By Mary Nichols, on July 7th, 2008
Globalization of the world economy has increased the flow of goods and services between countries, but it also has a darker side: the growing trade in people. Human trafficking has become one of the most lucrative aspects of international organized crime, estimated by the United Nations to have a total market value of $32 billion.
The real extent of human trafficking is unknown due its clandestine nature and a lack of adequate data collection. The U.S. government has calculated that, around the world, between 2 and 4 million people are trafficked annually, but many human rights and migration specialists believe that this vastly underestimates the true scale of the problem.
Sex trafficking has become the most common form of trafficking in recent years, with young women and children accounting for the majority of victims. But men are trafficked, too, often to be sold into forced labor. Traffickers are often of the same nationality as their victims and commonly consist of organized crime gangs. Their victims may be directly abducted or deceived by promises of well-paid jobs, legal entry into western countries, educational opportunities or marriage. Once in the destination country, they are frequently subjected to extreme mental and physical brutality by their employers and prevented from escaping. If detected by the authorities, they are often themselves treated as criminals for entering or working in the country illegally.
The main source regions for the trade in people are those with less developed economies and high levels of poverty: South and Southeast Asia, Latin America, Africa and the countries of the former Soviet Union. In contrast, the destination countries for trafficked people are mostly in Western Europe, North America, the Middle East and other parts of Asia. Trafficking also occurs within country borders or to neighboring countries, a form which reportedly often involves young children.
International Shortcomings
The United Nations is now leading the fight against human trafficking; its Protocol to Prevent, Suppress and Punish Trafficking in Persons, Especially Women and Children has been ratified by 119 nations to date. However, some 70 countries have not yet signed up while others are implementing the protocol ineffectively. Although overall numbers of prosecutions of offenders have increased in recent years, most escape with relatively minor penalties for their crimes, which fail to provide an effective deterrent to other traffickers. Moreover, there is little evidence that U.S. economic sanctions against countries that fail to cooperate in fighting trafficking, such as Burma, Cuba, Iran and North Korea, have much effect.
Since the economic rewards of trafficking outweigh the perceived risks of prosecution or the severity of the punishment, this inhumane trade is likely to increase. Moreover, in conditions of extreme poverty, potential victims will easily succumb to the promises of a better life or may simply make a calculated decision to try to better their lives by taking a chance on the unknown in a new country.
The lack of reliable data and information on trafficking presents one of the major barriers to the development of effective ways to tackle it. Even among those states that have signed the UN protocol, data collection and knowledge exchange on human trafficking is at best ad hoc. In the developed world, insufficient resources have been made available to improve the knowledge base, and data protection and other regulatory barriers have hindered information exchange between countries. In many of the poorer countries from which trafficked victims originate, resources are simply not available for statistics and research.
See Also
Laczko, F. & Gramegna, M.A. (2003) Developing Better Indicators of Human Trafficking.
International Organization for Migration, Geneva.
Seelke, C.R. & Siskin, A. (2008). Trafficking in Persons: U.S. Policy and Issues for Congress. Congressional Research Service.
United Nations Office on Drugs and Crime (2007). The Global Initiative to Fight Human Trafficking.
United Nations Office on Drugs and Crime (2008). United Nations General Assembly urges stronger action against human trafficking.
U.S. Department of Justice (2007). Nature and Extent of Human Trafficking.
U.S. State Department (2008). Trafficking in Persons Report.
By Lee Jamieson, on July 7th, 2008
This year marks four decades of freedom of speech in England’s theaters. Only 40 years ago, all plays were censored by the state for any “profanity or impropriety of language, indecency of dress, dance or gesture; offensive personalities or representations of living persons or anything calculated to produce riot or breach of the peace.” In 1968, Member of Parliament Michael Foot overturned this outdated system and introduced a new Theatres Act which abolished the Lord Chamberlain’s power to censor and ban plays (the office had been in operation since 1843).
In 1968, theater found itself at the forefront of the period’s huge social and cultural upheavals. Playwrights had become ungagged, and theater suddenly rekindled its relationship with politics, culture and society. In other words, theater rediscovered its active ingredient and became a “spokesperson” for the growing counterculture movement.
