“Crash Of 2007-8” Is Underway
By Richard C. Cook
19 August, 2007
The immediate triggers are being
described quite well: the collapse of the U.S. subprime mortgage market;
the vulnerability of the rest of the economy to the subprime undertow,
due to the “efficiency” of the markets in spreading risk;
the worldwide overextension of cheap credit; the failure of large institutional
investors and Wall Street brokerages to behave responsibly; and the
long-term effects of the U.S. trade and fiscal deficits which are now
coming home to roost.
Amazingly, some commentators
have been asking “if the monetary crisis will affect the producing
economy,” and whether a recession lies ahead. In reality, the
U.S. producing economy has been in a recession for the last year. This
is shown most clearly by the decline in M1, the portion of the money
supply immediately available to people for making purchases.
The causes of the M1 decline
are two-fold. One is the weak purchasing power of American consumers,
at least half of whose decently-paying manufacturing jobs have been
eliminated by the outsourcing, mergers, and productivity improvements
during the past two decades. The other is that while many of the U.S.
corporations not connected to housing have been doing all right, their
success has been tied to overseas investments and sales, such as GE
and GM who are heavily invested in China.
This type of business activity
props up the stock prices of these global corporations but does little
for the working American. The presumption that overflow earnings from
stockholders will benefit the rest of our domestic economy is the essence
of “trickle-down,” supply-side economics and is part of
the justification for the system that makes the rich richer and the
But as Barron’s reported
earlier this year, much of the profits from the global corporations
are being held as retained earnings for future growth, rather than being
passed on to stockholders as dividends. Because of the heavy debt load
corporations carry today, they are all in a grow-or-die mode. Again,
the result is deficient purchasing power which works to negate the already
dubious trickle-down effect.
The recession has been masked
by four factors: 1) the government’s phony GDP numbers, where
the “churning” of financial transactions masquerade as production;
2) the froth on the stock market that took the Dow Jones Average (DJA)
from a little over 11,000 to a record-breaking 14,000 during a one-year
period that ended with the decline that began in mid-July; 2) the propensity
of the American consumer, which is now ending, to continue to buy goods
and services on credit, including necessities of life like health care;
and 3) modest growth in low-paying service economy jobs, which also
may be coming to an end.
These lesser bubbles have
mirrored the big ones that are bursting as lenders lose confidence in
the ability of borrowers to repay. These are the housing bubble, affecting
consumers; the acquisition bubble, affecting equity funds; and the speculation
bubble, affecting hedge funds.
As the house of cards comes
tumbling down, the leading question on financial websites and blogs
is how deep will the decline go. Will it stop at the level of the recessions
of previous decades, including 2000-2002, with a decline that is reflected
in the DJA of somewhere around thirty-five percent from its peak? Or
will it be the “Armageddon” scenario which would take us
to depression-level conditions? Of course there are multiple possibilities
based on a decline somewhere between a recession and a depression that
would share some of the characteristics of each.
Muddying the waters is the
fact that the DJA is much less reliable as a measure of economic health
today than in the past. This is because today the vast majority of financial
transactions now take place within the furtive secrecy of the equity,
hedge, and derivative markets. No one really knows what is going on,
except that on any given day an announcement is made that another fund
or company has been wiped out.
Neither the Federal Reserve
nor the U.S. government believes they have an obligation to gather or
publish data that will help the public gauge the effects of these crises
on their homes or jobs. Some might call this negligence a crime against
democracy. In fact the Federal Reserve made tracking even more difficult
by ceasing to report the M3 macro-currency numbers, but researchers
have shown that growth in M3 is soaring while M1 goes down.
What appears to be happening
right now is that the Federal Reserve, which oversees the U.S. economy
on behalf of the financial, corporate, and government elites, is deliberately
trying to squeeze as much debt out of the economy as it can. It is doing
this with interest rates that are high relative to actual conditions,
while trying to avoid the Armageddon scenario.
The Fed is carrying out its
“soft-landing” policy by holding credit tight while introducing
“liquidity” into the markets on a day-by-day basis through
use of overnight “repos” and by cutting the discount rate
for bank borrowing. Conservative columnists like George Will and Bob
Novak watch and shake their pom-poms from the sidelines.
is just a fancy name for more loans. The one thing we can be certain
of is that every loan bears interest charges which someday, somehow,
will have to be paid by a person who works for a living.
And if you wondered where
the Fed got the $34 billion in liquidity it pumped into the markets
on Friday, August 10, you weren’t the only one. The answer is
that the Fed has a secret room upstairs where it keeps a large “printing
press.” It’s legalized counterfeiting, but as with any counterfeit
money, if people accept it in trade it acts just like the real stuff—for
The danger, which many commentators
are pointing to, is that the Fed will ignite a hyperinflation, which
may be what is happening and may actually be intentional because it
devalues debt. It’s what happens when debt is used to pay off
debt and is in fact an invisible tax. Such inflation is difficult to
discern, again because of the government’s rigged statistics.
