Economic Meltdown 2009 is Worse than the Great Depression
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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 meltdown to hit this hard or spread this fast. The failure at Bear triggered a freeze 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.
The 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 bursting 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 percent or more, and unemployment is rising at 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 a 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.
Treasury Secretary Geithner and Fed chief Bernanke have lent or committed $13 trillion trying to keep the financial system functioning, but they`ve only managed to plug a few holes and avoid a system-wide collapse. The financial system is hobbled and unable to provide sufficient credit to generate growth. Every sector has suffered cutbacks, layoffs and slimmer profits. The problems go beyond toxic assets or complex derivatives. The system is plagued with stagnation, overcapacity and redundancy. Economics professor Robert Brenner sums it up like this in an interview in the Asia Pacific Journal:
Robert Brenner: "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.
The economy is now in a downward spiral. Tightening in the credit markets has made it harder for consumers to borrow or businesses to expand. Overextended financial institutions are forced to shed assets at firesale prices to meet margin calls from the banks. Asset deflation is ongoing with no end in sight. Price declines in housing have reached 30 percent already and are now accelerating on the downside. This is the nightmare scenario that Bernanke hoped to avoid, a capitulation in real estate that drags the rest of economy into a black hole. Economist Nouriel Roubini and market analyst Meredith Whitney predict that housing prices will drop another 20 percent before they hit bottom. Nearly half of all homeowners will be underwater and owe more on their mortgages than the current value of their homes. That will increase the foreclosures and push scores of banks into default. According to Merrill Lynch`s economist David Rosenberg.
It would take over three years to achieve price stability (in housing) The problem is that prices do not begin to stabilize until we break below eight months` supply – and they tend to deflate 3% per quarter until that happens. So as impressive as it is that the builders have taken single-family starts below underlying sales, their efforts are just not sufficient to prevent real estate prices from falling further. In fact, even if the builders were to declare a moratorium immediately, that is, taking starts to zero, demand is so weak and the unsold inventory so intractable that it would now take over three years to achieve the holy grail of price stability in the residential real estate market.
The main economic indicators all point to a long period of retrenchment ahead. The slowdown in global trade has hit Germany, Japan, and most of Asia particularly hard. The export-driven model of growth has suffered a major setback and won`t rebound for some time to come. With the US consumer unable to continue his debt-fueled spending spree, surplus countries will have to develop domestic markets for growth, but it won`t be easy. Chinese workers save 50 percent of what they earn and German workers already have a comfortable life without increasing personal consumption. Higher wages and lower interest rates can help stimulate demand, but cultural influences make it difficult to change spending habits. Meanwhile, the economy will continue to languish operating well below its optimum capacity.
Capital flows have also suddenly reversed causing turmoil in the currency markets. January`s TIC data indicates that net capital outflows for the US were negative $148 billion in January. Capital is now fleeing the country. Financial protectionism has triggered the repatriation of foreign investment causing a sharp drop in the purchase of US sovereign debt. This is from Brad Setser, economist for the CFR:
The obvious implication of the recent downturn in total reserve holdings — and the $180 billion fall in q4 wasn`t driven by currency moves — is that the pace of growth in the world`s dollar reserves has slowed dramatically.
The obvious implication: most of the 2009 US fiscal deficit WILL NEED TO BE FINANCED DOMESTICALLY. The Fed`s custodial data indicates central banks are still buying Treasuries, though at a somewhat slower pace than in late 2008. But their demand hasn`t kept up with issuance. (Foreign Central banks aren`t going to finance much of the 2009 US fiscal deficit, Their reserves aren`t growing anymore, Brad Setser, Council on Foreign Relations)
The United States does not have the reserves to finance it own massive deficits which will soar to $1.9 trillion by the end of 2009. The Fed will have to increase its purchases of US Treasuries and monetize the debt. Foreign holders of Treasuries and dollar-backed assets ($5 trillion overseas) will be watching carefully as Bernanke revs up the printing presses to fight the recession and meet government obligations. China, Russia, Venezuela and Iran have already called for a change in the world`s reserve currency. It won`t happen overnight, but the momentum is steadily growing.
The S&P 500 has soared 23 percent in the last four weeks, but the current bear market rally is misleading. The prospects for a quick recovery are remote at best. The fundamentals are all weak. Corporate profits are down, GDP is negative 6 percent, housing is in a shambles, and the banking system broken. The Fed has increased the money supply by 22 percent, but economic activity is at a standstill. The velocity at which money is spent is the slowest since 1987. Nothing is moving. The banks are hoarding, credit has dried up, and consumers are saving for the first time in 2 decades. The banks` credit-conduit cannot function properly until bad assets are removed from their balance sheets. But the magnitude of the losses make it impossible for the government to purchase them outright without bankrupting the country. According to the Times Online, the IMF has increased its estimates of how much toxic mortgage-backed paper the banks are holding:
Toxic debts racked up by banks and insurers could spiral to $4 trillion, new forecasts from the International Monetary Fund (IMF) are set to suggest.
