Collapse of the US economy

[trex]

Excerpts from the article:

A Generalized Meltdown of Financial Institutions

Global Research, November 24, 2007

Reality has finally caught up to the stock market. The American consumer is underwater, the banks are buried in debt, and the housing market is in terminal distress. The Dow is now below its 200-Day Moving Average -- the first big "sell" signal. Anything below 12,500 could trigger program-trading and crash the market. The increased volatility suggests that we are watching a "real time" meltdown.

The credit storm that began in the United States with subprime mortgages has spread to markets across the globe. In fact, the train has already crashed. What we're seeing now is the boxcars piling up on top of each other.

On Tuesday Chinese government officials ordered a complete halt to bank lending to slow the speculative frenzy that has created an enormous equity bubble in the stock market. According to the Wall Street Journal:

"Chinese authorities are slamming the brakes on bank lending, in their latest attempt to curb the runaway investment threatening to overheat what is soon to be the world's third-largest economy. In recent weeks, regulators have quietly ordered China's commercial banks to freeze lending through the end of the year, according to bankers in several cities. The bankers say that to comply, they are canceling loans and credit lines with businesses and individuals." ("China freezes lending to Curb Investing Frenzy" Wall Street Journal)

The move illustrates how concerned the Chinese are that a slowdown in US consumer spending will trigger a crash on the Shanghai stock market. It also shows that the Chinese are having difficulty dealing with the inflation generated by the hundreds of billions of US dollars absorbed via the trade imbalance with the US. China is awash in USDs and that surplus is causing a steady rise in food and energy costs. This could be mitigated by allowing their currency to "float" freely. But a sudden, steep increase in the Chinese yuan's value could also send the world headlong into a global recession.

In California Governor Arnold Schwarzenegger has joined with four mortgage lenders to freeze adjustable interest rates (ARMs) for some of the state's highest-risk borrowers; another unprecedented move. The Governor hopes to avoid a collapse of the California real estate market which has gone into a tailspin. Home sales have plummeted more than 40 per cent for the last two months. Prices have dropped sharply---roughly 12 per cent statewide. New construction has slowed to a crawl. Layoffs are steadily rising. Jumbo loans (mortgages over $417,000) have been put on the "Endangered Species" list. Even qualified borrowers can't get mortgages. Nothing is selling. California housing is "off the cliff".

Schwarzenegger's plan to keep over-extended subprime mortgage-holders in their homes faces an uncertain future. What incentive is there for homeowners to continue paying exorbitant monthly rates when their payments are not applied to the principle? The homeowners would be better off bailing out, accepting foreclosure, and starting over with a clean slate.

It's unrealistic to thinks that Schwarzenegger can stop the tidal wave of foreclosures that are sweeping across the state. An estimated 3 million homeowners will lose their homes nationwide.

If you want to blame someone; blame Alan Greenspan. He's the one who created this mess. According to the economist Mike Shedlock:

"The Fed caused the credit crunch by slashing interest rates to 1 per cent to bail out its banking buddies in the wake of a dotcom bubble collapse. All the Fed did was create a bigger bubble. This bubble is so big in fact that it cannot even be bailed out. It's the end of the line for a serially bubble blowing Fed.

"So not only was this the biggest credit bubble in history, this was also the biggest transfer of wealth from the poor and middle class to the already enormously wealthy. That is the real travesty of justice regardless of whether or not the price tag is $1 trillion, $2 trillion, or $10 trillion." (Mike Shedlock, "Mish's Global Economic Trend Analysis")

The problem has gotten so serious that even Secretary of the Treasury, Henry Paulson, is putting up red flags. Last week, Paulson ignited a sell-off on Wall Street when he made this statement:

"The nature of the problem will be significantly bigger next year because 2006 [mortgages] had lower underwriting standards, no amortization, and no down payments....We're never going to be able to process the number of workouts and modifications (to mortgages) that are going to be necessary doing it just sort of one-off. I've talked to enough people now to know that there's no way that's going to work."

Like Schwarzenegger, Paulson is trying to get mortgage-lenders to provide a safety net for struggling borrowers who are defaulting on their loans. Paulson is calling for emergency legislation that will allow the Federal Housing Administration to play a greater role in the relief effort. The FHA has already expanded its traditional role by taking on hundreds of billions in extra debt just to keep a few "private" mortgage lenders and banks from going bankrupt. Of course, when Paulson's plan goes kaput and the debts pile up; it'll be the taxpayer that foots the bill.

"Paulson also called the Senate's failure to pass legislation overhauling mortgage giants Fannie Mae and Freddie Mac frustrating," saying that the two government-sponsored entities need to be playing a bigger role in the housing market.

