Article 43

 

How the US Economy Was Lost

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The increased inequality from 2001 to 2005 - during a recovery no less - caused the bottom 90% of households to lose income (-$2,071) while the best-off 1% of households gained $183,902 on average.
WHOSE GRABBING ALL THE NEW PIE - Lawrence Mishel, Economic Policy Institute

By Paul Craig Roberts
Information Clearinghouse
February 24, 2009

The American economy has gone away. It is not coming back until free trade myths are buried six feet under.

Americas 20th century economic success was based on two things. Free trade was not one of them. America’s economic success was based on protectionism, which was ensured by the union victory in the Civil War, and on British indebtedness, which destroyed the British pound as world reserve currency. Following World War II, the US dollar took the role as reserve currency, a privilege that allows the US to pay its international bills in its own currency.

World War II and socialism together ensured that the US economy dominated the world at the mid 20th century. The economies of the rest of the world had been destroyed by war or were stifled by socialism.f

The ascendant position of the US economy caused the US government to be relaxed about giving away American industries, such as textiles, as bribes to other countries for cooperating with Americas cold war and foreign policies. For example, Turkey’s US textile quotas were increased in exchange for over-flight rights in the Gulf War, making lost US textile jobs an off-budget war expense.

In contrast, countries such as Japan and Germany used industrial policy to plot their comebacks. By the late 1970s, Japanese auto makers had the once dominant American auto industry on the ropes. The first economic act of the free market Reagan administration in 1981 was to put quotas on the import of Japanese cars in order to protect Detroit and the United Auto Workers.

Eamonn Fingleton, Pat Choate, and others have described how negligence in Washington DC aided and abetted the erosion of Americas economic position. What we didn’t give away, we let be taken from us while preaching a free trade doctrine at which the rest of the world scoffed.

Fortunately, our adversaries at the time, the Soviet Union and China, had unworkable economic systems that posed no threat to Americas diminishing economic prowess.

The proverbial hit the fan when Soviet, Chinese, and Indian socialism collapsed around 1990, to be followed shortly thereafter by the rise of the high speed Internet. Suddenly, American and other first world corporations discovered that a massive supply of FOREIGN LABOR was available at PRACTICALLY FREE WAGES.

To get Wall Street analysts and shareholder advocacy groups off their backs, and to boost shareholder returns and management bonuses, American corporations began moving their production for American markets offshore. Products that were made in Peoria are now made in China.

As offshoring spread, American cities and states lost tax base, and families and communities lost jobs. The replacement jobs, such as selling the offshored products at Wal-Mart, brought home less pay.

“Free market” economists covered up the DAMAGE done to the US economy by preaching a New Economy based on services and innovation. But it wasn’t long before corporations discovered that the high speed Internet let them offshore a wide range of professional service jobs. In America, the hardest hit have been software engineers and information technology (IT) workers.

The American corporations quickly learned that by declaring SHORTAGES OF SKILLED AMERICANS, they could get from Congress H-1b work visas for LOWER PAID FOREIGNERS with whom to replace their American work force. Many US corporations are known for forcing their US employees to TRAIN THEIR FOREIGN REPLACEMENTS IN EXCHANGE FOR SEVERANCE PAY.

Chasing after shareholder return and performance bonuses, US corporations deserted their American workforce. The consequences can be seen everywhere. The loss of tax base has threatened the municipal bonds of cities and states and reduced the wealth of individuals who purchased the bonds. The lost jobs with good pay resulted in the expansion of consumer debt in order to maintain consumption. As the offshored goods and services are brought back to America to sell, the US trade deficit has exploded to unimaginable heights, calling into question the US dollar as reserve currency and Americas ability to finance its trade deficit.

As the American economy eroded away bit by bit, “free market” ideologues produced endless reassurances that America had pulled a fast one on China, sending China dirty and GRIMY MANUFACTURING JOBS. Free of these “old economy” jobs, Americans were lulled with promises of riches. In place of dirty fingernails, American efforts would flow into innovation and entrepreneurship. In the meantime, the “service economy” of software and communications would provide a leg up for the work force.

