Tags: global | economy

Global Economy Grinding to a Halt

Friday, 14 Nov 2008 01:09 PM

By Arnaud de Borchgrave

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More than 10 million people are jobless in America, an increase of almost 3 million in 2008. Unemployment is expected to reach 8 percent by year's end. One of the great symbols of American power in peace and war — General Motors — is on the verge of bankruptcy.

With its myriad subcontractors, GM keeps 2.5 million people employed. But automakers, losing $2 billion to $3 billion a month, and their congressional supporters, pleaded for a slice of Treasury's $700 billion rescue package.

President-elect Obama favors supporting the auto industry with a greater economic stimulus. In a nutshell, GM's assembly line workers cost the company $77 an hour (including all benefits); Toyota, in its U.S. plants, does the same job more efficiently at $46 an hour. GM, Ford, and Chrysler will run out of cash by next summer.

More than 1 million homes have been repossessed from gullible people who were conned by predatory swindlers. Unable to meet their 401(k) obligations, companies are pleading for relief vis-a-vis their employees and are warning they are under no legal obligation to match their staffs' retirement contributions.

The average American's retirement savings nosedived 40 percent during the current recession. And those who invested in the stock market, mostly in mutual funds, have lost, in many cases, 50 percent of their retirement fund. About $1 trillion in shareholder wealth was obliterated in three trading days this week.

The U.S. Treasury's $700 billion rescue plan, dubbed the Troubled Asset Relief Program or TARP, doesn't seem to be gaining traction; $250 billion of this taxpayers' money was funneled into insolvent banks to loosen credit, with little likelihood this will save the country from a severe recession.

Some banks are hoarding these financial blood transfusions to fund acquisitions and/or as a cushion against further losses.

Treasury Secretary Hank Paulson, the crisis czar during the interregnum through Jan. 20 when President Obama is sworn in, scrapped his original plan to buy troubled assets and tried mouth-to-mouth instead. The Dow Jones was understandably puzzled by trial and error at the highest level. The original intent of Congress in October was to authorize Treasury to buy bad, subprime mortgage loans from bank balance sheets.

Paulson admitted his trial-and-error plan was based on the "need to be able to change strategies as the facts change." Not exactly reassuring. And kind of hard to make investment decisions based on what number you expect as Paulson spins the roulette wheel one more time.

Years 2004 to 2007 were not only years of two wars at $10 billion a month, but also were the height of the lend-to-anyone credit boom when commercial banks doled out more than $600 billion a year in net new lending. Next year, half that amount is the estimate, which means loan portfolios may be flat, or at best plus 5 percent.

While U.S. taxpayers bailed out Wall Street's financial institutions to the tune of billions, and companies decided to freeze payrolls and forget about promised merit raises, executive compensation packages still seemed to be saying, "Let the good times roll," recorded again this year by George Clinton and the Red Hot Chili Peppers.

Ignoring voices urging restraint from the U.S. Congress, European parliaments, national governments and the European Union — and despite laying off thousands of its own workers — Wall Street still honored what compensation committees had approved for their executives before the crisis.

Bloomberg — the gold standard for Wall Street reporting — estimates the year-end bonus pool for the still standing big three investment banks at $20 billion through the third quarter.

At Merrill Lynch, which lost so many billions over five quarters that it sold itself to Bank of America, the bonus pool totals $6.7 billion, an average of $110,049 per employee, up a tad from 2007.

At Goldman Sachs and Morgan Stanley, both still profitable, the average per employee is down slightly to $210,322 and $138,749 respectively. But Bloomberg's figures are misleading, as bonuses are not distributed among employees; they are earmarked for top traders and corporate officers.

The American International Group has received $152 billion from the government (i.e., taxpayers). But AIG still managed to squirrel away $503 million in deferred compensation to keep valuable employees from jumping ship.

Some of the Wall Street barons believe the current crisis is yet to wreak worldwide havoc — and they see that coming next.

John Thain, chairman and CEO of Merrill Lynch, warned that the global economy is entering a slowdown of epic proportions. Addressing the company's annual banking and financial services conference, Thain said: "Right now, the U.S. economy is contracting rapidly. We are looking at a period of global slowdown. This is not like 1987 or 1998 or 2001. The contraction now going on is bigger than that. We will, in fact, look back to the 1929 period to see the kind of slowdown we are seeing now."

But Thain was optimistic about the absorption of Merrill Lynch into Bank of America because it would give his wealth management advisers access "to a huge pool of wealthy individuals." Any fear the huge pool might soon shrink and that the fat cats might soon dwindle was not addressed.

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