Agence France-Presse
Published: Thursday October 30, 2008
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WASHINGTON (AFP) – The US economy contracted in the third quarter as panicked consumers slashed spending, data showed Thursday in the first downside leg of what analysts say could be a deep and nasty recession.
In its first reading of gross domestic product (GDP) in the July-September period, the Commerce Department said output of goods and services fell at a 0.3 percent annual pace amid a sharp retrenchment by consumers and businesses.
The drop in gross domestic product (GDP) was the first negative figure since the fourth quarter of 2007.
The decline, not as steep as the 0.5 percent annualized drop expected by private economists, comes amid mounting expectations of a sharp falloff in the US economy amid the worst banking and financial crisis in decades.
Some analysts said the drop could be just the start of a deep and painful recession, which is normally defined as two consecutive quarters of negative growth.
"A heftier decline in real GDP is likely in the fourth quarter, which will confirm that the US economy is in recession," said Dawn Desjardins, economist at RBC Capital Markets.
The decrease marked a sharp fall from the 2.8 percent growth rate of the second quarter and reflected weaker consumer and business spending and housing activity, offset in part by strong exports and government spending.
With the decline, economic output was estimated at an annualized 14.43 trillion dollars.
"What is noticeable is that the US economy is hanging onto support from exports that will not last in the fourth quarter," said Avery Shenfeld, economist at CIBC World Markets.
"The rest of the world is slowing and the rising dollar will take some of the shine off exports. The fourth quarter is going to be much worse, with a decline of perhaps as much as two percent."
Consumer spending, the main driver of economic activity, fell 3.1 percent in the quarter on a sharp 14 percent plunge in spending on so-called durable goods like cars and appliances expected to last three years or more, the report showed.
Spending on nondurables such as food and clothing slid 6.4 percent, the biggest decline since 1950.
"The drop in consumer spending was the largest since the recession in the early 1980s," said Augustine Faucher at Economy.com.
"Households are cutting back because of the end of the tax rebates, tighter credit, the worsening labor market, falling house prices, the drop in the stock market, and general angst."
In housing, which has seen a horrific meltdown after a long boom, investment fell 19.1 percent, a major drag on the economy.
While the decline in activity was mild, the report comes amid expectations for one of the worst recessions in decades as the economy is strangled by a collapse in credit amid troubles from banks that bet on the US property bubble.
Ian Shepherdson, chief US economist at High Frequency Economics, noted the GDP number would have been even weaker without accounting for companies building up inventories, which added 0.5 percentage points on the positive side.
"This is the first of a run of negative GDP numbers," he said.
"The economy is in recession. We tentatively expect GDP of minus one percent in the fourth quarter and first quarter of 2009."
Activity had been supported in the second quarter by a big US government stimulus plan that sent out tens of billions of dollars in tax rebates to consumers, but the impact of that has now faded.
Exports, a main source of economic activity earlier this year, also helped keep the GDP figure from being weaker but growth slowed to 5.9 percent in the third quarter from 12.3 percent in the second.
Peter Kretzmer, economist at Bank of America, said another factor skewing the report was a 5.8 percent jump in government purchases,including an 18.2 percent annualized jump in federal defense purchases, which added 0.9 percentage points to GDP.
"We expect a faster pace of GDP decline in the current quarter, as capital spending declines far more rapidly, inventories are reduced at a faster pace, the housing decline remains steep and federal defense spending simmers down," he said.
Citigroup's Steven Wieting said it could get even uglier: "Production and employment declines, credit tightening, and wealth destruction are clearly more severe in the current (fourth) quarter, which should show shrinkage in GDP in excess of the 3.0 percent decline posted in consumption last quarter."
Lookout
This article appeared in the November 17, 2008 edition of The Nation.
October 29, 2008
In the final days of the election, many Republicans seem to have given up the fight for power. But that doesn't mean they are relaxing. If you want to see real Republican elbow grease, check out the energy going into chucking great chunks of the $700 billion bailout out the door. At a recent Senate Banking Committee hearing, Republican Senator Bob Corker was fixated on this task, and with a clear deadline in mind: inauguration. "How much of it do you think may be actually spent by January 20 or so?" Corker asked Neel Kashkari, the 35-year-old former banker in charge of the bailout.
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Globalization
Naomi Klein: As the planet is rocked by multiple shocks, here's a look at how disaster capitalists are reaping the benefits--leveraging the Iraq War, the push for arctic drilling and the global food crisis.
