San José, CA – On June 9, Spain and the European Union made an agreement to bail out Spain’s troubled banking sector. This agreement means Spain is the fourth country (along with Portugal, Ireland and Greece) in the eurozone to have to take a bailout.

The agreement will provide up to 100 billion euros ($125 billion) in loans to Spain’s bank bail-out fund, the FROB (Fund for Orderly Bank Restructuring). The agreement with the European Union was triggered by Spain’s third largest bank, Bankia SA, which needed a 19 billion Euro ($24 billion) bailout. But the FROB had only 9 billion euros, after three earlier rounds of bailouts of Spanish banks. The Spanish government, which would normally sell bonds to borrow money to bail out banks, was having a harder and harder time selling its own bonds.

Spain’s banks have billions of euros of bad real estate loans because of the boom and bust in the Spanish housing market. Spain’s housing boom was almost twice as large as the one in the United States, with construction spending accounting for about 10% of Spain’s Gross Domestic Product (GDP, the total spending on goods and service made in Spain), vs. 6% in the U.S.

Here in the U.S., big businesses have been able to bounce back from the financial crisis caused by the boom and bust in U.S. housing. This was aided by the U.S. central bank, the Federal Reserve, which printed some $2 trillion in money to buy financial assets, while the U.S. government spent another $800 billion on a bank bailout.

But Spain does not have the power to print money since it adopted the euro; rather this power lies with the European Central Bank or ECB. Spain’s government is also limited in its ability to borrow and spend money since its government bonds are not backed by the ECB.

As a result, while unemployment in the U.S. peaked at 10% and has since dropped to almost 8%, the unemployment rate in Spain has increased to almost 25% and is still rising. Over half the young people in Spain do not have jobs.

Spain actually had a small federal government budget surplus during its housing boom (with tax revenues greater than spending by 0.3% of GDP from 2000-2007). However the government budget deficit swelled to 12% of Spanish GDP in the aftermath of the 2008 financial crisis and deep recession in Europe that went hand-in-hand with Spain’s housing bust.

The Spanish government, first led by the social-democratic Spanish Socialist Workers Party (PSOE), and now by the conservative People’s Party, has instituted deep spending cuts and tax increases that have reduced the budget deficit from 12% to 9% of Spanish GDP. But this austerity has also led Spain into another deep recession, even before it had recovered from the 2008-2009 economic downturn.

These back-to-back recessions have dragged down the Spanish housing market, leading to even more losses at Spanish banks, which made a lot of loans during the boom times. Then in December of 2011, and again in February of this year, the European Central Bank made one trillion Euros (about $1.3 trillion) of long-term (three year) loans to Spanish and other European banks. But Spanish banks have already burned through almost all of this money in order to pay depositors withdrawing their money, and the rest, almost 40%, going to buy Spanish government bonds.

As the Spanish government had a harder time borrowing, the price of Spanish government bonds fell, causing even more losses among Spanish banks. Thus there is a need for another round of bank bailouts, to be paid for by the 100 billion euro E.U. loan.

While the bailout does put off an immediate Spanish banking crisis, it adds more European supervision to Spanish banks. This could worsen the Spanish depression if Spanish banks are forced to limit loans or even shut down to make the remaining banks more profitable. Spain’s unemployment rate is already close to 25%, the highest in the Euro-zone, and even higher than Greece’s unemployment rate. Industrial production (the goods produced by factories, mines, and refineries) in Spain has fallen 8.3% over the past year.

While the Spanish bailout does not have the severe austerity measures of tax increases and government spending cuts that have been imposed on the Greek, Irish and Portuguese people, it will make it harder for the Spanish government to borrow in the future. The EU bailout loan will be ‘senior’ to other Spanish government debts, meaning that the EU must be paid back before other owners of Spanish government bonds. This will make it harder for the Spanish government to sell bonds in the future.

On June 11, prices for Spanish bonds fell and their interest rate rose to more than 6.4% on a ten-year bond (in contrast, U.S. government ten-year bonds had an interest rate of only 1.6% on June 11). This increases the odds that the Spanish government itself may need a bailout or end up being forced out of the eurozone.

