The U.S. Recession: What’s In It For You ?
Recent talk of the U.S. recession being over has always sounded a bit ludicrous to me when I see people out on the streets selling the homeless paper on almost every corner and every freeway exit ramp in the downtown area of Nashville. The unemployment rate is still over 8% and there’s talk in Congress of implementing austerity measures and cutting back on all sorts of “entitlements.” What’s that all about? Exactly what is a recession and do we have one or don’t we?
A recession is really defined by a period of lowering of productivity, based upon the behavior of the Gross Domestic Product, or GDP, which is a measure of total goods and services produced in the economy. It’s not a measure of how good you feel, or how well you are doing. It’s simply an index of output. More output is better. Expansion is better. Less output and contraction is not so good. A recession is a small contraction. A depression is a big one. When people are buying more goods at Walmart and eating out at McDonald’s, that’s good. When they are staying at home and saving their money, that’s bad. If a hurricane came through and wiped out everything you had, forced you to live in a cardboard box, but you still showed up for work on time to build those wigets, the GDP wouldn’t change one iota. However, when you then took out a mortgage and sold your soul to rebuild your life, that would be good. The GDP would go up. New loan, new construction, new demand for all kinds of services. The personal sacrifice to you is irrelevant.
Recessions can be an indication of people coming to their senses, and productivity can be a measure of how bad things really have gotten. So the index of GDP and words like “recession” have to be put into perspective. Two consecutive quarters of negative growth or two quarters within the same year of negative GDP growth represents to a professional economist the qualifying conditions that can be described as a recession. The gross volume of production has taken a dive on a graph for a short period..
But recessions, as I have suggested, are really in the eye of the beholder. An economist playing theoretical numbers games without consideration for the growth of crime in the streets and homelessness is little more than a statistician, and does not understand the real job of understanding and measuring human comfort or misery. The effort to understand and comprehend life by measuring fluctuations in the quantity of goods and services produced among a people as a specific dollar value is a unique challenge and probably a useless one. You could have 80% unemployment and still be able to come up with a GDP with growth and very relative but significant volume if you had a very successful industry that employed only 20% of the people. If human misery is really the point of raising the issue of GDP, then we still have a lot of research to do.
The U.S. recession really began at the time of the dot.com bubble of 2000, and its bursting in 2001. There was this euphoria that seemed to stem from the wild investing that occurred during the dot.com period in which companies were formed purely on speculation without income or capital beyond the original venture capital to get them started. People made big big money speculating on the foolishness and unrealistic optimism of dreamers because they are cunning sharks who hunt in the waters of some very naïve people. . With the dot.com crash, fear set in, and suddenly real estate became very attractive. But the greed and sickness continued.
Curiously, about the same time, in 1999, the Gramm–Leach–Bliley Act (GLB), also known as the Financial Services Modernization Act of 1999, eliminated barriers in the Glass-Steagall Act to mergers between commercial and investment banks, securities firms, and insurance companies, and they were allowed to consolidate. This law, signed by Bill Clinton, evolved from a case a year earlier in 1998 in which Citibank actually violated the Bank Holding Company Act through a merger with Travelers, which specifically prevented commercial banks from merging with insurance companies. But instead of being prosecuted, Citibank was allowed to lobby for and actually reverse the law that prohibited such a merger through the enactment of GLB.
Here’s a case where the law was clearly known by the actors involved in the merger, and they went ahead and violated it. I can’t think of any explanation of why they would go to the trouble and risk unless they knew well in advance that the law could be overturned. Sure enough, we have Senators Gramm, Leach and Bliley quite obligingly introduce a bill doing just that, and then it is supported in a show of unusual and spectacular bipartisanship by the entire Congress and the President. WTF? Did they all have their hand in that cookie jar?
Here’s the trick, the real cookie in the cookie jar: At the time of his signing, Clinton offered the following statement: “The Act establishes an important prospective principle: banking organizations seeking to conduct new nonbanking activities must first demonstrate a satisfactory record of meeting the credit needs of all the communities they serve, including low- and moderate-income communities. Thus, the law will for the first time prohibit expansion into activities such as securities and insurance underwriting unless all of the organization’s banks and thrifts maintain a “satisfactory” or better rating under the Community Reinvestment Act (CRA). The CRA will continue to apply to all banks and thrifts, and any application to acquire or merge with a bank or thrift will continue to be reviewed under CRA, with full opportunity for public comment.”
Clinton and Company were effectively ordering any bank that might be interested in taking advantage of this change in the law that it must make real estate loans to minorities and lower income neighborhoods. How absolutely humanitarian of them. The Fed conveniently lowers the interest rates, and suddenly a whole new industry is created. Why are we pushing loans to poor people with no credit and a high predictable failure rate? There’s something really clever about this. It’s like a huge factory that gives out homes to people in return for the mortgage paper. The house isn’t the asset. No one cares about the house. The mortgage is the real asset. .
The Community Reinvestment Act, a law that was passed during the Carter years, while calling for sound banking practices, did not anticipate deregulation and the combined collaborative scheming of investment and commercial banks that would issue as many of these high risk loans as possible solely to make money on the back end through bundling and selling bonds based upon the jacked up artificial value of the bundle. The losses on the front end didn’t amount to a hill of beans, you know, $20, $30, $40 thousand on a house worth not much more in the shaky part of town. They didn’t care whether or not the borrowers could actually pay for the No Doc, Low Doc loans they wrote. They could issue thousands of bonds worth millions by just bundling a few together, attaching a price to them based upon arrangements with rating agencies to make it right.
During the entire Bush presidency, all this bad paper was being packaged and sold, and it was this big money machine that was producing what would become the key cause of the recession and what could still ultimately lead to the collapse of the entire global capitalist economy.
It wasn’t long before the foreclosures started coming in, and by 2006 they had snowballed into a cascading financial collapse of the entire market. I purchased one of those houses myself in which the foreclosure cost the bank half the value of the house. They just wrote down a $100,000 note and then sold me the house for a fraction of its value. It was this building tidal wave of debt that pushed us into a recession. Banks began losing confidence in the market because they knew that banking assets were all hinged upon the artificial value in the bonds they had been selling which now had no value at all, and which were based upon failing loans in the underlying real estate assets. The asset value of the banks themselves required a margin of liquidity they couldn’t maintain because the value wasn’t there anymore. .
Lending tightened. Businesses could no longer borrow to expand their businesses. Many began firing workers and trimming down because they couldn’t borrow money even to meet payroll. Unemployment jumped. GDP began coming down. And then began the recession. What sealed it, of course, was TARP, or the Troubled Asset Relief Program, in which the government decided to infuse banks with real money (conveniently printed of course) by buying these useless bonds at a price artificially created by the Treasury Department that had no bearing at all to the real market. Still, it changed nothing. The depth of bad paper in the assets of banks was far far greater than the $700+ billion spent by the Treasury. Estimates as high as $80 trillion have been kicked around. Banks held on to the new money and refused to loan it, and the recession was signed, sealed and delivered. Had the money been used instead to buy up mortgage debt directly, based upon real assets in real estate, the money would have immediately been a life-saving transfusion into the economy and it would have halted much of the painful effects of such policies.
What has all this done to America? While banks have had a field day ripping the economy to shreds while they profited handsomely from all these criminal dealings, we have been left holding a pretty ugly bag. The unemployment figures don’t begin to tell the whole story. Unemployment causes a general drop in wages, and a drop in wages decreases household wealth, and induces otherwise honest well-adjusted people to become violent and commit crimes.
Paul Barrow is US based writer, activist and founder of a policy group www.unitedprogressives.org
Readers can reach him at: