How the Economy Was Lost: The War of the Worlds (Counterpunch) by Paul Craig Roberts Read Free Book Online

growth would fall. Inventories would grow, and layoffs would result. When the economy cooled down, the cycle would start over.
    The nice thing about 20th century recessions was that the jobs returned when the Federal Reserve lowered interest rates and consumer demand increased. In the 21st century, the jobs that have been moved offshore do not come back. More than 3 million U.S. manufacturing jobs have been lost while Bush was in the White House. Those jobs represent consumer income and career opportunities that America will never see again.
    In the 21st century the U.S. economy has produced net new jobs only in low paid domestic services, such as waitresses, bartenders, hospital orderlies, and retail clerks. The kind of jobs that provided ladders of upward mobility into the middle class are being exported abroad or filled by foreigners brought in on work visas. Today when you purchase an American name brand, you are supporting economic growth and consumer incomes in China and Indonesia, not in Detroit and Cincinnati.
    In the 20th century, economic growth resulted from improved technologies, new investment, and increases in labor productivity, which raised consumers’ incomes and purchasing power. In contrast, in the 21st century, economic growth has resulted from debt expansion.
    Most Americans have experienced little, if any, income growth in the 21st century. Instead, consumers have kept the economy going by maxing out their credit cards and refinancing their mortgages in order to consume the equity in their homes.
    The income gains of the 21st century have gone to corporate chief executives, shareholders of offshoring corporations, and financial corporations.
    By replacing $20 an hour U.S. labor with $1 an hour Chinese labor, the profits of U.S. offshoring corporations have boomed, thus driving up share prices and “performance” bonuses for corporate CEOs. With Bush/Cheney, the Republicans have resurrected their policy of favoring the rich over the poor. John McCain captured today’s high income class with his quip that you are middle class if you have an annual income less than $5 million.
    Financial companies have made enormous profits by securitizing income flows from unknown risks and selling asset-backed securities to pension funds and investors at home and abroad.
    Today recession is only a small part of the threat that we face. Financial deregulation, Alan Greenspan’s low interest rates, and the belief that the market is the best regulator of risks, have created a highly leveraged pyramid of risk without adequate capital or collateral to back the risk. Consequently, a wide variety of financial institutions are threatened with insolvency, threatening a collapse comparable to the bank failures that shrank the supply of money and credit and produced the Great Depression.
    Washington has been slow to recognize the current problem. A millstone around the neck of every financial institution is the mark-to-market rule, an ill-advised “reform” from a previous crisis that was blamed on fraudulent accounting that over-valued assets on the books. As a result, today institutions have to value their assets at current market value.
    In the current crisis the rule has turned out to be a curse. Asset-backed securities, such as collateralized mortgage obligations, faced their first market pricing in panicked circumstances. The owner of a bond backed by 1,000 mortgages doesn’t know how many of the mortgages are good and how many are bad. The uncertainty erodes the value of the bond.
    If significant amounts of such untested securities are on the balance sheet, insolvency rears its ugly head. The bonds get dumped in order to realize some part of their value. Merrill Lynch sold its asset-backed securities for twenty cents on the dollar, although it is unlikely that 80 percent of the instruments were worthless.
    The mark-to-market rule, together with the suspect values of the asset backed securities and collateral debt