We should not forget that this move was no accident – rather, it was the result of a rapidly changing society that demanded a reconsideration of the relationship between the individual and the state.
The sexual liberation movement (both heterosexual and homosexual) demanded that the body be liberated from state control, hence the feminist maxim: “The personal is political.” Through protesting and the more promiscuous sexual practices of the British and American people, the physical presence of the body as a social and sexual weapon was brought to bear upon the political sphere.
Unsurprisingly then, naked bodies immediately appeared on stage after the new bill was passed. Infamously, the musical Hair (1968) and Oh! Calcutta! (1969) both depicted full-frontal nudity – an act which had become highly politicized.
State Intervention
Today, it seems almost incredulous that state intervention has shaped many of England’s modern classics. Would Samuel Beckett have taken his bleak existentialism in other directions? Was Joan Littlewood’s political voice curtailed in any way?
One of the last plays to be censored was Harold Pinter’s Landscape which was originally scheduled for production at the Aldwych Theatre in the months preceding the introduction of the new Theatres Act. Reading Landscape today highlights the absurdity of the situation – it is a gentle, melancholic play and contains no politically subversive material. Yet, the Lord Chamberlain’s office objected to the words “fuck all” and “bugger,” which read quite naturally in their original context.
“As I believe you know, I am willing to cut the phrase ‘fuck all’ but I see no good reason to change the word bugger,” wrote Pinter to Sir George Farmer, the then chairman of the Royal Shakespeare Society. “How childish the whole thing is, and what a pity one word is now between us and public performance.”
Eventually, Pinter’s play was recorded for BBC radio instead – an area over which the Lord Chamberlain had no jurisdiction. It was ludicrous that a play deemed too offensive for a small theater audience could be broadcast uncut over the radio to a mass audience.
Should We Be Celebrating?
Although there is no formal theater censorship in England, slanderous, blasphemous and racially aggravated productions can still be closed down. In the UK, the ongoing fight to protect freedom of speech now has to face growing pressures from the religious right.
Famously, the evangelical Christian right have dogged worldwide tours of Jerry Springer: The Opera since it opened. These attacks against the freedom of speech in theater have been highly organized. When the BBC decided to screen Jerry Springer: The Opera, an organization called Christian Voice led street protests, and the Christian Institute unsuccessfully attempted to prosecute the BBC.
Can small, cash-strapped theaters in the UK really be expected to confront these large (and in some cases wealthy) organizations committed to restricting freedom of expression? In 2004, the Birmingham Rep closed their production of the controversial Sikh play Behzti after the theater was subjected to violent attacks on opening night from the Sikh community.
The pre-1968 campaign for freedom of speech was united by a single cause: the abolition of the Lord Chamberlain’s office. Today, a single focus for the campaign is near impossible to identify – it is a clandestine mixture of political lobby groups and religious fundamentalists. The fight is far from over, and Britain’s theater scene is in dire need for support to help fight these growing movements.
By J.D. Seagraves, on July 7th, 2008
“Libertarians are Republicans who smoke pot.” So goes the saying. And most Americans know little else about the Libertarian Party, America’s third largest, or the libertarian political philosophy. So when former Republican congressman Bob Barr announced his candidacy for the LP’s presidential nomination on May 12, the mainstream media assumed he was a shoo-in. After all, he was a Republican and now lobbies for the Marijuana Policy Project—how could someone better fit the popular definition?
But what the media failed to recognize is that many party members don’t consider libertarianism to be a branch of conservatism but, instead, its diametric opposite. These libertarians refused to embrace Barr and, instead, rallied behind the candidacy of party stalwart Mary Ruwart during the Libertarian National Convention on May 25. It took six ballots before Barr was finally able to win the party’s nomination with just over 51% of the vote, and the rift now between the “reformers” who backed Barr and the “radicals” who supported Ruwart is bitter—and largely economics related.
