The Economic Collapse

...In ad­dition, the safety net of last resort for jobless individuals without children-state general assistance programs-has essentially disap­peared...

...So the government pro­vides money, but acquires virtually no influ­ence over the recipient banks' behavior...

...The weak economy is generating great fiscal distress in the states...

...The "shadow banking system"-the se­curities dealers, hedge funds, and other non-bank financial institutions that defined deregulated American finance-is unraveling as I write...

...As foreign capital has fled and confidence evaporated, the emerging world's stock markets have plummeted (ín some cases losing half their value) and its currencies have tumbled...

...These are levels of public debt that have not been seen since the early 1950s, when the debt was still winding down from its explosive growth during the Second World War...

...t55EHT The Economic Collapse Mark Levínson IN THE FALL of 2008, a little more than a year after the Bank for International Set­ tlements (a Switzerland-based organiza­tion that fosters cooperation between central banks) warned that "years of loose monetary policy have fuelled a giant credit bubble, leav­ing us vulnerable to another 1930s slump," the combustive concoction of free market funda­mentalism, corporate-dominated globalization, stagnant wages, growing inequality, greed, ex­cessive leverage, and financial innovations such as securitization finally exploded...

...In 2006-2007 he was the co-director of the Economic Policy Institute's Agenda for Shared Prosperity...

...The global economy wí11 not pro­vide a lifeline for the United States . The IMF forecasts a global recession for 2009, and for the first time since 1945, it predicts that the advanced countries of the world wí11 experience an economic contraction . The housing market is suffering its biggest slump since the 1930s...

...The seizing up of the credit market caused havoc, as foreign banks abruptly stopped lending and stepped back from the most basic banking services . Even China's eco­nomic juggernaut started to slow...

...This raises the spectacle of banks borrowing money (cheaply) from tax­payers in order to maintain their common stock dividends...

...down­turn is just beginning...

...There is a huge public in­vestment deficit in many areas : physical infra­structure, such as roads, bridges, and mass transit ; schools ; energy-producing technology, such as improved solar and wind generation ; electrical grids...

...Other coun­tries have already announced stimulus pack­ages that include public investment : China, $586billion...

...James Galbraith has proposed a foreclo­sure moratorium that would buy time while a Homeowner Loan Corporation is established to rewrite millions of unsustainable mortgages . Regulation . In testimony before the House Financial Services Committee, Robert Kuttner described the financial abuses of the 1920s, the effort in the 1930s to create a financial sys­tem that would prevent repetition of those abuses, and the steady dismantling of those safeguards over the last three decades in the name of free markets . According to Kuttner, "Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and endur­ing...

...consumer spending...

...In this climate, banks, and especially the unregulated shadow banking system, devel­oped fiendishly complex, sometimes outright fraudulent products and then generated huge purchases of these "assets" by other parts of the financial system through massive exten­sions of credit...

...government made its most dramatic interventions in finan­cial markets since the 1930s...

...Expanding unemployment insurance is long overdue and is particularly needed now...

...Fifth, contrary to many sug­gestions, Secretary Paulson did not require participating banks to raise private capital parci passu with the government's capital in­jections, which would at least have provided a valuable market test of viability...

...Once the financial mess gets straightened out, we need to build an economy whose ben­efits are more broadly shared...

...In Europe, economies are unraveling after ten years of growth financed by borrow­ing...

...The credit shock is reverberating across the world...

...General Motors is hem­orrhaging $2 billion a month and is on the verge of bankruptcy...

...Relief for Homeowners . Too many homeown­ers are being needlessly thrown out of their homes...

...We're still dancing...

...Fourth, participating banks are allowed to continue to pay dividends to their shareholders...

...Second, Secretary Paulson decided to purchase preferred stock with no voting, or other control, rights...

...President Bill Clinton, triangulating the Gingrich revolution, declared that "the era of big government is over" and abolished the Glass-Steagall Act, which provided for regula­tory firewalls between commercial banks, in­surance companies, securities firms, and investment banks (see Timothy Canova's "Legacy of the Clinton Bubble," Dissent, Sum­mer 2008...