The most important indicator to watch is the price of oil, which doesn’t
show up in “core inflation.”
But there are signs that
the “soft landing” is working, such as a modest increase
in U.S. exports. Reflecting the weak dollar, China is now charging more
for its own exports, which will stimulate our industry here at home.
And the Fed’s discount rate cut last Friday sparked a modest stock
Meanwhile, there is a debate
over whether quasi-public agencies like Fannie Mae and Freddie Mac should
be used to spread the housing market losses across the entire taxpaying
population. While society as a whole is made poorer, many individuals
who might have lost their homes or jobs are spared some pain. So it’s
hard to argue against it. But this type of bail-out would benefit individual
homeowners more than the big banks, so the conservative politicians
and commentators oppose it.
But there’s a bigger
picture. The strategy of the Fed is likely to allow the recession to
proceed but it does want to get the economy moving again before the
downturn goes too far. In fact they probably plan to do it in time for
the 2008 presidential election.
The Fed wants to see a recovery
in place by then so the American public will go back to sleep and elect
another politician who will steadfastly protect the privileges and powers
of the magnates who, through the Fed, rule the world. Even if a new
president has some progressive ideas, he or she won’t be able
to alter much if a recovery has started.
The “soft landing”
is a political power play.
It’s what they did
in 1984, when Ronald Reagan was reelected on a campaign theme of “It’s
morning in America,” after the Fed let up following the twenty
percent-plus rates it used to trash the producing economy from 1979-83.
The Fed did the same with the housing bubble to get George W. Bush reelected
The financiers’ worst
fear is that if things get too bad the American people might elect a
reformer in 2008. So far the corporate press has kept two such reformers—Ron
Paul and Dennis Kucinich—in the shadows. Now that Hillary Clinton
is starting to sound more progressive, they’ll attack her overtly
since she is too big a player to be ignored. The Washington Post has
So we’ll see if the
Fed’s plan succeeds as well over the next couple of years as it
has in the past. In the meantime, what remains firmly in place is the
monetarist regime through which the financiers and the Fed have ruled
America for the past thirty-six years, since President Richard Nixon
closed the gold window for international exchange in 1971.
During this period, we have
seen several interlocking phenomena: 1) interest rates that on the whole
have been much higher than the previous period of the New Deal and its
aftermath, lasting into the 1960s; 2) inflation that has eroded eighty
percent of the value of the dollar; 3) replacement of our producing
industrial economy with a service economy dominated by high finance;
4) almost continuous warfare with a clear objective of world domination
whose purpose is to shore up the dollar as the world’s reserve
currency; 5) ever-deepening public, private, and household debt; 6)
the ever-widening gap between rich and poor, with increasing numbers
of the poor, homeless, and hungry who are left out of the nation’s
economic life; 7) a crisis in the nation’s crumbling infrastructure;
and 8) the constant whipsawing of over 200 million ordinary people.
It’s our citizens who
are batted around like ping pong balls between alternating conditions
of boom and bust as every few years many of them watch the overnight
disappearance of their homes, pensions, savings, health insurance, and
jobs. Added to this is the stress that has eroded the health and even
life expectancy of the U.S. population.
It’s a horrible picture
created by a filthy system. It’s why religious leaders for thousands
of years have characterized usury, and a culture ruled by usury, as
a crime against God and humanity. The monetarist rule of the Federal
Reserve is legal, institutionalized usury. Over the years they have
mastered all the tools of the trade, the objective of which is to continually
allow the financial superstructure to skim the cream off the producing
economy. Come to think of it, isn’t that how the Mafia used to
work with its protection and loan-sharking rackets?
And can anything be done
about it? Of course.
In previous articles on the
Global Research website and elsewhere, this writer has offered a list
of reforms—mostly monetary—that can and should be made.
They all involve the recognition of credit as a public utility, part
of the societal commons, not the private playground of the financiers,
with the Fed as their facilitator.
Low-cost credit overseen
by the federal government was the basic building block of the New Deal.
It was done by strong people with an ideal of public service, though
in many respects they didn’t go far enough and relied too much
on World War II and armaments to attain a full-employment economy. We
now need a New Deal for the 21st century that would correct the flaws
of the last one, resolve the present crisis, and carry us into a future
that will benefit everyone, not just the privileged few.
Richard C. Cook is
a retired federal analyst, whose career included service with the U.S.
Civil Service Commission, the Food and Drug Administration, the Carter
White House, and NASA, followed by twenty-one years with the U.S. Treasury
Department. His articles on monetary reform, economics, and space policy
have appeared on Global Research, Economy in Crisis, Dissident Voice,
Atlantic Free Press, and elsewhere. He is the author of “Challenger
Revealed: An Insider’s Account of How the Reagan Administration
Caused the Greatest Tragedy of the Space Age.” His website is
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