“An Economic View Into a New Decade”

The financial decade has ended and all evidence points to 10 years of nothing. That’s right, the stock market was actually down during the last decade!

A new decade has begun and with it comes high hopes for a much better decade than the last. At least for the market. The big question is, what will the next decade bring and what will the best bets be for investors?

As we entered 2000, a new millennium, we had what appeared to be a thriving economy. Jobs were plentiful, tech was booming, the country had a budget surplus, and a deficit of only $5 trillion.

A decade later we have unemployment at 10%, tech has leveled off and has moved to selling toys and gadgets, and the deficit climbed to $12 trillion. Banks are failing at an accelerating rate and big banks, those ‘Too Big to Fail’ after being pulled from the abyss with taxpayer money, are cheating the economy at a greater level than at any time since the 1920’s.

A lost decade? The worst in our nation’s history!

Are the prospects for a more prosperous decade any better than they were at the beginning of 2000?

Have conditions really improved?

These questions will possibly be answered this year, but trying to predict the decade is beyond anyone’s capability.

Last decade was marked with a boom and bust economy; marred by bubbles, greed, and failures, by scams and schemes, by deficits and deceit. Many things changed during the past decade that will have a direct affect on the new decade.

This is destined to be a decade when we discover that the ‘market’ IS NOT the economy; Wall Street is not Main Street. The disconnect will become even more pronounced and evident as we struggle through the next, potentially painful, 10 years.

It will become glaringly apparent that the unfettered market and banking destroyed the economy. That is in part, because the market no longer fulfills its important purpose; capitalizing American business.

Markets have become casinos; mere bets on which way the money will flow on any given day, week, or month.

Puts, calls, shorts, derivatives, securitized products, naked shorts, and hedges have no real benefit in the health or operation of the corporations. They are just bets.

They are easily manipulated to no one but the gambler’s benefit. Or, to their unfortunate loss.

Regardless of the rise in the market since the March 9th low, the market faces incredible obstacles; obstacles that may last the entire decade.

Many economic issues created in the last decade, and yet to be resolved, present headwinds to a growing economy. In order to restore the economy’s health these issues must be dealt with in a responsible and mutually beneficial way.

The two elephants-in-the-room with regard to Main Street, are unemployment and housing. These are the issues that are most evident and immediate when addressing problems in the economy.

Without a healthy middle-class, which requires a dramatic improvement on Main Street, Wall Street will struggle for the entire decade. But, Wall Street has some imposing difficulties of its own.

There are three potentially destructive issues confronting Wall Street: banks—especially their toxic assets; mortgages and derivatives—(CDO’s and CDS’s); and the easy money from the Fed and the Government—to the benefit of the big banks, while increasing the deficit and giving false signs of hope of an improving economy.

There are nearly 1.7 million homes in trouble and at risk of foreclosure in 2010 alone.

Unemployment is at 10%, and though we’ve been told that the number of jobs lost is improving, over half-a-million American workers are being laid-off every week and filing for unemployment benefits. A total of 8.4 million hard-working Americans have lost their jobs since the start of this recession.

Combined, the two issues will dramatically affect the consumer and change the dynamics of a possible recovery.

Banks have been holding housing inventory or have been slow to foreclose on properties and putting them on the market; an effort to keep home prices from declining further. The purpose, hoping the market turns around before there is greater erosion, sounds like perfect business sense.

In normal recessions this might work, but, what’s happening in this ‘recession’ is not normal. The banks have been wrongly helped in this tactic by three things: the change in Mark to Market, the taxpayer bailout, and the Fed’s manipulation of monetary policy in the banks’ favor and hard-working Americans’ detriment.

The problem for housing will come when the ‘punch bowl’ is pulled. Taxpayers have already made it abundantly clear that they do not want anymore taxpayer money to go to big banks.

Mark to Market will have to be reinstated to get a ‘real’ picture of the health of the banks. And the Fed cannot continue to give the banks free money and allow them to buy the country’s debt to their UnAmerican benefit.

