Welcome To Next Great Depression

propping-up-wall-street.gifBuddy, can you spare a Prozac? Oh, wait. This kind of depression won’t be cured with a pill. And a dime doesn’t buy as much today as it did in 1930.

Watching the House vote on a package to rescue the economy fall apart this afternoon was as traumatic as seeing Wall Street brokers leaping from windows in October, 1929, on the day of the great crash. Alright, so that never really happened, but the metaphor is valid. And the tense, drawn looks on the faces of long-time Congressional correspondents as they reported the unfolding debacle told much more than they were saying: We’re in trouble, folks, and plenty of it.

I opposed early versions of the economic rescue plan. Treasury Secretary Hank Paulson’s first cut was the financial version of the Patriot Act or the Iraq War resolution granting absurd power with no oversight. Even the second and third drafts were mostly a fat cat handout with not much given back in return to protect the country.

Yet the fact is while the final version voted down by the US House is a bad law, it is seriously better than no law at all.

Now, if Nancy Pelosi and John Boehner cannot get a handful of members in their respective caucuses to change their vote when the bill comes up again after Rosh Hashanah, we are all toast.

Brokers may not be leaping from ledges but US stocks, most commodities except precious metals and oil are falling out the allegorical window. As the Dow plummeted 700 points, the Standard & Poor’s 500 – a much more reliable barometer than the Dow – was plunging by more than 8%, with 490 of the 500 companies that make up the index declining.

Look out below!

Car Loans, Credit Lines
It may take a few weeks for the real impact to rear its devastating head but some businesses already are feeling the effects of what amounts to a credit lockdown.

For 15 years, until my sister died of cancer in 1999, Steve was my brother-in-law. For at least that long, he’s run a reasonably successful small business. I mean, really small: He is the only employee. But the business is profitable, generates a decent cash flow, he pays his bills, and his credit score is squeaky clean.

I spoke with him this morning to see how things are going. Mostly, I wondered if Hank Paulson was telling the truth – that credit is approaching lock-down – or exaggerating. Turns out, he’s not, and it may be the first time in the history of the Bush Administration that a cabinet secretary is being honest with the nation.

“Two weeks ago, I leased a new truck to replace the old one,” Steve says of the vehicle that literally drives his business. “I’ve always leased them through the same bank we used for 20 years, and I always got cars and trucks for prime-plus-one (percent). When I called the bank for a new lease, they told prime-plus-two and a half. I was stunned and asked why, because I’ve been a good customer.

“They told me it’s only because I’ve been a good customer for so many years that they’re able to give me a lease at all, and I’m getting it at their best rate.”

He ended up getting a better rate through the manufacturer’s finance company and took it. But the truck was only his first surprise.

Last week, he renewed his revolving line of business credit which finances his inventory purchases. Steve’s had a $25,000 line for ages yet, when he called his account manager, he was greeted with astounding news.

“I’m sorry but we’re going to have to reduce your line to $15,000,” my former brother-in-law was told.

Again, he asked why and, again, he heard the same rationale.

“That we’re keeping it (the credit line) open at all is because you’ve been such a good customer and have an excellent credit score,” Steve says the apologetic banker explained. “Otherwise, we would have closed your line entirely.”

The Beginning
Steve will not be the only business owner in the country to get the same gloomy news over the next 10 or 15 days. Without a turnaround in the re-vote – if and whenever it comes –owners of one employee companies to the chief financial officers of Fortune 100 companies will be hearing the same thing.

Indeed, rates for commercial paper – how larger businesses finance operations – are skyrocketing making borrowing money for everything from inventory to payrolls to receivables incredibly expensive. When September and October unemployment figures are reported, sadly well after the election, we are likely to see a huge jump in the number of jobless. Layoffs beget more layoffs and terrify everyone still hanging on to a job.

So retailers depending on the holiday season for the bulk of their annual sales and profits will be facing disappointing news: The unemployed don’t have cash for gifts and those still working will be pulling in their wings to wait out the storm.

Property tax revenue around the country has already dropped as home values plunge so state and local government – in many regions, often the state’s largest employer – will be forced to cut back and lay off. Next, the Treasury will see corporate and personal tax collections decline sharply, as well, which means either borrowing even more money from China – which is already nervous about its US dollar exposure – or reducing programs to help the swelling ranks of the needy.

Thus, today’s inaction by the House may well spell the beginning of the start of Great Depression II. Since John McCain is already displaying all of the characteristics of Herbert Hoover, all that may save us is if Barack Obama turns out to be Franklin Roosevelt’s reincarnation.

