April 9, 2009
Light at the End of the Tunnel? Wrong!The Decade of Darkness
By MIKE WHITNEY
It's been 21 months since two Bear Stearns hedge funds defaulted, setting off a series of events which have led to the gravest economic crisis since the Great Depression. No one expected the financial earthquake to shake this hard or ripple this fast. The failure at Bear triggered a shock in the secondary market where mortgage loans are repackaged into securities and sold to investors. That market is now completely paralyzed cutting off 40 percent of funding for consumer and business loans and thrusting the broader economy into a deep recession. Banks and financial institutions have been forced to curtail their off-balance sheet operations and build their reserves which have ballooned from $45 billion to nearly $700 billion in the last 6 months alone. Like millions of homeowners who have seen their home equity vanish and their retirement savings slashed in half, the banks are hunkering down, hoping they can outlast the deflationary hurricane ahead.
Deteriorating economic conditions have taken their toll on consumer confidence and forced businesses to lay off employees that won't be needed during the slowdown. The system is hollow as an empty tomb with overcapacity. Demand is falling faster than any time since the 1930s. Inventories will have to be trimmed and budgets cut to muddle through the down-times. Foreign trade has slowed to a crawl, auto sales are down by 40 per cent or more, and unemployment is rising at a rate of 650,000 per month. Policymakers have pushed through a $800 billion stimulus plan, but it won't be nearly enough to stop the steady rise in unemployment or take up the slack in an economy where industrial output has been cut in half, new home construction has dropped to record lows, and manufacturing has fallen off the cliff. Economists warn that when governments don't step in and provide stimulus to increase aggregate demand, consumers cut back sharply on spending and push the economy deeper into depression.
"The current crisis is more serious than the worst previous recession of the postwar period, between 1979 and 1982, and could conceivably come to rival the Great Depression, though there is no way of really knowing. Economic forecasters have underestimated how bad it is because they have over-estimated the strength of the real economy and failed to take into account the extent of its dependence upon a buildup of debt that relied on asset price bubbles. In the U.S., during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plants and equipment was about a third of the previous, a postwar low. Real wages were basically flat. There was no increase in median family income for the first time since World War II. Economic growth was driven entirely by personal consumption and residential investment, made possible by easy credit and rising house prices. Economic performance was weak, even despite the enormous stimulus from the housing bubble and the Bush administration’s huge federal deficits. Housing by itself accounted for almost one-third of the growth of GDP and close to half of the increase in employment in the years 2001-2005. It was, therefore, to be expected that when the housing bubble burst, consumption and residential investment would fall, and the economy would plunge. " ("Overproduction not Financial Collapse is the Heart of the Crisis", Robert P. Brenner speaks with Jeong Seong-jin, Asia Pacific Journal)
http://www.counterpunch.org/whitney04092009.html
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