Friday, March 07, 2008

Welcome to the Republican Recession

Today is Friday, 7 March 2008.

WELCOME TO THE REPUBLICAN RECESSION, Part One. Tune in tomorrow for the conclusion of this column.

I say “Republican” recession, rather than “Bush-Cheney” recession, because the current recession is the result of the values of and policies adopted by the Republican Party leadership and accepted by many of their dupes.

What leads me to label our current economic plight a recession?

Word comes today that payrolls have dropped for the second straight month; February’s loss was the greatest in 5 years.

The unemployment rate fell, as yet more people give up on finding jobs, and quit looking altogether. (Much of this can be attributed to employers who try to increase productivity and profits by sweating more work out of existing employees, and hiring temps, rather than creating new positions.)

Fuel costs continue what seems like an inexorable climb. While some of the rise can be attributed to continued expansion in the Chinese and Indian economies, much is due to the radically increased instability in the Middle East, caused by the Republican attempt to conquer and annex Iraq.

Home values continue to fall, caused largely by the global credit squeeze, the real fox in the henhouse.

Last year, and continuing to this date, home equity is below 50%. That is, FOR THE FIRST TIME SINCE 1945, Americans owe more for their homes than they own of them.

Ain’t re-financing and capital extraction a great thing?

One of the consequences of the incredible fluidity of capital in our time, its ability to move almost instantaneously, not just between asset classes within an economy, but between economies on a global scale, is that, when the United States gets a cold, Malawi sneezes. Add to this the explosion over the past two decades of exotic financial instruments (collateralized debt obligations, all manner of credit swaps, etc.) which, while nominally independent, are in practice fantastically interconnected.

A prime example of these is securitized mortgages. Once upon a time, a home buyer received a loan from a bank, which retained the loan on its books unto; it was repaid. Securitization is combining tens of thousands of loans, often of varying quality and credit-worthiness, into pools, which are, in the Wall Street vernacular, “sliced and diced” into tranches (i.e. sections), each tranch being sold individually. The rating agencies went along with the gag, evaluating the securities as AAA, the highest ranking, irrespective of the fact that many of the loans within the tranches were of inferior quality.

(Thus, when the subprime mortgage crisis began to unfold in the USA/USE, The New York Times reported that the budgets of several small Norwegian towns, near the Artic Circle, were in serious jeopardy, since the value of their AAA mortgage-backed securities had fallen steeply.)

Because of the intimate interconnectivity of all these exotic securities, once subprime mortgages began to implode, a domino effect ensued, dragging down the value of all manner of other securities, and leading to the phenomenon of “de-leverage”. In the financial world, “leverage” means debt. If, for example, one wishes to speculate on the movement of the yen, one may plunk down one’s $10,000 on the table and make the bet. If, however, one borrows $90,000 to gamble along with one’s own money, ten times the profit can be made if one has correctly anticipated whether the yen goes up or down. However, if one has anticipated incorrectly, one will lose ten times as much.

Many, if not most, financial institutions, prefer to be as heavily leveraged as possible. This means, however, if the value of that (usually securities) which they have pledged as collateral for their loans declines, they must furnish further collateral to sustain the loan, or lose their initial investment. Presently, a wave of de-leveraging is sweeping through the global economy, as institutions sell off securities and other assets to raise cash to support the leveraged positions they choose to retain.

The credit squeeze occurs as lenders are, wisely, reluctant to lend into declining markets, which latter inevitably increase the number of defaults and bankruptcies.

And what does all this have to do with the Republican Recession?




Remember Ronald Reagan? Once upon a time, he was a President impersonator or something:


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