Fannie and Freddie, have already posted enormous quarterly losses and don't have the capital reserves to put millions of subprime mortgage-holders under their "government-sponsored" umbrella. Paulson is just grabbing at straws.

Similar troubles are brewing in the broader market where late-payments and defaults have spread to credit card debt and new car loans. Every area of "securitized" debt has suddenly veered off the road and into the ditch. Last week the Fed injected more credit into the teetering banking system than anytime since 9-11.

No one has predicted the downward-spiral in the market more accurately than Nouriel Roubini. Roubini is a Professor at the Stern School of Business at New York University. Last week's prediction was particularly dire and is worth reprinting here:

"It is increasingly clear by now that a severe U.S. recession is inevitable in next few months...I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets... massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks; ..ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe knock-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate...; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed's lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized." (Nouriel Roubini's Global EconoMonitor)

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What could be the outcome of such a collapse... that paper money becomes useless and mortgages go into the double-digits? Those who do a lot of borrowing are the most at risk. But if you own your home and car you might be ok. Just remember to keep your guns clean, and watch the night fires burn.

[jbg]

The US, overall, has a better resource and manpower base than the "Euro Zone". That is very hard to overcome.

One can only hope that the US Federal Reserve will stop looking for excuses to run an inflationary policy. Those excuses have flown thick and fast over the years:

1. In 1997, the meltdowns in Indonesia, Thailand and Russia;
   
2. In 1998, Long Term Capital (a major hedge fund)
   
3. In 1999, Y2K;
   
4. In late 2001 through 2003, September 11
   

In between, there was a tightening in 2000 and early 2001 in an effort to choke off the "dot-com" boom. Unfortunately, the political pain of sound money won out.

Despite this, the Euro has still not faced its own need for disinflationary policies and given the makeup of governments in the Euro-zone, I expect problems in this area. Thus, the dollar retains its status.

The other threat that you mention is China. Given their historical inabilty to truly liberalize either economic or political conentrations of power, I expect the lid to blow off there. The US, as usual, will be the port in the storm. Remember, the relative stability of both the Orient and Europe derives from American power.

[bush_cheney2004]

...The other threat that you mention is China. Given their historical inabilty to truly liberalize either economic or political conentrations of power, I expect the lid to blow off there. The US, as usual, will be the port in the storm. Remember, the relative stability of both the Orient and Europe derives from American power.

Excellent point that is often overlooked. America is and has been the economic foundation for times good and bad. Analysis that predicts the demise of America with a surging China or Europe fails to grasp this historical reality.

Edited November 25, 2007 by bush_cheney2004

[Riverwind]

The US is where Canada was in 1990s. A lot of people were predicting doom then as the C$ collapsed. The US government will need to cut spending and raise taxes but that does not mean the US economy is about to collapse.

[Sir Bandelot]

Excellent point that is often overlooked. America is and has been the economic foundation for times good and bad. Analysis that predicts the demise of America with a surging China or Europe fails to grasp this historical reality.

Yes, indeed.

Fed chief sees an 'unusually uncertain' future

WASHINGTON — Federal Reserve Chairman Ben Bernanke told Congress on Wednesday the outlook for the economy remains "unusually uncertain".

Bernanke said the Fed would consider action if matters worsened.

His comments to the Senate Banking Committee sent stocks tumbling. The Dow Jones industrial average had been up 20 points before he spoke. It fell as much as 160 points during his testimony, but recovered some losses to close down 109 points. Investors shifted money into the safety of Treasury bonds; the yield on 10-year Treasury notes fell to 2.86 percent.

[Pliny]

The US is stuck between Barack and a hard place.

Barack has an agenda. He cares little about economics. When all answers are political; economics and society take a back seat.

Edited July 22, 2010 by Pliny

[Sam13jj]

Hallo everyone.....

The US, overall, has a better resource and manpower base than the "Euro Zone". That is very hard to overcome.

Maybe the new government can make solution to this.....

make money online from home

[dre]

The stock market needs to hit about 5000 before it accurate reflects the real value and likely futures of the companies that are traded on it. Once it hits 5000 ill start buying again.

But just like the US government bailed out companies it thought were "too big to fail" countries around the world see the US the same way. Especially pacific rim countries with large trade surpluses with the US. As long as this dynamic continues the world will keep bailing out the US... just like during this recent recession where the US was able to forstall inevitable corrections in the stock and realestate markets by dumping trillions of dollars worth of foreign capital into the system.

