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This Time Is Different - by Stephen LendmanWhatever we know about today's financial crisis. Think we know. Eventually will know in the fullness of time. This time is really different. In 1922, Henry Ford put it this way in his book titled "My Life and Work:"
"The (economy's) primary functions are agriculture, manufacture, and transportation. Community life is impossible without them. They hold the world together....The great delusion is that one may change the foundation. The foundations of society are the men and means to grow things, to make things, and to carry things."
Until recently, and even now, many observers pretend that the US and major world economies will avoid recession. Or at worst experience a mild one with healthy growth resuming in 2009. Slowly and grudgingly, opinions are changing. Output is falling. Unemployment rising. Wages stagnant. Personal consumption falling and so are equity, bond and commodity prices. At the same time, households are way over-indebted and so are businesses, states, cities and the federal government. At issue is how bad things will get. For how long, and what, if any, corrective measures at this stage can stabilize and reverse conditions.
It's effects are broad-reaching. Chicago mayor Richard Daley faces a $469 million budget gap. As a result, he'll shut down "non-safety related city services" for six days over the holidays to save millions of dollars. California "faces the potential of a perfect storm created by the financial crisis effect on liquidity, lower-than-anticipated revenues currently coming into the state, and our late budget," according to governor Schwarzenegger's communication director. Another administration official agreed and said "the (revenue) window is shut, and if it stays shut, we are in deep trouble." The state needs an emergency $7 billion loan. It wants Washington to buy that amount of state bonds that it can't sell in the marketplace due to current conditions.
Other cities like New York are also strapped. With a projected $2.3 billion revenue shortfall in 2009 and gaps of around $5.2 billion in 2010 and 2011. To combat it, Mayor Bloomberg ordered a $1.5 billion spending cut and may raise property taxes by 7%. Other measures will follow as needed.
The Center on Budget and Policy Priorities reported that 29 or more states (and the District of Columbia) face an estimated $48 billion in total budget shortfalls for FY 2009. Unlike the federal government, states and cities can't run deficits or borrow like Washington for operating expenditures. They can only use available reserves, cut spending or raise taxes. Choosing the latter two will contract their economies further and contribute to a national slowdown.
Mountains of debt and multiple imploding bubbles are the problems. The housing one especially crucial for millions and the states where they live. It hits property tax revenues. Sales taxes from furniture, appliances, construction materials and other housing related products. Incomes taxes also from employment cutbacks at the same time demand for city services is increasing. Instead they're being cut for public health, education, the indigent, the elderly and disabled, and public workforces. All of which makes a bad situation worse. And according to some astute observers, it's only the beginning. The worst is yet to come.
Are We In Recession?
On October 17, the latest housing numbers added extra confirmation. New home construction hit a 17-year low in September. Housing starts fell 6.3% to a seasonally adjusted 817,000 annual rate. The lowest figure since January 1991, and single-family starts dropped 12% to 544,000. The worst showing since February 1982 in the depths of that period's severe recession. Until today called the deepest since the 1930s.
Building permits also fell 8.3% to 786,000. A 27-year low, and for single-family homes they dropped 3.8% to 532,000. The lowest in 26 years. Along with the data, the National Association of Home Builders reported that builder sentiment hit a record low in October and shows no signs of improvement. According to the University of Michigan/Reuters index (on October 17), so did consumer sentiment. Their latest reading fell to 57.5. Its biggest every monthly drop and nearing its all-time low 51.7 figure in May 1980.
Blame it on the housing slump and assets related to it causing a severe economic contraction. According to Merrill Lynch economist David Rosenberg, it will surpass the worst of the 1973 - 1975 one. He also sees huge and growing financial damage. Credit losses already around $600 billion ballooning to two or three times that amount before things stabilize. Economist Martin Feldstein, former US National Bureau of Economic Research head, sees the deepest US recession since WW II. He told CNBC: "The fact is that lenders don't want to lend, (and) asset buyers don't want to buy assets because of this tremendous uncertainty on what mortgage-backed securities are actually worth."
Investor Warren Buffett thinks a sharp downturn is underway, but he showed up in an October 17 New York Times op-ed saying now is a good time to own stocks. So he's buying. Others disagree and say we're in much more than a cyclical slump. The result of an unsustainable house of cards. No one knowing the amount of economic damage. From rampant speculation. Mountains of debt. The housing bubble, and the entire financial unraveling affecting households, businesses, all parts of the economy, and sentiment.
Noted economist Joseph Stiglitz is grim in his outlook. He sees "the most serious problem since the Great Depression (that) in some ways (is) worse in terms of the financial institutions....The reason, in part, is that while some of the same problems that occurred (then and since), such as excessive leverage, pyramid schemes, bubbles, have happened before, the so-called innovation of Wall Street, the financial innovations, that were supposed to manage risk, created a kind of non-transparency that is now so great that no one knows exactly the magnitude of the risk they face. It is particularly bad because our financial institutions are based on trust" that you can get your money out of banks you put it into.
Because of the current unraveling, that trust is fractured. "We are in the midst of micro-economic failure on a grand scale....rather than managing risk, the financial markets created" more of it. "The failure of our financial system to do what it is supposed to do matches in destructive grandeur the macro-economic failures of the Great Depression." The "country as a whole" lost out. What happened to "the American economy was avoidable." Stiglitz sees a protracted downturn, L-shaped at best, and lasting up to 18 months before it ends.
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