- When Henry Paulson agreed to leave his job as chairman
of the powerful Wall Street investment bank, Goldman Sachs to go to Washington
as Treasury Secretary in 2006 he demanded extraordinary powers as de facto
economic czar. He got it. Paulson is also head of the President's Working
Group on Financial Markets -- the secretary of the treasury and the chairmen
of the Federal Reserve Board, the Securities and Exchange Commission and
the Commodity Futures Trading Commission. The Working Group is the financial
world's equivalent of the Pentagon war room. Paulson, not Fed chairman
Bernanke, is the person running the Administration's crisis management.
And his recent actions indicate he has lost control as the snowballing
problems from the semi-government mortgage companies Freddie Mac and Fannie
Mae to the collapse of the multi-trillion dollar market in Asset Backed
Securities (ABS) to the real economy are compounding into the worst crisis
since the 1930's Great Depression.
-
- 'The US banking system is sound'
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- In an eerie echo of President Herbert Hoover in 1930,
during a Presidential campaign against Roosevelt, following the stock market
crash and collapse of numerous smaller banks, Paulson recently appeared
on national TV to declare "our banking system is a safe and sound
one." He added that the list of "troubled" banks "is
a very manageable situation." In fact what he did not say was that
the US bank deposit insurance fund, the Federal Deposit Insurance Corporation
(FDIC) has a list of problem banks that numbers 90. Not included on that
list are banks such as Citigroup, until recently the largest bank in the
world.
-
- The statement is hardly reassuring. The California savings
bank, IndyMac Bank which was declared insolvent a month ago was not on
the FDIC list a week before it collapsed. The reality is the crisis created
by "securitizing" millions of home mortgages into new financial
instruments and selling the packages to pension funds and investors is
unfolding like a snowball rolling down the Swiss Alps.
-
- Indication of the lack of control is the statement just
weeks ago by Paulson that "financial institutions must be allowed
to fail." That was two weeks before Paulson went to Congress to ask
for "Congressional authority to buy unlimited stakes in and lend to
Fannie Mae and Freddie Mac." As I noted in my recent piece, Financial
Tsunami: The Next Big Wave is Breaking: Fannie Mae Freddie Mac and US Mortgage
Debt , those two private companies insured some $6 trillion worth of home
mortgages, half the entire US mortgage debt. Paulson defended the request
by calling Freddie Mac and Fannie Mae "the only functioning part of
the home loan market."
-
- That comes back to the statement about a "sound
banking system". Can we have a sound banking system where the only
functioning part is literally insolvent-its debts greater than its assets?
-
- It is well known on Wall Street that some of the largest
financial institutions have huge undeclared problems with Asset Backed
Securities they have valued far above their worth to make their books look
better than they are. The names Citigroup, Lehman Bros., Morgan Stanley,
even Paulson's old firm, Goldman Sachs and of course the inventor of sub-prime
mortgage securitization, Merrill Lynch, all hold a huge percentage of what
are called Level Three assets, these being assets where no one is willing
to buy but the bank declares their worth based on "fantasy."
In short the value of those core financial institutions of the US financial
system is massively overvalued compared with their value were they forced
to sell into the open market today. In a sobering aside, readers should
not expect any serious economic remedies for the crisis from a President
Barack Obama. Obama's National Campaign Finance Chairman is Chicago real
estate billionaire, Penny Pritzker, who is heir to among other things the
Hyatt Hotels. It was Pritzker together with Merrill Lynch ten years ago
who first developed the model for securitizing "sub-prime" real
estate, the trigger for the current Financial Tsunami crisis.
-
- Already Citigroup has been forced to go to Dubai hat
in hand and ask for billions in cash. After it announced it would not need
more capital. Now Citigroup just announced plans to sell some $500 billion
more assets to raise funds. Is Citigroup really solvent is the question
sober investors are asking. Similarly Merrill Lynch raised $6.6 billion
from Kuwait Mizuho, stated it was fine and weeks later had to raise still
more capital. Morgan Stanley sold a 10% share of the company to China International
Corp.
-
- The real economy contracting rapidly
-
- Behind the reassuring statements from Paulson and others
that the "worst is over" the reality of the credit collapse since
August 2007 is a deepening economic contraction which I have said several
times in this space will surpass the Great Depression of the 1929-1938
period. A good friend who is an unemployed homebuilder in a prosperous
part of Arizona just sent me the following list of US department retail
store closures. It is worth noting that over 70% of the US GDP is consumer
spending and that the entire Federal Reserve strategy of Alan Greenspan
after the March 2000 collapse of the stock market bubble, was to bring
US interest rates to their lowest levels since the 1930's in order to stimulate
consumer spending on credit, i.e. debt, to avoid "recession."
Note the scale of the following store closings across America in recent
weeks:
-
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- Ann Taylor closing 117 stores nationwide.
- Eddie Bauer to close more stores after closing 27 stores
in the first quarter.
- Cache, a women's retailer is closing 20 to 23 stores
this year.
- Lane Bryant, Fashion Bug, Catherines closing 150 stores
nationwide
- Talbots, J. Jill closing stores. Talbots will close all
78 of its kids and men's stores plus another 22 underperforming stores.
The 22 stores will be a mix of Talbots women's and J. Jill.
- Gap Inc. closing 85 stores
- Foot Locker to close 140 stores
- Wickes Furniture is going out of business and closing
all of its stores. The 37-year-old retailer that targets middle-income
customers, filed for bankruptcy protection last month.
