The bleak economic news--also echoed in Europe--comes amid bankruptcies of telecommunications and energy trading companies, and a spreading collapse of economies in Latin America. Unlike the stock market crash in 1987, the bursting of the 1990s bubble in equity markets is threatening the biggest U.S. banks. Financial institutions such as J.P. Morgan Chase and Citicorp have massive holdings of derivatives and loans that are "at risk" as these trends continue.

The U.S. economy expanded at an annual rate of 1.1 percent in the second quarter, and consumer spending grew by just 1.9 percent, both considerable declines from the previous two quarters. Businesses reduced spending for the seventh consecutive quarter, breaking the record for the longest such streak since the Commerce Department began keeping records in 1947. Unemployment remained stagnant in June with the official jobless rate at 5.9 percent.

Commercial construction slumped 14 percent in the second quarter and state and local government spending shrank by 1.1 percent. Much-touted auto sales, which jumped in July, were spurred after General Motors, Ford, and DaimlerChrysler AG announced interest-free financing and rebates similar to those offered last fall. Such offers dig deep into the profit rates of the auto giants.

After originally reporting that the economy shrank only in the third quarter of 2001, the Commerce Department revised its figures to show a decline throughout the first three quarters of last year.

Bourgeois commentators are now openly talking about a "double dip recession"--that the economy may be on the cusp of a second downturn in the business cycle in two years.  
 
Stock market’s long decline
Since its peak in early 2000, the Dow Jones Industrial Average is off 30 percent and the Nasdaq has crashed 75 percent in the same period. Some $7.7 trillion in paper values has been wiped out since the markets peaked in March 2000.

The banks face a near-record pace of debt default by U.S. companies and $155 billion of debt has fallen from investment-grade ratings to junk ratings so far this year. In Latin America, Brazil’s economy is teetering on the brink of collapse under the weight of $250 billion in foreign debt, largely owed to U.S. banks. The economies of Argentina, Paraguay, and Uruguay are already in the midst of a a free-fall. Hundreds of billions of dollars of uncollectible loans made by the major banking institutions are now threatening a banking crisis.

Two large banking institutions in the United States that have given loans to the energy and telecommunications industries are being battered by the financial crises in those industries. The stock of Citigroup, the third largest corporate lender in the United States, fell 16 percent July 23, shaving $26 billion off its market value in one day and leaving it down nearly 50 percent for the year. J.P. Morgan Chase’s stock is down 31 percent for the year.

Three of the largest telecommunications companies--Adelphia Communications, Global Crossing, and WorldCom--have filed for bankruptcy, in effect defaulting on their debt payments. Another major player, Qwest Communications International, recently reported that it had exaggerated revenue and understated costs over the last three years. The industry faces overcapacity. Of the long haul fiber optic lines built by these companies in the United States, some 95 percent remain unused. Overseas, companies such as Deutsche Telekom and France Telecom, overloaded with debt, are spiraling toward disaster.

Some $1 trillion in local phone company market value is "at risk" worldwide, according to USA Today. Big-business economists are suggesting that more telecommunications companies will be forced into bankruptcy to rid themselves of debt and stay competitive.

"The end game is that all the long-distance carriers go bankrupt," said Susan Kalla, analyst at Friedman Billings Ramsey. "If the name of the game is to wipe out debt...it’s likely they’ll all take advantage of that."

The chairman of the Federal Communications Commission, Michael Powell, blamed the collapse of telecommunications companies on "a near-hysterical belief that the opportunities for growth were limitless. Very few did not get swept up in the hot air."

Stock shares in energy traders have plummeted after rising to heights well beyond the value of the companies themselves. Dynergy and Mirant have posted second-quarter losses in the hundreds of millions of dollars. Since the bankruptcy of Enron in December--the second-largest in history--Dynergy’s stock has plunged more than 95 percent and Mirant’s by 75 percent.

Bankruptcies are spreading in the airline industry, which received a $10 billion government bailout last September. Carriers fly with only 80 percent to 85 percent of the passengers they did a year ago. Midway Airlines, in bankruptcy protection for a year, ceased operations in July. Sun Country was grounded and forced into bankruptcy when its creditors demanded to be paid in January. The company emerged in a shrunken form after investors in April purchased some of its assets. Vanguard Airlines, twice rejected by the government for federal loan guarantees from the industry bailout, shuttered its doors July 30.

In July the U.S. Senate postponed a vote on legislation that would force individuals to pay back credit card companies and others instead of wiping out debt by filing for bankruptcy. As consumer debt has reached record highs, banking and credit card companies have pressed for laws that crack down on middle- class and working people. In order to win support from enough Democrats to pass the legislation, Republican leaders agreed to an amendment that would bar antiabortion rightists from using bankruptcy to get out of paying fines imposed for blockading facilities that provide abortion. Several Republicans withdrew their support over the amendment and demanded it be removed before they vote in favor of the bill.

Stephen Roach, a top official at Morgan Stanley, noted there is little the federal government can do to generate an economic upturn. In an interview with the International Herald Tribune, he said that a double-dip recession "is not the end of the world. Given the excesses that we built up during the bubble, sadly we probably need a double dip to begin the painful process of purging those excesses."

"I don’t think policy can do much to avoid that," he said of the U.S. government. "The Federal Reserve cut interest rates by 4.75 percentage points, and it hasn’t made much of a difference."  
 
 
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