This is a rough write-up of an interview I did with an economist/trader for a Collegian article. Most of this is not showing up in the article, but I thought it was pretty valuable. Economics is a very tough game, and economists usually disagree, so I don’t expect you to necessarily agree with or understand anything below.
Hugo Chavez, a vocal opponent of the Bush administration, urged his Latin American allies last Saturday to begin pulling out billions of dollars from U.S. banks in light of the recent economic crises, according to The Associated Press.
Chavez, presenting at the summit of the Bolivarian Alternative for the Nations of Our America, put a voice to thoughts running through the minds of many political leaders around the world — the U.S. economy is not only tumbling; we’re possibly in a recession.
The U.S. economy is facing stiff shocks to the economy; most recently with the sub-prime mortgage crisis, the rising costs of oil and natural gas, the continued decline of of the U.S. dollar’s value, and agricultural goods that grew as much as 50 percent over a one-year period.
Throw a war on top of all that, and economists are debating if the economy is in a recession, and if so, when we will recover.
One professional currency trader said the recession is not just a possibility, but that it has already arrived, and it may be the after-shock of the greatest tragedy in modern American history: the terrorist attacks of Sept. 11, 2001.
“We are well past the line of recession … there’s no doubt in my mind that we’ve been in recession for some time,” said Chicago-based trader Tim Morge. “This is the first time in 40 years that we’ve had a decline in housing prices — and that’s as long as we’ve been keeping records.”
Morge, who has 35 years of trading experience in billions of dollars, said current U.S. economic problems lay mostly at the feet of a patriotic man who was formerly at the helm of the Federal Reserve Bank, the U.S.’s central banking system: Alan Greenspan
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“Greenspan relaxed all of the lending regulations [after 9/11] and printed money like there was no tomorrow,” Morge said. “I think he thought he was the economic savior of America, showing the rest of the world that we were still strong … he was wrong, but he was being patriotic.”
Morge said a combination of politicians ebbing away at anti-trust policies during former President Bill Clinton’s administration, as well as bravado on the part of Greenspan, led to the sub-prime mortgage crisis, which many economists say has spurred the decline of the U.S. economy, if not a full-blown recession.
But the buck doesn’t stop there.
For the past three years, banks were giving interest-only mortgage loans at up to 125 percent of the appraised value of the house. When the value of the houses began to fall, millions of Americans were left with loans they could neither afford nor pay.
A bank like Citi Bank is probably holding $50 to $60 billion of these types of loans, Morge said. He estimates that 3 of the 5 major US banks will go “belly up” in 2008.
Banks, such as Citi, would bundle the loans, and in turn sell them to investment banks and hedge funds for a premium, who Morge labeled as “the greater fools.”
The problem, however, was much larger than the sub-prime mortgage, Morge said.
For the past two years, the Chinese have been selling billions of dollars of U.S. debt in the form of treasury bonds and treasury bills. In effect, a foreign central bank such as China can “own” the U.S. debt when the U.S. government releases treasure bonds and treasury bills, which are basically ‘I.O.U.’s’ in which the government makes promises, or debt, in return for money up front.
“The Chinese were the first ones to step up to the plate and say ‘having all of our money in America is not a good thing,’ ” he said. “We had $5 or $6 trillion in debt, all issued in bonds and bills.”
As the Chinese central bank disinvested — or took their money out — of the U.S. economy, many nations were soon to follow, Morge said.
This disinvestment is helping to drive down the value of the U.S. dollar, as the Euro, British Pound, Canadian Loony and a host of other currencies’ values climb versus the dollar.
“Our interest rates are going down, all of Europe’s central banks said ‘we’re not going to lower rates with you,’ and their interest rates are going up,” Morge said. “China, in the next 3 to 6 months, will float currency and start raising their interest rates — and the demand for U.S. money will only decline.”
The interest rates to which Morge is referring are the federal funds rate, or the rate at which banks lend federal funds at the Federal Reserve to other banks, usually overnight. The Chairman of the Federal Reserve, who, since October 2005, has been Ben Bernanke, uses the rate to try to regulate the money supply in the U.S. — something most students learn in ECON 004 (Introductory Macroeconomic Analysis and Policy).
This past Tuesday, Jan. 22, Bernanke lowered the rate .75, the largest cut in US history, and he is expected to cut the rate again Wednesday.
Morge said that the interest rate cuts, as well as the economic stimulus package totaled at $150 billion announced by the President a few days ago, are not only too little — they are much too late.
“The economic stimulus means nothing — CitiBank and Bank of America are writing off more than the stimulus package is going to be. And in reality, Bernanke knows that he’s sitting on 17 percent to 18 percent inflation … maybe as high as 20 percent,” he said. (The official number released by the Bureau of Labor and Statistics is 4.1%, but Morge, who worked for the Bureau in the past, said they “blatantly lie,” to try to assuage the fears of the American people.)
Morge said that Bernanke, along with the treasury department, Congress, and the Bush administration, want the American public to feel good, but that the “tax credits” won’t have any affect.
Combine rising prices of oil, agricultural goods, copper and steel — due to the rocketing demand in China and India — and Morge said we’re sitting on a time bomb, and we’re “due for a reckoning.”
“Eighty-five percent of all industrial cranes are in China now for their various construction needs and from the middle of 2006 to 2007, auto sales in China grew six-hundred percent, in comparison with the U.S. growing at 4 percent,” he said.
“How can you compete with that?” Morge rhetorically asked.
Not all is lost he said, but the battle for the presidency of the United States will be certainly affected — no matter who wins, Morge said, their affect on the U.S. economy will be moot, because the majority of the power will rest with Bernanke.
As stock markets crumble — and Morge said will continue to do so for the foreseeable future — there is only one solution: get rid of inflation.
Morge’s proposal includes raising interest rates, and he adds that people will lose jobs and homes, and he expects to see unemployment in the “teens.”
Although Morge’s news is bleak, he says he doesn’t want to be the “dooms-day prophet,” and had some practical advice for students concerned with the plight of the economy.
“If you have the opportunity to get more education and stay out of the current job market, take it,” he said, encouraging students to try to find jobs where the employer guarantees educational benefits.
“Your career is for your lifetime … find what you like to do, and do it. The money will take care of itself.”
