[THS] Mike Whitney: Wall Street Gets Trillions While Workers Get Bupkis

[The Harder Stuff in news and commentary]

http://www.informationclearinghouse.info/article26040.htm

Wall Street Gets Trillions While Workers Get Bupkis

By Mike Whitney

July 28, 2010 "Information Clearing House" -- On Tuesday, the 30-year fixed rate for
mortgages plunged to an all-time low of 4.56%. Rates are falling because investors
are still  moving into risk-free liquid assets, like Treasuries. It's a sign of panic, and
the Fed's lame policy response has done nothing to allay the public's fears. The
flight-to-safety continues a full two years after Lehman Bros blew up.

  Housing demand has fallen off a cliff in spite of the historic low rates. Purchases of
new and existing homes are roughly 25% of what they were at peak in 2006.
Case/Schiller reported on Monday that June new homes sales were the "worst on
record", but the media twisted the story to create the impression that sales were
improving. Here are a few of Monday's misleading headlines:

"New Home Sales Bounce Back in June"--Los Angeles Times. "Builders Lifted by June
New-home Sales", Marketwatch. "New Home Sales Rebound 24%", CNN. "June
Sales of New Homes Climb more than Forecast", Bloomberg.

It's all bunkum. The media's lies are only adding to the sense of uncertainty. When
uncertainty grows, long-term expectations change and investment collapses. Lying
has an adverse effect on consumer confidence and, thus, on demand. This is from
Bloomberg:

The Conference Board’s confidence index dropped to a 5-month low of 50.4 from
54.3 in June. According to Bloomberg News:

   "Sentiment may be slow to improve until companies start adding to payrolls at a
faster rate, and the Federal Reserve projects unemployment will take time to decline.
Today’s figures showed income expectations at their lowest point in more than a
year, posing a risk for consumer spending that accounts for 70 percent of the
economy.

“Consumers’ faith in the economic recovery is failing,” said guy LeBas, chief fixed-
income strategist at Janney Montgomery Scott LLC in Philadelphia, whose forecast of
50.3 was the closest among economists surveyed by Bloomberg. “The job market is
slow and volatile, and it’ll be 2013 before we see any semblance of normality in the
labor market." (Bloomberg)


Confidence is falling because unemployment is soaring, because the media is lying,
and because the Fed's monetary policy has failed. Notice that Bloomberg does not
mention consumer worries about "curbing the deficits". In truth, the public has only
a passing interest in the large deficits. It's a fictitious problem invented by rich
corporatists (and their think thanks) who want to apply austerity measures so they
can divert more public money to themselves. In the real world, consumer confidence
relates to one thing alone--jobs. And when the jobs market stinks, confidence
plummets. This is from another article by Bloomberg:

  "Consumer borrowing in the U.S. dropped in May more than forecast, a sign
Americans are less willing to take on debt without an improvement in the labor
market.

"The $9.1 billion decrease followed a revised $14.9 billion slump in April that was
initially estimated as a $1 billion increase, the Federal Reserve reported today in
Washington. Economists projected a $2.3 billion drop in the May measure of credit
card debt and non-revolving loans, according to a Bloomberg News survey of 34
economists.

"Borrowing that’s increased twice since the end of 2008 shows consumer spending,
which accounts for about 70 percent of the economy, will be restrained as Americans
pay down debt. Banks also continue to restrict lending following the collapse of the
housing market, Fed officials said after their policy meeting last month" (Bloomberg)


Consumer confidence is falling, consumer credit is shrinking, and consumer spending
is dwindling. Jobs, jobs, jobs; it's all about jobs. Budget deficits are irrelevant to the
man who thinks he might lose his livelihood. All he cares about is bringing home the
bacon. Here's a quote from Yale professor Robert Schiller who was one of the first to
predict the dot.com and the housing bubble:

"For me a double-dip is another recession before we've healed from this recession ...
The probability of that kind of double-dip is more than 50 percent. I actually expect
it."

There's no need for the economy to slip back into recession. It is completely
unnecessary. Fed chairman Ben Bernanke knows exactly what needs to be done;
how to counter deflationary pressures via bond purchasing programs etc. He has
many options even though interest rates are "zero bound". But Bernanke has chosen
to do nothing. Intransigence is a political decision. By the November midterms, the
economy will  be contracting again, unemployment will be edging higher, and the
slowdown will be visible everywhere in terms of excess capacity. The Obama
economic plan will be repudiated as a bust and the Dems will be swept from office.
The bankers will get the political gridlock they seek. Bernanke knows this.

