FacebookTwitterGoogle+RedditEmail

Digging Out of the Recession

The U.S. economy is in recession with no end in sight. Falling housing prices are blamed, but the root causes are bad economic policies and lousy banking practices.

U.S. imports exceed exports by more than $700 billion, thanks mostly to expensive oil and lopsided commerce with China. To finance this gap, Americans sell bonds and other securities to foreigners, and Wall Street banks, like Citigroup and Merrill Lynch, recycle those funds to American consumers.

U.S. consumers borrow from mortgage companies, local banks and finance companies through mortgages, auto loans and credit cards. Those firms sell the loans to Wall Street banks, who bundle loans into bonds for sale to big fixed income investors. The Chinese government, Middle East royals and other foreign investors purchase huge sums of such U.S. interest bearing securities.

Last year, this scheme started coming unglued, because many homeowners borrowed more than their paychecks and home values could support. Loan officers encouraged home buyers to exaggerate incomes on mortgage applications and hired real estate appraisers that would inflate home values. Wall Street disguised bad loans in complex derivatives, instead of creating simple bonds, which fooled fixed income investors into believing they were buying securities backed by solid loans. Other rouses propagated like aggressive adjustable rate mortgages, and bogus credit default swaps alleged to make risks disappear.

When the worst bonds failed-those backed by subprime adjustable rate mortgages-the fixed income market closed to U.S. banks.

Banks don’t have enough deposits to make all the loans the U.S. economy needs, because Americans increasingly by-pass banks, investing directly in mutual funds, retirement accounts and the like. Hence, banks must turn about half of their loans into bonds.

Now investors, ranging from U.S. insurance companies to foreign investors, are not willing to buy bonds from U.S. banks, and banks cannot make enough loans to credit-worthy homebuyers, consumers and businesses. Housing prices plummet, car sales sink, businesses can’t invest, and the economy tanks into recession.

The Federal Reserve has cut interest rates and temporarily loaned banks $600 billion dollars, but those steps help little because the bond market is closed to banks.

Moreover, foreign investors are getting nervous about all the money they have loaned Americans to finance huge trade deficits. They are fleeing the dollar by moving cash into euro denominated securities, gold, oil, and other investments.

Fixing the trade deficit will require Americans to use less gasoline and balance commerce with China. Americans must either let the price of gas double to force conservation or accept tougher mileage standards cars. Fifty miles a gallon by 2020, instead of the 35 required by current law, is achievable, but that means more hybrids and lighter vehicles.

China subsidizes exports by selling its currency, the yuan, for dollars at artificially low values in foreign exchange markets, making Chinese goods artificially cheap at Wal-Mart. The U.S. government should tax dollar-yuan conversions at a rate equal to China’s subsidy until China stops manipulating currency markets. That would reduce imports from, and increase exports to, China.

Finally, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are working to clean up the practices of mortgage brokers, loan officers and real estate appraisers but Wall Street banks must be willing to create simple bonds from mortgages and other loans that investors can understand and whose risks can be reasonably accessed. This is less profitable than the complex bonds and derivatives that were sold prior to the subprime meltdown.

Paulson and Bernanke should bring together the largest banks and fixed income investors, among insurance companies and the like, to lay out the requirements for such bonds and require the banks to stick to them.

Banks may resist, because plain vanilla mortgage underwriting doesn’t pay outsized fees and bonuses they have been spoiled to expect from complex derivatives. However, Americans need the banks to make mortgages and other loans to get the economy back on track, and Bernanke and Paulson have the leverage to bring them to the table-the $600 billion the Federal Reserve is loaning banks to keep them afloat.

It’s time to get realistic about using less oil and to get tough with China and the banks.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

 

 

 

 

 

More articles by:

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

April 24, 2018
Carl Boggs
Russia and the War Party
William A. Cohn
Carnage Unleashed: the Pentagon and the AUMF
Nathan Kalman-Lamb
The Racist Culture of Canadian Hockey
María Julia Bertomeu
On Angers, Disgusts and Nauseas
Nick Pemberton
How To Buy A Seat In Congress 101
Ron Jacobs
Resisting the Military-Now More Than Ever
Paul Bentley
A Velvet Revolution Turns Bloody? Ten Dead in Toronto
Sonali Kolhatkar
The Left, Syria and Fake News
Manuel E. Yepe
The Confirmation of Democracy in Cuba
Peter Montgomery
Christian Nationalism: Good for Politicians, Bad for America and the World
Ted Rall
Bad Drones
Jill Richardson
The Latest Attack on Food Stamps
Andrew Stewart
What Kind of Unionism is This?
Ellen Brown
Fox in the Hen House: Why Interest Rates Are Rising
April 23, 2018
Patrick Cockburn
In Middle East Wars It Pays to be Skeptical
Thomas Knapp
Just When You Thought “Russiagate” Couldn’t Get Any Sillier …
Gregory Barrett
The Moral Mask
Robert Hunziker
Chemical Madness!
David Swanson
Senator Tim Kaine’s Brief Run-In With the Law
Dave Lindorff
Starbucks Has a Racism Problem
Uri Avnery
The Great Day
Nyla Ali Khan
Girls Reduced to Being Repositories of Communal and Religious Identities in Kashmir
Ted Rall
Stop Letting Trump Distract You From Your Wants and Needs
Steve Klinger
The Cautionary Tale of Donald J. Trump
Kevin Zeese - Margaret Flowers
Conflict Over the Future of the Planet
Cesar Chelala
Gideon Levy: A Voice of Sanity from Israel
Weekend Edition
April 20, 2018
Friday - Sunday
Paul Street
Ruling Class Operatives Say the Darndest Things: On Devils Known and Not
Conn Hallinan
The Great Game Comes to Syria
Jeffrey St. Clair
Roaming Charges: Mother of War
Andrew Levine
“How Come?” Questions
Doug Noble
A Tale of Two Atrocities: Douma and Gaza
Kenneth Surin
The Blight of Ukania
Howard Lisnoff
How James Comey Became the Strange New Hero of the Liberals
William Blum
Anti-Empire Report: Unseen Persons
Lawrence Davidson
Missiles Over Damascus
Patrick Cockburn
The Plight of the Yazidi of Afrin
Pete Dolack
Fooled Again? Trump Trade Policy Elevates Corporate Power
Stan Cox
For Climate Mobilization, Look to 1960s Vietnam Before Turning to 1940s America
William Hawes
Global Weirding
Dan Glazebrook
World War is Still in the Cards
Nick Pemberton
In Defense of Cardi B: Beyond Bourgeois PC Culture
Ishmael Reed
Hollywood’s Last Days?
Peter Certo
There Was Nothing Humanitarian About Our Strikes on Syria
Dean Baker
China’s “Currency Devaluation Game”
Ann Garrison
Why Don’t We All Vote to Commit International Crimes?
FacebookTwitterGoogle+RedditEmail