EDUCATION was the answer to all challenges. This appeased the academics, and they produced no studies that would contradict the propaganda and, thus, curtail the flow of federal government and corporate grants.

The “free market economists,” who provided the propaganda and disinformation to hide the act of destroying the US economy, were well paid. And as Business Week noted, “outsourcings inner circle has deep roots in GE (General Electric) and McKinsey,” a consulting firm. Indeed, one of McKinseys main apologists for offshoring of US jobs, Diana Farrell, is now a member of Obama’s White House National Economic Council.

The pressure of jobs offshoring, together with massive imports, has destroyed the economic prospects for all Americans, except the CEOs who receive performance bonuses for moving American jobs offshore or giving them to H-1b work visa holders. Lowly paid offshored employees, together with H-1b visas, have curtailed employment for older and more experienced American workers. Older workers traditionally receive higher pay. However, when the determining factor is minimizing labor costs for the sake of shareholder returns and management bonuses, older workers are unaffordable. Doing a good job, providing a good service, is no longer the corporations function. Instead, the goal is to minimize labor costs at all cost.

Thus, “free trade” has also DESTROYED THE EMPLOYMENT PROSPECTS OF OLDER WORKERS. Forced out of THEIR CAREERS, they seek employment as shelf stockers for WAL-MART.

I have read endless tributes to Wal-Mart from libertarian economists, who sing Wal-Mart’s praises for bringing low price goods, 70% of which are made in China, to the American consumer. What these economists do not factor into their analysis is the diminution of American family incomes and government tax base from the loss of the goods producing jobs to China. Ladders of upward mobility are being dismantled by offshoring, while California issues IOUs to pay its bills. By shifting production offshore, offshoring reduces US GDP. When the goods and services are brought back to America to be sold, they increase the trade deficit. As the trade deficit is financed by foreigners acquiring ownership of US assets, the change in ownership means that profits, dividends, capital gains, interest, rents, and tolls leave American pockets for foreign ones.

The demise of Americas productive economy left the US economy dependent on finance, in which the US remained dominant because the dollar is the reserve currency. With the departure of factories, finance went in new directions. Mortgages, which were once held in the portfolios of the issuer, were securitized. Individual mortgage debts were combined into a ғsecurity. The next step was to strip out the interest payments to the mortgages and sell them as derivatives, thus creating a third debt instrument based on the original mortgages.

In pursuit of ever more profits, financial institutions began betting on the success and failure of various debt instruments and by implication on firms. They bought and sold collateral debt swaps. A buyer pays a premium to a seller for a swap to guarantee an assetԒs value. If an asset insuredӔ by a swap falls in value, the seller of the swap is supposed to make the owner of the swap whole. The purchaser of a swap is not required to own the asset in order to contract for a guarantee of its value. Therefore, as many people could purchase as many swaps as they wished on the same asset. Thus, the total value of the swaps greatly exceeds the value of the assets. (An excellent explanation of swaps can be found here )

The next step is for holders of the swaps to short the asset in order to drive down its value and collect the guarantee. As the issuers of swaps were not required to reserve against them, and as there is no limit to the number of swaps, the payouts can easily exceed the net worth of the issuer.

This was the most shameful and most mindless form of speculation. Gamblers were betting hands that they could not cover. The US regulators had abandoned their posts. The American financial institutions abandoned all integrity. As a consequence, American financial institutions and rating agencies are trusted nowhere on earth.

The US government should never have used billions of taxpayers dollars to pay off swap bets as it did when it bailed out the insurance company AIG. This was a stunning waste of a vast sum of money. The federal government should declare all swap agreements fraudulent contracts, except for a single swap held by the owner of the asset. Simply wiping out these fraudulent contracts would remove the bulk of the vast overhang of ғtroubled assets that threaten financial markets.

The billions of taxpayers’ dollars spent buying up subprime derivatives were also wasted. The government did not need to spend one dime. All government needed to do was to suspend the mark-to-market rule. This simple act would have removed the solvency threat to financial institutions by allowing them to keep the derivatives at book value until financial institutions could ascertain their true values and writethem down over time.

