FedUpUSA

Archive for September 22nd, 2010

The headlines read that the recession is over.  In fact, the recession has been deemed over since June of 2009 by the National Bureau of Economic and Research (NBER).  Yet the fact of the matter is working and middle class Americans are solidly in a deep recession.  There was a town hall that was televised where a Wall Street “worker” was telling the President that he was tired of being treated like a “piñata” because Wall Street is directly linked to Main Street.  It is not.  Wall Street has turned into a giant vampire leech that is sucking every ounce of productivity out of the real economy.  The big banks have grown bigger yet unemployment remains elevated near peak levels.  The net worth of Americans is still over $12 trillion below the peak reached only a few years ago.  Home values are still in the dumps.  Why is the recession over?  Because GDP has grown and other random indicators that really just pertain to the top 1 percent.

The FDIC has interesting data on the banking system.  They tell us that we have close to 7,800 banks in the U.S. but the asset break down is really as unbalanced as it can get:

Source:  FDIC

105 banks (about 1 percent of the total banks in the U.S.) control close to 80 percent of all banking assets in the U.S.  The top 105 banks control over $10.3 trillion in assets.  Keep in mind banks can call things assets like commercial real estate loans and questionable real estate loans as well.  The FDIC backs this system up with an insolvent reserve fund.  All it would take is one of the bigger banks to fail to cause the system to shut down.  Of course, this wouldn’t happen because the FDIC has a $500 billion lifeline to the U.S. Treasury just in case this should happen.

As we move forward and forward it is becoming more apparent that Wall Street and Main Street especially with our current banking structure have completely opposite motives.  Big banks are pushing capital wherever it can go for cheap labor, less regulation, and frankly less law to game the system.  Keep in mind the money they are using right now is backed by taxpayer dollars.  Many of these banks would be sitting with Bear Stearns and Lehman Brothers if we were to follow a free market approach but they are corporate welfare recipients and have pushed their propaganda out to Main Street.  Yet public sentiment has now shifted.  Many now don’t believe in these real estate and stock fantasies.

First let us look at some metrics to see how healthy the economy is today.

(Un)Employment

Take a look at the above chart.  Does it look like the employment market is better?  It is clearly not.  In fact, the unemployment rate is near the peak since the recession supposedly ended last year.  It is apparent that someone with no job is not growing their income.  That is why we now have 43 million Americans in poverty and this number has grown throughout the entire recession.  Many of these people fell out of the middle class category.  If we are not in recession then we must be in growth at least by a strict definition.  Yet who is growing here?

Big banks grow

The too big to fail banks are growing while the banking system consolidates.  In fact, as of Q2 of 2009 when the recession was marked as over we had 8,195 banks in the U.S.  Today we have 7,830 which signify 365 fewer banks.  Yet total assets remain steady.  What has occurred is the too big to fail have gotten bigger with their government lifelines.  The banking system is becoming even more inherently dangerous in terms of setting up for another crisis.  If too big to fail is an issue, then why make these banks even bigger?  The top 1 percent controls much of the financial wealth in the U.S. and right now they are protecting their own.

Small time investors flee stock market

Maybe small time investors have jumped back into the stock market?

Source:  NY Times

In fact, the few working and middle class investors that do have money are rushing into safer products if they even have extra money to invest.  The money flowing out of stocks has gone one way.  Right now Wall Street is one giant casino for the wealthy and people are waking up.  The attempt is lure back in more sucker money so they can then off load their junk to more suckers (think of subprime, CDOs, and all that other waste).  By the time retail investors bought into the propaganda from the get rich quick Wall Street it was too late and they were left holding the bucket.  This is how Wall Street plays the game through investment banks.  Right now no actual real wealth is being created.  In fact, with days like the flash crash in May a trillion dollars in paper money was wiped out in one day for a few hours.  Basically half of the yearly GDP of California was shed in a few hours of trading.  There is a big disconnect from Wall Street and Main Street. The fact that economists are claiming this recession over when we have:

-26 million unemployed or underemployed Americans

-43 million Americans in poverty

-The median household income under $50,000 (stagnant for over 15 years in real terms)

-Home values near their trough

-Household net worth down $12.3 trillion from the peak

Yet GDP is growing?  If the working and middle class aren’t getting any more of the pie, who is?

