What a difference a year makes (Headlines from the Meltdown)
America’s accountant-in-chief: The United States is bankrupt (streaming videos)
60 Minutes, March 2007
The Real Story, CNN, March 2007
[Cardin comments: What a difference a year makes, at least in today’s world of throwaway news and entertainment with its attention span dwindling to such a vanishingly small point that it verges on instant amnesia. When was the last time you heard any mainstream news source talking about David Walker, the comptroller general of the U.S., the guy who heads up the Government Accountability Office (GAO)? Almost a year ago he and his dire warning about America’s economic future were the subject of a flurry of print and electronic headlines. Now it seems the attention of the Mad Monkey that is contemporary media culture has turned elsewhere. Economic doomsday stories abound but they’re focused mostly on “news of the day,” including the largely ephemeral fluctuations of the stock market.
But Walker’s warning is more substantial than that. In the words of a 60 Minutes broadcast from March 2007 (rebroadcast in July), “When the stock market soars or plunges, everyone pays attention. But short term results aren’t that important to the man you’re about to meet. David Walker thinks the biggest economic peril facing the nation is being ignored, and for nearly two years now he has been traveling the country like an Old Testament prophet, urging people to wake up before its too late.” That peril, in the words of the same story, is a financial overstretch so epic that it threatens the very survival of the United States: “He’s totaled up our government’s income, liabilities, and future obligations and concluded that our current standard of living is unsustainable unless some drastic action is taken. And he’s not alone. It’s been called the ‘dirty little secret everyone in Washington knows’ — a set of financial truths so inconvenient that most elected officials don’t even want to talk about them, which is exactly why David Walker does. . . . As Walker sees it, the survival of the republic is at stake.”
I wrote about Walker here at The Teeming Brain last year, referencing the 60 Minutes story and linking to a Financial Times article that detailed his comparison of the U.S., with its current fiscal overextension and cultural decline, to the late Roman empire. That was six months ago. Today, only a breath but seemingly an eon later, financial news is more focused on consumer spending and the economic poison of the credit derivative market.
Against the current cacophony of these things, it’s worth revisiting Walker’s long-term warning about America’s unsustainable fiscal policies. For those who missed the 60 Minutes broadcast, here it is, in the first of the video windows below. The second is from CNN’s The Real Story, from a program that aired just last month, on January 8. Okay, yes, I was exaggerating just a little bit when I railed a moment ago on the instant amnesia of mass media culture. Some corners of the media world are still bringing Walker and his warning to light. But they’re blessed few in light of the severity of his message. Host Glenn Beck of The Real Story interviewed Walker last month in a segment of that day’s edition titled “Fiscal Tsunami.” Beck began with these words: “If you name any of the real big threats that our nation faces, you are bound to find a large number of respected people who will argue that it’s really no big deal. There is one exception to this, one scenario that we face as a nation that virtually every expert agrees could bring America to its knees. And it ain’t global warming.” You can watch and listen to the rest below. Or, if you prefer, you can read the transcript; the portion about Walker and America’s “fiscal tsunami” begins about halfway through.]
60 Minutes piece about David Walker and America’s long-term fiscal emergency — March 2007:
CNN’s The Real Story: Fiscal Tsunami (interview with David Walker) – January 8, 2008:
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The Economist, Feb. 7
When a British Airways Boeing 777 crash-landed just short of the runway at Heathrow Airport a few weeks ago, there was a lively debate about why its twin engines had suddenly lost power at the same time. People might well ask the same question about the twin engines of America’s credit system — the capital markets and the banks — whose simultaneous misfiring has helped drive the country close to, or into, recession.
….Regulators are getting nervous. In a speech to Florida bankers at the end of January, John Dugan, the Comptroller of the Currency, noted that more than one-third of America’s community banks — and more than three-fifths of Florida’s — have commercial-property loans that are more than three times their capital. And he went on to predict increases in loan-loss reserves and a rise in bank failures. How bad could things get? Gerard Cassidy of RBC Capital Markets estimates that between 50 and 150 banks with assets of up to a couple of billion dollars each could fail in the next couple of years, the highest rate since the savings-and-loan crisis of the late 1980s.