The affect of unemployment on the housing market is obvious. The market, as I stated in “The Dow at 6,000,” sent to the Wall Street Journal on April 2, 2009, was, at the time, in the process of moving from a subprime foreclosure problem to one of unemployment. It has made that transition and now nearly 20% of American homeowners are upside down on their mortgages. A rash of new foreclosures would send housing prices tumbling another 15% to 20% leaving more than a million additional homeowners with negative equity.

The economic problems are complex, each element pushing negatively on the others causing our economy to slowly erode despite reports to the contrary.

Even the unemployment picture is clouded with multiple programs and benefits, with old seasonal adjustments that don’t apply under the current environment, extended benefits in several tiers, and untenable levels of Emergency Unemployment Compensation exceeding 5.63 million recipients.

Reality indicates there is little improvement in the unemployment situation. That will continue to have an adverse affect on the housing market.

The confluence of unemployment and declining housing prices in the near future is a huge negative for the consumer and for the market. These factors alone could cause pain and suffering for the next ten years.

The markets continue to be oblivious to the headwinds of housing and unemployment that the consumer faces. But the consumers’ woes will eventually lead to a stark realization, much like the surprise of last year, that things aren’t nearly as sound as the markets seem to indicate.

And the markets’ have their own headwinds to be concerned about; re-regulation, the most imposing of the potential obstacles they face. But regulation, especially of the Big banks, is absolutely necessary to ensure a healthy, vibrant, growing economy. The banks have proven that it was a mistake to deregulate the financial institutions, and if left unchanged the economy will face the same destructive forces for another decade.

We cannot endure another decade of greed, arrogance, and general disregard for the people that the financial institutions have displayed since the passage of the Gramm/Leach/Bliley Bill in 1999. Those Representatives, (343 of them), and Senators, (90 of them), that voted for the bill reversed 68 years of protection from the predatory capitalism that caused the Great Depression and subsequently caused this financial crisis. Those that voted for the bill will be exposed in a future article.

Congress had an opportunity to reinstate Glass-Steagall type legislation which probably would have protected us from a financial meltdown during this decade, but instead, they chose TARP; the bailout of the Big banks and investment houses that caused the financial crisis.

Another issue that will destroy any hope of a financial recovery in this decade is Collateralized Debt Obligations (CDO’s) and Credit Default Swaps (CDS’s). These false financial instruments will be the fatal end of the global financial system if left unregulated.

In 1996, Brooksley Born, then CFTC Director, tried to control derivative trading. Two years later Long-Term Capital Management (LTCM), a large U.S. hedge fund, nearly brought down the global financial system. In a Frontline documentary, “The Warning,” the story unfolds which will leave you angry at the stupidity of Alan Greenspan, Robert Rubin, Larry Summers, and Congress, and understand why Arthur Leavitt regrets what they did to her in Congressional hearings.

These fine gentlemen and Congress, through their failure to heed the warnings of the CFTC Director, set the stage for financial failure and the ‘lost decade’ we just experienced in the markets.

But those problems are only three of the many future problems facing Wall Street.

Free money has been a windfall for the huge banks, but the Fed’s policy of easy money has cost the American taxpayers dearly while lining the pockets of American bankers and financial leaders. This disparity, allowing banks to borrow cheap and invest in American debt at a profit destroys the benefit of ‘free market capitalism’ and is furthering the redistribution of wealth from middle-class families to the wealthiest in the country.

Years of deregulation, unfettered greed, and minimal consequences in housing, stock markets, and banking has left us with an economy that requires extensive reregulation and massive amounts of money globally if we are going to survive.

But there are so many other things in the way of a healthy recovery and hopes of a better decade: campaign financing, lobbyists, an obstructionist Congress, miss-targeted stimulus, the administration’s economic team, wars that are costing us dearly, a failed and costly healthcare system, an unfunded medicare drug bill that needs fixing, a crumbling national infrastructure, and passing on huge deficits to our children and grandchildren.

Back to the main question. Will the next decade be better for the stock markets than the past ‘lost decade?’

If we don’t change the mind set which permeates business and government, we are destined to endure another difficult 10 years; one potentially worse than the last.

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