Teetering domestic economy could spell doom for U.S. war against Iraq

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'The U.S. banking system is in deep trouble. Thi U.S. banking system is in deep trouble.

collapse of the Bank of New England on Jan. 6—the third largest bank collapse in U.S.

history—showed how fragile many financial LOS ANGELES-Stock prices climbed upwards and the price of crude oil fell sharply in the first few days of the U.S. military attack on Iraq. The upwards climb of the stock market reflected hopes on the part of international investors that the war will be over shortly and that peace in the Middle East will restore consumer spending in the United States.

This hope hinges on the belief that people have stopped purchasing expensive itemslike cars and houses—out of uncertainty over the war.

There is also the hope that the lower price of world oil will soften downward pressures on the U.S. economy.

In fact, Saudi Arabian oil production is already more than making up for the loss of the oil from Irag and Kuwait. Moreover, the Bush Administration is releasing oil from U.S. strategic reserves. An oil glut has developed in world markets and oil prices will continue to drop, barring a lethal attack on Saudi oil facilities.

The problems in the U.S. economy, however, are deeper than simply the high price of oil that has prevailed since August. The eight-year-long expansion of the economy that began in 1982 has ended. Consumer spending has dropped because people are deeply in debt, prices are much too high, and many fear job losses as unemployment spreads across the nation.

Total industrial production of U.S. companies has been falling since September 1990.

Economic horizon looks bleak The U.S. banking system is in deep troubie. The collapse of the Bank of New England on Jan. O—the third largest bank collapse in U.S. history-showed how fragile many financial institutions are today.

New England's weak economy had already seen the shutdown of 45 privately-insured credit unions and small banks in Rhode Island on New Year's Day.

As companies are cutting back on production, layoffs are increasing. Private industry slashed . 206,000 jobs in October and 270,000 jobs in November.

«The declines were of the same magnitude as recorded in the early months of the severe 1981-82 recession," Business Week stated on Dec. 24. "They explode the notion that this downturn would be quick and painless."

The same magazine declared one month later, in the Jan. 21 issue, "What seems to be brewing is an economic slump much graver than the 3 percent decline in output of the harsh 1982 recession."

The economy of the United States is tied to the production cycles of the housing and automobile industry. Production in both industries is dropping sharply. Auto output institutions are today.' Joseph Ryan/Socialist Action Jan. 26 demonstration In San Francisco fell to an annual rate of 5.3 million cars in November 1990—22.1 percent lower than the 6.8 million annual rate of October 1990. In November 1990 alone, the auto industry eliminated 54,000 jobs.

But auto production has been generally declining since 1986, when U.S. annual production reached 16.3 million vehicles.

A similar phenomenon is visible in commercial and residential building. Homebuilding has dropped 4 percent since December 1990. There were 62,000 construction jobs lost in November. In 1990, housing. construction fell a disastrous 16 percent. Since 1986, the sales of new single-family homes have dropped from over 750,000 a year to 520,000.

Vacancy in office buildings, currently at 20 percent, is almost twice what it was in 1982, at the bottom of the previous recession. ORIN ANKA FUNER MIE The long-term crisis in construction is large part of the problem of U.S. banking.

Crisis of over-production

The economic upsurge of the 1980s saw unprecedented investment in private and commercial real estate, as office buildings, shopping malls, and expensive housing projects spread across the country, and real estate prices climbed at dizzying rates.

It was here where many of the fortunes of the 1980s were made. Banks lent unprecedented billions of dollars to finance and profit from this real estate boom. Savings and loan companies were in on the bonanza.

But the massive overproduction of real estate inevitably led to a bust. It seems that many forgot that there are only so many people and companies that can afford to buy new houses and offices. Developers were caught overextended and unable to pay on their debts. This devastated bank loan portfolios and insurance company investments.

Consumers who bought houses in the last phase of the upturn are also in trouble. They face high mortgage payments while the value of their real estate is failing.

The U.S. banking system has already been hit much harder in this recession than in 1981-82. In 1989-90, some 350 banks either closed or needed financial bailouts. This compares to about 50 in the earlier period.

