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In September, Treasury Secretary Hank Paulson sold his $700 billion bailout to Congress on the premise that banks were hoarding money to prop up their balance sheets and that this was bringing the economy to a screeching halt.
Paulson has thrown a big chunk of that money at the banks -- all but $60 billion of the first $350 billion authorized by Congress has been committed -- and they've started lending to each other. But it has done virtually nothing to prevent the worst-case economic scenario we are all worried may come to pass -- a meltdown of the "brick and mortar" economy -- because the banks still aren't lending to the general public.
That's not just a result of the banks restricting loans that would allow businesses to stay afloat, if not expand, and individuals to buy so much of the stuff that the global economy produces. It's also because there are fewer American families and businesses that are credit-worthy.
In the housing market, that's indicated by a drop-off in the number of new loan applications. Mortgage applications are down by about a third from this time last year. As economist Dean Baker noted this week, "If people with good credit were being turned down, we would expect the number of applications to be rising, as they apply to several banks before finally finding one that will issue a loan. The fact that applications are actually declining ... is solid evidence that the problem is not that otherwise credit-worthy borrowers can't get loans. The problem is that people are not credit-worthy."
With the housing and financial crises hitting home after the middle class had already absorbed an almost decade-long pummeling during the Bush years, the economy is starting to spiral dangerously downward as a vicious cycle begins to take hold. What started as a housing crisis that shook the financial system is now hitting all kinds of businesses hard, and they're shedding jobs at a rapid rate -- over a half-million were lost in the course of the past two months. And that only tells part of the story, as official jobless rates don't count the underemployed or those who have given up trying to land a gig. The broadest measure of underemployment is now a hair under 12 percent; 1 in 8 American workers aren't getting the number of hours on the job they need to make ends meet.
Those people aren't spending much. Neither are the rest of us. Even people who have a safe job fear for their futures, and the belts are tightening.
With the bottom dropping out of the consumer market -- responsible for two-thirds of the American economy -- businesses across the board are feeling a major crunch. Electronic giant Circuit City filed for bankruptcy this week, a move that came on the heels of bad news from Neiman Marcus, Starbucks, Gap, Best Buy and Nordstrom that, as the Washington Post reported, "show consumer spending contracting and retail revenue shrinking." On Friday, Sun Microsystems announced that it would slash 6,000 jobs; DHL killed off its U.S. business entirely this week, sending 10,000 people to the unemployment lines, including 7,000 in the tiny town of Wilmington, Ohio (out of a population of 12,000).
Best Buy's CEO, Brad Anderson, told the Post that recent economic changes were "seismic" and that the company was facing "the most difficult climate we've ever seen." The New York Times reports that America's "buying binge is grinding to a halt."
As profits drop, businesses are expected to lay off even more workers, which will mean even less consumer spending. Firms are pulling back across the board. The deflation in real estate values, which began in residential, is now spreading into the commercial market. Commercial real estate sales are expected to fall by half from last year's levels. Already this year, $15 billion worth of planned commercial real estate projects have been canceled. The Washington Post reported that "growing layoffs and falling profits mean companies are giving up office space at rapid rates. Nationwide, more than 19 million square feet of space -- enough to fill more than 300 football fields -- has been emptied by office users this year, the most since the months after the Sept. 11, 2001, attacks."
See more stories tagged with: china, green jobs, stimulus, unemployment, housing crisis, financial crisis
Joshua Holland is an AlterNet staff writer.
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