...In Newt Gingrich's Contract With America, that "magic" gave free license to the DISSENTI Winter 2009 .61 anti-tax, anti-government, pro-deregulation ín- slump, as happened in the 1930s . stincts of an increasingly fervent Republican Party...

...Sixth, the capital injections are being made with no pub­lic-purpose quid pro quos at all-e .g., a mini­mal lending requirement, or a pledge to refinance more mortgages...

...No one can be certain about the staggering scale of the eventual financial losses, which the IMF now puts at $1 .4 tril­lion, or whether they will precipitate not just a recession but a deep and protracted global T HE GROWTH OF the financial sector rela­tive to the real economy-to the point where it has recently accounted for one­third of U.S...

...economy...

...Those fears depressed the values of securities based on mortgages, and made them "troubled .") Foreclosures are personally painful and eco­nomically costly...

...For example, subprime mort­gages were bundled together with other types of mortgages and corporate bonds . And, as Richard Bookstaber, author of A Demon of Our Own Design, put it, "Like a kid who brings his cold to a birthday party, the sickly subprime mortgages mingled with these other instruments...

...And if housing prices continue to drop as expected, twenty-three million mortgage holders wí11 have mortgages worth more than their houses . In addition to the impact of the shrinking construction and housing-related sectors, an even more important problem of the bursting housing bubble is that U.S...

...It is a crisis of a failed thirty-year eco­nomic and social model . It started in the late 1970s, when a resurgent business community won support for the argument that inflation and low growth were the result of too much public spending, too much taxation, too much union power...

...The Bush presidency sealed the market fundamentalist victory...

...the current bailout wí11 push this over 72 percent, and there wí11 probably be more bailouts as well as further deficit in­creases due to automatic spending increases and revenue declines as the economy weakens...

...Even with these debt levels, it is crucial that Barack Obama proceed with a large fiscal stimulus package that includes the following elements . Public Investment...

...Congress should immediately provide $100 of jobs and help stabilize the economy...

...When you strip them down to their es­sence, they are variations on a few hardy perennials-excessive leveraging, misrepresen­tation, insider conflicts of interest, non-transDISSENT I Winter 2009 . 65 parency, and the triumph of engineered euphoria over evidence...

...and Korea, $11 billion...

...Because states cannot run defi­cits, they must close their shortfalls by cutting spending or raising taxes . Both approaches take money out of the economy, making the down­turn worse...

...Since the financial crisis has grown to be so complex and multí-faceted, it is worth recall­ing that it all began with falling house prices and defaults on mortgages-or, rather, fears that defaults would become rampant...

...Much of this bor­rowing and spending has come to an end, and the third-quarter 2008 report saw the largest drop in consumer spending in twenty-eight years...

...Eventually, the music stopped, Citigroup lost tens of billions of dollars, and Prince lost his job . No one in the interconnected world of glo­bal finance knows who is holding the most toxic assets and who is on the hook for losses if and when borrowers default . The financial sector spread the huge risks it had created in such a way that few, if any, islands of security remain intact...

...MARK LEVINSON is chief economist for UNITE-HERE...

...Fix the Safety Net...

...As a result, many of the female, low-in­come, and part-time workers who now make up a significant portion of the labor force do not qualify for UI benefits when they are laid off...

...This regulatory framework has failed to protect homeowners, and it is now clear that it made no sense for our We are finally emerging from Ronald Reagan's shadow...

...and, in effect, extend­ed government deposit insurance to $3 .4 trillion in money market funds . Then, in the largest government rescue op­eration in history, Treasury Secretary Henry Paulson announced a plan to buy up to $700 billion of toxic securities from troubled banks . Incredibly, Paulson's original plan, only three typed pages, would have given Wall Street al­most unrestrained access to public revenues at little cost...