#SanJoséCA #Unemployment #Depression #Europe #capitalistCrisis #bankBailout #EuropeanUnion #Spain

While the pace of layoffs has slowed from earlier in the year, the unemployed are finding it harder and harder to land new jobs. The average time out of work continues to rise, hitting more than 5 months in April. The number of workers collecting unemployment insurance benefits set a new record in April, at 8.5 million, almost three times the level of a year earlier. The number of people on the Federal Food Stamp program is also at a record high, with more than 32 million, or 10.6%, of the population getting food aid.

While jobs and income losses mount, home prices continue to fall. The price of homes has fallen 30% since the peak in mid-2006 as of February. This drop in price has led to more than one-quarter of homeowners being ‘underwater’ with mortgages greater than the value of their home during the first three months of 2009. One of the worst hit areas is in California’s central valley, where housing prices in Modesto and Stockton have fallen an eye-popping 50%.

Many banks had temporarily stopped foreclosure proceedings through March but are now ramping up their foreclosure efforts. These foreclosures are not only hitting neighborhoods that are mainly oppressed nationality, but also more and more renters who are being evicted when their landlords are foreclosed. Even apartment renters are being hit as former homeowners are competing for a place to live, keeping rents up even with the rising unemployment.

This situation is bound to increase the number of homeless people even as a record number of homes stand empty. During the first three months of 2009, 15% of houses were vacant, or more than 19 million homes. The situation has gotten so bad that one bank demolished new homes in Victorville, a city near Los Angeles, California, that it had foreclosed on – rather than trying to sell them.

In the past, many households could borrow against their homes to tide them over rough economic times. But with unemployment up and housing prices in their deepest fall since the Great Depression, household bankruptcies are soaring. In April, more than 125,000 individuals filed for bankruptcies, up 36% from a year ago. There could be as many as 1.6 million bankruptcy filings this year, almost three times the number of 2006 when filings plunged due to the bank-backed new law that made declaring bankruptcy much harder.

State and local governments are also being squeezed by the economic crisis. 47 of 50 states have budget deficits, totaling more than $100 billion for fiscal year 2009, which comes to more than 15% of their budgets. Despite raising taxes and cutting spending, California and many other states face growing deficits as the economy continues to deteriorate.

These budget cuts and tax increases are hitting working people both directly and indirectly. Here in California, state employees (except for prison guards, who make up two-thirds of state workers) were forced to take two days a month off without pay, which is almost a 10% cut in pay. States across the country are cutting health care spending for low-income families, even as more and more people are losing their health insurance due to job losses. Medicaid and the State Children’s Health Insurance Program or SCHIP are both under the gun, along with Temporary Aid to Needy Family (TANF or welfare) and other social service programs.

Local governments and schools are at the beginning of belt-tightening as property tax revenues fall along with housing prices and cuts in state aid. In March, some 25,000 public school teachers in California received early notification of possible layoffs for the fall. State universities and colleges are raising fees and cutting admissions to cope with budget cuts.

Despite the rising unemployment and bankruptcies along with falling home prices, Wall Street, the corporate-controlled media and many politicians are saying that the economy is bottoming out. They say that since the economy is getting worse at a slower pace, a turnaround is in the near future.

One problem with this rosy view is that corporations, weighed down with huge amounts of debt, are in trouble. Business bankruptcies are on the rise as more than 43,000 businesses declared bankruptcy in 2008, 54% more than in 2007. In April, Chrysler Corporation filed for bankruptcy, as the economic downturn, financial crisis and mismanagement finally sunk one of Detroit’s Big Three despite billions of dollars of federal government aid. As auto manufacturers close plants and shed jobs, there is a multiplier effect on parts suppliers and dealers.

Others base their optimism on the huge government stimulus package. But while the Obama administration program does provide some help for the unemployed, schools and transportation, a far larger amount has been spent on bailing out banks and other financial institutions. These same banks continue to cut back on lending that households and businesses need. In contrast, the federal government’s aid to General Motors and Chrysler is conditioned on even more factory and dealer closings that will cut – not create – jobs.