- Levitz - the furniture retailer, announced it was going
out of business and closing all 76 of its stores in December. The retailer
dates back to 1910.
- Zales, Piercing Pagoda plans to close 82 stores by July
31 followed by closing another 23 underperforming stores.
- Disney Store owner has the right to close 98 stores.
- Home Depot store closings 15 of them amid a slumping
US economy and housing market. The move will affect 1,300 employees. It
is the first time the world's largest home improvement store chain has
ever closed a flagship store.
- CompUSA (CLOSED).
- Macy's - 9 stores closed
- Movie Gallery video rental company plans to close
400 of 3,500 Movie Gallery
- and Hollywood Video stores in addition to the 520 locations
the video rental
- chain closed last fall as part of bankruptcy.
- Pacific Sunwear - 153 Demo stores closing
- Pep Boys - 33 stores of auto parts supplier closing
- Sprint Nextel - 125 retail locations to close with 4,000
employees following 5,000 layoffs last year.
- J. C. Penney, Lowe's and Office Depot are all scaling
back
- Ethan Allen Interiors: plans to close 12 of 300 stores
to cut costs.
- Wilsons the Leather Experts closing 158 stores
- Bombay Company: to close all 384 U.S.-based Bombay Company
stores.
- KB Toys closing 356 stores around the United States as
part of its bankruptcy reorganization.
- Dillard's Inc. will close another six stores this year.
-
- For anyone familiar with American shopping malls and
retailing, this represents a staggering part of the daily economic life
of the nation, from furniture stores to clothing to video rentals to leather.
The process has only begun and neither major party Presidential candidate
has dared to mention this on the ground economic reality, because they
evidently have no solutions to offer that would not jeopardize their campaign
finances. Obama is tied to not only Pritzker but also to Omaha billionaire,
Warren Buffett and George Soros. McCain depends on the traditional money
contributions of the Republican Party which demand permanent tax reform
for highest income earners and a pro-bank laissez faire treatment of millions
of homeowners facing home foreclosure and asset seizure by banks.
-
- Banks across the country have severely cut back on loans,
fearful of bad debts. That has aggravated the consumer collapse documented
above. Hundreds of thousands of real estate brokers, small and large bankers,
furniture workers and salespeople, and construction workers are unable
to find work. Jobs are being cut wholesale and those working are often
on reduced hours. Car sales in June plunged by 28% for Ford, 18% for General
Motors and even 21% for Toyota which will mean more layoffs in coming weeks.
This will be the next wave of unemployment.
-
- The economic reality is not reflected in official US
Commerce Department or Labor Department statistics. There the data is constantly
being "revised" to hide the grim reality in an election year.
-
- My good friend, economist John Williams of California,
has meticulously tracked such "data revisions" for more than
25 years and found the manipulation of reality so alarming that he founded
an independent subscriber service titled "Shadow Government Statistics"
( http://www.shadowstats.com/" ), where he makes best estimate calculations
of the reality not the official mythology.
-
- By Williams' calculations the US economy first entered
recession, defined as two consecutive quarters of negative GDP growth,
at the end of 2006. Ever since, the recession has deepened, dramatically
so in the past 12 months. Little known is the fact that the Labor Department
also publishes six different unemployment statistics from U1, U2 through
to U6 being the most comprehensive. The reported "official unemployment"
is the very narrowly defined U3 which stands at 5.5%. However, as Williams
notes, U6 is the real measure and that officially shows 9.7% unemployed.
His calculations put the figure at 13.7% actually unemployed and seeking
work.
-
- A personal account
-
- The unemployed homebuilder from Arizona I mentioned above
recently sent me the following personal note on the situation. "Here
is how it looks to people like me: Real estate dealings fuelled the economy
in most areas of the country for the past decade or more. We've been in
a market downturn for three years. We have seen the cost of doing business
increase for builders, along with a big drop in buyers as everyone tightens
their belts, or can't sell existing homes. Many employers have gone under
ending thousands of jobs. If they have a job people are worried about losing
it. Driving long distances to work is not possible with gasoline costs
double that of 2006. There has been a 40% drop in most peoples' home equity
worth. Many people are "underwater" on their homes, meaning they
owe more than the market price is worth today. So many under-employed don't
show up in government unemployed statistics. Self employed like me never
get counted."
-
- The Arizona homebuilder continued, "Today nobody
is building. Unsold home inventories are triple that of 2003. Banks no
longer give easy credit for home buyers. Many realtors I know have gone
two years without selling a home. Empty storefronts are becoming common.
In many areas unemployment among construction trades people is 50% or more.
Tens of thousands of illegal Mexicans who did most of the manual labor
have returned to Mexico to find work. What now? Well, I do handyman projects
of all sorts, big or small and make about 70-90% of what it takes to survive
with a family of a wife and three young children. My savings make up the
rest. That can't go on for too much longer. We went from affluent and comfortable
to nervous and broke with diminished opportunities in just three years.
We used to be the middle class."
-
- To be continued
-
- *F. William Engdahl is author of A Century of War: Anglo-American
Oil Politics and the New World Order (Pluto Press) and Seeds of Destruction:
The Hidden Agenda of Genetic Manipulation ( http://www.globalresearch.ca"
www.globalresearch.ca). He is at work on a new book, from which this has
been adapted, Power of Money: The Rise and Decline of the American Century.
He may be reached through his website, http://www.engdahl.oilgeopoitics.net"
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