In Brian Doherty’s 2007 book Radicals for Capitalism, which chronicles the history of the libertarian movement, five figures are cited as essential: Ludwig von Mises, Friedrich Hayek, Milton Friedman, Murray Rothbard and Ayn Rand. All but Rand were economists. And if we eliminate Rand, who was a philosopher, from the discussion (both Barr and Ruwart said she was their favorite philosopher during a debate), the four economists can be easily divided among the “reform” and “radical” camps—Hayek and Friedman to the reformers, Mises and Rothbard to the radicals. Monetary theory was the key difference between Hayek/Friedman and Mises/Rothbard, and this difference is a microcosm for the larger ideological divide within the Libertarian Party.
Two Different Sides…of the Same Coin?
Friedman, a hero to the reformers, was critical of the Federal Reserve System but not of fiat currency in general. Fiat currency is money that’s given value by government decree and “legal-tender” status—meaning people must accept it by law. The most popular alternative, commodity-backed currency, has usually been based on gold. Under a gold standard, paper notes may be redeemed for gold coins or bullion, and thus money is valued for the gold it represents. Friedman saw monetary gold as unproductive since resources were expended to mine gold out of the ground in one part of the world only to have it stored in underground bank vaults in another part of the world.
Rothbard, a disciple of von Mises and an early LP “radicalizer,” strongly disagreed. He supported the Austrian economist Carl Menger’s theory of the origin of money which stipulated that money came into being “organically” in the course of prehistoric barter. For example, a shoemaker and a butcher who wanted to make a trade would have a need for money if the butcher already had enough shoes. The butcher would be willing to accept an “exchange commodity” even if he didn’t want the particular commodity for himself because he knew he could trade it to someone else for something he did need.
Gold, in Menger’s theory, became the “most commonly accepted means of exchange” (i.e., money) due to its durability, divisibility, portability and homogeneity or sameness. Butter, by contrast, would not have been a good form of money since it is perishable and significant values of it would be hard to carry in one’s wallet. Diamonds would also make bad money since they aren’t easily divisible and vary widely in quality.
Closing the “Gold Window”
To Rothbard and others who believe in this origin theory, the governments of the world have played a sinister trick on their citizens. People only accept U.S. dollars because they had value yesterday. Trace things back far enough, and you’ll get to August 15, 1971. The day before that, the dollar was convertible into gold. But on that day, President Nixon closed the “gold window,” making the U.S. dollar a purely fiat currency.
People still accept the dollar, according to Rothbard, because they’ve been conditioned to do so. But a fiat currency could never arise naturally in the marketplace. Thus, the U.S. monetary system, based on the fiat dollar, is fraudulent and, according to Rothbard and his followers, designed to redistribute wealth from the poor and working people to the rich and politically connected. This “principled populism” is a far cry from right-wing conservatism which is often labeled as being for Big Business and against the poor and laboring classes.
Ron Paul, the maverick Republican congressman and former 2008 presidential candidate, was a disciple of Rothbard and Mises and was himself the Libertarian Party’s presidential nominee in 1988. Both the reformers and the radicals of the LP claim Paul as one of their own. But he has made a career of criticizing the Federal Reserve and advocating a return to gold as money. With the reform wing’s victory over the radicals this election year, the LP’s presidential ticket will likely be silent on this issue.
Reformers wish to deal with the “practical,” just as Friedman and Hayek, both Nobel laureates, did. The radicals hold fast to principles no matter the political cost, much like Mises and Rothbard. But as the U.S. dollar continues on a seemingly perpetual slide, the radical position of abolishing the Fed and restoring the gold standard is looking more and more like a practical reform.
By James Ratcliff, on July 7th, 2008
Browsing through the stacks of my local library a few weeks ago, I came across a copy of E. F. Schumacher’s Small Is Beautiful: Economics as if People Mattered.
I hadn’t opened a copy of the book in over 25 years. As I leafed through the chapter on “Buddhist Economics,” I realized I didn’t have as much in common with Fritz Schumacher today as I did when I was an economics major in the early 1970s. But I discovered that we still agree on the Big Questions.