The Bush gang prefers bureaucratic instruments: "distressed asset" auctions and the "equity purchase program." But make no mistake: the goal is the same as it was for the defeated Portuguese--a final frantic looting of the public wealth before they hand over the keys to the safe.
How else to make sense of the bizarre decisions that have governed the allocation of the bailout money? When the Bush administration announced it would be injecting $250 billion into America's banks in exchange for equity, the plan was widely referred to as "partial nationalization"--a radical measure required to get the banks lending again. In fact, there has been no nationalization, partial or otherwise. Taxpayers have gained no meaningful control, which is why the banks can spend their windfall as they wish (on bonuses, mergers, savings...) and the government is reduced to pleading that they use a portion of it for loans.
What, then, is the real purpose of the bailout? I fear it is something much more ambitious than a one-off gift to big business--that this bailout has been designed to keep pillaging the Treasury for years to come. Remember, the main concern among big market players, particularly banks, is not the lack of credit but their battered share prices. Investors have lost confidence in the banks' honesty, and with good reason. This is where Treasury's equity pays off big time.
By purchasing stakes in these institutions, Treasury is sending a signal to the market that they are a safe bet. Why safe? Because the government won't be able to afford to let them fail. If these companies get themselves into trouble, investors can assume that the government will keep finding more cash, since allowing them to go down would mean losing its initial equity investments (just look at AIG). That tethering of the public interest to private companies is the real purpose of the bailout plan: Treasury Secretary Henry Paulson is handing all the companies that are admitted to the program--a number potentially in the thousands--an implicit Treasury Department guarantee. To skittish investors looking for safe places to park their money, these equity deals will be even more comforting than a Triple-A rating from Moody's.
Insurance like that is priceless. But for the banks, the best part is that the government is paying them--in some cases billions of dollars--to accept its seal of approval. For taxpayers, on the other hand, this entire plan is extremely risky, and may well cost significantly more than Paulson's original idea of buying up $700 billion in toxic debts. Now taxpayers aren't just on the hook for the debts but, arguably, for the fate of every corporation that sells them equity.
Interestingly, Fannie Mae and Freddie Mac both enjoyed this kind of unspoken guarantee. For decades the market understood that, since these private players were enmeshed with the government, Uncle Sam would always save the day. It was the worst of all worlds. Not only were profits privatized while risks were socialized but the implicit government backing created powerful incentives for reckless investments.
Now, with the new equity purchase program, Paulson has taken the discredited Fannie and Freddie model and applied it to a huge swath of the private banking industry. And once again, there is no reason to shy away from risky bets--especially since Treasury has not required the banks to give up high-risk financial instruments in exchange for taxpayer dollars.
To further boost confidence, the federal government has also unveiled unlimited public guarantees for many bank deposit accounts. Oh, and as if this wasn't enough, Treasury has been encouraging the banks to merge with one another, ensuring that the only institutions left standing will be "too big to fail." In three different ways, the market is being told loud and clear that Washington will not allow the country's financial institutions to bear the consequences of their behavior. This may well be Bush's most creative innovation: no-risk capitalism.
There is a glimmer of hope. In answer to Senator Corker's question, Treasury is indeed having trouble dispersing the bailout funds. It has requested about $350 billion of the $700 billion, but most of this hasn't yet made it out the door. Meanwhile, every day it becomes clearer that the bailout was sold on false pretenses. It was never about getting loans flowing. It was always about turning the state into a giant insurance agency for Wall Street--a safety net for the people who need it least, subsidized by the people who need it most.
This grotesque duplicity is an opportunity. Whoever wins the election on November 4 will have enormous moral authority. It can be used to call for a freeze on the dispersal of bailout funds--not after the inauguration, but right away. All deals should be renegotiated immediately, this time with the public getting the guarantees.
It is risky, of course, to interrupt the bailout. The market won't like it. Nothing could be riskier, however, than allowing the Bush gang their parting gift to big business--the gift that will keep on taking.
About Naomi Klein
Naomi Klein is an award-winning journalist and syndicated columnist and the author of the international and
New York Times bestseller
The Shock Doctrine: The Rise of Disaster Capitalism (September 2007); an earlier international best-seller,
No Logo: Taking Aim at the Brand Bullies; and the collection
Fences and Windows: Dispatches from the Front Lines of the Globalization Debate (2002).
more...
Paulson's Swindle Revealed The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.
