(TPJ 186)
Steven Jonas, MD, MPH – April 3, 2008
According to most observers, that is, a majority of Americans, the
United States is in a recession. This the general view, even if the
economic indicators that are carefully chosen by conservative economists to
measure such things don’t quite meet the criteria carefully laid out to define
it (very conservatively). Certain authorities are talking about the
possibility of a repeat of the Great Depression of the 1930s, although the
thought/hope is that the protections against such a re-occurrence put in place
during the New Deal, even as ravaged as they have been by the Georgites, would
protect the nation against such an outcome. We’ll see about that.
However, when at least some of the commentators and hosts on the
fairly conservative CNBC-TV are talking about a recession (and they have just
begun to do so recently) you can be pretty sure that one is underway.
(One does wonder what they are saying on the new Fox”News”Channel’s financial
cable outlet, but I must admit that I have not checked. I do watch F”N”C
itself from time-to-time and I think that that’s enough of a sacrifice to
ask.) Readers know that I don’t usually do economics in this space, Judge
Gheen being our extremely well-informed voice on the subject. However,
since I am a professor, and have in the past had some experience with health
economics, I thought to set forth here some thoughts on what an introductory
course (all I could manage) on the current economic situation in the US might
cover. The sections are presented in no particular order, but since such
a course would never come to reality, at least under my direction, I don’t have
to worry about such niceties.
One class session, towards the beginning of the course, might
consider a scenario for a world-wide “recession” (which sounds like a
Depression to me) developed by an NYU Professor of Economics, Nouriel Roubini,
who publishes something called “The RGE Monitor,” the Roubini Global Economics
newsletter. I came across Prof. Roubini’s scenario in an article posted
by Paul Farrell at “Market Watch” on March 4, 2008. Prof. Roubini’s report is
called "The Rising Risk of a Systemic Financial Meltdown: Twelve Steps to
Financial Disaster." Mr. Farrell describes it a Shakespearean
tragedy in 12 acts. I present it here in the barest of outlines.
1. Home prices will fall 20% to 30% from the peak.
2. Prime and near-prime mortgages losses.
3. Consumer debt defaults will increase sharply.
4. The credit insurers rescue package is insufficient.
5. Commercial real estate loan market will deteriorate.
6. Some large banks with heavy mortgage exposure will fail.
7. Banks' losses grow as asset values drop further.
8. Once the recession gains speed, expect corporate defaults.
9. Unregulated 'shadow banking system' facing huge problems.
10. As recession spirals out-of-control, stock markets drop again.
11. Credit crunch will dry up liquidity in many financial markets.
12. Massive global recession spreading, spiraling down.
Now it is not the purpose of my course to get into all of the
economic details, nor even to specifically discuss any of the Prof. Roubini’s
predictions beyond the collapse of the real estate bubble and the subprime loan
crisis that has already hit (Bear, Stearns, anyone?) Actually, it looks
presently like we are already somewhere in the step 5-7 range. It is my purpose
to take a look at just how Georgite economic and political policies have lead
directly to this ensuing disaster. Fortunately, in my view, Sen. Obama is
beginning to take notice of, and talk about, these connections between broad
Georgite policy and the broad state of the economy (while Sen. Clinton
generally sticks to her lawyer’s list of micro-fixes). And so, here are
some additional topics my course would cover.
1. The
War on Iraq and the economy. Sen. Obama has talked about such a
connection in terms of how spending on the Iraq War has taken away spending
from the domestic economy, especially for our slowly collapsing (literally in
certain cases) physical, social, educational, and health infrastructure.
But that, although it is important, is not the main connection in my
view. US Presidents and Congresses, regardless of party, would never
authorize national domestic spending in anywhere near the order of magnitude
that we see for Iraq. And while an echt economist and generally
terrific columnist, The New York Times’ Paul Krugman, says that there is little
connection between the Iraq War and the reasons why our economy is rapidly
deteriorating, I, not an economist by training, echt or otherwise, beg
to differ. They are indeed directly connected. This war is funded
by overseas borrowing, an inconvenient fact that not even Sen. Obama mentions
with any frequency (if at all). It is that massive borrowing which is
majorly responsible for the decline in the value of the dollar. It is
that decline which has lead, to the major increase in the price of oil,
worldwide (since oil is valued in dollars). While the rise in oil prices
has been just wonderful for the oil and related companies (like, just
coincidence, mind you, Cheney’s Halliburton), it has had a major negative
impact on the American economy as well as that of many other countries.