When I was a college student, Small Is Beautiful was touted in literary and academic circles as a groundbreaking critique of Western economics. Schumacher challenged political and industry leaders to reorganize society on a human scale. He called for sustainable local economies based on local currencies and responsible stewardship of natural resources.
Schumacher’s ideas have been kept alive by the E. F. Schumacher Society, an educational nonprofit organization founded in 1980 for the purpose of “linking people, land, and community by building local economies.”
The society hopes to demonstrate through its programs that “social and environmental sustainability can be achieved by applying the values of human-scale communities and respect for the natural environment to economic issues.”
I wondered: what would Schumacher, one of the most influential advocates of human-scale, decentralized, appropriate technologies think of the World Wide Web? A Google search showed me where to go for an answer.
Would Schumacher Have a MySpace Page?
The world needs a modern-day Schumacher on the program of the fifth annual Web 2.0 Summit, November 5-7 in San Francisco, California. The annual event is the brainchild of Tim O’Reilly, the man who invented the term “Web 2.0.” The theme of this year’s Summit is “The Opportunity of Limits: Sustaining, Applying and Expanding the Web’s Culture to Change the World.”
O’Reilly explains that the event isn’t “just about the Web” this year, “From harnessing collective intelligence to a bias toward open systems, the Web’s greatest inventions are, at their core, social movements,” he points out. “To that end, we’re expanding our program this year to include leaders in the fields of healthcare, genetics, finance, global business and yes, even politics.”
But, I object, no one from the field of economics?
The list of speakers is a “Who’s Who” of the Internet: Max Levchin, the Ukrainian immigrant who cofounded PayPal when he was twenty-two years old; Chris DeWolfe, cofounder and CEO of MySpace.com; Mark Zuckerberg, founder and CEO of Facebook.
It’s a powerful list, but there’s no one on the program that’s likely to ask the questions Schumacher asked in Small Is Beautiful. Sure, one or two of the “global business” or “finance” people might have a degree in economics, but there isn’t anyone on the list that’s likely to represent Schumacher’s worldview.
For Schumacher, a deeply religious man, the ultimate aim of economics was the creation of a society where the first priority of the individual is the attainment not of material comfort but of purpose-filled living. “When the available ‘spiritual space’ is not filled by some higher motivations,” he wrote in the Epilogue to Small Is Beautiful, “then it will necessarily be filled by something lower.”
Schumacher kept asking the Big Questions right up to the end: he was on a speaking tour in Switzerland when he died in 1977. He wouldn’t have identified with the “MySpace” community of more than 100 million regular users; Schumacher’s focus was on something much bigger than “his space” in the world.
“Everywhere people ask: ‘What can I actually do?’” he wrote. “The answer is as simple as it is disconcerting: we can, each of us, work to put our own inner house in order.” As a deeply spiritual Catholic, he was talking about our “spiritual” house, of course. No one on the Web 2.0 Summit program is likely to offer anything remotely resembling Schumacher’s solution.
What Can We Actually Do?
Put yourself in the following scenario for a moment: what if Tim O’Reilly asked you to add one name to the list of speakers on the Web 2.0 Summit program? Who would you choose?
Let’s pretend: the producers of the summit ask you to name the keynote speaker. The title of the keynote address is: “Web 2.0: What Are We Filling the ‘Spiritual Space’ With?”
Let us know your choice. When we have a winner, we’ll contact the producers of the Web 2.0 Summit. Will they listen? I think they will. The people that are shaping the next generation of the web are where they are today because they pay attention to their communities of users.
Let’s see if their hearing is still intact.
Send your choice of speaker to editor@amateureconomists.com.
By B.P.T., on July 7th, 2008
Exploding gas prices, a housing burst and the shaky state of the stock market have all combined to create a tenuous economy that has already had a direct impact on travelers and vacationers in the U.S. In addition to the weak dollar with respect to the euro, the cost of flying across the pond seems to increase on a daily basis. In an effort to combat high fuel prices, United Airlines has recently joined American in the latest fee taxed upon travelers for what has long been a complementary service – a flier gets to bring his luggage with him!