The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.
Banks and insurers, which so far have owned up to $1.29 trillion in toxic assets, are facing increasing losses as the deepening recession takes a toll, adding to the debts racked up from sub-prime mortgages. The IMF`s new forecast, which could be revised again before the end of the month, will come as a blow to governments that have already pumped billions into the banking system."
Since banks lend at a ratio of 10 to 1; the amount of credit cut off to the broader economy will ensure that sluggish growth well into the future. If there is a recovery, it will be weak. The Obama administration will have to increase its capital injections even though they will add to mushrooming deficits. So far, financial institutions have only written down $1 trillion or 25 percent of their losses. This means the banking system is insolvent. Eventually, Obama will have to resolve the bad banks and auction off troubled assets, even though political support is rapidly eroding. According to political analyst F. William Engdahl, most of the garbage assets are concentrated in the nation`s five biggest banks:
Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency`s Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.
The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere` $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain`s HSBC Bank USA has $3.7 trillion. (Geithner`s ‘Dirty Little Secret`: The Entire Global Financial System is at Risk, F. William Engdahl, Global Research)
These five banking Goliaths are at the center of political power in America today. Their White House emissary, Timothy Geithner, has concocted a rescue plan--the Public-Private Investment Program--which will provide 94 percent funding from the FDIC for the purchase bad assets. The program is designed to keep asset prices artificially high while transferring the bulk of the losses to the taxpayer. The plan has been widely criticized and has even raised a few eyebrows even among usually-supportive members of the establishment like the Financial Times:
US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JP Morgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury`s $1,000bn (£680bn) plan to revive the financial system.
The plans proved controversial, with critics charging that the government`s public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans.
Banks have three options if they want to buy toxic assets: apply to become one of four or five fund managers that will purchase troubled securities; bid for packages of bad loans; or buy into funds set up by others. The government plan does not allow banks to buy their own assets, but there is no ban on the purchase of securities and loans sold by others. (The Financial Times)
It`s a multi-billion dollar shell game with myriad opportunities for fraud. In theory, the banks could create their own off-balance sheet operations (SIVs or SPEs) and use them to purchase their own bad assets taking advantage of the government`s 94 percent low interest non recourse loans. It`s a blatant swindle and another windfall for Wall Street.
Geithner`s plan does not fix the problems with the banks, it only delays the final outcome. The next leg-down in the recession will push many of the undercapitalized banks into receivership. Geithner`s PPIP won`t change that. As housing prices fall and foreclosures rise, the capital position of many of the banks will become untenable leading to a rash of bank failures. An article in Monday`s Wall Street Journal puts adds some historical perspective to today`s financial crisis:
The events of the past 10 years have an eerie similarity to the period leading up to the Great Depression. Total mortgage debt outstanding increased from $9.35 billion in 1920 to $29.44 billion in 1929. In 1920, residential mortgage debt was 10.2% of household wealth; by 1929, it was 27.2% of household wealth.
The causes of the Great Depression need more study, but the claims that losses on stock-market speculation and a monetary contraction caused the decline of the banking system both seem inadequate. It appears that both the Great Depression and the current crisis had their origins in excessive consumer debt -- especially mortgage debt -- that was transmitted into the financial sector during a sharp downturn.
Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we`re witnessing the second great consumer debt crash, the end of a massive consumption binge.
Gandhinagar (IANS): As many as 558 people have filed nominations for the 26 Lok Sabha seats in Gujarat.
The nomination papers were filed April 8 and 9, a senior poll official at the State Election Office said on Friday. Nominations will be scrutinised on Saturday. The last date for withdrawal of candidature is April 13.
The number of contestants in the 2004 Lok Sabha polls was 162.
There are 36.3 million voters in the state comprising 18.8 million men and 17.5 million women. As per the latest records, the Navsari seat in south Gujarat has the highest number of voters - at 1.61 million - and Dahod in central Gujarat has the lowest - at 1.19 million.
Four of the 26 seats are reserved for Scheduled Tribe and Scheduled Caste candidates.
***The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system****
This is such stooopid self serving piece of bull shit that the author must think readers are really dumb. The days of such right wing kooks are looooong gone and their banishment in to their low life stages are long over due. Their credibility is so low, see the recent piece of Paul Krugman, the latest Nobel prize winner for economics,write about in the New York Times.
It is obvious the next 30 years Banking sector will be in dumps all over the world.
NEW DELHI (PTI) : Nearly 16 per cent of candidates contesting in the first phase of Lok Sabha polls have pending criminal cases against them, with Bihar and Uttar Pradesh accounting for the maximum such contestants, a report claimed on Saturday.
