Just read an excellent piece on the second wave of the economic crisis
that's about to hit us, and what should be done about it. Article
A note on the source: Counterpunch is the decidedly left-wing soapbox of
one of my favorite commentators, Alex Cockburn. However, unlike most on
the left, he brings in a wide range of points of view, many of which
surprisingly coincide with his own.
For those who object to the opinions of lefties, a word on the author of
this piece: from the mini-bio at the end of the article:
Paul Craig Roberts was Assistant Secretary of the Treasury in the
Reagan administration. He is coauthor of The Tyranny of Good Intentions.
Another Real Estate Crisis is About to Hit
By PAUL CRAIG ROBERTS
For a picture of the US real estate crisis, imagine New Orleans wrecked
by Hurricane Katrina, and before the waters even begin to recede, a
second Katrina hits.
The 1,120,000 lost US retail jobs in 2008 are a signal that the second
stage of the real estate bust is about to hit the economy. This time it
will be commercial real estate--shopping malls, strip malls, warehouses,
and office buildings. As businesses close and rents decline, the ability
to service the mortgages on the over-built commercial real estate
The over-building was helped along by the irresponsibly low interest
rates, but the main impetus came from the slide of the US saving rate to
zero and the rise in household indebtedness. The shrinkage of savings
and the increase in debt raised consumer spending to 72% of GDP. The
proliferation of malls and the warehouses that service them reflect the
rise in consumer spending as a share of GDP.
Like the federal government, consumers spent more than they earned and
borrowed to cover the difference. Obviously, this could not go on
forever, and consumer debt has reached its limit.
Shopping malls are losing anchor stores, and large chains are closing
stores and even going out of business altogether. Developers who
borrowed to finance commercial ventures are in trouble as are the
holders of the mortgages, derivatives and other financial junk
associated with the loans.
The main source of the economic crisis is the infantile belief of US
policymakers that an economy could be based on debt expansion. As
offshoring moved jobs, incomes, and GDP out of the country, debt
expanded to take the place of the missing income. When the offshored
goods and services were brought back to be sold to Americans, the trade
deficit rose, adding another level of financing for an economy that
consumes more than it produces.
The growth of debt has outpaced the growth of real output. Yet, the
solution offered by Obama’s economic team is to expand debt further.
This is not surprising as Obama’s economic team consists of the very
people who brought on the debt crisis. Now they are going to make it worse.
The unexamined question is: Who is going to finance the next wave of debt?
The US budget deficit for fiscal year 2009 already appears to be on a
path to $2 trillion, and that is before Obama’s stimulus program. What
we are looking at is a $3 trillion budget deficit if Obama’s program is
enacted in time to impact the economy this year.
Foreign countries can finance a $500 billion US budget deficit out of
their trade surpluses with the US. But foreigners do not have the funds
to finance a US budget deficit in the trillions of dollars, and they
would not finance such a deficit even if they had the funds. Foreigners
are over-weighted in dollar holdings and prefer to lighten their holding
than to add to them. America’s economic prospects are dim as are the
dollar’s prospects as reserve currency. An annual budget deficit in the
trillions of dollars makes the dollar’s prospects appear even dimmer.
The federal government’s likely solution to the debt problem will be to
monetize the debt, that is, the government will finance its deficit by
printing money. Debt will be inflated away. But for those Americans
without jobs or whose incomes do not rise with inflation, life will be
Life is already cruel for Americans living on retirement savings. Not
only has the stock market bust reduced their wealth by half, but also
their remaining assets are producing no income. Interest rates are so
low that debt instruments produce no income, and there are scant capital
gains in the stock market. Retirees are living by consuming their capital.
America’s economic policy of low interest rates and debt expansion bodes
ill for everyone living off their savings. Their future prospects are
even worse as high inflation will destroy the value of their savings,
especially if held in cash or debt instruments, including “safe” US
There are more intelligent ways to try to escape from the current
crisis. However, the financial gangsters and their shills that Obama has
put in charge of economic policy are thinking only of their own
interest. What happens to the American people is not a concern.
A compassionate government would handle the crisis in this way:
The trillions of dollars in credit default swaps (CDS) should be
declared null and void. These “swaps” are simply bets that financial
instruments and companies will fail, and the bulk of the bets are made
by people and institutions that do not hold the financial instruments or
shares in the companies. The ideology that financial markets were
self-regulating allowed illegal gambling free rein. There is no reason
under the sun for taxpayers to bail out gamblers.
The bailout money, instead of being given to favored financial
institutions to finance their acquisition of other institutions, should
be used to refinance the defaulting mortgages. This would slow, if not
stop, the growing inventory of foreclosed properties that is driving
down home prices.
The mark-to-market rule should be suspended until the real values of the
troubled properties and instruments can be determined. Suspension of the
rule would prevent the failure of sound institutions and lessen the need
for a bailout.
Interest rates have to be raised in order to encourage saving and to
provide incomes to retirees.
To preserve the dollar’s status as reserve currency, a credible policy
of reducing both budget and trade deficits must be announced. In the
near term the budget deficit can be reduced by $500 billion by
withdrawing from Iraq and Afghanistan and by cutting a bloated defense
budget that represents the now unattainable goal of US world hegemony.
The trade deficit can be significantly reduced by bringing offshored
jobs back to America. One way to do this is to tax corporations
according to the value added to their output that occurs in the US.
Corporations that produce their products for US markets abroad would
have high tax rates; those that produce domestically would have low tax
This approach to the economic crisis stands in marked contrast with the
approach of the gangsters running US economic policy. The gangsters are
using the crisis as an opportunity to steal from taxpayers and to
finance their misdeeds and exorbitant salaries with Federal Reserve
loans. Their shills among economists and the financial press tell the
people that the solution is to fatten up the banks with funds so they
will resume lending to an over-indebted public that will then return to
the shopping malls.
This unrealistic approach to a serious crisis indicates a leadership
crisis on top of an economic crisis.
=========================================================================Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan
administration. He is coauthor of The Tyranny of Good Intentions. He can
be reached at: firstname.lastname@example.org.
"I know I will go to hell, because I pardoned Richard Nixon."
- Former President Gerald Ford to his golf partners, as related by
Click to see the full signature.