Goldilocks and the ‘bear’ market
Published Jun 9, 2005 8:27 PM
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.”
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