Interview With Jack Rasmus
Jack Rasmus is professor of economics at St. Mary’s College and Santa Clara University in Northern California. He is a member of the newly formed National Steering Committee of the Workers Emergency Recovery Campaign (WERC). Members of Unity & Independence, an independent trade union newsletter published 6 times a year, interviewed Rasmus this Spring.
U&I: Recently, banks have been saying the banking crisis has "turned the corner" and may even be over. Is it?
Rasmus: No. Quite the contrary. The financial side of the economic crisis is continuing to deepen. All this talk about the banking crisis stabilizing and recovery beginning reminds me of what happened in April 2008, when CEOs of the big banks proclaimed the crisis was over, following the so-called rescue of Bear Stearns in March 2008. Half of those CEOs would be gone, fired, before the end of the year as the crisis intensified and then erupted once again in August-September 2008. Something similar may be happening once again. Just look at the continuing collapse of housing. Foreclosures are still rising. Delinquencies and defaults are increasing. On the residential mortgage side, the problems are spreading from subprime mortgages to the less risky Alt-A and supposedly safest prime mortgages. According to data released recently by Standard & Poors, the business rating agency, almost $300 billion in subprime mortgages are now classified as nonperforming as well as another $225 billion of Alt A mortgages and about $30 billion of prime. In fact, prime mortgages are showing the fastest rise in defaults of the three. RealtyTrac, the real estate reporting service, reported foreclosures up 24 percent compared to the end of last year. Fannie Mae, the U.S. government agency that has bought $800 billion of mortgage loans, reported the largest surge in delinquencies in January since it started keeping data in 1998.
We are starting to see a second wave of residential mortgage problems, as six million workers have been laid off since last October. There’s at least another $500 billion in losses due to home mortgages coming. But two even bigger bombs are just around the corner. One is commercial property losses, just beginning. There’s over $1 trillion more in losses coming there, over 50 percent of which will hit the banks. The second bomb is the securitized consumer loans markets—that’s auto loans, student loans, credit cards, and the like. That’s more than another $1 trillion. All this is going to hit the banks 6 to 12 months from now and tear an even larger hole in their balance sheets than subprimes did. Another growing problem involves losses in the defined benefit pension plans which, on average, have lost more than a third of their value.
We’re hearing from the capitalist press that bank stocks are rising, along with the stock market in general. How is that possible, given the scenario you just presented?
It’s what they call a classic bear market rally. Some of the banks are reporting profits. Not surprising, since the Federal Reserve is giving them free money at 0.25 percent interest and they’re continuing to loan at 5 to 8 percent for mortgages and to companies at rates as high as 20 percent. The Fed and U.S. Treasury have pumped $4 trillion into them since last September and Fed-Treasury has announced they will provide another $8 trillion. That’s $12 trillion committed to the banks and other financial institutions. Compare that to only $27 billion this year for jobs in Obama’s economic stimulus package. The banks’ newfound profitability is also being boosted by allowing them to falsely report the value of assets on their books. This is part of the "mark to market" accounting issue. Up until early April, banks had to report the total losses on their securitized loans, most of which had fallen to ten cents on the dollar. That’s called mark to market pricing. But then Congress allowed them to suspend mark to market accounting. Now the government is allowing them to falsely report assets on their balance sheets at 90-95 cents on the dollar vs. the real market value of those assets. No wonder they suddenly appear profitable. But it’s a false, engineered profitability. It’s all part of an orchestrated joint effort by the government and the banks to make it appear as if the financial crisis is now stabilizing, which it isn’t.
What’s behind big banks announcing they want to pay back the cash the government gave them under TARP?
Under TARP, then Treasury Secretary Paulson found out he couldn’t buy the bad assets from the banks because they refused to sell them to him at their true (low) market prices. Paulson said the sky would fall without the $700 billion with which to buy their bad assets to get credit moving again. But when the banks refused to sell the bad assets to the government at anything but bloated prices, Paulson had to show he was doing something. So he threw $250 billion to his big 10 banking buddies, including JP Morgan and Goldman Sachs. With it came certain reporting requirements and limits on executive pay. Now they want to get out from under that government inspection possibility (still not being enforced adequately). They also want to give themselves big bonuses again. It’s interesting, isn’t it, that Goldman Sachs recently reported it had $164 billion in cash on hand. It either took taxpayer money under TARP it didn’t need or else it is now lying about having $164 billion. Ditto for the other big banks. Why should the banks want to take government money with strings attached, when they can get unlimited free money at zero interest from the Federal Reserve?
The government says the bailout is working. Is it?