Even if the end of the recession is not far off, it will be marked by growth in the economy and corporate profits, not jobs. Many jobs in auto are gone for good as plants and dealers shut down. With millions of empty homes, construction jobs will not reach the peaks of the last housing boom. The FIRE (Finance, Insurance, and Real Estate) industries were among the fastest growing before the recession when the economy was piling on more and more debt, but no more. In the last two recessions in 2001 and 1991, job losses continued for up to two years after the recession ended.

But the people’s fight back against the crisis is growing. Workers and progressive people across the country rallied to support the Chicago Republic Window Workers and their union, United Electrical, Radio, and Machine Workers (UE) Local 1110 in their struggle against the shutdown of their plant by Bank of America. In Minneapolis, Minnesota, the People’s Bailout Coalition is fighting foreclosures and pushing for a people’s bailout bill in the state legislature by uniting labor, community and student organizations. In North Carolina, students, campus workers, and faculty protested the budget cuts at the University of North Carolina’s Board of Trustee meetings – just one of a growing number of fight backs against cuts in public education.

While most struggles are small and locally based, there is a growing anger at big bankers and big business who brought on the crisis. To add insult to injury, many of them are being rewarded with obscene bonuses, high salaries and tax cuts while the suffering of working people, and in particular in oppressed nationalities such as African Americans and Latinos, deepens. Time will tell that there is no recovery in sight for working people and that our real hope lies is organization and struggle, not the Democrats or Republicans in Washington D.C.

#SanJoseCA #Analysis #Depression #capitalistCrisis #recession

In the six months since the financial crisis exploded with the collapse of New York investment bank Lehman Brothers, the world economy has been gripped by the greatest economic crisis since the Great Depression of the 1930s. U.S. and European banks have admitted a trillion dollars in losses, while the banking system of Iceland totally collapsed. Almost all of the major economies of the world, with the exception of China, have started to contract, with millions of workers losing their jobs and businesses going bankrupt right and left. Hardest hit for now are the new capitalist economies of eastern Europe, who are being slammed by their dependence on borrowing from foreign bankers, falling exports and plunging currencies.

Here in the United States, the news is grim. The housing market continues to fall, with prices down more than 20% and new housing starts off a staggering 80% from the peak in January 2006. Monthly job losses continue to climb, with more than four million jobs lost since the recession began, most of those in the last four months. The unemployment rate in January was 7.6%, up from 4.7% before the recession began. A growing number of big corporations like Circuit City have given up the ghost and liquidated, while hundreds and thousands of smaller businesses are going under. State and local governments are raising taxes and cutting services, adding to the woes of working people.

The financial crisis continues despite the U.S. Federal Reserve Bank lending some $1.5 trillion, and the Federal government pumping hundreds of billions more into ailing financial companies. The companies given the most government aid, from insurance giant American International Group (AIG), to the former world’s largest bank, Citigroup, have had to come back for a second round of bailout money and will need a third round soon. Bank losses continue to rack up as unemployment and business bankruptcies climb, and may come to $2 or $3 trillion more.

As the recession and financial crisis tighten their grip on the economy, the U.S. and other governments are desperately trying to turn the tide. With U.S. interest rates lowered to almost zero, and trillions of dollars of financial aid to big banks unable to stem the crisis, there is talk of ‘nationalization’ of some banks, a stunning turnaround for a system wedded to deregulation just two years ago. There are also early signs that the Federal Reserve has had to crank up their electronic printing presses to pump more money into the economy, an act of desperation that could lead to much higher inflation down the road.

A $790 billion economic stimulus package was signed into law in February. But despite the big numbers, the actual impact will be at best to take the edge off the recession. $90 billion will go to household making six-digit incomes. Much of the rest of the tax cuts and new spending will be largely offset by tax increases and budget cuts by state and local governments. Working people will benefit from more money for unemployment benefits, health insurance and schools. But even the optimist official forecast is for two more years of unemployment even higher than it is today.

