Is the Economic Crisis: Winding Down?

by Andre Pollack / May 2009

In the first three months of this year many bourgeois politicians and pundits declared that the corner had been turned on the economic crisis, basing their claims on a handful of mildly positive economic indicators. But numerous economists, even mainstream ones, quickly punctured these illusions.

A widely distributed article by economics professors Barry Eichengreen and Kevin O’ Rourke argued in April that "the world economy is now plummeting in a Great-Depression-like manner. Indeed, production, trade, and stock markets are diving faster now than during 1929-30."

Eichengreen and O’Rourke said: "When we look globally, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. Similarly, while the fall in the US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression."

Progressive economist Dean Baker argued in the April 13 London Guardian that while "many economic analysts have seized on recent economic reports to claim that the upturn is in sight, this analysis badly misreads the data."

For example, he wrote, the widely-cited 22.2% jump in housing starts in February ignored the fact that this still left starts only 4.5% above the December number, and that January starts were artificially low because of bad weather. And in any case, sales of existing homes dropped 3% in March. Similarly, supposedly good chain store sales in March ignored the fact that massive closures of non-chain stores should have meant a much bigger jump for the chains.

Baker also cited supposed renewed profits at Wells Fargo, which "was enough to cause Time magazine to pronounce the end of the banking crisis." He noted the enormous discretion banks have over when, and by how much, they choose to recognize losses, especially now that the government has suspended mark-to-market accounting (i.e. pegging prices to current market value). And he dismissed the recent stock market rally as being no more reliable a forecaster of a turnaround than reading tea leaves.

Baker noted that "the economy is shedding close to 700,000 jobs a month. An economy that is about to turn around does not lose 700,000 jobs a month." And employers have shortened workweeks for those who did not lose their jobs. Hours worked fell by 1 percent in March, which will reduce consumption, as will the loss among baby boomers of most of their wealth in the housing crash and stock market plunge."

Martin Wolf wrote in the April 21 Financial Times: "Is the worst behind us? No. The rate of economic decline is decelerating. But it is too soon even to be sure of a turnaround, let alone a return to rapid growth. Yet more remote is elimination of excess capacity. Most remote of all is an end to deleveraging. … As the Organisation for Economic Co-operation and Development noted, ‘the world economy is in the midst of its deepest and most synchronised recession in our lifetimes."

In the U.S., said Wolf, the rate of decline of manufactured output compares with that of the Great Depression. He noted the mutually reinforcing problems of huge excess capacity, rising unemployment and huge losses in wealth, collapse in demand and profits, massive and persistent fiscal deficits and soaring debt, and flight from riskier borrowers. The interaction of all these will in turn lead to the similarly mutually reinforcing results of deflation, a rise in savings, cutbacks in investment, and higher interest rates.

"In its latest Global Financial Stability Report, the International Monetary Fund now estimates overall losses in the financial sector at $4.1 trillion [double its previous estimate]. The next estimate will presumably be higher," said Wolf.

"Total US private sector debt rose from 112% of GDP in 1976 to 295% at the end of 2008. How much of a reduction in these measures of leverage occurred in the crisis year of 2008? None. On the contrary, leverage rose still further."

Liberal economists, who have every ideological incentive to support Obama’s policies and thus to claim to see light at the end of the tunnel, are strikingly unanimous in their belief that the crisis is nowhere near over, and that Obama is doing little to change that.

Robert Reich wrote: "We're not at the beginning of the end. I'm not even sure we're at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. Cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. It doesn't."

"Most importantly, there's still a yawning gap between the economy's productive capacity and what it's now producing, and absolutely nothing will turn the economy around until that gap begins to close.“ His conclusion: "The world economy is at the early stages of a long and painful deleveraging and restructuring.“

Fellow liberal and New York Times columnist Paul Krugman declared: "Things are still getting worse. Industrial production just hit a 10-year low. Housing starts remain incredibly weak. Foreclosures, which dipped as mortgage companies waited for details of Obama’s housing plans, are surging again.

"The most you can say is that there are scattered signs that things are getting worse more slowly. The Fed’s own periodic survey of business conditions reported that only five of the twelve Fed Districts noted a moderation in the pace of decline."

Like Baker, Krugman attributed positive bank earnings reports to financial finagling. "There may be other shoes yet to drop. Even in the Great Depression, things didn’t head straight down. There was a pause in the plunge about a year and a half in —roughly where we are now. Commercial real estate is coming apart at the seams, credit card losses are surging and nobody knows yet just how bad things will get in Japan or Eastern Europe. It’s far from certain that the worst is over."

Yet Krugman predicted that policymakers—who’ve already done virtually nothing to help anyone except bankers—would emulate FDR, who quickly cut his own bare-bones stimulus program, which precipitated the second huge plunge within the overall downturn of the Great Depression.