After Geithner announced the latest bailout, the banks and private investors lobbied hard for changes. Some key changes in the government plan were made. First of all, any zero interest loans that investors get from the government are now considered "non recourse." That means if they buy up bad assets and the prices of those assets fall again, then they, the investors (which include private hedge funds, private equity firms, and the like) don’t have to pay back the loans to the government. Nice deal, isn’t it? That’s to get the investors to buy up the bad securitized assets on banks balance sheets. Those are the packaged securities with subprimes, student and auto loans, and the like bundled in them that are now worth only around ten cents on the dollar. It’s a hidden way to make the taxpayer pay for the almost certain losses without having to go to Congress and get the money, like they did with TARP. The money for the non recourse loans for investors will come from the Federal Reserve, which doesn’t have to go to Congress. The Fed will simply print the money for the loans.
For the non-securitized loans held by the banks the problem is a little different. These are a different kind of loan which banks get to keep on their books at over-inflated value, say around 98 cents on the dollar, when the loans are actually worth 50 cents. The banks don’t want to sell these at 50 cents because they’ll have to record 48 cents of losses. So the government will make up the other 48 cents for them. This money will come from the FDIC (the Federal Deposit Insurance Corp). Most of the FDIC’s money will eventually come from the Fed as well. So that’s how Geithner and Obama plan to do an end run and give trillions more to the banks without having to appear to go to Congress and ask for it directly. It’s a shell game. A more clever version of the TARP. Even so, it appears investors are balking. They only want to cherry pick the loans they can make the most profit on. They’ll leave most of the securitized loans in the banks.
What about Obama’s Housing Affordability Act?
That’s a program designed to subsidize the home builders who haven’t been able to sell their inventory of new homes still on the market, as well as subsidize the mortgage lenders and mortgage servicers. Eighty percent of the mortgage servicing, by the way, is done by the five largest banks. Little of that $275 billion is earmarked to help the 5-7 million expected to go into foreclosure over the next few years. It’s mostly going to subsidize lenders to get them to lower mortgage rates for new buyers looking to buy up the foreclosures and unsold inventory. Modifying principal and interest payments are still largely voluntary by the lenders. There is a provision in the law that would allow a court to enforce a mortgage modification. That’s called the cramdown provision. But the banks and lenders are lobbying aggressively to prevent that provision.
There’s a lot of talk in the press and from government officials that the real economy is showing green shoots of recovery. What’s your take on all that?
Those green shoots are really weeds and crabgrass. It happened last spring when the government passed a $165 billion stimulus package. This year’s package is a similar $180 billion, about the same in an economy much worse. It will have the same kind of temporary, tepid effect. Unlike the banking sector, which at least can claim a false appearance of phony bank profits, there isn’t even that for the real economy. We have been running job losses of about a million a month, when properly calculated, since last November. We are around 15 million unemployed now. Last December I predicted 20 million jobless by the end of 2009 and we are well on track, and may even exceed that number. That’s the key problem right now. You can’t get any kind of economic recovery with that kind of continuing job loss. In fact, it’s a job loss rate that, at even the official 600,000 a month, tracks almost exactly with what happened in 1929-1930. If the true losses are calculated, we are losing jobs today at a rate even faster than 1929-1930.
The job losses are causing a collapse in consumption, which makes up 70 percent of the U.S. economy. Consumers are also cutting back because of foreclosures, home equity values falling, fears of job loss even if they still have one, worries about their 401ks collapsing further, tighter credit terms from the banks, credit card rate balances rising to 29.99 percent. All these factors will cause further collapse of consumption that in turn will exacerbate the mortgage market problems as well as provoke the crisis in the consumer loan markets (autos, student, credit cards).
Meanwhile, to make matters worse, world trade is in freefall and export sales are plummeting. State and local governments are raising fees and taxes while cutting jobs and services. Business capital spending is down 40 percent. Moody’s business research is predicting a tripling of the corporate default rate from around the current 5 percent to more than 15 percent. This is not a scenario even close to recovery.
Are we in a depression yet?
We are not yet in a depression, but we’re headed there—fast. Don’t forget, the depression of the 1930s was accompanied by unemployment of 25 percent, 30-40 percent if farm labor is included. Production fell nearly 50 percent. Prices fell 50-70 percent. The stock market plummeted 90 percent. The important thing about the Great Depression is that the steep declines of 1929-1934 were associated with a series of four banking crises. In between the banking crises were deepening unemployment, business defaults, collapsing consumption, and falling prices. Roosevelt’s second New Deal of 1935-37 didn’t end the Depression, it only stopped it from falling further. When business interests forced the beginning of the dismantling of the New Deal in 1937, the economy quickly fell back into depression in 1938 and continued to stagnate thereafter. It wasn’t until 1942 that the full recovery occurred. That’s World War II. But it’s important to know that it wasn’t simply spending on bullets and guns that ended the Depression, it was massive government spending on infrastructure, buildings, new factories and such, all financed by the government and taxpayer. That is what ended the Depression. What kept it from coming back in 1945 was the massive shift in income to workers during the war.