Another problem is that the government’s attempts to make businesses profitable again can actually hurt the economy. The bank bailout last October let banks collect interest on the money that they stash away with the Federal Reserve. Previously, these ‘reserves’ paid no interest, giving banks an incentive to lend. But now banks can make a profit by not lending, and hundreds of billions of dollars are piling up in banks even as small businesses and working people are starved for credit.

The fundamental problem is that there is a crisis of overproduction. Big businesses can produce more than people can buy. At some point, enough businesses will be closed that the others will become profitable and the economy and profits will start to grow again. Mainstream economists say that this will happen later this year, assuming that no other crisis erupts – and this is a big if! But even if and when the economy begins to grow, there will be little relief for working people.

Take, for example, the auto industry. All around the world, car companies can produce millions more cars than they can sell. The U.S. government has given billions of dollars in loans to General Motors and Chrysler, and is considering more aid for them, their parts suppliers and auto finance companies. But these loans have the goal of a ‘viable’ industry, which means even more plant closings, layoffs, and wage and benefit cuts. When enough plants will be closed the companies will be profitable at a lower level of sales. But what about the hundreds of thousands of auto, auto parts and auto dealer workers who have lost their jobs? What about the tens of thousands of retirees whose benefits have been slashed? These jobs and benefits are not coming back.

This is why we need to fight back. We need to follow the example of the Chicago Republic workers who wouldn’t let Bank of America shut the company down and lay off all the workers without a fight. In Minnesota, welfare rights, labor, student and other community groups have formed a People’s Bailout Coalition to make the rich pay and to protect the interests of working people. In California, high schools students have walked out of class to protest budget cuts.

Looking towards the future, we need to reject capitalism and fight for socialism. Is all that we can hope for is a return to what existed before the crisis? A return to a capitalist economy where millions go without health insurance even when the economy is growing? An economy where working peoples’ incomes fall in the long run while the rich get richer? An economy where we have to go up to our necks in debt to make ends meet while always having to worry where the next paycheck is coming from? An economy that is drained by one or more wars thousands of miles away to protect the interests of big oil? An economy where more than forty years after the civil rights act, African American, Latinos and women still earn less than whites and men? We can do better.

Working and oppressed people need a socialist system where political power is in the hands of the working class and the economy serves the people.

So as we fight for our needs and rights today, we should educate and organize for a socialist government and economy that will benefit us, and not Wall Street and big business.

#UnitedStates #Commentary #EconomicCrisis #Depression #Socialism #Editorials

San José, CA – On Jan. 7, the Congressional Budget Office (CBO) estimated that the federal budget deficit for this fiscal year (October 2008 to September 2009) would be $1.2 trillion. But the CBO estimate only counted the $68 billion approved for the wars in Iraq and Afghanistan, when they actually cost more than $186 billion in 2008. Given that the wars will cost at least another $100 billion, the federal budget deficit will be $1.3 trillion, or even more if the economy worsens more than expected. This estimated deficit is almost 10% of the Gross Domestic Product (GDP), which measures the value of all the goods and services* produced in the United States in a year, and would be the biggest deficit since World War II.

In addition, the Obama administration’s economic stimulus package will cost $800 billion or more over the next two years. Assuming at least $300 billion will be spent this fiscal year, the total federal budget deficit will be about $1.6 trillion, or about 12% of GDP. Obama’s economic advisors released a report on Jan. 10 estimating that their economic stimulus plan could create more than 3.5 million jobs.

Republicans and conservative Democrats are starting to complain about the size of the deficit. However this is pure hypocrisy, as they helped to double the federal government debt, borrowing some $5 trillion under the Bush presidency. When the deficits went to tax cuts for the wealthy, the invasion and occupation of Afghanistan and Iraq, or lending to banks it was not an issue. But now that there is talk about spending money on the unemployed, helping homeowners and creating jobs, the deficit is all of sudden a ‘big concern.’

