True, America and China, unlike Europe, have pumped trillions in the economy to support demand. Their huge fiscal stimulus seems to be paying off. Problem is toxic assets still plague the US and EU financial systems, and a huge credit card default crisis lies in store, when Bank of America and others will be forced to acknowledge the extent of their losses  on finanical assets in their balance sheets. If consumer credit goes bust, the recovery just won’t happen, unless purchasing power is redistributed — by tax or strike — toward employees and lower social strata in America, Europe, Asia, and a new international monetary system, based on stocks of primary goods and on fixed, but adjustable, exchange rates, comes into being. Kaldor proposed it to the UN thirty years ago. It would provide a firmer anchor for the global economy than current international reserve currencies, and promote North-South economic realignment, since it would regulate the terms of trade between manufactured goods and agricultural and mineral commodities.

Don’t believe the hype: the recovery is NOT around the corner. It remains to be seen what will happen when, especially in Europe, the crisis worsens in late 2009 and early 2010: Anarchy in the EU?

By Alexander Cockburn, Counterpunch

On any rational assessment the popular new president is skating on thin ice. Pollyanna bulletins about the economy puff up from the White House and Federal Reserve, like auguries of a new Pope through the  Vatican chimney. “Habemus spem.” We have hope. We’ve just heard it from President Obama: “We are starting to see glimmers of hope across the economy.” From Fed Chairman Ben Bernanke, who’s so far unleashed $12 trillion in booster money, we get the always sinister reassurance, like Death giving the Appointee in Samarra a friendly tap on the shoulder, “the foundations of our economy are strong”.

The economic news in the near and medium term is ghastly, as Mike Whitney outlined on this site last Thursday. Retail sales crashed again in March, nowhere worse than in the car market, though electronics and building materials were way off too. They now reckon there’ll be just over two million housing foreclosures in 2009, up 400,000 from 2008. Industrial output is going through the floor at an annual rate of 20 per cent, the biggest quarterly drop since the end of the Second World War. US industry is now running at only 70 per cent of capacity, the worst number since they started tracking this stat in 1967. Job losses are currently running at 650,000 a month.

Round the next corner is credit card delinquency and  the long-heralded slump in commercial real estate, where vacancy rates are already running at 15 per cent,. Capital One, a huge issuer of Visa and Mastercard, just  said the annualized net charge-off rate for U.S. credit cards — debts the company reckons will never be paid — rose to 9.33 percent in March from 8.06 percent in February. In other words, Capital One – whose credit card promotions take up  hefty space in the mailbag of every US postman – is in big trouble, and  under one in ten of these credit card holders will have a messed up credit rating for several years to come.

Wall Street and its boosters are trying to pretend that indeed the worst is over. The Dow and S&P Index have been rallying for five weeks. Wells Fargo, the huge San Francisco-based bank, second biggest home lender, announced that first quarter net income rose 50 per cent to $3 billion.  No one seriously believes the bank is in anything other than continuing huge trouble, and will soon need – so Blomberg News surmises – $50 billion to settle near-term commitments. The profit figure stems from newly relaxed rules about the valuation of Wells Fargo’s assets.

In other words it’s thin economic ice from here to the horizon. Robert Reich, now teaching economics at Berkeley and formerly labor secretary in the Clinton administration, wrote a piece recently, titled “Why We’re Not at the Beginning of the End, and Probably Not Even At the End of the Beginning”. There are huge problems with the whole orientation of the US economy. The “free market” outsourcing model has failed. Even at the best of times the US consumers who account for over 70 per cent of all economic activity in the country, don’t have purchasing power to keep the whole show on the road, unless they put it on the credit cards which are now maxed out and going into default, or borrow on houses they can’t afford.

Amid a hail of well founded criticism from liberal and conservative economists alike, Obama, with Geithner, Summers and Bernanke at his elbow, remains absolutely committed to giving the bankers everything they ask for, trillion upon trillion.  As William Black, deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, recently remarked in an acrid interview in Barron’s, (reprinted here last week) “ Unless the current administration changes course pretty drastically, the scandal will destroy Obama’s administration, both economically and in terms of integrity. We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure?”