The chairman of the Federal Deposit Insurance Corporation-the governmental arm charged with bailing out banks-testified to Congress that "more big banks could go bust in 1991 unless the current recession is 'short and shallow," Time magazine said Jan. 21.

L. William Seidman testified that the FDIC fund of $9.1 billion could be bankrupted. The FDIC shelled out over $2 billion to the Bank of New England. Seidman estimated there would be 180 further bank failures in 199l.

It was commercial real estate loans that brought down the Bank of New England, but real estate is only part of the problem for U.S. banks. Banks have extended massive credit to individuals and industry.

Indeed, the entire economic expansion of the past eight years has been lubricated by the expansion of credit. In 1990, total private debt was over 40 percent greater than the gross national product. This compares to SOCIALIST ACTIC a debt only a few percentage points higher than GNP in 1982.

As the recession deepens, the problems of the banks will get worse. "Last year," Business Week said on Jan. 21, "banks charged off a record $30 billion in bad loans, compared to some $6 billion in the 1982 recession. And that figures to be just the beginning."

People and businesses will be unable to pay and they will want credit to tide them over the slump. Defaults will mount, and as the banks themselves lose cash they will be all the more wary about lending money out to any but the most secure borrowers.

The credit shortage impacts equally on corporations. They will be all the more reluctant to produce goods, as the availability of credit for purchasing shrinks and as their low fallback reserves dry up.

This kind of "credit crunch" occurred in the Great Depression of the 1930s. Even though interest rates fell to 1.5 percent, few companies were looking for loans. Banks were unwilling to lend except to the most strong. Industrial production fell by 29 percent between 1929 and 1933.

Only the building of massive armaments for World War II ultimately pulled the United States out of the Depression.

Effect of the Gulf War The question naturally follows: What about the current war in the Middle East? What effect will it have on the economic downturn?

It is too early to be able to give any satisfactory answer to this question.

We should recall that the Vietnam War spurred the economy in the Unted States for a few years, from 1966-68. But the inflationary impact of massive war spending increasingly outweighed the "positive" effect on the economy that military purchases produced. The economy capsized, pummelled by high U.S. prices and cheap foreign imports.

By 1974, U.S. industry had slumped to its worst position in the post-Second World War era. It was this period that saw the opening of the bosses' massive attack on workers and their unions, the slashing of production and the rationalization of industry that has continued to the present day.

Today, however, the banks are in a more vulnerable position. A massive increase in government spending for war materials would produce new strains on the financial institutions and undoubtedly lead to higher interest rates when the economy is already slumping. This would exacerbate the credit crisis we have already discussed and all the more dampen investment as production slides.

Such financial uncertainties cloud the already bleak horizon of the U.S. economy. While many in Washington are crowing over the technological expertise of the military equipment that is devasting Iraq, the economic situation is sliding towards disaster for the hundreds of thousands who are losing their jobs and their sources of income.

The banking system is teetering on the verge of its worst crisis since the 1930s, a crisis which the conservative Business Week magazine (as we have already seen) thinks will lead to a deeper recession than 1981-82, when national unemployment rates climbed above 10 percent.

Such an impending domestic crisis is sending shivers down the backs of the warmakers in Washington.

Bailouts for the rich only As banks increasingly turn to the federal government for rescue in time of financial crisis, the government itself is forced to bail them out to keep their depositors from going under. Right?

Not necessarily. According to the law, the FDIC only insures deposits up to $100,000.

In the case of the $22 billion Bank of New England, the FDIC waived this law and supplied funds to the bank's larger depositors.

Not so with the much smaller, Blackowned Freedom National Bank (assets $121 million), which failed last November in New York City's Harlem.

In that case, "The FDIC saw no risk of a widespread panic and let holders of large deposits suffer heavy losses,"

Time reported on Jan 21. "Stunned charities, churches and other customers lost $11 million in accounts that exceeded the $100,000 limit."

N FEBRUARY 1991

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The masses are supporting Aristide but

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HUS DRAIN Our SiL's

SORRY, SIR.... NE HAVEN'T DEVELOPED AN ECONOMIC PATRIO MISSILE YET...