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Reuters, Feb. 9
TOKYO (Reuters) – Financial regulators and central bankers delivered a grim assessment of the credit market upheaval on Saturday, warning that worse may lie ahead as banks tighten lending and an economic slowdown spreads.
In an interim report to the Group of Seven finance ministers, the Financial Stability Forum cautioned against a rush to regulate into this vicious cycle of credit writedowns, preferring to allow markets-based systems to operate.
….FSF President Mario Draghi told a news conference that the next 10 days to two weeks would be crucial to understanding the extent of damage to the financial system as many banks issue their first audited accounts since the crisis started.
Asked about the extent of total exposure to the U.S. sub prime mortgage sector, he replied, “the only thing we know is that it’s big and we keep on discovering new dimensions to it.”
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CoStar Group, Feb. 6
Announcements over the last couple months include Movie Gallery closing another 400 stores; Charming Shoppes closing 150 stores and cutting expansion plans by 50%; Starbucks closing 100 stores and slowing expansion plans by 34%; Ann Taylor shuttering 117 stores and slowing store growth; Boston Market evaluating its real estate opportunities; Buffet Holdings sorting out its underperformers; Sprint Nextel closing 125 stores and 4,000 distribution points; Cost Plus World Market closing 18 stores; Liz Claiborne closing 54 Sigrid Olsen stores; New York & Company axing the Jasmine Sola brand and its 32 stores; Ethan Allen closing 12 stores; PacSun closing all of its 173 demo stores; and Talbots exiting its kids and men’s lines through closure of 78 stores.
Others include Rite Aid exiting Nevada by closing 28 stores; Macy’s closing nine stores; Krispy Kreme expecting many franchisees to close stores; Kirkland’s Home likely closing 130 stores; CompUSA’s remaining 103 stores being disposed of; Rent-A-Center closing 280 stores; Sofa Express closing 44 stores in bankruptcy; 84 Lumber closing 12 stores; Home Depot closings some call centers; Levitz Furniture disposing of 76 stores in bankruptcy; Pep Boys closing 31 stores; Lifetime Brands closing 30 stores; Big A Drugs liquidating its 21 stores; and more.
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The Wall Street Journal, Feb. 8
[Cardin comments: The bulk of this article is behind a paywall. The excerpts below include snippets from the subscriber-only portion.]
Credit-card delinquencies are rising across the nation, a sign that some Americans are at the end of their rope financially. And these mounting delinquencies, in turn, have prompted banks to tighten lending standards, keeping people who have maxed out their cards from finding new sources of credit.
The result could be a sharp pullback in consumer spending that would further weaken the slowing U.S. economy.
….Sinking home prices have made it much harder to convert home equity into cash for living expenses. At the same time, plastic has pushed into every corner of American life, making new inroads that worry some economists and card issuers.
In past economic downturns, Americans used credit cards mainly for discretionary purchases, such as furniture, appliances and jewelry. Now, however, many of them regularly whip out plastic to pay for groceries, gasoline and other everyday necessities. Credit-card issuers won’t disclose exact figures, but they say it is evident that a growing percentage of card volume is for basic purchases. Many issuers even dole out extra rewards for such transactions.
….Indeed, many Americans are so dependent on their credit cards for basic needs that about 25% of the clients walking into Margo Mitchell’s credit-counseling office in Tulsa, Okla., have opted to pay their monthly credit-cards bills before their mortgages. “The credit card is a means for them to supplement their income and becomes a cushion to buy groceries,” she says.
But when recessions hit, consumer borrowing typically drops off substantially as consumers, facing the mounting threat of job losses and lower household income, can no longer keep up with their card payments.
