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Christopher A. Young
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"David Nebenzahl" wrote in message
s.com...
Just read an excellent piece on the second wave of the
economic crisis
that's about to hit us, and what should be done about it.
Article
at
http://counterpunch.org/roberts01222009.html.

A note on the source: Counterpunch is the decidedly
left-wing soapbox of
one of my favorite commentators, Alex Cockburn. However,
unlike most on
the left, he brings in a wide range of points of view, many
of which
surprisingly coincide with his own.

For those who object to the opinions of lefties, a word on
the author of
this piece: from the mini-bio at the end of the article:

Paul Craig Roberts was Assistant Secretary of the
Treasury in the
Reagan administration. He is coauthor of The Tyranny of
Good Intentions.


================================================== =====================

Another Real Estate Crisis is About to Hit

By PAUL CRAIG ROBERTS

For a picture of the US real estate crisis, imagine New
Orleans wrecked
by Hurricane Katrina, and before the waters even begin to
recede, a
second Katrina hits.

The 1,120,000 lost US retail jobs in 2008 are a signal that
the second
stage of the real estate bust is about to hit the economy.
This time it
will be commercial real estate--shopping malls, strip malls,
warehouses,
and office buildings. As businesses close and rents decline,
the ability
to service the mortgages on the over-built commercial real
estate
disappears.

The over-building was helped along by the irresponsibly low
interest
rates, but the main impetus came from the slide of the US
saving rate to
zero and the rise in household indebtedness. The shrinkage
of savings
and the increase in debt raised consumer spending to 72% of
GDP. The
proliferation of malls and the warehouses that service them
reflect the
rise in consumer spending as a share of GDP.

Like the federal government, consumers spent more than they
earned and
borrowed to cover the difference. Obviously, this could not
go on
forever, and consumer debt has reached its limit.

Shopping malls are losing anchor stores, and large chains
are closing
stores and even going out of business altogether. Developers
who
borrowed to finance commercial ventures are in trouble as
are the
holders of the mortgages, derivatives and other financial
junk
associated with the loans.

The main source of the economic crisis is the infantile
belief of US
policymakers that an economy could be based on debt
expansion. As
offshoring moved jobs, incomes, and GDP out of the country,
debt
expanded to take the place of the missing income. When the
offshored
goods and services were brought back to be sold to
Americans, the trade
deficit rose, adding another level of financing for an
economy that
consumes more than it produces.

The growth of debt has outpaced the growth of real output.
Yet, the
solution offered by Obama’s economic team is to expand debt
further.
This is not surprising as Obama’s economic team consists of
the very
people who brought on the debt crisis. Now they are going to
make it worse.

The unexamined question is: Who is going to finance the next
wave of debt?

The US budget deficit for fiscal year 2009 already appears
to be on a
path to $2 trillion, and that is before Obama’s stimulus
program. What
we are looking at is a $3 trillion budget deficit if Obama’s
program is
enacted in time to impact the economy this year.

Foreign countries can finance a $500 billion US budget
deficit out of
their trade surpluses with the US. But foreigners do not
have the funds
to finance a US budget deficit in the trillions of dollars,
and they
would not finance such a deficit even if they had the funds.
Foreigners
are over-weighted in dollar holdings and prefer to lighten
their holding
than to add to them. America’s economic prospects are dim as
are the
dollar’s prospects as reserve currency. An annual budget
deficit in the
trillions of dollars makes the dollar’s prospects appear
even dimmer.

The federal government’s likely solution to the debt problem
will be to
monetize the debt, that is, the government will finance its
deficit by
printing money. Debt will be inflated away. But for those
Americans
without jobs or whose incomes do not rise with inflation,
life will be
cruel.

Life is already cruel for Americans living on retirement
savings. Not
only has the stock market bust reduced their wealth by half,
but also
their remaining assets are producing no income. Interest
rates are so
low that debt instruments produce no income, and there are
scant capital
gains in the stock market. Retirees are living by consuming
their capital.

America’s economic policy of low interest rates and debt
expansion bodes
ill for everyone living off their savings. Their future
prospects are
even worse as high inflation will destroy the value of their
savings,
especially if held in cash or debt instruments, including
“safe” US
Treasuries.

There are more intelligent ways to try to escape from the
current
crisis. However, the financial gangsters and their shills
that Obama has
put in charge of economic policy are thinking only of their
own
interest. What happens to the American people is not a
concern.

A compassionate government would handle the crisis in this
way:

The trillions of dollars in credit default swaps (CDS)
should be
declared null and void. These “swaps” are simply bets that
financial
instruments and companies will fail, and the bulk of the
bets are made
by people and institutions that do not hold the financial
instruments or
shares in the companies. The ideology that financial markets
were
self-regulating allowed illegal gambling free rein. There is
no reason
under the sun for taxpayers to bail out gamblers.

The bailout money, instead of being given to favored
financial
institutions to finance their acquisition of other
institutions, should
be used to refinance the defaulting mortgages. This would
slow, if not
stop, the growing inventory of foreclosed properties that is
driving
down home prices.

The mark-to-market rule should be suspended until the real
values of the
troubled properties and instruments can be determined.
Suspension of the
rule would prevent the failure of sound institutions and
lessen the need
for a bailout.

Interest rates have to be raised in order to encourage
saving and to
provide incomes to retirees.

To preserve the dollar’s status as reserve currency, a
credible policy
of reducing both budget and trade deficits must be
announced. In the
near term the budget deficit can be reduced by $500 billion
by
withdrawing from Iraq and Afghanistan and by cutting a
bloated defense
budget that represents the now unattainable goal of US world
hegemony.

The trade deficit can be significantly reduced by bringing
offshored
jobs back to America. One way to do this is to tax
corporations
according to the value added to their output that occurs in
the US.
Corporations that produce their products for US markets
abroad would
have high tax rates; those that produce domestically would
have low tax
rates.

This approach to the economic crisis stands in marked
contrast with the
approach of the gangsters running US economic policy. The
gangsters are
using the crisis as an opportunity to steal from taxpayers
and to
finance their misdeeds and exorbitant salaries with Federal
Reserve
loans. Their shills among economists and the financial press
tell the
people that the solution is to fatten up the banks with
funds so they
will resume lending to an over-indebted public that will
then return to
the shopping malls.

This unrealistic approach to a serious crisis indicates a
leadership
crisis on top of an economic crisis.

================================================== ========================
Paul Craig Roberts was Assistant Secretary of the Treasury
in the Reagan
administration. He is coauthor of The Tyranny of Good
Intentions. He can
be reached at: .


--
"I know I will go to hell, because I pardoned Richard
Nixon."

- Former President Gerald Ford to his golf partners, as
related by
the late Hunter S. Thompson