Taxpayers, equity owners, and the credit standing of the US government are being ruined by FINANCIAL SHYSTERS who are manipulating to their own advantage the governments commitment to mark-to-market and to the ғsanctity of contracts. Multi-trillion dollar bailouts and BANK nationalization are the result of the government’s inability to respond intelligently.

Two more simple acts would have completed the rescue without costing the taxpayers one dollar: an announcement from the Federal Reserve that it will be lender of last resort to all depository institutions including money market funds, and an announcement reinstating the uptick rule.

The uptick rule was suspended or repealed a couple of years ago in order to permit hedge funds and shyster speculators to rip-off American equity owners. The rule prevented short-selling any stock that did not move up in price during the previous day. In other words, speculators could not make money at others expense by ganging up on a stock and short-selling it day after day.

As a former Treasury official, I am amazed that the US government, in the midst of the worst financial crises ever, is content for short-selling to drive down the asset prices that the government is trying to support. No bailout or stimulus plan has any hope until the uptick rule is reinstated.

The bald fact is that the combination of ignorance, negligence, and ideology that permitted the crisis to happen is still present and is blocking any remedy. Either the people in power in Washington and the financial community are total dimwits or they are manipulating an opportunity to redistribute wealth from taxpayers, equity owners and pension funds to the financial sector.

The Bush and Obama plans total 1.6 trillion dollars, every one of which will have to be borrowed, and no one knows from where. This huge sum will compromise the value of the US dollar, its role as reserve currency, the ability of the US government to service its debt, and the price level. These massive costs are pointless and are to no avail as not one step has been taken that would alleviate the crisis.

If we add to my simple menu of remedies a ban, punishable by instant death, for short selling any national currency, the world can be rescued from the current crisis without years of suffering, violent upheavals and, perhaps, wars.

According to its hopeful but economically ignorant proponents, globalism was supposed to balance risks across national economies and to offset downturns in one part of the world with upturns in other parts. A global portfolio was a protection against loss, claimed globalism’s purveyors. In fact, globalism has concentrated the risks, resulting in Wall Street’s greed endangering all the economies of the world. The greed of Wall Street and the negligence of the US government have wrecked the prospects of many nations. Street riots are already occurring in parts of the world. On Sunday February 22, the right-wing TV station, Fox News, presented a program that predicted riots and disarray in the United States by 2014.

How long will Americans permit their government to rip them off for the sake of the financial interests that caused the problem? Obama’s cabinet and National Economic Council are filled with representatives of the interest groups that caused the problem. The Obama administration is not a government capable of preventing a catastrophe.

If truth be known, the banking problemӔ is the least of our worries. Our economy faces two much more serious problems. One is that offshoring and H-1b visas have stopped the growth of family incomes, except, of course, for the super rich. To keep the economy going, consumers have gone deeper into debt, maxing out their credit cards and refinancing their homes and spending the equity. Consumers are now so indebted that they cannot increase their spending by taking on more debt. Thus, whether or not the banks resume lending is beside the point.

The other serious problem is the status of the US dollar as reserve currency. This status has allowed the US, now a country heavily dependent on imports just like a third world or lesser-developed country, to pay its international bills in its own currency. We are able to import $800 billion annually more than we produce, because the foreign countries from whom we import are willing to accept paper for their goods and services.

If the dollar loses its reserve currency role, foreigners will not accept dollars in exchange for real things. This event would be immensely disruptive to an economy dependent on imports for its energy, its clothes, its shoes, its manufactured products, and its advanced technology products.

If THE UNIPOWER WILL OVERNIGHT BECOME a THIRD WORLD country, unable to pay for its imports or to sustain its standard of living.

How long can the US government protect the dollars value by leasing its gold to bullion dealers who sell it, thereby holding down the gold price? Given the incompetence in Washington and on Wall Street, our best hope is that the rest of the world is even less competent and even in deeper trouble. In this event, the US dollar might survive as the least valueless of the world’s fiat currencies.

