Credit Contraction And Economic Propaganda
The “Great Recession” is over, so we're told by CBS News, quoting Mark Zandi of Moody Analytics. Zandi, CBS explains, is one of the nation's top economists. The recovery, we hear, is moving forward, the light at the end of the tunnel is within our view. The economic times are a-changin', they tell us. However, the facts and figures seem to tell a different story, one in which that light at the end of the tunnel may very well herald the arrival of the Greater Depression. The prevailing economic propaganda of recovery tends to leave out contraindicating factors, such as credit contraction and its affect on the economy as a whole.
On February 5, 2010, Bloomberg reported that consumer credit declined again, for the 11th month in a row. According to the article, the “series of declines is the longest on record.” This decline is due, as noted in the article, in part to a reduction in consumer spending, as consumers think twice about taking on nonessential debt and parting with their hard earned cash. However, consumers coming to their senses -- spending less and saving more -- isn't the only factor at play in this decline. Credit contraction also plays a significant role in the reduction of spending and borrowing, as well as being an important factor in the current condition of the economy.
When banks and lenders could sell away risk via the derivatives market, credit expanded rapidly, and the housing bubble inflated, raising home prices far above the norm. With the ability to pass risk onto investors via such financial instruments as mortgage backed securities and collateralized debt obligations, a whole world of sub-prime credit opened up to potential borrowers. Bad credit loans, no cash down, no credit history needed – the advertisements were everywhere. Home equity loans flourished as home values continued to inflate. Credit card companies hawked their wares aggressively. Even family pets received credit card offers in the mail.
And then came the sub-prime tremors. Sub-prime mortgage defaults exploded and the mortgage melt-down began. With a whoosh felt 'round the world, the rapid deflation of the housing bubble sucked the value out of properties and the financial instruments built upon real estate mortgages and loans. Banks, lenders, and investors incurred incredible losses. Those investors included school districts and municipal planners, which felt the losses via, as a November 15, 2007, Bloomberg article explained, the fact that “state-run pools have parked taxpayers' money in some of the most confusing, opaque and illiquid debt investments ever devised. These include so-called structured investment vehicles, or SIVs, which are among the subprime mortgage debt-filled contrivances that have blown up at the biggest banks in the world.” Pension funds and other retirement plans saw their worth seeping away. Trillions of dollars of wealth evaporated.
With that, credit began contracting. Not only had losses rendered banks and lenders that hadn't outright failed without the liquidity for lending at previous levels, but also they were no longer able to sell off risk to frightened and fiscally wounded investors. In response to mounting losses, banks and lenders began to pump up credit card interest rates and slash credit limits, even on those with good payment histories. Home equity loans dried up. Small business loans became increasingly difficult to come by. The government started pumping money into the financial system – taxpayer money. One of the primary goals for this was to get banks and lenders to lend again.
The reason that re-expanding credit has been deemed so important is that the collective American perception of economic well-being has been built on a foundation of credit and debt, rather than on solid financial achievements. Houses, cars, vacations, big screen televisions, etc. and so on – all the trappings of the good life – just make the monthly payments, choose your payment plan, interest only, adjustable rate, pay the monthly minimum, put your equity to work and let the good times roll. A full 70 percent of the American economy depends on consumer spending. And, as pointed out in a February 3, 2010, ABC news report, “service jobs comprise more than 80 percent of non-farm U.S. Employment.” Thus, if consumers are not spending, profits fall for those that depend on that spending, and jobs are lost. Hence, our current record unemployment rates. Because the spending that kept everything moving was hugely reliant on the availability of credit, credit contraction resulted in economic turmoil.
However, despite the infusions of taxpayer money via government bailouts and lending programs, credit remained tight. For a brief period of time, banks were hesitant to even lend to each other. Rather than using government money for loosening credit as it was intended, banks chose to shore up their cash reserves and stronger banks bought weaker banks. Waves of foreclosure swept the nation, as homeowners were unable to refinance homes with fallen values, lower credit scores, and little remaining equity. Negative equity became the phrase of the day, as property values fell so low that people owed more than the property was worth. According to a February 2, 2010, New York Times article, it is expected that by June 2010, more than 5 million homes will be worth less than 75 percent of their mortgages.
The recovery propagandists use Orwellian phrases like “jobless recovery” while they try to convince the public and potential investors that everything is just fine. Things are moving in the right direction, they tell us, so let the spending begin. How exactly is there to be a recovery without jobs? How are consumers to consume without cash or credit? Why would any sensible consumer consume in the face of record debt burdens, including those that the government forced upon them via bailouts and astronomical deficit spending? As Stephen Lendman recently wrote, if the recession is over, it's because the depression has begun.
In a January 18, 2010, Atlantic Free Press article, Lendman quoted David Rosenberg, a former Merrill Lynch economist, currently working with the Canadian firm, Gluskin Sheff. “The credit collapse and the accompanying deflation and overcapacity are going to drive the economy and financial markets in 2010. We have said this repeatedly that this recession is really a depression because the (post-WW II) recessions were merely small backward steps in an inventory cycle but in the context of expanding credit. Whereas now, we are in a prolonged period of credit contraction, especially as it relates to households and small businesses,” said Rosenberg, as quoted by Lendman. Lendman went on to write that “Rosenberg highlighted asset deflation and credit contraction imploding “the largest balance sheet in the world - the US household sector” in the amount of “an epic $12 trillion of lost net worth, a degree of trauma we have never seen before.”
A common sense interpretation of the economic facts – facts, that is, not the misinformation, manipulated statistics, and incomplete data presented as facts by politicians, big business, and their media cheerleaders – indicates clearly that we are not in recovery and our recession is not over. In fact, the credit contraction, asset deflation, rampant foreclosure, record high unemployment, and struggling dollar all indicate that economic depression may be upon us. Remember, the recovery propagandists are of the same group that never saw this coming, those that couldn't imagine that the housing and other bubbles would burst. Don't let that group influence your financial planning. Instead, rely on your own common sense assessment of what you see around you and your own checking of facts and figures. The information is out there, so put it to work for you to mitigate the potential damages of our struggling economy.