Not only has international travel been impacted but domestic travel as well, with one of the hardest hit areas being family summer vacations. With gas prices exceeding $4 per gallon, families are rethinking and reorganizing the family road trip. The Travel Industry Association, which develops an annual Travel Price Index, estimated a 6% increase in travel prices in April from one year prior. The major driver of this increase is, of course, gas prices which have increased well over 20% in the past year. This is all in contrast to the Consumer Price Index which increased a seemingly mere 3.9% during the same period.
Families who take the quintessential Great American Road Trip have been directly impacted by these increases. Indeed, AAA recently released a report that estimates the cost of driving a new car at 54.1 cents per mile – a 1.9-cent increase from last year. AAA’s sensitivity to fuel prices is reflected in its online travel planner which lists current gas prices at over 100,000 gas stations in the U.S.
At Lake Bruin, Louisiana, Memorial Day weekend was a crowded day on the lake. A rural oxbow lake near the Mississippi River, the lakeshore is dotted with family homes and holiday camps. Vacationers in the local bait and gas shop were heard discussing the increased number of people. “We think it is because families who usually drive down to the beach or go somewhere else have stayed closer to home this time – gas is just too high!” lamented lake-goers. “There seems to be far more people here for a holiday weekend than normal,” agreed another.
From Hollywood to Reality
Another vacation method families have long used to both limit costs and heighten the vacation experience has been the home exchange. While not a new concept, the idea was popularized in the 2006 movie The Holiday, starring Cameron Diaz and Kate Winslet. The premise is simple: potential vacationers are matched via a website based on where they live and where they would like to visit – and they stay in each other’s homes.
A quick read-through of some of the most popular websites that handle these exchanges, such as HomeExchange.com and 1stHomeExchange.com, will show that most of these homes are very nice abodes. Most profiles tell a bit about the owners as well, revealing a large proportion of professionals, including physicians, attorneys, professors and retirees; some are couples, others have small children. This seemingly affluent group comes with the expected nice selection of homes as well, ranging from suburban McMansions to Caribbean condos to beach bungalows.
However, even within this group of sophisticated yet frugal vacationers, the dynamics are changing. Whereas a year ago many American homes listed were requesting exchanges in Europe, Mexico, Australia and around the world, many recent updates are sticking closer to home. Listings give site members a spot to list where they are interested in visiting. Although there are still many around the world, a higher proportion now lists areas much closer to home than did a year or two ago.
One particular listing in Sarasota, Florida, for instance, states, “We are looking for a place close to home, due to the weakening economy – two days of driving distance at the most.” Another listing in Georgia lists its preferences as Tennessee, North Carolina and Florida. A Sacramento, California, ad requests, “Anywhere in California.” Several Hawaii listings request, “Any other island in Hawaii.” While these types of listings are not singularly the result of the price of gasoline (some people just like to stay close to home), the increased frequency with which these types of requests appear seems to be.
For now, these changes in the travel habits of Americans seem to be only slight. Vacationers are still traveling, just perhaps for shorter distances or driving rather than flying – a tightening of the belt but still relatively slight. With fuel prices steadily increasing, however, the long-term fallout on the travel industry and the great American summer vacation remains to be seen.
By Cheryl Grey, on July 7th, 2008
The face of U.S. demographics is changing. According to the U.S. Census Bureau, the central point of the U.S. population U-Hauled from central Indiana to Phelps County, Missouri—about halfway between Springfield and St. Louis on U.S. Highway 44—between the years 1900 and 2000. In the decade preceding the turn of this last century, it shifted a distance of 324 miles further west and 101 miles south as people moved out of the densely populated Northeastern states to warmer and more economically friendly climates.