Roughly 222 of the 1440 candidates or 16 per cent contesting polls in 11 states in the first phase on April 16 have serious charges framed against them, the independent body Association of Democratic Rights (ADR) said in its report.
While Congress has fielded 24 such contestants, BJP comes a close second with 23. BSP and Samajwadi party have fielded 17 and 10 such candidates respectively, it said in a report.
However, in terms of percentage of such candidates to total nominees fielded by them, CPI-ML (Liberation), RJD and JD(U) outdo Congress and BJP, according to the data compiled by ADR based on affidavits submitted by contestants.
While eight of the 13 candidates or 65.51 per cent fielded by CPI (ML) have pending criminal cases against them, JD(U) with 7 of the 12 candidates or 58 per cent and RJD with 7 of the 16 or 43 per cent follow in line.
In a democracy, it does not matter whether a candidate is a crook IF his people elect him again and again. You think any party other than DMK will ever run the State of Tamil Nadu? No that state was lost to DMK forever because in man one vote system the overwhelming one party rule of DMK will rule there for ever. Rest of the detail doen not matter!!. That is absolutely pure democracy. Just hold your nose and vote for people`s choice like these DMK characters and the ilks of Mayawati!!
Sucker`s Rally Approaching an End
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Whatever the technical reason for the 25 percent rise in the S&P over the past five weeks, or a more modest eight percent bounce in GCC regional stock prices, the absurdness of this sucker’s rally ought to be obvious to all.
Unemployment is still rising, house prices are still falling, and the fundamentals of bank balance sheets are still deteriorating with total bad debts unknown except that we know they must be getting worse.
Global trade fell off a cliff in the first quarter of the year. Even Mercedes car sales to the oil rich of the GCC fell 23 per cent. The collapse of the world’s second largest economy, Japan, has been unprecedented.
Bad news coming
Nor do you have to look hard to see what the bad news to come might be: US banks will have to reveal all in government stress tests to be published at the end of this month; the bankruptcy of Chrysler and General Motors (GM) loom, two companies of vast importance to Main Street USA with a million jobs in jeopardy and huge borrowings to be written off by the banks.
The stock market pattern in 2008-9 has so far been a mirror image of the crash of 1929-30 with a halving of prices from the autumn followed by a 25 per cent rally from March lows. In April 1930 stocks moved sideways and then they crashed another 50 per cent into the summer.
What possible reason is there for optimism to believe that history will not repeat itself? Government stimulus packages have more than likely been too small and too late to prevent another down leg in stocks, and will take time to revive the real economy, if indeed they can do so.
They might just stop the worst possible scenario but are they going to prevent the plunge downwards? Governments have not managed it so far.
Consumers and unemployment
At the commonsense level you have to ask why should an economy show signs of recovery as it lays off hundreds of thousands of people: the unemployed are not big consumers, and it frightens the hell out of people left in work who stop spending and save.
Consumer demand is the most important fundamental in modern economies and the confidence of consumers is being blown to pieces. It will take more than weasel words from US bankers and ‘green shoots’ in the waffle of President Obama to put things right.
Eventually global stock markets will reach a bottom but they are not close to having visited it just yet. Wall Street and its friends are playing investors as suckers but they are in danger of overdoing it. For once these guys are impoverished where will the next bunch of fools come from?
Goldman Sach’s (GS) results this week might well mark the top of the rally, beyond that the only way is down.
Russell 2000 Rising 36% Flashes Warning for S&P Rally
April 13 (Bloomberg) -- The Russell 2000 Index’s record one-month gain is sending danger signals to investors who remember how similar rallies in U.S. stocks came to an end.
The gauge of companies with a median value of $301 million is beating the Standard & Poor’s 500 Index, where stocks have an average market value of $6.5 billion, by 9.8 percentage points. Gains in the Russell 2000 are being led by an 11-fold jump in Spansion Inc., a bankrupt chipmaker, and a sevenfold rise for Hayes Lemmerz International Inc., a wheel manufacturer that hasn’t had a profit since 2006.
While small-caps tend to lead the way out of bear markets, when they have outpaced larger stocks by this much, both indexes erased gains and fell, according to data compiled by Birinyi Associates Inc. Increased trading and ratios of advancing to falling stocks have also risen to levels that preceded declines, boosting investor concerns that the S&P 500’s 27 percent advance since March 9 will end the same way as the 24 percent rally that fizzled in January.
This move is too explosive to be sustainable, said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $60 billion. None of the structural underpinnings of the market have really changed. It’s going to be a multiyear healing process.
