Goldilocks and the ‘bear’ market

Not too hot. Not too cold. Just right. Wall Street used the Goldilocks fairy tale to create an image of a capitalist economy on steady course, encouraging investors to continue sinking money into the capitalist markets. But Wall Street is worried about 1970s-style stagflation.

According to the May 31 Wall Street Journal, “The prevailing view of the stock market is one of celebration. Low inflation, moderate economic growth and an end soon to Fed rate increases. That kind of ‘Goldilocks’ economy ... is just fine for stocks.” Alan Greenspan, chairperson of the Federal Reserve Board, agreed wholeheartedly with this rosy picture.

Less than a week later, on June 3, the fairy tale was exploded by Poppa Bear. A “bear market” is a sellers’ market that panics investors. Stock prices are driven down by speculators who buy stocks and don’t pay up front. When the stocks go down, they meet those obligations and huge profits can be made. But if the stocks go up, heavy losses are incurred. It is risky and speculative and one factor in the volatility of the stock market. That day the stock market plunged 93 points.

Economic reports for May put this in perspective. The Labor Department reported that employers added only 78,000 workers. It was the weakest growth since August 2003 and a sharp drop from 274,000 jobs in April.

The Institute of Supply Management (ISM), a closely watched survey, showed slower growth in the index of non-manufacturing business activity—58.5 in May to 61.7 in April. According to the ISM, a reading of 50 or below means the economy is tanking. The survey measures the vitality of various service industries such as construction, insurance and real estate.

Wall Street depends upon the service sector to expand its “Goldilocks” economy. Weakness in the service sector worries Wall Street analysts that a broader economic slowdown is in the making.

Manufacturers, led by General Motors, Ford and their parts divisions, IBM and a myriad of suppliers and contractors, are a drag on the economy. The ripple effect has been a disaster for the industrial workforce. Corporations cut 7,000 jobs in May, following a loss of 9,000 in April, and are down almost 70,000 jobs since last August.

Average hourly earnings increased a miserly three cents for May, far short of the inflation rate. With food, energy, transportation and rent costs soaring along with health care, a low-paid workforce must make hard decisions. Workers can’t buy back the very products they produce and the services they need, in contrast to the wealth they create for a parasitical billionaire ruling class.

Consumer spending is two-thirds of the Gross Domestic Product—-the value of all goods and services produced.

A bubble and a pop

There are early signs that the housing bubble is about to run out of air or burst. Construction companies reported their May payrolls increased by only 20,000, compared with 48,000 in April. Green span, a master manipulator of the word, admitted that housing prices showed signs of “froth.” He said there were “little bubbles” floating throughout the country—a feeble attempt to ease the fears of Wall Street.

Those “little bubbles” are really one giant bubble. When it bursts, it will create a ripple effect that would be catastrophic for the economy. The collapse would immediately affect the job security of millions of workers in the construction and consumer industries that build and produce the consumer products that stock these newly-bought homes.

Rising real-estate prices have powered the economic recovery as investors and consumers borrow astronomical sums to finance home ownership and to furnish them, incurring more debt. High prices boosted the value of the real estate market and stimulated the economy but encouraged risky speculation.

There is a frenzy to speculate in real estate—not to own a home, but to buy only to sell at prices that have reached unprecedented levels. Long-term, 30-year mortgages feed the bubble, because interest rates are still low for now. Mortgage brokers and bankers are making a quick buck. They encourage home buyers to borrow far beyond their income.

According to Barron’s Online of May 25, there has been an unprecedented run-up of over $5.5 trillion to the total market during the last five years.

Here’s how they suck in the working population, who dream of owning their own homes. The consumer buys into contracts from blood-sucking lenders called “interest rate only” and “adjustable mortgage rate,” where the buyer needs to pay only interest for a defined time period. The headaches come later when they have to pay the principal and the interest combined. When interest rates jump, the home owner is stuck with more debt. Over 63 percent of new mortgages are covered by these speculative investments.

The Fed has raised short-term interest rates eight times since last June. They plan to raise it once again in August.

Foreclosures on the rise

For many home owners, particularly people of color and white workers in urban centers, the housing bubble has already burst. According to Foreclosure.com, “Fore closure rates rose in 47 states in March.”

The May 30 Washington Post reported: “The rates in Florida, Texas and Colorado are more than twice the national average. Even in New York City and Boston ... foreclosures are rising in working-class neighborhoods... Allegheny County, which includes Pittsburgh, had record auctions of foreclosed homes ... and officials speak of a ‘Depression-era’ problem.

“The foreclosures fall particularly hard on Black and Latino families ... . Should the nation’s housing bubble deflate, as many economists and federal officials expect, the foreclosures could prefigure a national crisis.”

A great many cities face huge budget deficits and bankruptcy. Detroit, with an overwhelmingly Black population, has double-digit unemployment. These depression-like conditions are spreading throughout the country. The Bush administration has ignored this capitalist decay and hypocritically speaks of an “ownership society.”

Renters who can’t afford to buy a home have also been deeply affected by inflated prices in the real-estate market. The May 22 New York Magazine reported in a comprehensive analysis, “The ratio of prices to rents is already higher than at any time in the past two decades, including the late eighties.” The cover is plastered with the word “CRASH—Is It Coming? How Bad? How Soon?”

A week later, the May 31 New York Times headlined an article, “Fed Debates Pricking the U.S. Housing ‘Bubble.’” The article points out the fruitless efforts by the Fed to control the housing bubble. “Mr. Greenspan and other top officials argued that it was a mistake to head off potential bubbles, in part because they are difficult to identify in advance, and in part, because the effort might easily cause more damage than it prevents.”

The signs are getting clearer that U.S. imperialism, super-global power, is heading for a crash landing. The “Goldilocks” economy remains a fairy-tale. The U.S. is a humongous debtor nation owing trillions of dollars to central banks and private institutions abroad to finance its global ambitions.

By spending hundreds of billions on endless war, the bonanza for the military-industrial complex and tax cuts for the wealthy, the ruling class is on a collision course with workers, the poor and the oppressed nationalities here and abroad.

A constellation of new class forces will rise from below that can forge a fight-back program which opposes endless imperialist wars and unites their issues. U.S. monopoly capitalism—a decaying, crisis-ridden system that threatens the globe—is on trial. The verdict is “Guilty.”