Businesses moved with them. Between 1996 and 2006, according to the ALEC-Laffer report Rich States, Poor States, nonfarm payroll employment in Nevada grew by 52.0%, the highest rate in the U.S. and well above the national average of 13.4%, followed by Arizona (39.7%), Idaho (30.8%), Florida (29.7%), Utah (26.0%), Wyoming (25.1%) and Texas (21.7%). The states with the lowest levels of job growth include such traditional industrial areas as Ohio (2.8%), Illinois (4.3%), Indiana (4.7%) and Michigan which had 0.3% fewer jobs in 2006 than in 1996. When Wyoming’s state government realized they had more jobs than workers, they advertised in Michigan; and so many automotive manufacturing jobs have moved south that the Atlanta division of the Federal Reserve tracks the statistics independently from other industrial sectors.
Representative government trailed along, too. Following the 1990 census, 19 of the 435 seats in the House of Representatives were reapportioned, moving from the Northeastern and Midwestern states to—you guessed it—the South and West, with California, Florida and Texas gaining political clout and New York, Illinois, Michigan, Ohio and Pennsylvania losing it. Another 12 seats followed in 2000 and an additional 14 are projected to shift in 2010 according to POLIDATA.
Work Is Where the Heart Is
Another factor doing cosmetic surgery on U.S. demographics is the explosion of telecommuting and home-based businesses. In 2005 the Census Bureau counted 20.4 million non-employer establishments, mainly one-person or mom-and-pop shops, out of an estimated 149.3 million civilian workers. While it’s certainly possible that some number of these people still hold their day jobs, the most requested form on the IRS website is the W-9, the taxpayer identification form for contractors.
Yet another telling statistic comes from the Department of Labor which in 2004 estimated that 20.7 million people, both employees and the self-employed, regularly perform all or part of their work from home rather than at a centralized worksite. With the wide availability of email, cell phones and teleconferencing, more and more people find they don’t need to live near their employers or clients. While some urban workers are moving downtown to cut their commutes, subdivisions are also springing up in the West Texas desert near Big Bend National Park, as far out of a city as it’s possible to get. (Check e-Bay; it’s for real.)
Falling Behind
Have U.S. economic indicators been left behind in this shifting landscape?
Take Standard & Poor’s Case-Schiller Home Price Index as an example. It’s widely used as a barometer of home values at the national level; however, what it actually does is measure changes in house prices in 20 selected metropolitan areas. These are mainly located in traditional industrial and business centers such as New York City, Washington, D.C., Los Angeles and Chicago, the areas of waning influence in the U.S. economic landscape. Leaving aside the entire issue of an exploding housing bubble, of course these areas are losing value—along with population, jobs, business opportunities and House seats.
So why does Standard & Poor’s, no fools when it comes to analysis, continue to monitor house values in Minneapolis, Cleveland and Detroit while ignoring those in Houston, the fourth largest city in the nation and still growing? Good question.
Or there’s the manufacturing survey, a monthly questionnaire sent to regional CEOs which gives an excellent snapshot of that area’s industrial health and expectations. The press squawked over the poor figures in the recent Empire State Manufacturing Survey when more CEOs reported declining levels of shipments and new orders than those reporting increasing ones. On the survey’s June 16 release date, the U.S. dollar fell against the currencies of Switzerland, Great Britain, Australia, New Zealand, Canada and the Eurozone and crude oil surged to a record price of $139.89 per barrel. But when Federal Reserve branches in Dallas, Richmond and Atlanta all reported more positive results, nobody peeped.
The most significant aspect of any regional indicator is the level of influence it commands within the national and international frameworks. So perhaps our current population of economic indicators should shift their demographic boundaries, too.
By Evelyn Black, on July 7th, 2008
 Most people living in the US are fully aware that we are currently in the middle of a crisis. What kind of crisis is a more slippery sort of topic, but even the most optimistic (read: delusional) pundits tend to agree this crisis has something to do with money, and that it started a couple of years ago when US financial institutions put sanity and common sense aside to write mortgage loans on properties with badly inflated appraised values, for people who couldn’t afford them.
Then, just to make things interesting, all these bad loans were chopped up and repackaged into investment vehicles and sci-fi securities that were traded with such abandon that at some point it became impossible to even figure out who owned the bad debt and who owned the good debt.