On Tuesday, a $38 billion Treasury auction drove 2-years bond-yields down to record
lows. (0.665%) Investors are willing to take less than 1% on their money just for the
guarantee of getting it back. Bond yields are a referendum on Bernanke's policies; a
straightforward indictment of the Fed's strategy. 3 years into the crisis and investors
are more afraid than ever. The flight to Treasuries is an indication that the retail
investor has left the market for good. It is a red flag signaling that the public's
distrust has reached its zenith.

British economist John Maynard Keynes showed that the business cycle can be eased
by government intervention, that the state can generate demand when consumers
are forced to cut back on their spending. Presently, big business is awash in savings
($1.8 trillion) because consumers are on the ropes and demand is weak. The
government's task is simple; make up for worker retrenchment by providing more
fiscal and monetary stimulus. If private sector and public sector spending shrink at
the same time, the economy will contract very fast and recession will become
unavoidable. So, Go Big; create government work programs, help the states, rebuild
infrastructure and support green technologies.  The economy is not a sentient being;
it makes no distinction between "productive" labor and "unproductive" labor. The
point is to keep the apparatus operating as close to capacity as possible--which
means low unemployment and big deficits. When in doubt--keep spending.

Increasing the money supply does nothing when interest rates are already at zero
and consumers are slashing spending. Bernanke has added over $1.25 trillion to
bank reserves but consumer borrowing, spending and confidence are still in the tank.
The problem is demand, not the volume of money. Bernanke knows what to do, but
he refuses to do it. He'd rather line the pockets of bondholders, bankers and rentiers.
This is from Calculated Risk:

 "This report from the National League of Cities (NLC), National Association of
Counties (NACo), and the U.S. Conference of Mayors (USCM) reveals that local
government job losses in the current and next fiscal years will approach 500,000,
with public safety, public works, public health, social services and parks and
recreation hardest hit by the cutbacks.

The surveyed local governments report cutting 8.6 percent of total full-time
equivalent (FTE) positions over the previous fiscal year to the next fiscal year (roughly
2009-2011). If applied to total local government employment nationwide, an 8.6
percent cut in the workforce would mean that 481,000 local government workers
were, or will be, laid off over the two-year period."

  The cutbacks will ravage local governments, state revenues and public services.
Emergency facilities by the Fed provided $11.4 trillion for underwater banks and non
banks, but nothing for the states. The GOP is helping the Fed strangle the states by
opposing additional aid for Medicare payments and unemployment benefits. Many
cities and counties will be forced into bankruptcy while Goldman Sachs rakes in
record profits on liquidity provided by Bernanke. It's a disaster.

On Wednesday, Moody's chief economist, Mark Zandi and former Fed vice chairman,
Alan Binder released the first in-depth analysis of the government's emergency
response to the financial crisis. The paper evaluates the effects of the TARP, Obama's
$787 billion fiscal stimulus, and the Fed's liquidity facilities. Here's an excerpt from the
New York Times:

  "We find that the effects on real GDP, jobs, and inflation are huge, probably
averting what would have been called Great Depression 2.0. For example, we
estimate that, without the policy responses, GDP in 2010 would be about 6½%
lower, payroll employment would be about 8½ million jobs lower, and the nation
would now be experiencing deflation.

When we divide these effects into two components, one attributable to the various
rounds of fiscal stimulus and the other attributable to the panoply of financial-market
policies (including the TARP, the bank stress tests, and the Fed's quantitative easing),
we estimate that the latter are substantially more powerful than the former.
Nonetheless, our estimated effects of the fiscal stimulus policies alone are very
substantial: In 2010, real GDP that is about 2% higher, an unemployment rate that is
about 1½ points lower, and almost 2.7 million more jobs
. ("In Study, 2 Economists
Say Intervention Helped Avert a 2nd Depression", Sewell Chan, New York Times)

The bottom line? When Wall Street is hurting, money's never a problem.  But when
the states are on the brink of default and 14 million workers are scrimping to feed
their families, there's not a dime to spare. Explain that to your kids.