So the US economy wont "collapse" until the rest of the world stops seeing the US as "too big to fail". When will that happen? Its hard to say... but my guess is that it wont happen until countries will huge trade surpluses with the US can find replacement markets for their exports. These markets are starting to emerge as the rest of the world developes but we are still quite a long ways away from the point where the world can stop bailing out America and let fail. Probably 10-20 years still.

[WIP]

The U.S. is in a decline that they are not going to spin their way out of this time. The big reasons are an energy-intensive economy that's largely dependent on foreign oil, and an out of control military industrial complex that, along with the two foreign wars they spawned, consumes so much of federal tax dollars, that Social Security and Medicare are going broke.

But let's not forget that there is a major distribution of wealth problem that is destroying the middle class -- 22 Statistics That Prove The Middle Class Is Being Systematically Wiped Out Of Existence In America

Some of the highlights:

66 percent of the income growth between 2001 and 2007 went to the top 1% of all Americans.

In 1950, the ratio of the average executive's paycheck to the average worker's paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.

As of 2007, the bottom 80% of American households held about 7% of the liquid financial assets.

The bottom 50% of income earners in the United States now collectively own less than 1% of the nation’s wealth.

More than 40% of Americans who actually are employed are now working in service jobs, which are often very low paying.

This is what American workers now must compete against: in China a garment worker makes approximately 86 cents an hour and in Cambodia a garment worker makes approximately 22 cents an hour.....how do you like free trade now?

Approximately 21% of all children in the United States are living below the poverty line in 2010 - the highest rate in 20 years.

Despite the 2008 financial crisis, the number of millionaires in the United States rose 16% to 7.8 million in 2009.

The top 10% of Americans now earn around 50% of national income.

Too bad the same thing is happening here in Canada. We just have a little catching up to do before our middle class has also disappeared. I think this was the conservative strategy all along! Conservatives are defenders of aristocracy, who have viewed the middle class as a source of social instability since the time of Edmund Burke.

[bush_cheney2004]

The U.S. is in a decline that they are not going to spin their way out of this time. The big reasons are an energy-intensive economy that's largely dependent on foreign oil, and an out of control military industrial complex that, along with the two foreign wars they spawned, consumes so much of federal tax dollars, that Social Security and Medicare are going broke.

The US became a super power because of an "energy intensive" economy based largely on petroleum. Would you prefer that American wars be domestic instead? Defense spending is less than spending on social programs, which are not discretionary and will be the main problem, not the "military industrial complex".

The top 10% of Americans now earn around 50% of national income.

They also pay more of the taxes.

Too bad the same thing is happening here in Canada. We just have a little catching up to do before our middle class has also disappeared. I think this was the conservative strategy all along! Conservatives are defenders of aristocracy, who have viewed the middle class as a source of social instability since the time of Edmund Burke.

Doesn't matter...would have collapsed anyway under your doomed America scenario!

Edited July 26, 2010 by bush_cheney2004

[Pliny]

But let's not forget that there is a major distribution of wealth problem that is destroying the middle class --

This despite all the social programs and government action to redistribute wealth. Why do you suppose government is acheiving the opposite effect despite the gains in social welfare. There is health care, old age pensions, the Canada pension plan, maternity leave, affirmative action, billions to natives, billions to welfare, job creation programs, unemployment insurance, transfer payments to have-not provinces, laws regarding unfair labour practices, set minimum wages, disability pay, worker's compensation, etc.

All these things have been initiated by government to decrease the gap. How is it that the opposite is being achieved?

You make people dependent but you can't make them rich.

[jbg]

Hallo everyone.....

The US, overall, has a better resource and manpower base than the "Euro Zone". That is very hard to overcome.

Maybe the new government can make solution to this.....

Other than your rank plagarism of my post, good point.

make money online from home

What does this link have to do with anything on this board?

[Topaz]

I listened to a radio progranm and on there this guy said that within a 1.5 years the US will have its $$ devalued and BIG trouble will come and that most Americans are NOT financialy ready for the down swing. I also found this article about their debt. http://www.thewe.cc/contents/more/archive/us_debt.html

[bush_cheney2004]

I listened to a radio progranm and on there this guy said that within a 1.5 years the US will have its $$ devalued and BIG trouble will come and that most Americans are NOT financialy ready for the down swing.....

The US dollar has already been devalued by design (weak dollar policy). Americans are experienced with the advantages and disadvantages.

[jbg]

The US dollar has already been devalued by design (weak dollar policy). Americans are experienced with the advantages and disadvantages.

Some people forgot that during August 1971 and then again finally and totally in February 1973 (or maybe January or March 1973) the dollar was left to float.

[WIP]

The US became a super power because of an "energy intensive" economy based largely on petroleum. Would you prefer that American wars be domestic instead? Defense spending is less than spending on social programs, which are not discretionary and will be the main problem, not the "military industrial complex".