Blame Game
And thus begins the blame game: Democrats blaming Republicans who are, truthfully, mostly at fault; Republicans blaming Democrats who, truthfully, share some of the blame; Dennis Kucinich blaming everyone; Bob Barr – is he still a presidential candidate? – blaming “government.” Eventually, everyone will blame everybody else and I’m sure that, with enough time, my friend Susan’s Daschundt Maxie will blame her two cats, Sasha and Evita. And vice versa.

Actually, there is a definite start date to this afternoon’s collapse.

Genuine blame for the deal falling apart can be traced to a tense night in December, 2000. The Supreme Court had just elected George Bush president by one vote. Congress was locked in a budget showdown with the outgoing Clinton administration. And a balding, bespectacled Phil Gramm strode onto the floor of the United States Senate the evening of the 15th.

As Congress and the White House were hurriedly hammering out a $384-billion spending bill, Gramm quietly slipped in a 262-page amendment called the Commodity Futures Modernization Act. He boasted to the gathered solons that his measure ensures that neither the SEC nor the Commodity Futures Trading Commission – soon to be chaired by Gramm’s wife – would regulate an incredibly complicated new financial product called swaps, Gramm all but said he saved Wall Street by “protect(ing) financial institutions from overregulation” and “position our financial services industries to be world leaders into the new century.”

Even Nazi Germany’s Third Reich lasted a few years a longer than it took Wall Street to collapse under the weight of its own greed, hauling the global economy down with it in the bargain.

charley-james.jpgSo here we sit, teetering on the edge of the precipice, wondering if our futures will be just grim or totally bleak while Washington scratches its bewildered head, calculating what to do next with the election looming a mere 39 days away.

Those who voted against the bill – a lethal combination of hard right Republicans and far left Democrats – may be gleeful this evening at their success. But it’s a fool’s folly to be happy about what the United States House of Representatives did today. How will they explain their decision to what will surely be the largest swelling of unemployment, homelessness and despair seen in their various districts since the 1930s?

Charley James

If you’re born in Milwaukee, you are born a Democrat. And so I gravitated naturally to liberal politics, first as journalist and then an activist. I’ve been writing since I was eight years old and, after working in newsrooms for far too long, I have devoted much of the past decade as an independent investigtative jouralist. When not writing about politics or George Bush, I scribble out essays on the peculiarites of modern times.

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Comments

  1. Georgia says

    Thank you for your article and your comment reply. I’m still trying to understand and grasp how a $700 Billion bailout to the very people and institutions that lead to this disaster is ‘ok’. I feel no matter what the CEO’s and CFO’s and Phil Gramm, Rove, etc…are all somehow going to make millions more off of this deal. It would be much easier to swallow this bailout pill if some of these economic titans were going to jail along with BUSH, and all of their estates and yachts were being confiscated to punish them. They are worse than drug dealers. I am very frightened. I’m 50 and used up my 401k trying to same my modest home after 9/11 deleted my travel agent career. I was a victim of predatory lending in 2005- too early to get any information or help from my lender, or lenders. My mortgage had a new name to write monthly cks every year. Utter dismay.

    • Charley James says

      Let’s see if this helps. Paul Krugman came up with a much simpler answer on his blog than I could ever create.

      (From The New York Times)

      Let’s return to the basic balance sheet of a typical financial company before the writedowns:
      Good Assets:…………………………$ 95
      Questionable Assets:………………….$ 5
      TOTAL ASSETS:………………………..$100

      Liabilities to Customers:……………..$ 80
      Debt to Bondholders:………………….$ 17
      Shareholder Equity:…………………..$ 3
      TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $100

      Now let’s write down the questionable assets – not all the way to zero, but to $2:

      Good Assets:…………………………$ 95
      Questionable Assets:………………….$ 2
      TOTAL ASSETS:………………………..$ 97
      Liabilities to Customers:……………..$ 80
      Debt to Bondholders:………………….$ 17
      Shareholder Equity:…………………..$ 0
      TOTAL LIABILITIES AND SHAREHOLDER EQUITY:.$ 97

      This shortfall of protection on the liability side of the balance sheet is what causes a run on the institution, because once shareholder equity is gone, the only way to get at the debt to bondholders is for the company to declare bankruptcy.

      The Paulson plan as originally sold didn’t provide any real answer to the problem.