So, even without the subprime mortgage and ensuing credit crises, indeed the
War and the recession are directly connected.
2. Deregulation,
one of the Georgite rallying cries, lead directly to the so-called “subprime”
mortgage crisis, where totally unregulated non-bank mortgage preyed upon
unsuspecting borrowers with “teaser” loans, chopping them up into
unrecognizable bits, reselling them to likewise greedy brokerage houses, and
etc. You know the story. But they were able to do this because they
were totally unregulated. When banks make mortgage loans they are
required to maintain certain reserves against predicted consumer
defaults. Not so the subprime guys. And the financial markets
played right into the developing tragedy. One would have thought that
once around Robin Hood’s barn on this one, in the 1930s, would have taught
everyone a lesson. But greed rules when it can get away with it and the
Grover Norquists of this world have made “regulation” the double
bogeyman. I was happy to hear Sen. Obama make re-regulation to guarantee
a market that works to everyone’s benefit a major focus of his speech on the
economy On March 27.
3. The
role of the Federal Reserve Bank. In this decade it has become more and
more apparent that the Chairmen of the Federal Reserve Bank, first Alan
Greenspan and then Ben Bernanke, have seen their primary role as bolstering to
the extent possible, Georgite economic policy and political interests as
well. For example, it was Greenspan, a so-called “fiscal conservative,”
who supported the unfunded Bush tax cuts for his rich friends and corporate
sponsors while at the same time making no objections to borrowing at an
unprecedented rate to pay for Bush’s War of Neocon Choice. Bernanke has
been hell-bent-for-leather to cut interest rates, even though doing so further
weakens the dollar and increases the chances of runaway inflation. Why?
Because doing so makes the stock markets feel good. And if the impending
real crash (a Dow in the 8-9000 range anyone?) can be put off until a
Democratic administration is in office, well why not?
4. Finally
there is the so-called “free market.” As one of its most visible
promoters, Bill Kristol (you know, The Weekly Standard, the Fox”News”Channel,
and now The New York Times [!]) is so fond of telling us, the “free market”
will, if just left alone, if just relieved of any and all “government
interference,” solve all economic problems. That is the “free market,”
except when it doesn’t work and those problems involve really rich people, like
the top investors in Bear, Stearns and previously rescued, totally mis-named
“hedge funds” (really high-end stock-trading gambling houses which are not a
hedge against anything except nasty government inspectors from the Securities and
Exchange Commission looking over their shoulders). (See for example, EJ
Dionne, “Wall Street Won’t Turn Down Welfare,” Newsday, 3/20/08; AR Sorkin, The
Hand Behind the Deal, New York Times, 3/25/08; G. Palast, “The $200 billion bail-out for predator banks and
Spitzer charges are intimately linked,”.)
In such cases, as a good friend and
shrewd observer of the political economy has put it: at the high end of the
economic scale (but not anywhere else on it) “profit = private, loss =
public.” The function of private capital investment is to make
profits for the investors. Despite the propaganda, phrases like “the
equitable distribution of goods and services” and “the guarantee of personal
freedom” as such self-parodying Right-wing Radio Talkers like Mark Levin are
fond of telling us, such investment is not designed to achieve either of the
latter; only the former. Capitalism, for better or for worse, has proved
the truth of hat proposition over and over again. The current developing
recession, caused in major part by the collapse of Georgite-inspired
unregulated lending and capital markets, with their prime, and indeed only,
focus being on making as much money as they can, really does prove that,
folks.
So there are the beginnings of my course. Enough
for a semester? Perhaps, perhaps not.
If I come up with any more components for it, I will surely share them with
you.