It's too bad Eisenhower didn't mention his unease about the growth of the Military Industrial Complex before he was on his way out the door at the Whitehouse, because the growth continued under successive Republican and Democratic administrations. All of the conservatives running around today yammering on about the Constitution seem to ignore the fact that the Framers did not want the new nation to have a standing army. They seen the examples of England, France, Spain, Portugal, and Prussia, and how devotion to military created the need for more wars, to fight for more colonial expansion, to keep feeding large armies and navies.

The U.S. is energy intensive because they plotted a course of depending on cheap oil from the Middle East....and a major part of keeping that oil flowing from the ME, means spending vast sums of money on foreign bases and carrier fleets. If they had any sense, they would have off-loaded those costs onto the oil companies, who are the only major beneficiaries of this policy. The modern gunboat diplomacy, along with the economic leverage of the World Band and IMF, is colonialism short of the actual colonial political regime.

Dependence on oil, especially the political dependence on funding from oil companies, is the major stumbling block to ending oil addiction today. If we had any sense, we would be making the shift now, instead of digging up the dirtiest sources in Alberta, and the most ecologically dangerous sources deep under the oceans.

They also pay more of the taxes.

And they can afford to pay more! There have been several psychological studies done over the last 40 years or so, which demonstrate that happiness derived from economic improvement stops at a certain point in modern, first world nations. We have enough money for the essentials, but still feel pressured to buy more. Most of the pressure is subtle and unrecognizable. I never felt like I had enough money when I lived in a new subdivision, because there were neighbours with a three-car garage instead of mine that only accommodated two cars....and everyone else had better cars, and better home furnishings. When I decided to sell out and move to an older northend neighbourhood, I realized that I was not gaining anything that would make me happier by trying to keep up with the Jones's, yet that same dynamic of trying to achieve the lifestyle of those immediately above us on the economic ladder, is what fuels consumption for the sake of consumption.

Billionaires don't feel like they have enough either, because the guy with more billions has a bigger yacht, or a mansion with more bedrooms. At one time, religion was the cultural force that acted as a brake on unbridled greed and materialism; but nowadays religion may often be another factor fueling the demand for more crap -- non-denominational churches that teach the prosperity gospel for example.

So, if nothing else acts as a brake on increasing the gaps in income and living standards, then the tax man has to step in and do it for us. The results of extreme income stratification are bad for society as a whole, since it decreases social cohesion and the general sense of community in all levels of economic income. When everybody is just in it for themselves, we don't have libertarian paradise....we get pretty much what we're getting now: decaying cities, extreme poverty, and lack of interest in voting and participating in the democratic process.

[WIP]

This despite all the social programs and government action to redistribute wealth. Why do you suppose government is acheiving the opposite effect despite the gains in social welfare. There is health care, old age pensions, the Canada pension plan, maternity leave, affirmative action, billions to natives, billions to welfare, job creation programs, unemployment insurance, transfer payments to have-not provinces, laws regarding unfair labour practices, set minimum wages, disability pay, worker's compensation, etc.

All these things have been initiated by government to decrease the gap. How is it that the opposite is being achieved?

You make people dependent but you can't make them rich.

Like I said, we have slightly better numbers on issues like income gap than the U.S. has, but we are headed in the same direction. All of those things you mentioned above were put there because of the horrible situations that demanded reform decades ago. Now, conservatives with collective amnesia want to take us back to the days of the soup kitchens and hobos riding boxcars! Waste on any of those programs hardly concerns me as much as waste on tax incentives for oil exploration and military spending on jet fighters that are of no value patrolling our long coastlines, and only seem to be useful in our continuing role as assistant to the U.S. war machine.

If you want to know why minimum wage laws can't stop the general decline in wages, take a look at Free Trade, and how free trade strategies that started almost 30 years ago were pushed on us under the claim that it would increase overall prosperity. What free trade has done is exactly what most of us feared it would do 30 years ago -- it has led to a hollowing out of manufacturing in Canada and the United States because so much manufacturing can be done by people working for less than a dollar an hour. Free trade was supposed to raise Third World living standards up to acceptable levels (especially Mexico's), but those nations that get rewarded with transplanted manufacturing invariably have anti-union and other labour-busting governments that want to keep factory workers toiling away for peanuts. The only country where it looks like this system may break is China. There has been reports of growing unrest over the last couple of years, but even in a best case scenario of Chinese workers successfully gaining higher wages, there will be a stream of multinationals moving out and setting up shop in the next country with no wage laws, or health and safety laws.

Free trade and globalization have made multinational corporations more powerful than political governments.

