Monday, September 29, 2008

Welcome To The Next Great Depression

Buddy, can you spare a Prozac? Oh, wait. This kind of depression won’t be cured with a pill. And a dime doesn’t buy as much today as it did in 1930.

Watching the House vote on a package to rescue the economy fall apart this afternoon was as traumatic as seeing Wall St. brokers leaping from windows in October, 1929 on the day of the great crash. Alright, so that never really happened but the metaphor is valid. And the tense, drawn looks on the faces of long-time Congressional correspondents as they reported the unfolding debacle told much more than they were saying: We’re in trouble, folks, and plenty of it.

I opposed early versions of the economic rescue plan. Treasury Secretary Hank Paulson’s first cut was the financial version of the Patriot Act or the Iraq War resolution granting absurd power with no oversight. Even the second and third drafts were mostly a fat cat handout with not much given back in return to protect the country.

Yet the fact is while the final version voted down by the US House is a bad law, because it had reasonable safeguards and limits it is seriously better than no law at all.

Now, if Nancy Pelosi and John Boehner cannot get a handful of members in their respective caucuses to change their vote when the bill comes up again after Rosh Hashanah, we are all toast.

Brokers may not be leaping from ledges but US stocks, most commodities except precious metals, and oil are falling out the allegorical window. As the Dow plummeted 700 points, the Standard & Poor’s 500 – a much more reliable barometer than the Dow – was plunging by more than 8%, with 490 of the 500 companies that make up the index declining.

Look out below!

Car Loans, Credit Lines

It may take a few weeks for the real impact to rear its devastating head but some businesses already are feeling the effects of what amounts to a credit lockdown.

For 15 years, until my sister died of cancer in 1999, Steve was my brother-in-law. For at least that long, he’s run a reasonably successful small business. I mean really small: He is the only employee. But the business is profitable, generates a decent cash flow, he pays his bills and his credit score is squeaky clean.

I spoke with him this morning to see how things are going. Mostly, I wondered if Hank Paulson was telling the truth – that credit is approaching lock-down – or exaggerating. Turns out he’s not, and it may be the first time in the history of the Bush administration that a cabinet secretary is being honest with the nation.

“Two weeks ago, I leased a new truck to replace the old one,” Steve says of the vehicle that literally drives his business. “I’ve always leased them through the same bank we used for 20 years, and I always got cars and trucks for prime-plus-one (percent). When I called the bank for a new lease, they told prime-plus-two and a half. I was stunned and asked why, because I’ve been a good customer.

“They told me it’s only because I’ve been a good customer for so many years that they’re able to give me a lease at all, and I’m getting it at their best rate.”

He ended up getting a better rate through the manufacturer’s finance company and took it. But the truck was only his first surprise.

Last week, he renewed his revolving line of business credit which finances his inventory purchases. Steve’s had a $25,000 line for ages yet, when he called his account manager, he was greeted with astounding news.

“I’m sorry but we’re going to have to reduce your line to $15,000,” my former brother-in-law was told.

Again, he asked why and, again, he heard the same rationale.

“That we’re keeping it (the credit line) open at all is because you’ve been such a good customer and have an excellent credit score,” Steve says the apologetic banker explained. “Otherwise, we would have closed your line entirely.”

The Beginning

Steve will not be the only business owner in the country to get the same gloomy news over the next 10 or 15 days. Without a turnaround in the re-vote – if and whenever it comes –owners of one employee companies to the chief financial officers of Fortune 100 companies will be hearing the same thing.

Indeed, rates for commercial paper – how larger businesses finance operations – are skyrocketing making borrowing money for everything from inventory to payrolls to receivables incredibly expensive. When September and October unemployment figures are reported, sadly well after the election, we are likely to see a huge jump in the number of jobless. Layoffs beget more layoffs and terrify everyone still hanging on to a job.

So retailers depending on the holiday season for the bulk of their annual sales and profits will be facing disappointing news: The unemployed don’t have cash for gifts and those still working will be pulling in their wings to wait out the storm.

Property tax revenue around the country has already dropped as home values plunge so state and local government – in many regions, often the state’s largest employer – will be forced to cut back and lay off. Next, the Treasury will see corporate and personal tax collections decline sharply, as well, which means either borrowing even more money from China – which is already nervous about its US dollar exposure – or reducing programs to help the swelling ranks of the needy.

Thus, today’s inaction by the House may well spell the beginning of the start of Great Depression II. Since John McCain is already displaying all of the characteristics of Herbert Hoover, all that may save us is if Barack Obama turns out to be Franklin Roosevelt’s reincarnation.