In foreign policy the ice is just as treacherous. As the nation emerges from its disastrous adventure in Iraq, Obama redeploys to the Afghan-Pakistan theater. The administration delightedly touts claims that its remote-controlled missiles are decimating al-Q’aida. The Washington-based journalist Gareth Porter last Thursday cited here data leaked by the Pakistani government showing that only ten out of 60 drone attack in February and March hit al Qaida leaders and the rest did what bombs and missiles usually do, namely kill civilians, 537 of them – thus immeasurably strengthening the hand of the Taliban  in the battle for hearts and minds.

Obama is no doubt unworried by this since the hearts and minds he’s mostly interested in belong to the American people and especially opinion-forming elites, who remain unflustered when high explosive falls on a wedding party in Waziristan. Failure in Iraq was re-labeled “victory” and in terms of domestic politics the chickens only come home to roost when there’s film of people climbing off the roof of the US embassy into a helicopter, or when the casualty rates among US soldiers start soaring. Soaring Pentagon budgets are popular with Congress, whose members nix any effort to cut back.

Where the ice is giving way for Obama is among those who thought he might strike out in a new direction in foreign policy. There’s not much sign of that. Whether it’s a sell-out of Haiti’s poor or acquiescence in Israel’s grim plans for the Palestinians, Obama’s game is strictly business as usual, up to and including the Cuban blockade whose damage, as Fidel Castro said here last week, “cannot be calculated only on the basis of its economic effects, for it constantly takes human lives and brings painful suffering to our people. Numerous diagnostic equipment and crucial medicines –made in  Europe, Japan or any other country– are not available to our patients  if they carry U.S. components or software.”

Obama has welshed on promises that America will stop kidnapping its enemies and “rendering” them to secret prisons overseas. As under Bush, enemy combatants languish without rights or recourse in prisons like Bagram. The torturers who flourished in the Bush years will not be prosecuted. Electronic eavesdropping continues unabated. It seems, so CounterPunch’s Fred Gardner is reporting in exclusives on this site, he and his attorney general are welshing on commitments not to harass medical marijuana operations in states where local laws sanction such activity.

Will the liberal-left mutiny? Never. Remember, Bill Clinton bombed Yugoslavia and kicked away life supports of America’s poorest and most of the liberal-left stayed loyal to the end and cherish his memory. The labor movement has already seen defeat for its cherished “card check” bill, designed to win a level playing field for union organizers, thus presumptively boosting effective purchasing power among working people, vital to the nation’s economic well-being.  They’re not really blaming this on Obama, even though it is his chief aide, Rahm Emmanuel who, in his years on the Hill, picked Democratic candidates who feel no loyalty to labor and refused to push for the card check bill, and though Obama recently stressed he is a “new” Democrat – transparent code for someone distancing himself from the labor movement.

Obama’s polling numbers remain good. He has only to say there are “glimmers of hope” and the pollsters duly find increasing sentiment among Americans that they feel the economy is moving in a “positive” direction. He gets good assessments from Democrats and Independents. Many  Republicans don’t like him but here again Obama is lucky, just as he was lucky – at least in the near term -  to have three Navy SEALS off the horn of Africa who were good shots. The Republican opposition is in appalling shape, lumbering from one ill-conceived stunt to the next.

Obama’s lucky to have succeeded a terrible president. He gets out a lot and talks a great game. His problem is the same as the country’s. The economic ice is cracking under his feet, and the “stimulus” is going to be about as efficacious as those cushions under the seats the flight attendants assure us are going to come in handy when the plane goes down in the North Atlantic.

The Curse of Rockefeller

He died in action thirty years ago, in intimate activity in a subterranean sanctuary at the end of a secret tunnel under a street in the West 50s in New York.  Nelson Rockefeller was one of the richest men in the world, but he never found a way to buy his way into the Oval Office. As Bruce Jackson writes in our April 16-30  newsletter, just published:

– he was the individual more responsible than any other for the rise to power of Henry Kissinger. Kissinger was on Rockefeller’s personal payroll for a decade; it was because of Rockefeller that Kissinger was brought into the Nixon administration;

– he was responsible for the September 13, 1971 bloodbath at Attica prison;

– in 1973 he created the most repressive drug laws in the nation. In 1973, he got the New York legislature to pass what immediately became known as “the Rockefeller Drug Laws,” These laws imposed very long sentences, many with mandatory minimums, for what were often minor offenses everywhere else. Sale of two ounces of heroin, morphine, opium, cocaine or cannabis in any form, or possession of four ounces of those same drugs brought the same sentence as second-degree murder: 15 or 25 to life, with no parole before the minimum was served and no judicial discretion.