...Countries that run trade surpluses with the As recently as 2005, when talking about the housing bubble, Alan Greenspan said that "widespread securitization of mort­gages make[sl it less likely" that price declines would "have substantial macroeconomic implications ." The very thing Greenspan thought would reduce risk, in fact, spread risk . **Dean Baker deserves special mention for sounding the alarm about our bubble economy for years . Eight years ago, he wrote in these pages, "It is hard to get a good view of the economic landscape from inside a bubble . . . There is likely to be a whole range of accounting and financial sins that wí11 be exposed in the deflation of the bubble . . . .Many other forms of creative bookkeeping will come to light after a market crash has made them impossible to sustain . Only after the crash wí11 it be possible to determine the extent to which the financial system is crippled ." ("Holes in the 'New Economy," Dissent, Summer 2000...

...But it also pro­vides us with a once-ín-a-lifetime chance to create a more equitable U.S...

...they undermine property val­ues ; and they lead to fire sales of homes, which depress house prices further, thereby continu­ing the vicious cycle...

...corporate profits-was built on a now rapidly collapsing house of cards . An out­of-control financial sector also lies behind the destructive wave of private-equity buyouts that have has saddled productive companies with huge and perhaps unmanageable debts, and wild, speculation-driven gyrations in energy, food, and other commodity markets . These have had particularly devastating consequences for poor developing countries . "The crisis," according to Nouriel Roubini, who along with a few others has been pre­dicting this catastrophe for several years, "was caused by the largest leveraged asset bubble and credit bubble in the history of humanity . . . a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the big­gest real sector and financial sector deleverag­ing since the Great Depression ." U.S...

...In an important speech during the primary campaign, Obama demonstrated that he clearly understands the need to re-regulate . We need to regulate institutions for what they do, not what they are . Over the last few years, commercial banks and thrift institutions were subject to guidelines on subprime mortgages that did not apply to mortgage brokers and companies . It makes no sense for the Fed to tighten mortgage guidelines for banks when two-thirds of subprime mortgages don't origi­nate from banks...

...The Treasury plan was rejected by the House of Representatives and subse­quently modified by the Senate...

...Commodity exporters were thriving, thanks to high prices for raw ma­terials . Even as talk mounted of the rich world suffering its worst financial collapse since the Great Depression, emerging economies seemed a long way from the center of the storm...

...Relief to State and Local Governments...

...Their own banks held few of the mortgage-based assets that undid the rich world's financial firms...

...Nor has he purchased any mortgage-related assets . . . I fault the Treasury on at least six dimen­sions: First, while I understand the need to keep proprietary information confidential, the program is enshrouded in too much secrecy...

...The version approved by Congress promises to make a larger share of any subsequent profits into pub­lic revenues . The landscape of American finance has radically changed . The independent invest­ment bank, a Wall Street animal that relied on high leverage, is now extinct . Lehman Broth­ers has gone bust, Bear Stearns and Merrill Lynch have been swallowed by commercial banks, and Goldman Sachs and Morgan Stanley have become commercial banks them­selves...

...This will preserve thousands Because of the collapse of finance, consump­tion, and investment, the only way to mitigate the effects of the recession wí11 be a massive, expansionary fiscal policy-in the range of 4 percent of GDP or $600 billion and perhaps even more...

...The Federal Re­serve and the Treasury nationalized the country's two mortgage giants, Faunie Mae and FreddieMac...

...More than three million fami­lies are likely to lose their homes by the end of 2009...

...For much of the past year the emerging world watched the Western financial hurricane from afar...

...It is difficult to see a way out of this mess without reducing the coming tsunami of defaults and foreclosures . Congress wrote legislation that, at numerous points, exhorts, encourages, and even directs the Secretary of the Treasury to use TARP [Troubled Assets Relief Program] funds to ac­quire mortgages and get them refinanced . But he has not done so...

...households typi­cally borrow against the equity in their homes . The expansion of the U.S...