Blame Game

And thus begins the blame game: Democrats blaming Republicans who are, truthfully, mostly at fault; Republicans blaming Democrats who, truthfully, share some of the blame; Dennis Kucinich blaming everyone; Bob Barr – is he still a presidential candidate? – blaming “government.” Eventually, everyone will blame everybody else and I’m sure that, with enough time, my friend Susan’s Daschundt Maxie will blame her two cats, Sasha and Evita. And vice versa.

Actually, there is a definite start date to this afternoon’s collapse and a specific person to blame.

Genuine blame for the reason a deal was needed, and fell apart can be traced to a tense night in December, 2000. The Supreme Court had just elected George Bush president by one vote. Congress was locked in a budget showdown with the outgoing Clinton administration. And a balding, bespectacled Phil Gramm strode onto the floor of the United States Senate the chilly evening of the 15th.

As Congress and the White House were hurriedly hammering out a $384-billion spending bill, Gramm quietly slipped in a 262-page amendment called the Commodity Futures Modernization Act. He boasted to the gathered solons that his measure ensures that neither the SEC nor the Commodity Futures Trading Commission – soon to be chaired by Gramm’s wife – would regulate an incredibly complicated new financial product called swaps, Gramm all but said he saved Wall Street by "protect(ing) financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."

Even Nazi Germany’s Third Reich lasted a few years a longer than it took Wall St. to collapse under the weight of its own greed, hauling the global economy down with it in the bargain.

So here we sit, teetering on the edge of the precipice, wondering if our futures will be just grim or totally bleak while Washington scratches its bewildered head, calculating what to do next with the election looming a mere 39 days away.

Those who voted against the bill – a lethal combination of hard right Republicans and far left Democrats – may be gleeful this evening at their success. But it’s a fool’s folly to be happy about what the United States House of Representatives did today. How will they explain their decision to what will surely be the largest swelling of unemployment, homelessness and despair seen in their various districts since the 1930s?


EzMun said...


Don't you think that the fact that everyone, including you, talk on the abstract and noone can name 5 financial institutions that are on the brink of failure suggests that the administration hasn't done a sufficient job of fully explaining the problems on Wall Street.

The Bush administration has named a figure ($700 Billion), but there is no explanation for how they came up with this number. Mind you this bill, if passed, would be the single largest single item every sought in a single piece of legislation. Unprecedented scale and magnitude and not a single number to explain the problems in Wall Street.

I appreciate your analysis, but it sounds like that of others... arguing the big picture while lacking any detail. Frankly, this is the same sort of talk that Bush doled out on the eve of his request to Congress to authorize the war in Iraq... lots of punditry... big pricetag ... urgent ... and slim on the details and the whys.

Charley James - The Progressive Curmudgeon said...

Thanks for your comment, Ezmun, and I appreciate your reading my blog. There's soundness in much of your argument but it's marred by one flaw.

The lack of bank failures you mention isn't because the banking system is flawed, it's because things like this always start at the top with the most-highly leveraged banks going first; it may be the only part of "trickle down" economics that works. But just yesterday, Wachovia was forced by the Fed, the Comptroller of the Currency and FDIC into an engineered takeover to prevent the second bank collapse in less than a week. (Washington Mutual was the first.) It was the fourth or fifth in less than a month.

The fact is that the credit market is locked down tighter than Folsom Prison after a riot. The example of a small business owner with a great credit history finding money harder to get that I wrote about is not an isolated one, and the issue or crisis or whatever you want to call it isn't limited to small businesses. Major corporations are withdrawing issuances of commercial paper because the only way the market will buy it is at loan shark-like rates. That's why the interest rate on short term T-Bills is, for all practical effect, zero. (For a time yesterday, the 30-day T-Bill was 0.15%; essentially, people were willing to pay the Treasury to hold their cash.

Stock and credit markets are driven as much by confidence as they are by news and facts. In our situation right now, there is no confidence, no good news and no good, underlying facts.

The 1929 market crash and ensuing Depression happened not because stock prices fell but because credit markets seized up, forcing margin calls (stock bought with only a small percent of the stock price paid in cash, betting it will rise).

What we're seeing today is a global collapse of confidence, sour economic news and the underlying fundamentals - rising joblessness, flat or declining profits, a lack of market liquidity - are poor.

As Paul Krugman wrote the other day in his New York Times column, "So what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch. As a friend said last night, we’ve become a banana republic with nukes."