SOURCE

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Who’s To Blame?

Commentary By Ron Beasley
Newshoggers
February 23, 2009

Canadian-budget-cookie-jar So who is responsible for the current economic meltdown? is it

a) The bankers and mortgage brokers who put their hands in the cookiejar

b) The people like Phil Graham and Alan Greenspan who unlocked the cookiejar

c) The stock traders and Wall Street brokers that all but forced the bankers to steal from the cookiejar?

While there is plenty of blame to go around I think much of the blame falls on c), Wall Street.

As I first suggested here Wall Street is not the economy but has come to more closely resemble a Ponzi Scheme or a Las Vegas Black Jack table.  The only time Wall Street actually contributes anything to the economy is when new stock is issued.  The rest of the time no additional capital is added to the economy.  The traded companies are expected to show short term stock price gains and that is how success is measured even though those short term gains may damage the company in the long term.  That’s why the automobile companies continued to build SUVs - that was where the profits were, in spite of the fact that a long term strategy would have suggested an emphasis on more fuel efficient cars.  The same thing was at work with the banks. Decisions that were unwise in the long term were producing big profits and driving up stock prices in the short term.  Corporate officers who could not produce sharp short term gains would lose their jobs.

The economy can’t be fixed without ending the casino operation of Wall Street.  Some of it can be done by regulation but excessive trading, which adds to the pocket books of brokerage firms but nothing to the economy as a whole must be reduced.  An increase in the capitol gains tax, 35% or more, and a transaction tax on stock transactions should do a lot to reduce casino style trading trading.

SOURCE

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New study confirms economy was destroyed by Democrat policies

By Robert Moon
The Examiner
December 21, 2012

A new STUDY from the widely respected National Bureau of Economic Research released this week has confirmed beyond question that the left’s race-baiting attacks on the housing market (the COMMUNITY REINVESTMENT ACT - enacted under Carter, made shockingly more aggressive under Clinton) is directly responsible for imploding the housing market and destroying the economy.

The study painstakingly sorted through failed home loans that caused the housing market collapse and identified an overwhelming connection between them and CRA mortgages.

Again, let’s review:

-President Bush WENT to Congress repeatedly for years warning them that Fannie Mae and Freddie Mac were going to destroy the economy (17 times in 2008 alone). Democrats continuously ignored him, shut down his proposals along party lines and continued RAIDING the institutions for campaign contributions on their way down.

Fox News shows timeline for economic meltdown

Timeline shows Bush, McCain warning Dems of financial and housing crisis; meltdown

-John McCain also co-sponsored urgently critical reforms that would have prevented the housing market collapse, but Democrats shut that down as well, along party lines, and even openly ridiculed anyone who suggested reforms were necessary...to protect their taxpayer-funded campaign contributions as the economy raced uncontrollably toward the cliff.

-No one was making bad loans to unqualified people until Democrats came along and threatened to drag banks into court and have them fined and branded as racists if they didn’t go along with the left’s Affirmative Action lending policies...all while federally insuring their losses. Even the New York Times warned in the late 1990s that Democrats continuing to force banks into lowering their standards would lead to this exact catastrophe.

-Obama himself is even on the record personally helping sue one lender - Citibank - into lowering its lending standards to include people from extremely poor and unstable areas, which even one of the left’s favorite blatantly partisan “fact-checkers,” Snopes, ADMITS (while pretending to set the record straight).

-Even The New York Times ADMITTED that there is “little evidence” of any connection between the “Republican” deregulation measures Obama blames, like the Gramm-Bleach-Liley Act (signed into law by a Democrat), and the collapse of the housing market.

But non-Fox media have spent years deliberately and relentlessly inoculating people against the facts, training them to mindlessly blame Bush for being in charge when Democrat policies destroyed the economy. So here we sit, to this day, still watching Obama excuse and shrug off endless economic failures, illegal government takeovers and utter national bankruptcy with zero accountability.

SOURCE

Posted by Elvis on 02/25/09 •
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