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TOO BIG TO FAIL MYTH HURTING ECONOMIC RECOVERY

Apr 27th, 2009 by James Breedlove | 0

The “Too big to fail” mantra has been at the heart and soul of all efforts to mitigate the economic crises that has Americans staggering, fearful, and uncertain of what the future holds.

 

Contrary to the touts of some financial pundits the recent Wall Street rally isn’t the beginning of an economic turnaround because there isn’t any concrete data supporting a significant change in the underlying fundamentals of either the Dow or the S&P 500.

 

It seems that anxious investors looking for any reason to get back into the market responded to the rash of billion dollar government programs and bid up depressed stocks in anticipation that the economic financial crisis had bottomed out.

 

But the one shot deal of cleansing toxic assets from the balance sheets of the banks has not unlocked the credit markets, stemmed the tide of home foreclosures, stopped the job losses or induced the public to return to old spending habits.  In short, none of the indicators that would validate the stimulus programs have turned positive.

 

Weekly jobless claims have now topped 6.1 million setting a new record for the 12th straight week.  A weak job market tends to forestall any economic recovery.

 

The decline in home prices is still accelerating, with the 20-city Case-Shiller index falling at an annual rate of 26.5 percent over the last quarter.  Home prices have further to fall to get back to their pre-bubble levels.  Many people who lost equity in their homes when prices fell cannot afford the down payment for a new home when they have to move even with the lower home prices.

 

The number of American households threatened with foreclosure grew 24 percent in the first three months of this year and is poised to rise further as major lenders restart foreclosures after a temporary pause during the bailout negotiations.

 

The nation’s household savings rate collapsed to zero as jobs were lost and the unemployment rate climbed.  The fear and pessimism that accompanies an economic meltdown results in less consumption and investment which exacerbates the cycle of declining output and employment.

 

After the billions of dollars pumped into the auto industry it has been reported that the Treasury Department is preparing a Chapter 11 bankruptcy filing for Chrysler that could come as soon as next week.

 

Thus the facts do not support the use of “Too Big To Fail” economic recovery plans that prioritize attention on big businesses and little or no attention on the small business sector.

 

Since the mid-1990s, small businesses have created 60 to 80 percent of the net new jobs. In the latest data published by the U. S. Small Business Administration firms with fewer than 500 employees created 78.9 percent of the net new jobs.  Meanwhile, large firms with 500 or more employees added 21.1 of the net new jobs.

 

Small businesses employ about half of U.S. workers, pay nearly 45 percent of total U.S. private payroll, and hire 40 percent of high tech workers such as scientists, engineers, and computer specialists.  The real innovation of the last half century came from the small business sector.

 

Yet, in spite of the facts we still prefer to equate bigness with success and seem to be focused on rebuilding the same economic model that has put the country into financial insolvency.

 

With the May 4 government deadline for releasing the bank stress test results fast approaching the Wall Street financial institutions are highly motivated to portray themselves as profitable, stable, well capitalized and safe.  They do not want the stress test report to show them as less than desirable institutions which would further erode investor confidence.

 

The same big financial institutions that created, packaged, and marketed the deceptive investment schemes and practices that precipitated the current economic crisis are engaged in the questionable accounting practices that make their books look better than they are.

 

But instead of providing a true picture of current fiscal condition the financial institutions are propping up their fundamental insolvency with reports that are long on fluff and short on real data.  The questionable securitization model that was at the heart of the financial melt down is still being used to restructure the financial sector that is too big to fail.

 

We continue to throw good money at banks that are essentially insolvent in an attempt to justify a system that has proven it does not work. The US government and Wall Street are laboring feverishly to keep the securitization model alive when it should be allowed to die a natural death.

 

Although dealing with this economic crisis seems complex the data is proving that the downward spiral created by Wall Street and the financial sector is resistant to all the trillions of dollars thrown at it so far.  It is time for new drastic surgery if the cycle is to be broken.

 

Why not use the money to incentivize the creation of a new economy, with new executives not wedded to the old “too big to fail” philosophy that will be viable over the long run and permit us to live prosperously without the threat of self destruction.

 

Big is not the answer to the current economic crisis.

 

James W. Breedlove

Comments or opinions may be sent to the writer at: www.truthclinic.com

 

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