Fast forward to July 7, 2008 and what we have now are the two biggest government-backed mortgage lenders, Fannie Mae and Freddie Mac, unable to back up the loans they’ve made with adequate cash. As a result, stocks for each of these major lenders (at this moment) have plunged 18% in a single day.
This free-fall was kicked off when Lehman Brothers announced that a pending accounting change would require both lenders to raise an additional $17 billion. In May, Freddie Mac promised to raise an additional $5.5 billion but has not done so yet. As its stock plummeted today, a Freddie Mac spokesperson declined to comment on its ability to raise funds until second the quarter earnings for the mortgage giant are announced. It’s not likely that the second quarter earnings announcement will be a happy one.
What does all that mean?
It means the economy is in a really, really bad mess and no one knows how to fix it.
Basically, that’s it in a nutshell.
Currently, the US Congress has been locked in a battle to pass some kind of too-little-too-late help for homes in foreclosure, a measure that would almost certainly involve refinancing through Fannie Mae and Freddie Mac for homeowners who qualify for whatever program Congress might eventually pass, once they all quite fighting about it, which will happen, well, who knows when it will happen?
The point is, by the time Congress agrees on a package, it seems clear that neither of these lenders will be in any position to help anyone in any way, least of all themselves. Instantly, the too-little-too-late Congressional measures will become worthless measures, that is, no measures at all. It is what we have come to expect from this Congress (their approval rating is hovering around 17% right now, even lower than the President’s), but it isn’t nearly good enough.
We need bold action on this, and we needed it months ago.
It strikes me that the financial crisis that started with the sub-prime lending mess has gotten rapidly worse for one major reason, and it’s always the same reason, over and over again: Denial. Every month, for months now, we’ve been hearing that the housing mess is finally bottoming out, and then the next thing you know, it’s worse. And not just a little worse either; a lot worse.
When the Federal Reserve took the extraordinary step of brokering a deal so that Chase could buy out Bear Stearns at a fire sale price, the Fed was acknowledging in a backhanded way that this particular US financial crisis is an extraordinary crisis, not just an economic lull. The Fed correctly recognized that the Bear Stearns failure had the potential to freeze up credit markets completely, and that a string of domino-effect bank failures could happen very quickly without the dramatic intervention it made.
And yet, it didn’t take long for Wall Street to lull itself back to sleep and start looking for signs that the worst was already over.
It’s not even close to over. Ordinary people have known this for over a year now, but Washington does not seem to know this. The Fed is out of ammunition and will likely have to start raising interest rates very soon. Not only that, the money it has been loaning financial institutions to get them through this rough patch can’t keep flowing at the rate it is currently flowing, and the Fed knows this. At some point, the Federal Reserve will have to allow some banks to fail: At last count, the FDIC was looking at about 70 of them, mostly large regional commercial banks.
The next big wave of defaults will be on home equity lines of credit and unsecured credit like credit cards; in fact, it’s already starting, with many banks freezing both kinds of lines and cutting way back on availability. Some people who had home equity lines maxed out at 100K or 200K are now being sent letters that their new appraisal gives them a credit line of 30K or 40K, the line is frozen, and by the way, the line is past due too. These aren’t necessarily customers with bad credit, but they are customers who are now facing mounds of debt and no way to get any other loans. So the crisis continues to spread and infect other areas of commercial and personal finance that no one thought about when it all started to go sour.
It seems incredible that with these extraordinary negative developments happening on a daily basis, pundits can still be kicking around the precise meaning of ‘recession’ and ‘Bear market’. It’s as if a hemorrhaging patient arrived in an emergency room, and instead of taking emergency measures to save the patient, the doctors started to debate the exact moment and which the bleeding moved from ordinary heavy bleeding to hemorrhaging, and why. And while the doctors debate this, the patient bleeds out and dies.
I don’t envy Benjamin Bernanke. I don’t want his job. But it would be refreshing to hear at least one know-it-all admit that, well, we’re screwed. I mean, it comes down to that, doesn’t it? The truth is always a good place to start, I think.
If we’d have started with the truth two years ago, we wouldn’t be here.
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