It Is Not Over

It Is Not Over

This “Great Recession,” crisis or whatever you want to call it, is not over. The financial industry and the press would like you to believe that the slow up in the fall of some statistics presages an upturn. That is wishful thinking or deliberate deceit.

It is probably not wrong for them to try to convince you the crisis is over because you’re thinking that it is has the potential to hasten the end. Just don’t bet your 401(k) on it.

The consensus view that the recession is ending ignores the two most salient facts in regard to this recession. First, this recession is being universally compared to previous postwar recessions when it is analytically an entirely different phenomenon. It tracks a different economic model through the jumble of GDP, CPI, unemployment rate, DJIA, M2 and all the other measures that purport to explain movements in our economy.

Second, this recession is accompanied by a first-class financial crisis which may be even more important to the future of our economy than the recession and it is something we are not doing anything about. The trillions of dollars poured in the economy are like blood transfusions when no one is closing the wound or otherwise caring for the patient.

Previous postwar recessions occurred because the Federal Reserve was slowing the economy to prevent inflation. Those recessions were part of the cyclical nature of an industrialized capitalist economy. When inflation threatens, the Fed raises interests rates and then waits for the economy to respond with a drop in the inflation rate and a rise in unemployment. They then reverse course, lower rates and in due time the recovery comes. Then of course, the process starts all over again.

This time the collapse in the economy came because the middle class, paycheck America, run out of money or places to borrow it. The economy had been sustained by a virtuous circle of borrowing against credit cards, mortgages and an ever greater inflation of assets. The good-times consumption from 1990 to 2007 was built on income borrowed from the Chinese and the illusion of wealth created by a financial sector endlessly relending money they did not have.

Working America did not have any real income increase because the financial sector was an illusion, the medical sector was taking an ever greater share of national income, manufacturing was outsourcing or moving offshore and unions were shorn of any real bargaining power.

Consumption makes up 60 to 70 percent of our GDP and as long as the consumer’s income is stagnant or dropping, GDP cannot rise and the recession cannot be over.

The financial crisis is a completely separate but interwoven analytical problem. Probably it should be compared to the financial crisis of 1907 rather than the banking crisis of 1932.

In 1907, the United States had no central bank or lender of last resort to maintain liquidity in the financial system. J.P. Morgan had been acting as a national bank for regional problems but even he could not handle the nationwide crisis that occurred in 1907.

The Federal Reserve Act of 1913, which established the Federal Reserve System as our national Bank, was a direct result of the financial sector recognition that someone had to control the money supply. The bankers wrote the law and took control.

It is not generally known that the Federal Reserve System is owned and run by the American banking system. In order to maintain that control, the private banks and the economics profession insist on the “independence” of the Fed from any kind of government involvement.

The Fed failed miserably in 1932 and again in the period 1987-07, the only two instances when they were called upon to do their job of protecting the structure of the system.

The New Deal did happen and its bold action to control the financial system through a series of watchdog agencies and division of power kept the system working..

The deregulation that began in 1980 was, in a sense, appropriate to a changing technology. It is just that the regulators mistook government for the problem and forgot the basic issues that brought on the 1907 and 1932 crises. The fundamental problem is that banks have no natural limit to the amount of money they are willing to create and use to pay themselves. Government has to control them.

This financial crisis will not be over until the people in the United States get spending money in their pockets and assume appropriate control over their own finances.
So far the stimulus package has been at most a palliative for an economy bleeding to death. The Fed is fighting any change, even a mere audit. A fundamental restructuring of the Fed and the whole financial structure is essential if our economy is to allocate resources with any kind of efficiency.
This crisis is nowhere near over.