These are dynamite facts that demand immediate action to halt the bailout deal and correct its giveaway terms. Stop payment on the Treasury checks before the bankers can cash them. Open an immediate Congressional investigation into how Paulson and his staff determined such a sweetheart deal for leading players in the financial sector and for their own former employer. Paulson's bailout staff is heavily populated with Goldman Sachs veterans and individuals from other Wall Street firms. Yet we do not know whether these financiers have fully divested their own Wall Street holdings. Were they perhaps enriching themselves as they engineered this generous distribution of public wealth to embattled private banks and their shareholders? Leo W. Gerard, president of the United Steelworkers, raised these explosive questions in a stinging letter sent to Paulson this week. The union did what any private investor would do. Its finance experts vetted the terms of the bailout investment and calculated the real value of what Treasury bought with the public's money. In the case of Goldman Sachs, the analysis could conveniently rely on a comparable sale twenty days earlier. Billionaire Warren Buffett invested $5 billion in Goldman Sachs and bought the same types of securities--preferred stock and warrants to purchase common stock in the future. Only Buffett's preferred shares pay a 10 percent dividend, while the public gets only 5 percent. Dollar for dollar, Buffett "received at least seven and perhaps up to 14 times more warrants than Treasury did and his warrants have more favorable terms," Gerard pointed out.
"I am sure that someone at Treasury saw the terms of Buffett's investment," the union president wrote. "In fact, my suspicion is that you studied it pretty closely and knew exactly what you were doing. The 50-50 deal--50 percent invested and 50 percent as a gift--is quite consistent with the Republican version of spread-the-wealth-around philosophy."
The Steelworkers' close analysis was done by Ron W. Bloom, director of the union's corporate research and a Wall Street veteran himself who worked at Larzard Freres, the investment house. Bloom applied standard valuation techniques to establish the market price Buffett paid per share compared to Treasury's price. "The analysis is based on the assumption that Warren Buffett is an intelligent third party investor who paid no more for his investment than he had to," Bloom's report explained. "It also assumes that Gold Sachs' job is to protect its existing shareholders so that it extracted from Mr. Buffett the most that it could.... Further, it is assumed that Henry Paulson is likewise an intelligent man and that if he paid any more than Mr. Buffett--if he paid $1 for something for which Mr. Buffett would have paid 50 cents--that the difference is a gift from the taxpayers of the United States to the shareholders of Goldman Sachs."
The implications are staggering. Leo Gerard told Paulson: "If the result of our analysis is applied to the deals that you made at the other eight institutions--which on average most would view as being less well positioned than Goldman and therefore requiring an even greater rate of return--you paid a$125 billion for securities for which a disinterested party would have paid $62.5 billion. That means you gifted the other $62.5 billion to the shareholders of these nine institutions."
If the same rule of thumb is applied to Paulson's grand $700 billion bailout fund, Gerard said this will constitute a gift of $350 billion from the American taxpayers "to reward the institutions that have driven our nation and it now appears the whole world into its most serious economic crisis in 75 years."
Is anyone angry? Will anyone look into these very serious accusations? Congress is off campaigning. The financiers at Treasury probably assume any public outrage will be lost in the election returns. I hope they are mistaken.
POLITICS -- McCAIN CAMPAIGN SLANDERS MIDDLE EAST SCHOLAR AS ANTI-SEMITIC: In recent days, Sen. John McCain (R-AZ) and his surrogates have attempted to paint Sen. Barack Obama (D-IL) as holding anti-Israel views because of his links to Palestinian-American professor Rashid Kahlidi. Former New York City mayor Rudy Giuliani claimed this week that Khalidi has a "very hostile view of Israel" and disapprovingly noted that the Woods Foundation funded "Khalidi's organizations" while Obama was a board member. Yesterday, McCain campaign blogger Michael Goldfarb called Khalidi, "anti-Semitic, anti-Israel, and anti-American," and as the Washington Post notes today, McCain himself likened Khalidi to "neo-Nazis." In fact, Khalidi is a well-respected, mainstream scholar of Middle Eastern studies. As the Washington Post explained in a 2004 profile of Khalidi and his book "Resurrecting Empire," "Among other scholars who specialize in the region, [Khalidi's book] isn't a radical take on the present state of affairs. Michael C. Hudson, director of the Center for Contemporary Arab Studies at Georgetown, describes Khalidi as preeminent in his field, a courageous scholar and public figure." Further demonstrating the inaccuracy of the McCain campaign's characterization of Khalidi is the fact that while McCain served as chairman of its board, the International Republican Institute distributed nearly $500,000 in grants to the Palestinian research center co-founded by Khalidi." As the American Prospect's Ezra Klein noted, "This, of course, just goes to show how absurd it is to suggest that Khalidi is some sort of radical polemicist."".
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