Thousands of drug dealers, drug users and “mules” went to prison for decades under the Rockefeller laws, but few big time dealers did any more time under them than they would have under the laws that had been in place before 1973, primarily because many of them – like Nicky Barnes and Frank Lucas – were not only willing to turn informer, but had enough people to snitch on to make massive sentence reductions worthwhile to the prosecutors.

Now by agreement between Gov. Paterson and the New York state assembly, these laws are about to be repealed. Read Bruce Jackson in CounterPunch newsletter on the true reasons for repeal and the awful legacy of a truly appalling human.

Also in this terrific new issue: As the economy implodes, the social fabric frays and nutball groups organize for Armageddon. Pam Martens sets forth the national game-plan of the “Free State Project”. Is it coming to a town near you?

Half a million new jobless every month and the salesmen of “free trade” still hawk their credo. Paul Craig Roberts describes what offshoring has done to America.

Alexander Cockburn can be reached at alexandercockburn@asis.com

March 2, 2009

Remember the good old days, when we used to talk about the “subprime crisis” — and some even thought that this crisis could be “contained”? Oh, the nostalgia!

Today we know that subprime lending was only a small fraction of the problem. Even bad home loans in general were only part of what went wrong. We’re living in a world of troubled borrowers, ranging from shopping mall developers to European “miracle” economies. And new kinds of debt trouble just keep emerging.

How did this global debt crisis happen? Why is it so widespread? The answer, I’d suggest, can be found in a speech Ben Bernanke, the Federal Reserve chairman, gave four years ago. At the time, Mr. Bernanke was trying to be reassuring. But what he said then nonetheless foreshadowed the bust to come.

The speech, titled “The Global Saving Glut and the U.S. Current Account Deficit,” offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia.

In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world.

The result was a world awash in cheap money, looking for somewhere to go.

Most of that money went to the United States — hence our giant trade deficit, because a trade deficit is the flip side of capital inflows. But as Mr. Bernanke correctly pointed out, money surged into other nations as well. In particular, a number of smaller European economies experienced capital inflows that, while much smaller in dollar terms than the flows into the United States, were much larger compared with the size of their economies.

Still, much of the global saving glut did end up in America. Why?

Mr. Bernanke cited “the depth and sophistication of the country’s financial markets (which, among other things, have allowed households easy access to housing wealth).” Depth, yes. But sophistication? Well, you could say that American bankers, empowered by a quarter-century of deregulatory zeal, led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors.

And wide-open, loosely regulated financial systems characterized many of the other recipients of large capital inflows. This may explain the almost eerie correlation between conservative praise two or three years ago and economic disaster today. “Reforms have made Iceland a Nordic tiger,” declared a paper from the Cato Institute. “How Ireland Became the Celtic Tiger” was the title of one Heritage Foundation article; “The Estonian Economic Miracle” was the title of another. All three nations are in deep crisis now.

For a while, the inrush of capital created the illusion of wealth in these countries, just as it did for American homeowners: asset prices were rising, currencies were strong, and everything looked fine. But bubbles always burst sooner or later, and yesterday’s miracle economies have become today’s basket cases, nations whose assets have evaporated but whose debts remain all too real. And these debts are an especially heavy burden because most of the loans were denominated in other countries’ currencies.

Nor is the damage confined to the original borrowers. In America, the housing bubble mainly took place along the coasts, but when the bubble burst, demand for manufactured goods, especially cars, collapsed — and that has taken a terrible toll on the industrial heartland. Similarly, Europe’s bubbles were mainly around the continent’s periphery, yet industrial production in Germany — which never had a financial bubble but is Europe’s manufacturing core — is falling rapidly, thanks to a plunge in exports.

If you want to know where the global crisis came from, then, think of it this way: we’re looking at the revenge of the glut.

And the saving glut is still out there. In fact, it’s bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust.

One way to look at the international situation right now is that we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.

So that’s how we got into this mess. And we’re still looking for the way out.