank. This institution, with $25 billion in assets, represents the 6th largest bank failure in American history. So far, 2009 has witnessed 77 bank failures in the United States. In all of 2008, the year that the banking crisis exploded, 35 banks were shut down by the FDIC, and only 3 in 2007.

With the number of bank failures accelerating, and running far ahead of last year’s pace, it is preposterous to conclude that the U.S. banking sector is well capitalized and strong enough to endure a severe economic recession. Yet, that is exactly the fantasy world the key economic policymakers in the Obama. administration  are beckoning us to embrace.

This problem of cognitive dissonance is not a uniquely American one, however. In Western Europe there is a numbing resistance to understating how vulnerable that region’s banks are to the disastrous and worsening economic situation in Eastern Europe. As with America and the UK, former Soviet bloc countries have suffered a severe contraction in home prices. In addition, many East European homebuyers obtained their mortgages from banks located in Germany, Italy, Austria and other parts of Western Europe. The loans were structured in euros, and now virtually all the national currencies in Eastern Europe have severely declined in value in relation to the euro. The results is a wave of mortgage defaults, which are eroding balance sheets throughout the European banking system.

Action speaks louder than words. Economic realities in the United States, Eurozone and UK, and the multiplication of bank failures in America, point to the futility of trying to pretend a problem does not exist, then converting that ignorance into a solution. Just as the political decision makers lost control over the financial system in 2008, they seem headed down the same path now, having failed to learn from their recent mistakes, which have already inflicted such a fearful cost on the global economy.

At a time of severe global and economic crisis, America is even more dependent than in the past on its traditional open-door policy towards foreigners and their intellectual capital. During the height of the Cold War, artists and intellectuals from across the globe flocked to the United States, not the Soviet Union. This longstanding contribution stemming from the free flow of ideas and culture has played no small part in America’s economic and social development.

Eight years after 9/11 that tradition seems to have been transformed, however, by a national security complex that seems convinced that mindless profiling designed to humiliate foreign visitors is a valid substitute for effective intelligence work and sound counterterrorism strategy. Several recent incidents involving high profile Muslim visitors from India seem reflective of a pattern that will neither protect America from Al-Qaeda nor enhance her economic competitiveness at a time of global financial contraction.

Abdul Kalam is the former president of India, the head of state of the world’s most populous functioning democracy. A national poll picked Kalam as “India’s Best President.” He is also a Muslim, and a renowned Indian patriot. As a scientist and aeronautical engineer, he played an important role in developing India’s missile technology, and his work was seen by his compatriots as a valuable contribution towards enhancing India’s national security. However, his stature, and even Indian airport security protocols that exempt dignitaries from being frisked, did not exempt the personnel from Continental Airlines from doing just that, as he prepared to board his flight to the United States.

What the former president of India had to endure is apparently not an isolated incident, but rather reflective of a pattern. Another recent example has sparked deep outrage in India.

The Indian community in Chicago invited one of the leading actors  from India to participate in the windy city’s India Independence Day parade. He is Shah Rukh Khan, known as the “King of Bollywood.” However, he might as well have been King Canute, as far as the INS personnel at Newark International Airport were concerned.  He was detained and subjected to humiliating treatment. It seemed that he was going to be forbidden entry into the United States, until the Indian consul general intervened.

The two incidents  above may involve high profile celebrities, however, large numbers of academicians, entrepreneurs and professionals are receiving the same treatment, though without the media spotlight. There is a common thread in each case; a Muslim sounding name seems to have been the sole basis for detaining  foreign visitors, and subjecting them to at times humiliating and offensive treatment.

Unquestionably, especially after 9/11, the United States, as with any sovereign country, has the right to protect its national security. There is a reason why visas, passports, and INS checkpoints are required at ports of entry. However, an important aspect of national security is adopting measures that exhibit common sense.  It doesn’t seem logical to believe that Al-Qaeda, not generally regarded as a stupid organization, will send only operatives into the United States who have Muslim sounding names. And how does the “King of Bollywood” or former president of India become a mortal danger to America’s national security?

Islamophobia has run amok in the U.S., and it is actually undermining the nation’s security and economic interests. One trend has already developed;  America is gaining a reputation as a land that does not welcome guests with Muslim names. A growing number of students and entrepreneurs from Muslim countries are traveling to China in lieu of the United States. As America becomes increasingly seen as hostile to Muslims irrespective of who they are, while China is perceived as welcoming, these trends will translate into economic realities. Ultimately, there will be a price to pay, in terms of America’s economic security, if it continues to inflict inexplicable humiliation among human beings who clearly harbour no ill intent towards the United States. There cannot be true national security without sanity and reason.

At  its peak level of GDP, the U.S. economy depended on the American consumer for more than 70% of its output of goods and services. It has been the deleveraging of the American consumer, and to a growing extent his/her unemployment, that has been the catalyst of the U.S. recession. And not only America; the centrality of the U.S. consumer to the overall global economy has meant his pulling back on a debt induced shopping spree has sparked a worldwide synchronized recession.

The vast amount of money that Uncle Sam has borrowed to fund a nearly $800 billion economic stimulus program is supposed to substitute for the falloff in consumer demand, stop the avalanche of job losses and in the process regenerate consumer spending. The perception that this policy response was beginning to bear fruit has been the foundation of a recent flurry of statements emanating from the Federal Reserve, intimating that the recession was winding down, with recovery just around the corner. Both the Fed, Obama administration and Wall Street fully expected that the July retail sales figures would reflect a return to growth in consumer spending, juiced up by a taxpayer funding “cash for clunkers” gimmick aimed at kick-starting auto sales.

When the official sales figures were released by the Commerce Department, jaws dropped right through the floor. Instead of the .7% rise that was expected, July’s retail sales figures revealed a decline of .1%. However, the reality was much worse than even the posted decline, for the July figures were artificially inflated by a large increase in automobile related products due to “cash for clunkers.” Without the engineered car driven increase in consumer purchases, the actual retail sales contraction was .6%.

The ugly truth is that no matter how manipulated official economic statistics are, including the U3 unemployment number, the reality is that total consumer purchasing power, reflecting the number of hours worked multiplied by average wage, has declined to a level that makes it virtually impossible to recreate vigorous economic growth. Despite the happy talk from Washington,  I think it would be surprising if the Obama administration does not ask Congress for a second massive stimulus package before the end of the year.

Should a second stimulus package be proposed by President Obama, he may encounter stiff resistance from Republicans and fiscally conservative Democrats over concerns about the exploding national debt. However, it is likely that the Obama administration will place a higher priority on going into the 2010 mid-term elections with the ability to claim they have reduced unemployment rather than positioning themselves as fiscally responsible.

Higher deficits, however ,create the danger of inflation and much higher interest rates. Escalating interest rates will serve as a brake on economic expansion, defeating the purpose of deficit  funded stimulus programs. Now, in that situation, one can always resort to monetary policy, with the Federal Reserve reducing interest rates. However, in this unique economic disaster our planet is currently navigating its way through, the Fed, as with many central banks throughout the world, has already reduced its funds rate to close to zero.

Could the Obama administration be running out of options? If fall retail sales continue to plummet and unemployment rises, things could get even more ugly for the problematic American economy.