Profit Slump
Bank losses approaching $1.3 trillion spurred the first simultaneous recessions in the U.S., Europe and Japan since World War II last year, pushing the benchmark gauge for U.S. equities down as much as 57 percent from its October 2007 record. Profits among S&P 500 companies have dropped for six straight quarters and are forecast to decline for three more, the longest streak since the Great Depression, according to data from S&P and estimates compiled by Bloomberg.
Mistaking a temporary jump for a sustained bull market can be costly. In 41 so-called bear market rallies since 1928 -- gains of more than 10 percent that are later wiped out -- equities fell an average 25 percent after peaking, according to Birinyi, the Westport, Connecticut-based money-management and research firm founded by Laszlo Birinyi.
Soros Fund Management LLC’s George Soros and BlackRock Inc.’s Dan Chamby also say investors should be wary of the S&P 500’s rise. The surge between March 9 and April 9 ranks as the steepest 23-day advance since 1933, according to data from Howard Silverblatt, an S&P analyst based in New York.
Steeper jumps for small-cap stocks one month into a rally are signs of indiscriminate buying and usually come before equities fall, said Cleve Rueckert, a Birinyi analyst. The Russell 2000’s 36 percent climb since March 9 is its steepest since the index began in 1979, according to Bloomberg data.
No Reason
It’s unusual for a new cycle to start with such an abrupt gain, Rueckert said. Bear market rallies are broad. Everything goes up really sharp, really fast and not necessarily for a particular reason.
None of the bull markets tracked by Birinyi included small- caps outperforming after a month by the rate they are now. On average, smaller stocks are tied with the S&P 500 at this stage of a lasting recovery, the data show.
Small-caps were beating larger stocks before the end of the advance in January. The Russell 2000 increased 34 percent from Nov. 20 to Jan. 6, a stretch in which the S&P 500 index added 24 percent. The S&P 500 fell to a 12-year low two months later.
We’re not convinced that this rally will be sustained, Chamby, who helps run the $23.5 billion BlackRock Global Allocation Fund, said on April 7 in an interview from New York. We’re defensively positioned, so we are underweight equities.
The S&P 500 added 1.7 percent last week, extending its rebound since March 9 to 27 percent. For 2009, the index is down 5.2 percent, compared with a 6.3 percent retreat for the Russell 2000.
Unprecedented stimulus measures may mean history is no guide for handicapping stocks, because the government’s $12.8 trillion of spending to revive the economy will lift earnings and keep stocks from retesting their March lows, said John Wilson of Morgan Keegan & Co. in Memphis, Tennessee. President Barack Obama has proposed a $3.6 trillion budget blueprint that he says will bring tax relief for most working Americans while making investments in energy infrastructure and education.
I don’t think just because we’ve had a sharp move in the small-caps that it means it’s a bear-market rally, said Wilson, who helps oversee $120 billion as co-director of equity strategy. I don’t think you can throw caution to the wind, but you can be cautiously optimistic.
Six-Year Low
Just 58 companies in the Russell 2000 have dropped since the index reached a six-year low on March 9. Sunnyvale, California-based Spansion and Hayes Lemmerz in Northville, Michigan, led the rebound.
The balance of rising shares is another sign stocks may fall, Birinyi data show. From March 9 to April 9, companies on the New York Stock Exchange posted almost 17,000 more single-day advances than declines, a record compared with past equity market rallies. So-called contrarian investors argue that too widespread a recovery shows investors aren’t paying attention to fundamentals such as earnings and economic growth.
U.S. stocks posted the broadest increase since at least July 2004 on March 23, when 21 companies rose for each that fell on the NYSE, according to data compiled by Bloomberg.
We’ve run pretty far, pretty fast, said Bruce McCain, chief investment strategist at Cleveland-based Key Private Bank, which manages $22 billion. We would be looking more for an indication of a market that claws its way off the bottom in somewhat slower moves.
Normally Bullish
Another normally bullish sign that’s increasing investor concerns is the rise in trading volume, Birinyi’s data indicate. Since March 9, the number of shares traded on the NYSE has been about 23 percent higher than in the preceding 200 days. That compares with an average 13 percent climb during the first month of bull markets.
Companies in the S&P 500 may report a 38 percent decline in first-quarter earnings and those in the S&P SmallCap 600 will post a 46 percent slump, based on analysts’ estimates compiled by Bloomberg and New York-based Brown Brothers Harriman & Co. More than 30 S&P 500 companies and at least 90 in the Russell 2000 are scheduled to release results this week.
The American economy contracted at a 6.3 percent rate in the three months ending in December and is forecast to decline 5 percent in the first quarter and 1.9 percent in the next, based on a Bloomberg survey of economists.
It’s a bear-market rally because we have not yet turned the economy around, Soros, the billionaire hedge-fund manager who made money last year while most peers suffered losses, said in an April 6 Bloomberg Television interview in New York. This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.
| NIFTY 