...The Fed has already cut the Fed­eral Funds rate from 5 .25 percent to 1 .0 per­cent...

...Financial market conditions in the OECD countries sunk to their lowest levels in more than half a century, and the U.S...

...The result was contagion be­tween markets...

...Wall Street executives made huge amounts of money as the real estate and other asset bubbles expanded...

...It is, after all, the taxpayers' money being put at risk...

...T REASURY SECRETARY PAULSON'S plan has been, like so much else in the Bush ad­ministration, a disaster...

...Consumer spending represents two­thirds of the nation's economic activity, and this kind of severe decline portends an ex­tended recession...

...Collectively, the state budget short­falls wí11 be around $100 billion in 2009...

...and energy conservation tech­nologies, such as advanced building materials . Investing in these areas is not only necessary for economic recovery, it is the way to create a competitive and decent society...

...We need to respond to the unmet needs made worse by the recession . For example, our unemployment insurance system has not kept up with changes in the labor mar­ket...

...The resulting downward pressure on wages and the soaring trade deficit should have shrunk U.S...

...Distressed sellers have seen property prices fall by up to 50 percent in some areas...

...There is not much more to cut, so monetary policy cannot have even a small frac­tion of the expansionary effect that it had on the last recession, when it contributed to the expansion of the housing bubble . The national debt is already more than 69 percent of GDP...

...bailed outAIG, the world's larg­est insurance company...

...In mid Novem­ber, Alan Blinder, a professor of economics at Princeton, former member of President Clinton's Council of Economic Advisers, and former vice chairman of the Board of Gover­nors of the Federal Reserve, testified before the House Committee on Financial Services on the administration's pathetic response to the great­est economic crisis in seventy years...

...Cu­riously, just days before the legislation was passed, Warren Buffett concluded a deal with Goldman Sachs (a major recipient of TARP money) that included both preferred stock with a 10% dividend yield and more attrac­tive warrants...

...This is no ordinary business cycle down­turn...

...Frankly, I find it all breathtaking . 64 . DISSENT I Winter 2009 A Recovery Program billion in relief...

...But debt-financed asset bubbles provided an illu­sory way for the economy to generate growth...

...Japan,$51 billion...

...No longer...

...62 . DISSENT I Winter 2009 have given up looking, the real underemploy­ment rate is just under 12 percent . As bad as the economy is, the U.S...

...Third, taxpayers wí11 receive only a 5% dividend on their investment (for the first five years...

...Instead, we would rely on what Ronald Reagan once called "the magic of the market...

...It also means health care for all Americans, a fairer and more progressive tax system, and an interna­tional economy without today's untenable im­balances . This is a terrifying moment...

...Chuck Prince, ex-CEO of Citigroup, expressed the outlook of the herd of independent minds that run our major fi­nancial institutions when, before the market burst, he told the Financial Times, "When the music stops, in terms of liquidity, things wí11 be complicated . But as long as the music is playing you've got to get up and dance...

...policy has created a global market with no rules other than those designed to protect economic elites . American workers have been fully exposed to competition from low-wage economies...

...economy from the bottom of the 2001 recession to last year was largely driven by this borrowing . At the peak of the bubble in 2006, consumers were cash­ing out some $780 billion a year from (then rapidly rising) home equity...

...The basic cash assistance safety net for job­less families and individuals that do not qualify for UI benefits is far weaker than in past re­cessions . Only about 40 percent of families that qualify for cash assistance under Temporary Assistance For Needy Families (TANF) actu­ally receive that aid (and the help in preparing for and finding jobs that should come with it), while in the recessions of the early 1980s and early 1990s, about 80 percent of poor families eligible for cash assistance received it...

...That means growth should result from rising wages rather than unsustainable borrowing...

...The market has lost its "magic," but the cost has been great . We con­front a recession that is going to get much worse at a time when the problems in Ameri­can society-inadequate health care, lack of retirement security, poverty, inequality, stag­nant wages-are increasing...