[Shady]

conservatives with collective amnesia want to take us back to the days of the soup kitchens and hobos riding boxcars!

Complete nonsense and pure hyperbole.

The primary reason the American economy is so sluggish is a man named Barack Hussein Obama. Or as Chris Matthews now refers to him, O'Carter!

NBC's Matthews Makes Freudian Slip: Will Dems Run Away From "President O'Carter"?

RCP

[bush_cheney2004]

It's too bad Eisenhower didn't mention his unease about the growth of the Military Industrial Complex before he was on his way out the door at the Whitehouse, because the growth continued under successive Republican and Democratic administrations....

Eisenhower presided over the continuation of a massive American Cold War investment.

The U.S. is energy intensive because they plotted a course of depending on cheap oil from the Middle East....and a major part of keeping that oil flowing from the ME, means spending vast sums of money on foreign bases and carrier fleets.

WW2 for your failed empire was fueled largely by American oil....such a plot!

Dependence on oil, especially the political dependence on funding from oil companies, is the major stumbling block to ending oil addiction today. If we had any sense, we would be making the shift now, instead of digging up the dirtiest sources in Alberta, and the most ecologically dangerous sources deep under the oceans.

The world consumes 80 million bpd....about 25% of it in America. I leave the math to you.

And they can afford to pay more! There have been several psychological studies done over the last 40 years or so, which demonstrate that happiness derived from economic improvement stops at a certain point in modern, first world nations. We have enough money for the essentials, but still feel pressured to buy more.

Then send all of yours to Ottawa, not mine.

Billionaires don't feel like they have enough either, because the guy with more billions has a bigger yacht, or a mansion with more bedrooms. At one time, religion was the cultural force that acted as a brake on unbridled greed and materialism; but nowadays religion may often be another factor fueling the demand for more crap -- non-denominational churches that teach the prosperity gospel for example.

More of your value judgements....so much for liberty when you are king, eh?

....we get pretty much what we're getting now: decaying cities, extreme poverty, and lack of interest in voting and participating in the democratic process.

Nonsense....there is very little "extreme poverty". Many "poor people" in Canada or the USA live better than a majority of others around the world. You are defining "povertry" with the very wealth benchmarks you assail....make up your mind.

[dre]

This despite all the social programs and government action to redistribute wealth. Why do you suppose government is acheiving the opposite effect despite the gains in social welfare. There is health care, old age pensions, the Canada pension plan, maternity leave, affirmative action, billions to natives, billions to welfare, job creation programs, unemployment insurance, transfer payments to have-not provinces, laws regarding unfair labour practices, set minimum wages, disability pay, worker's compensation, etc.

All these things have been initiated by government to decrease the gap. How is it that the opposite is being achieved?

You make people dependent but you can't make them rich.

All these things have been initiated by government to decrease the gap. How is it that the opposite is being achieved?

Because those arent the only things that have been done by government during that timeframe. The government represents various different groups that have conflicting interests. So while you can name some things that were done to help the poor and working class they are eclipsed by the things they have done to help the rich get richer, and the government has represented wealthy special interests more aggresively than they have represented the poor for obvious reasons.

[Sir Bandelot]

Nonsense....there is very little "extreme poverty". Many "poor people" in Canada or the USA live better than a majority of others around the world. You are defining "povertry" with the very wealth benchmarks you assail....make up your mind.

"Let them eat cake."

[Shady]

"Let them eat cake."

Definitely. And in North America, there's more cake than anywhere else.

[davidmabus7]

Definitely. And in North America, there's more cake than anywhere else.

Let them eat each other!

[Sir Bandelot]

Flaherty all but rules out more stimulus

OTTAWA - Finance Minister Jim Flaherty says Canada's economic growth is "substantial" and unlikely to require more government stimulus to sustain what is becoming an increasingly fragile recovery.

The finance minister was reacting to media questions a day after the Bank of Montreal warned that weakening conditions in the United States may put Canada's recovery in jeopardy.

This is the problem with globalization and free trade. Even though our economy is doing comparatively well it could still be taken down by the impending collapse of the United States. Regardless of the best efforts of the government and economists to be responsible in their investing, the financial system is too intertwined to protect us from an economic disaster in one area. Then the whole house of cards comes down. Their failure could completely suck all the money out of our own coffers. We are shackled to a corpse.

[bush_cheney2004]

.... Their failure could completely suck all the money out of our own coffers. We are shackled to a corpse.

It's not your "coffer" money until you earn it...most Americans don't pay attention to what Finance Minister Jim Flaherty has to say or what happens to the Canadian economy either way. You have the key to your own shackles.