“Many Americans don’t realize the direct correlation between the need to change their behavior and their income,” said Bill Druliner, a credit counselor for GreenPath Inc. “The longer somebody maintains that lifestyle, the bigger the crash is when it finally comes down to earth.”
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Reuters, Feb. 8
[Cardin comments: You may not recognize the significance of this story right away if you haven’t educated yourself on the history of oil economics and America’s global dominance. If this describes you, then just be aware of this: The fact that a senior official with OPEC is talking publicly about abandoning the dollar as the currency to which oil is pegged should be stated in CAPS and BOLDFACE with ***ASTERISKS*** around it for proper emotional effect. Flashing red letters would be nice, too, but I’m not that proficient with HTML. The decision several decades ago to price oil internationally in dollars — which is referenced in the story below — was the crucial economic fact underlying the post-WWII explosion of American material prosperity at home and economic dominance abroad. A shift away from the dollar by OPEC, the world’s largest collective oil producer, would signal the figurative and literal end of an era, with all of the real-world, life-on-the-ground effects that such transitions always involve. We continue to live right in the heart of the Chinese curse; these are very interesting times indeed.]
DUBAI — OPEC may abandon the dollar for pricing oil and adopt the euro but any such switch will “take time”, OPEC Secretary-General Abdullah al-Badri was quoted as saying by a weekly magazine.
A decline in the dollar has eroded oil exporters’ purchasing power, prompting some members of the Organization of the Petroleum Exporting Countries to call for a switch away from the U.S. currency.
Badri’s remarks sent the dollar lower against the euro on Friday.
“Maybe we can price the oil in the euro,” the London-based Middle East Economic Digest (MEED) quoted Badri as saying in an interview. “It can be done, but it will take time.”
….”Badri tells MEED … that the producers’ cartel may switch to the euro within a decade to combat the dollar’s decline,” the magazine said without providing a direct quote about the time frame.
“It took two world wars and more than 50 years for the dollar to become the dominant currency. Now we are seeing another strong currency coming into the, which is the euro,” said Badri, who is Libyan.
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Clusterfuck Nation, Feb. 4
[T]he current bubble in housing remains only fractionally “worked out.” It has a long way to unwind yet, and a lot of damage to do. It will bring down banks, insurance companies, hedge funds, municipal governments, and leave a lot of individuals impoverished, literally out in the cold. As long as trillions in losses remain concealed or unresolved, the basic system for deploying capital will remain paralyzed.
I wonder if fixing all the infrastructure for happy motoring is not an exercise in futility and another layer of tragic misinvestment. After all, it’s based on the assumption that we will still be running huge numbers of cars and trucks decades ahead, and I’m not convinced that this will be possible under any circumstances. The psychology of previous investment will exert a powerful pull to throw money at our highways. It might be more realistic to think of this as a triage process — to ask ourselves how much of this stuff do we just let go of and which parts do we actually keep. Thousands of miles of suburban commercial strip highway six-laners may not be needed at that “level of service.” What becomes of them? Do we run trains down the interstates? Surely, we don’t want our bridges to crumble.
By the same token, I wonder if our investments in alternative energy will prove to be chimerical — things wished and hoped for but impossible to achieve. My own hunch is that our notions of scale are not consistent with what reality will permit in this field. I don’t believe that we will build more than a few giant wind farm installations. Rather, I believe we’ll discover that wind power is only really practical on the household or extremely local basis. Ditto solar. I also doubt that we will continue to get all the necessary exotic metals needed to fabricate the hardware for these things. Along similar lines, I believe our expectations for ethanol and bio-diesel fuel production will prove to be not only disappointing but destructive to the food production sector.
All of which is to say that an investment campaign aimed at sustaining the unsustainable by other means would end in tears. Personally, I don’t think there will be a “next bubble.” I think we’re out of bubbles and that our current mode of life in this nation is running out of time. We’re facing such an array of potential instabilities that even assuming we continue to live in an orderly society may be too much. Like every other activity in our lives, finance, too, may be in for an epochal downscaling.