This is the real question facing the United States: Will all this government spending work? Mainstream economists from the conservative Martin Feldstein, who served the Reagan administration, to liberal Paul Krugman, who has been a fierce critic of the Bush administration, have backed a huge increase in federal government deficit spending to try to stem the recession. These economists are taking up the ideas of John Maynard Keynes. Keynes argued during the Great Depression of the 1930s that there could be a “liquidity trap” where banks refuse to lend. This would make the monetary policy of trying to lower interest rates ineffective. Keynes said that the government must borrow and spend to get the economy going again. The economy today is caught in a vise between a deepening recession and a growing financial crisis, just as in the 1930s. With the free market economics of the last 30 years buried under the collapse of big banks, many are calling for a Keynesian economic policy.

Following the economic crisis of the 1970s the United States turned to what was known as ‘Reaganomics’ – with tax cuts for the rich (and tax increases for the working class in the form of higher social security taxes), deregulation of industry (laying the basis for first the savings and loan crisis of the late 1980s and then today’s financial crisis), anti-union policies and the offshoring of jobs to other countries. This restored corporate profits and economic growth, as the rich grew richer and the poor grew poorer, while the working class and even many professionals went deeper and deeper into debt to make up for the lack of wage increases. Businesses and the government also went on a borrowing binge, driving total debt from 1.4 the size of GDP in 1977 to 2.25 times the size of GDP in 2007. This big increase in debt was led by the financial sector, whose debt has increased five times faster than the growth of the economy during this time.

This borrowing binge allowed workers to buy more when their wages saw little or no growth (adjusted for inflation). It also provided a profitable outlet for the extra profits that the capitalists were making. However it did not prevent a growing overcapacity, where industry can produce more cars, homes and other goods and services than can be sold. The financial crisis that exploded last year has led to ‘deleveraging’ of many households, who are cutting back on borrowing and starting to pay down their debts. Businesses are also borrowing less, while financial debt is declining sharply due to defaults on loans and banks refusing to lend. This has led to the worst crisis of overproduction since the Great Depression.

Only the federal government has stepped up borrowing, lending and spending to try to prevent the economy from going into free fall. The problem is that a capitalist economy cannot keep going forever based only on more federal government borrowing and spending. When the Japanese stock and real estate markets crashed in the 1990s, the result was years of economic stagnation. The Japanese government has run huge deficits (relative to the size of their economy) for many years since then. The problem in Japan was not the large size of the deficits, nor the resulting increase in government debt, but rather that the huge increase in government spending was not able to get the economy moving again. Even coupled with interest rates that have been less than one percent since 1995, the Japanese economy never was able to get back to steady economic growth. The only sector that had done well was exports, which are now falling due to the worldwide recession.

The United States is now following the same policy as in Japan. But if government deficit spending didn’t work in Japan, why should it work in the United States today? This is particularly true for the U.S. government, which has had to borrow 75-100% of past deficits from investors, insurance companies, pension funds and banks in other countries. In contrast, Japan has a higher savings rate, which makes their government able to borrow at home. At some point the rest of the world could cut back on purchases of U.S. government bonds, leading to higher interest rates and more economic pain in the United States. The only other option would be for the U.S. Federal Reserve to print more money to buy U.S. government bonds, putting the value of the U.S. dollar at risk and possibly leading to much higher inflation.

Many are comparing Obama’s economic stimulus with the Depression-era New Deal. The New Deal started many government programs that helped working people, such as Social Security, unemployment insurance and welfare. However it was not able to reduce unemployment back to pre-Depression levels. More government spending – for the unemployed, homeowners facing foreclosure and jobless workers – will help people, but won’t cure the economy. The economy faces a bleak future of continued high unemployment and/or the threat of higher inflation. Even the Obama economic team admits that with the economic stimulus, unemployment will remain above 7% for two more years! What is needed is an economy not based on private profit – a socialist system that would serve the interest of working people.

*GDP only counts final goods and services, for example the value of a book printed in the United States, and not the value of the paper that went into the book, or the trees that went into the paper, in order to avoid double and triple counting.

#SanJoséCA #Analysis #EconomicCrisis #FederalDeficit #Depression #NewDeal