My Budget360

The Panic of 1920 started out as a contender for the greatest depression of all time, with a drop in prices and production during its first twelve months that dwarfed those of any other economic crash, and she piled on an unemployment rate that skyrocketed from invisible to 12% in a flash. Ignoring calls to do something, anything, to “help”, Washington, DC simply allowed the economy to adjust wherever it chose to go. In tandem, Federal Reserve officials looked upon the rapid deflation in prices not with horror but with a declaration of its necessity. Yet, despite the lack of government intervention and monetary “pump-priming”, the economy corrected itself within two years. As a modern day American, I can hardly imagine.

Prior to the denouement, the Fed money spigot had been on full blast for seven years; an index of wholesale prices had surged from a base of 100 in 1913 to 226 in early 1920. One economist from the time noted a concurrent “outbreak of speculation in business and stock market circles that for recklessness has had few parallels”.

The storm broke in May of 1920 and arrived as these things usually do – almost everyone at the opera was caught napping when the lights suddenly came on. Bank failures, which numbered 63 in 1919, spiked to 506 by 1921. By June of the latter year, the money supply had dropped 9%, GNP 17%, and the index of wholesale prices collapsed from 247 in May of 1920 to 141 by July of 1921. To this day, the index has yet to show a more precipitous drop in such a short time.

Across America, the suffering began.

The prevailing opinion on the proper response was summed up in Warren G. Harding’s speech as he accepted the 1920 Republican presidential nomination. He pledged an “intelligent and courageous deflation, and (to) strike at the government borrowing which enlarges the evil”. He was a man of his word. Between 1920 and 1922, the federal budget fell by almost one half, tax receipts by 38%, and outstanding debt by 5%. Meanwhile, Federal Reserve officials made no attempt to maintain prices at any level.

With prices allowed to adjust, the recovery was already underway by August of 1921. Between then and 1923 manufacturing production in the US rose 48% while unemployment declined to 2.4%. The depression of 1920 was notable not only for its quick turnaround but also for its absence of political and monetary intervention. In many ways it was to be the curtain call for American laissez faire; to read of 1920 today sounds not only of another time but of another country altogether.

Today there are more fish swimming the Sahara Desert than people in DC who would dare utter such things as Warren G. Harding once spoke. If President Obama called for “intelligent and courageous deflation” he’d be tossed into the Time Out Corner with Ron Paul and derided as a lunatic. Yet, the short-lived Panic of 1920 suggests that there may be other options available than just more inflation and debt – that we can seek economic recovery by doing absolutely nothing, by allowing our much ballyhooed free market for once to be just that – free.

Harding’s depression, one of far greater initial ferocity than 1929, lasted barely two years. In contrast a meddling Herbert Hoover passed a fat and healthy depression to FDR, who nurtured, loved, and stuffed it to bursting with the New Deal. Why don’t we try Harding’s response? He has the far better track record.

Instead, today our Fed officials artificially set their fund rate at zero – during a time of extreme economic distress – then wonder why nobody is willing to lend, all in a misguided effort to ward off falling prices for all, bankruptcy for the insolvent, and to keep money “cheap”. I believe that it is not money that lubricates an economy, but prices. Prices are the clearing mechanism that moves goods and services efficiently. Break down the price mechanism – and constant political and monetary interventions are an excellent way to do so – and you can have all the money supply that trees can provide and it will do nothing of any benefit.

While we may look upon Fed officials from 1920 as ignorant oafs who did not understand monetary policy (and so failed to “re-inflate” prices), we fail to consider that in our response we might have it wrong. This is not a knock on the modern day American economist; forgetting to remember something important is nothing new. A group of economists remarked in 1937 on “the melancholy fact that each generation must relearn the fundamental principles of money in the bitter school of experience”. Yet, while our faulty memory is tragic, to me a far greater defect within us has been revealed by the current economic trauma.

Once upon a time, our forefathers stormed ashore at Normandy into the teeth of German machinegun fire with nothing between them and Heaven but a khaki shirt; while today far too many of us tremble at the mere thought of our largest banks and other institutions collapsing into their well-deserved bankruptcy. To me, this fear of taking our medicine is the saddest spectacle of all. While that Greatest Generation fought Hitler’s Wehrmacht so that we, their descendants, would never have to, today we are sticking our descendents with trillion dollar bailout bills for fear of our well-earned comeuppance.

What will future generations say of us?

CJ Maloney lives and works in New York City. His first book “Like Moving Into Heaven: Arthurdale, West Virginia and the New Deal” will be published February 2011 by John Wiley & Sons. The views and opinions expressed are those of the author and do not reflect those of the publisher or the author’s employer. He may be contacted at: peloponny1@aol.com

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