As it became clear that the disinvestment in public health services in the United States over the last four decades had left the nation highly vulnerable to the Corona Virus pandemic, the U.S. Congress rushed through a bill to provide emergency aid. The Corona Virus Relief and Economic Security Act (CARES) passed the Senate on March 25 and the House the next day, totaling over $2 trillion in funding. The vote in both Houses was nearly unanimous, as the looming specter of mass death was used to silence any opposition. While most of the funds were allocated to aspects of the fight against the pandemic—money to cities, states and hospitals for medical costs, loans for small and medium enterprises, a one-time payment to taxpayers making less than $75,000 per year—it also included $450 billion in Treasury Department loan guarantees to the Federal Reserve, which can be leveraged that up to ten times, to assure additional liquidity to the financial system to deal with the expected economic dislocation.
Parallel to the passage of the CARES Act, the U.S. Federal Reserve announced a package of programs, providing initially more than $4 trillion in liquidity, to allow the "smooth functioning" of the U.S. economy. This was necessitated, Fed spokesmen claimed, as the "lock-down" required to fight the pandemic would have a devastating effect on the U.S. economy.
And the lock-down has had an extremely profound impact on the economy. From March 18 to the week ending April 15, more than 22.5 million people have lost their jobs. U.S. retail sales had a record drop in March, and the output at factories suffered the largest monthly decline since 1946, when the economy was winding down sharply from what was required to fight World War II. Further, a bloodbath in real estate markets is underway. As mortgage payment delinquencies are rising, banks are tightening mortgage lending, leading to a drop in home sales. The shrinkage in sales ranges from over 40% in major markets such as northern Virginia and Chicago, to 67% on Long Island, a suburb of New York City. Economists at Goldman Sachs estimate a 24% total GDP loss in the second quarter, and a drop by almost 4% for the year, assuming there will be a strong recovery in the second half of 2020, which is highly unlikely based on present policies.
But the talk of a "Corona Depression" is a fraud. As Lyndon LaRouche warned after the Crash of 2008—which he had forecast one year earlier—the measures taken by the Bush and Obama administrations rewarded the speculators whose reckless investments caused that crash, with trillions of dollars in bailouts, while accelerating the collapse of the real economy and the process of deindustrialization, which made the next crash inevitable. The pumping of unprecedented volumes of liquidity by the Federal Reserve into the financial system over the next decade created a new stock bubble, and fueled an explosion of unsustainable corporate debt, consumer debt and government debt.
DEBT BUBBLES ALWAYS POP
While many economists, elected officials, and President Donald Trump hailed this speculative bubble as a sign of robust economic health, these claims were proven false by the rush of the Fed, in mid-September 2019, to take over the overnight liquidity pumping of the repo markets, when banks and other shadow banking institutions refused to continue their short-term lending. The amounts required in short-term loans to cover overnight "accounting" grew from $20 billion in September to more than $100 billion by the end of the year, and needed to be supplemented by a new round of Quantitative Easing, reversing the deleveraging by the Fed which had been underway.
Note that these expanding infusions of liquidity were required by cash-strapped firms before the Corona Virus was identified in late December 2019!
As the demand for cash increased dramatically after the announcement of the lock down to combat the pandemic, the Fed rushed in with new liquidity, repeating—on a larger scale—the failed bailout policies which followed the 2008 blowout. In an orgy of asset purchases of all types, including taking junk bonds off the books of banks and financial institutions, the Fed balance sheet has grown at an astounding rate. On March 11, the Fed was holding $4.31 trillion in assets; as of today, that has swelled to $6.13 trillion, an increase of 42% in one month.
The result of this liquidity pumping has been a reversal of the stock market crash which had been underway. Between February 19 and March 23, before the new emergency actions by the Fed, the Standard and Poors stock index had fallen by a third, wiping out trillions of dollars. Since then, it has rebounded by 25%, even as economic indicators continue a downward plunge.
A BAILOUT IS NOT A RECOVERY
In 2008, the driver of the collapse had been real estate speculation, as home prices soared. As part of the speculative "financialization" of the economy, which was driven by the takedown of banking regulation, investors made bets on the housing bubble, in the form of mortgage-backed securities (MBS). When the home price bubble popped, so did the MBS market, threatening to bring down the whole financial system.
The bubble, then as now, was created by private sector debt appreciation. By bailing out those who gambled on the housing market, the Treasury and the Fed guaranteed that speculators would continue to profit, with public funds. This was described by independent journalist Matt Taibbi as making gambling "an essentially government-sponsored activity", in which the most irresponsible investors were rewarded with infusions of cash, while millions of families lost their homes, and with them, much of their life-savings. The justification offered by the Obama administration was that it was necessary to protect "systemically important" institutions, as their failure would have huge consequences. In other words, the financial institutions had become "Too Big to Fail." (quotes from Taibbi in "Resetting the Bomb", April 6, 2020)
Today, Fed officials offer soothing words that the "reforms" instituted after 2008 guarantee that banks are now adequately capitalized, in fact "over-capitalized". Yet the figures present a different picture. While banks which were bailed out then had loan loss provisions of 4-6%, the major banks now have less than 2% loan loss provisions, meaning they will again need to be bailed out as assets depreciate. Instead of mortgage debt, the weakness today comes from corporate debt, securitized commercial loans, and takeovers.
One example of the problem is the prevalence of corporate stock "buy backs." In order to "maximize shareholder value"—a major focus of neoliberal economic apologists—S&P 500 corporations have spent $2 trillion on buybacks since 2017. Much of this money was either borrowed, adding to corporate debt, or came from the tax cuts passed by the Congress. Instead of investing in research and development, new plant and equipment, worker training and employee benefits—which would increase long-term profitability of the company and the overall economy—this money went into boosting stock valuations, and executive bonuses. An example of this is the airlines, now slated to receive $50 billion in bailout funds. Since 2012, the four major U.S. airlines spent $43.7 billion on buybacks, meaning that the bailout is in essence a "retroactive subsidy" for the buy backs, according to Taibbi.
Taibbi describes the bailout as a means "to manipulate financial markets, finance takeovers and subsidize executive bonuses." Cash-strapped and over-leveraged corporations are thus enabled, due to the largess of the Federal Reserve, to follow a "Ponzi-like pattern: borrow, inflate, strip assets, crash, get bailed out, start over."
The present, ongoing crash makes clear that this is not a sustainable model. On the contrary, many economists are now echoing LaRouche's warning that liquidity pumping to defend speculative values on the books of banks and shadow-banking entities threatens to unleash a 1923 Weimar-style inflation. It is therefore the adherence to the neoliberal economic doctrine associated with the British Empire, which puts profits before people, which is responsible for the present unfolding global economic crisis, and not the Corona Virus.
Understanding this is a precondition for an economic recovery, which will never occur by doing "more of the same." The demand to immediately "reopen the economy", to "return to normal", without first rejecting the disease of British neoliberalism—with the implication that things were going along just fine before the Corona Virus —is a recipe for disaster.