Saturday, October 25, 2008

Learning to Walk

"People would rather defend the possibility of becoming rich rather than to admit to their own poverty."
John Hancock

Everybody should have seen this coming but when the money is rolling in, nobody wants to rock the boat. As always the poor suffer the most and the middle class are being hit very hard as the Wall Street traders are sitting pretty with their average $600,000 bonuses. There hasn't been such a disparity in wealth since 1929 with the very, very top, the top one percent and especially the top .1 percent living like Roman emperors on the dime of the rest. Well we all know what happened to Rome.
The causes have been detailed and analyzed. It doesn't take a genius to see why this happened. Also, what we have learned is that the dollar is still (for now) the currency of the world. Even I predicted that the Euro would be the new dollar and China and Japan would eventually cut off our IOU for a more stable standard. This seems not to be the case. China will not call in its markers short of a nuclear war.

The ailing stock market, the bank defaults, the housing bubble and all the rest are only symptoms of the disease. The Reaganomic, trickle down theory where free markets regulate themselves is horse manure. Yesterday Greenspan finally admitted this, if in an ever so subtle way. Congressional hearings are just for show with both parties staging the theater and no one goes to jail. Unenforced regulations mean nothing. Only legislation has teeth. People need to go to jail for fraud or this will certainly happen again. FDR used the psychology of a strong, likeable, father figure to help the public feel better, but it was the economic policy he pursued from John Maynard Keynes that slowly removed us from The Great Depression.

The economy can be saved if we take that bailout money and invest from the bottom up.

1) Infrastructure projects like roads, bridges, hospitals, schools, water supplies, sewage plants would put people to work immediately and leave us with something to show for our money. Despite what some say, there are projects ready to go right now at the state and local level where the plans are already drawn and are just waiting for funding.
2) National health care would take the load off of business both big and small and advance hiring.
3) A shot in the arm for education would pay huge dividends within a decade.
4) Of immediate concern is that money needs to be spent on the homeowners so they can stay in their homes... renegotiated rates to address the discrepancy between what they paid and what they have now.
Of course $800 Billion US (or whatever it is now) wouldn't do all of these things. Rolling back the tax cuts on those at the top to a more equitable level will help but as Keynes said, an economic downturn of this magnitude is the real time to go into hock (not a stupid useless war) Now is the time to borrow even if our national debt is over $10 Trillion. China, Japan, Saudi Arabia are still willing to lend and if we put the money in the right place right now this will reverse itself in 3-5 years. But it looks like the government and the Fed want to play both ends..from the top and the bottom. This will just prolong the agony.So I am predicting that this is no time for happy faces or for drinking the Kool Aid.

This is the big one. It will not be another Great Depression because there are still some safeguards in place leftover from the 1930's but hard times will certainly linger on for most of a decade.

Monday, October 13, 2008


"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men."

Woodrow Wilson, after signing the Fed Reserve Act in 1913

Three weeks after the $800 Billion economic bailout and three weeks before the 2008 presidential election we are a nation still leading the world to the precipice. Today England and the European countries will attempt to the bring us back from the edge. The principles should have had time to scramble into their lifeboats and the offshore accounts where names are replaced by numbers. Europe, not so strangled by the hands of Political Action Committees can act swiftly. The plan is based on the Swedish model in 1992 where the government spent 4 percent of it's GDP and bought out shares of the banks in return for a stake in the recovery. This was a bitter pill for the bankers and the investers and while Sweden still experienced a recession, it avoided a total financial meltdown.

It will be much more complicated today because thanks to the mathematical hocus pocus, the assets have been bundled, packaged and made to disappear. Finding them will be no easy task but this, at least, is the second step in recovery. (Acknowledging the problem was the first step) This is not a solution but a tourniquet for a badly bleeding patient. It doesn't take a medical doctor to realize that a blood transfusion to the perpetrator will not save the victim.

The proper treatment is obvious to everyone in the hospital but the doctors are reluctant to prescribe a remedy that is contrary to the interests of the administration, the investors and themselves.

In 1933 after Herbert Hoover remained frozen and seemingly oblivious to the financial crisis, FDR was elected and began to implement the economic philosophy of John Maynard Keynes.
This involved a government infusion of funds from the bottom up. By funding infrastructure like roads, bridges and schools; jobs would be created, credit would get rolling again and there would be something tangible to show for it in the end. FDR also implemented regulations for banking and protections for the savings and the welfare of the citizens. The states have these rebuilding plans ready to go and they could be implemented quickly.

Former Treasury Secretary Robert Rubin, who served under President Bill Clinton, told CNN that an infrastructure plan that could quickly pump money into the economy was the most important action that U.S. authorities could take to help deal with the current economic crisis.
"I would put in place an infrastructure piece... bridges, water systems roads, highways, but not new projects that are going to take a long time to set up," Rubin said. "There are a lot of existing projects where states and cities are having a hard time finding a lot of financing where you could funnel that money right into existing activities where you would be able to act very very quickly."
By David Lauder Sun Oct 12, 9:51 PM ET