Meanwhile, Nouriel Roubini, the NYU economist known as "Dr. Doom" for having repeatedly punctured earlier Panglossian projections by other mainstream economists, judged the current "consensus optimism" about the economic future to be "not supported by the facts."

He states, "The latest rally in global stock markets has to be interpreted as a bear-market rally. In the last two years, the stock market has predicted six out of the last zero economic recoveries—that is, six bear market rallies that eventually fizzled and led to new lows.

"The latest 'dead cat bounce' may last a while longer, but in due course it will turn south again."

Progressive economist Mark Weisbrot noted that "even if the Treasury's latest plan were to restore solvency to the entire financial system—and this seems very unlikely—we would still be facing a serious recession in the real economy. Even solvent banks are not going to increase lending if there are no additional credit-worthy borrowers seeking loans.

“The OECD is now forecasting a phenomenal 2.75 GDP% decline worldwide. Shrinking global demand and an overvalued dollar do not offer much hope for trade to boost the US recovery.”

Several crucial corporations reported sharply worse performance in the first quarter. Chemical and plastics giant 3M, which sells to a wide range of sectors, both corporate and individual, reported sharply lower profits and sales. In April the company offered early retirement packages to 3600 employees, about 11% of its U.S. work force. Its first-quarter net income of $530 million was about half that of the same period a year ago.

The crisis has finally hit home at Microsoft, which reported its first year-over-year quarterly revenue decline. Revenue fell by almost $1 billion, and net income by 32%. "I didn’t see any improvement at the end of the quarter that gives me encouragement that we are at a bottom and coming out of it," said Microsoft’s chief financial officer. United Parcel Service, another company whose involvement in broad sectors of the economy means it is closely watched, said its first-quarter net dropped by 56 percent.

On April 24, The New York Times reported that in the first quarter "much of the industrial sector remain[ed] gripped by a deep manufacturing slump." Through the end of 2008 there was a record 25 percent year-over-year slide in durable-goods demand. And the first quarter of 2009 "was far worse: industrial companies in the S&P 500 reported a 44% decline in year-over-year earnings."

Spurious bank profits

Banking profits supposedly signaling a turnaround were quickly revealed to have appeared, in the words of New York Times business columnist Andrew Sorkin, "out of thin air."

Results reported by "Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America all used sleight of hand," said Sorkin. "With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing a $1.3 billion loss that month)." And an analyst called one accounting measure behind Bank of America’s profit reports "perfectly delusional."

Billionaire investor George Soros said the recent streak of gains in stock was little more than a bear market rally in the middle of an economy that still had not been turned around. A report by Standard & Poor’s said companies made a total of $77 billion in dividend cuts in the first quarter of 2009, the worst ever for corporate dividends.

The Business Roundtable reported that chief executives of many major corporations are anticipating a decrease in sales, capital expenditures and employment figures for the next six months.

Despite massive government gifts to banks, The Wall Street Journal reported that lending has actually declined 23 percent since the giveaways began. Leading German newspaper der Spiegel said that "experts think the euphoria is wishful thinking. As they see it, things are going to get worse soon—and banks will be forced to make billions more in write-downs.”

Coming calamities

Another New York Times business columnist, Floyd Norris, predicted that "defaults on leveraged corporate loans and bonds will soon rise to levels not seen since the Great Depression," which would lead to "a wave of corporate bankruptcies."

He described much corporate borrowing as "the worst junk ever."

The cause, as with mortgages, is the packaging of corporate debt into pools lumping together junk and higher-quality debt, which in turn were repackaged in Ponzi-scheme style. Leveraged companies need to refinance $26 billion in loans this year, $44 billion in 2010, and $120 billion in 2011.

Meanwhile, a second brutal wave of home foreclosures looms, as mortgages issued in mid-decade will reset to much higher levels in 2010 and 2011. These resets will mean even larger leaps in payments than for subprime mortgages.

Getting ready for any development

The more sober mainstream economists quoted above note the continuing, mutually reinforcing impact of factors explaining the short and medium term crisis, as vanishing wages, jobs, investment, demand, and other factors continue to drag each other down. But even those who admit this—and within this group the even smaller number who note the problems in the productive as well as the financial sectors—rarely address the overarching explanation that Marxists call attention to: the decades-long falling rate of profit inherent in a system that inevitably combines overproduction, under-consumption, and falling demand.

As we’ve emphasized in previous articles, the only way for capital to survive such longer-term crises is to launch savage attacks on working-class living standards and organization. If a short-term economic recovery does come about, it should of course be welcomed, as it would marginally lessen the suffering of working people. Even more important, it would give breathing space to workers still reeling from the onset of the crisis—space desperately needed to arm themselves politically and organizationally for the much more dramatic attacks that are coming.

In the end, only politically conscious, organized action by the working class can end this irrational system once and for all.

We encourage our readers once again to look over our Workers’ Action Program, and to discuss with coworkers steps that can be taken in their unions and community organizations to begin raising these demands in action.