Here’s two facts that should not be overlooked. First, in 1929 the wealthiest 1 percent of households had 22 percent of all income. By 1945, they had only 8 percent. Their share remained at that level until the late 1970s and then accelerated again. By 2006 the richest 1 percent were back up to 22 percent. In other words, massive shifts in the distribution of income are directly related to depressions. We won’t prevent a depression unless we can re-shift income once again, from investors and bankers back to workers and their families. That will take not only a massive jobs creation program, but longer-term programs that re-shift income as well. By longer term, I mean programs like single payer universal health care and the creation of a national retirement pool that guarantees everyone a decent livable retirement.
We must re-unionize the economy. That’s why the Employee Free Choice Act (EFCA) is key. Not only because it is a just thing to do, but because unions play a key historic role in ensuring more equitable distribution of income. It’s not by accident that the unionization of the economy had fallen to less than 9 percent in 1929 and consumption collapsed so badly and fast in the 1930s. If the workforce were today at the 22 percent union rate in 1980, it would mean 15 million more members in unions. That’s 15 million making 25 percent more income a year. That’s a trillion dollars a year in spending power. EFCA, single payer health care, and retirement reform are keys to avoiding a depression.
Also essential is the shift of government public investment in the economy. In 1929 the government was only 3 percent of the economy. A rise in government spending to 20 percent in 1935 only checked the Depression’s fall but did not ensure recovery. Today, government spending is only 20 percent. We need to increase public investment to 40 percent, the level of spending in 1942. That’s what ended the Depression. That does not mean war spending. I’m talking about job-intensive public investment in health care, education, alternative energy, public services, and the like.
You published a recovery program earlier this year. What are some of the major provisions in that plan?
My program calls for spending $1 trillion immediately on job retention and creation, to create 20 million jobs at $50K per job. Second, we must stop the collapse of housing and foreclosures driving that collapse. My program calls for a full nationalization of the residential mortgage and small business property markets. Not a bailout, but a nationalization putting the markets under full government financial and operational control. The program calls as well for nationalizing the consumer credit markets—the auto and student loan markets in particular. I envision a phased deepening of the nationalization of the banking sector. A new banking structure where banking is just another regulated utility, at least the consumer side of that sector. We will also have to fully nationalize the Federal Reserve System, which is too influenced by the banks. This was only partially done in the 1930s.
In addition, the program calls for a longer run redistribution of income by instituting single payer health care, a new national pension pool, passing the EFCA, and a re-unionization of the economy. It also reinstitutes Regulation Q, which was repealed in the 1970s, which puts a single digit ceiling on credit card rates. To help pay for all this, the plan requires the repatriation of the $4-$6 trillion stuffed by wealthy U.S. investors, hedge funds, and corporations in 27 offshore tax havens, which is costing at least $500 billion a year in lost tax revenue. Refusal to put their money back in the U.S. would result in fines every 90 days plus potential criminal violations by repeat refusers. A major restructuring of the tax system is also part of the program, primarily in the form of rolling back capital gains, dividends, inheritance, foreign profits, and other capital incomes taxes to their 1979 levels. Finally, the program calls for the payroll tax to be levied on all forms of incomes, not just wages, at the current tax rate. And a value added tax on all intermediate goods to fund a national retirement pool.
What are some of your predictions for the coming years?
The economy will continue to deteriorate and job losses will rise to 20 million by year end. Home prices will fall another 20 percent, in addition to the roughly 25 percent so far. The Obama-Geithner PIPP-TALF-HASP bank bailout program will produce few and insufficient results. As a consequence, there will be renewed discussion and debate on what form bank nationalization should take. There will be a second economic stimulus bill before the end of the year. Business and consumer defaults will rise precipitously and become more obvious in the news, in particular commercial property defaults and consumer auto-student loan defaults. General Motors will be allowed to enter Chapter 11 and autoworkers will lose their defined benefit pensions. Global economies will continue to weaken, especially Japan, the UK, and Spain. Eastern European countries will be severely impacted, provoking banking problems elsewhere in Europe. Foreign buyers of U.S. bonds—including China—will cut back their purchases, forcing the Federal Reserve to print more money to cover deficits from the bank bailouts. That will set in motion a decline of the dollar as a global currency.