      The Treasury plan seeks to buy up those questionable assets and thereby protect the institution against failure. Problem is, suppose the Treasury buys those questionable assets at their going value of $2. Here’s the result:

      Good Assets:………………………….$ 95
      Cash Proceeds from Sale of
      Questionable Assets to Treasury:……….$ 2
      TOTAL ASSETS:…………………………$ 97
      Liabilities to Customers:………………$ 80
      Debt to Bondholders:…………………..$ 17
      Shareholder Equity:……………………$ 0
      TOTAL LIABILITIES AND SHAREHOLDER EQUITY:..$ 97

      Does this transaction protect the institution against failure? No! If you buy the bad assets off the balance sheet at their market value, nothing changes on the liability side!

  2. says

    1. There are thousands of banks doing business in the United States, and so far, less than 10 have gone under. Bank of America and Wells Fargo does not need a bailout bill in order to continue doing business as usual. Warren Buffett certainly doesn’t. Banks will continue doing business without a bailout deal, and consumers will continue having access to capital. A short term collapse would force both banks and consumers to take greater responsibility for their actions. When the government takes that responsibility for you, you give up a piece of your freedom.
    2. Reckless borrowing and lending was what got us into this problem to begin with, I can hardly see how even more borrowing and lending can get us out of it. Americans are going to need to learn to live within their means, and banks are going to need to learn how to stop acting like a bunch of idiots.
    3. Economic fluctuations are normal for a free market society, when Uncle Sam tries to force everyone to play nice they only make things worse. Recessions are typically accompanied with deflation, which promotes a stronger dollar as not as much currency is circulating. When people are free to make their own decisions, they are also free to make their own mistakes. The market must be allowed freedom to make their own mistakes and to learn from them, instead of being forced to play nice, and having to pay for it with their tax-dollars.
    4. If anyone is going to be bailed out, it should start from the bottom-up, not the top-down. What about young adults who are paying off their college loans, what about families paying for their healthcare bills, what about struggling families that are making their mortgage payments. Helping them in turn would also help the banks that own their debt. If anyone is going to be helped, it must go to those that need it, not those who got burned out of their own greed.
    5. $700B is either going to be borrowed from China, printed out of thin air, or both. The resulting inflation on top of stagnant incomes, will be far worse for the economy than the tightening of the credit markets – which has yet to provide evidence of a resulting recession.

    • Charley James says

      Thanks for your comment and for reading my article. There’s soundness in much of your comment but it’s marred by one, overriding flaw.

      The lack of bank failures you mention isn’t because the banking system is sound, it’s because financial crises like this always start at the top with the most-highly leveraged banks going first; it may be the only part of “trickle down” economics that works. But just yesterday, Wachovia was forced by the Fed, the Comptroller of the Currency and FDIC into an engineered takeover to prevent it from being the second bank collapse in less than a week. (Washington Mutual was the first.) It was the fourth or fifth bank failure in less than a month.

      If all that were involved was reckless lending and foolish borrowing, the problem would not be as wide-spread as it is. Fraud was involved, instruments were created that no one understood (including the underwriters) and came into existence mostly to generate fees as they were packaged, sold and re-sold again.

      Stock and credit markets are driven as much by confidence as they are by news and facts. In our situation right now, there is no confidence, no good news and no solid, underlying facts.

      The US economy is driven by credit: The ability of businesses to borrow money to finance day-to-day operations for everything from inventory to payroll to receivables. But the fact is the credit market is locked down tighter than Folsom Prison after a riot.

      The example I wrote about of a small business owner with a great credit history finding money harder to get is not an isolated one, and the problem isn’t limited to small businesses. Large businesses are holding back issuing commercial paper because the only way the market will buy it is at loan shark-like rates. That’s why the interest rate on short term T-Bills is, for all practical effect, zero. For a time yesterday, the 30-day T-Bill was 0.15%; essentially, people are willing to pay the Treasury to hold their cash.

      What we’re seeing today is not part of a “normal economic cycle” as you suggest. It is the global collapse of confidence, sour economic news and the underlying fundamentals – rising joblessness, flat or declining profits, a lack of market liquidity – are poor. The first to be affected will be small business owners trying to keep their company going, students seeking new or extended college loans, individuals wanting to buy a car, people trying to re-finance their homes. It’s happening already.

      Finally, with the assurances written into the bill giving the government stock warrants of financial institutions participating in the rescue, actual taxpayer exposure is probably well under $100-billion – most likely a good deal less.

      As bad as the legislation that failed yesterday might have been, it was better than no legislation at all.

      As Paul Krugman wrote the other day in his New York Times column, “So what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch. As a friend said last night, we’ve become a banana republic with nukes.”

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