Some Lessons from Bailout Month

Despite the first rejection of the Paulson Plan, the effort is ongoing in Washington to push through a plan that is likely to be substantially similar to the first one (as far as I can tell, the only changes will be tax cuts and the inclusion of the renewable energy bill items). Given the overwhelming pressure to "do something", and despite warnings that we are being rushed for no reason into a terrible plan, it is rather unlikely that the final version of the plan is going to be very satisfactory. In any case, the following will hold true irrespective of the outcome of the Paulson Plan.

(Note: This was written for the European Tribune this week-end, ie before the rejection of the plan by Congress, and before the most recent bank bailouts, but its conclusions stand)

  • the consequences of the financial crisis are so dire that the lesson here should not be that a bailout is necessary (it is, at this point) - but to acknowledge that the financial sector has the power to hold the rest of the economy to ransom during both good times and bad times and thus that it need to be emasculated so that we never get again to the stage where a bailout is necessary. The lesson is that the financial world cannot behave responsibly, if left to its own devices and thus should not be left to its own devices;
  • another is that the main argument to give financial markets a free hand — that they have created so much growth and prosperity — needs to be called for what it is: a lie. Not only the so-called prosperity of the past year was highly unequally shared (see the next point), but it was not even real, as the income and profits of the good years are now dwarfed by the losses of today. Arguments about growth need to be dismissed by a reference to the "full cycle," i.e. the prosperity of the recent past can only be accepted as real if it wasn't a capture of the prosperity of today and the near future. If the forthcoming growth and GDP numbers are dismal, this should be seen as a direct proof that the growth of the past was nothing but, and that the policy prescriptions focused on financial profit are abject failures;
  • as the bailout calls for yet another transfer from poor to rich, it is worth noting that even in the good years, the vast majority of the population saw very little of the then much touted prosperity: incomes were stagnant or declining, while benefits declined, and healthcare and energy costs skyrocketed. Thus, current policies seem focused, at all times, on maximizing the income of the few rather than that of the general population;
  • the next conclusion is that our political systems are completely geared towards fulfilling that last goal: politicians of all stripes are supporting the bailout despite massive protests by their constituents, just like they supported financial deregulation, labor market "reform," "free" trade, the tax race to the bottom and other similar policy prescriptions in the past. Politicians are supported in that by a media system that brings to the fore pundits that are fully aligned with these prescriptions, and creates an incestuous class of insiders who, as it were, tend to personally benefit directly from the overall winner-takes-all policies put in place;
  • the quasi-unanimous support of the Serious People for the bailout, or at least their inability to point out that the current crisis was the inevitable conclusion of the policy framework pushed by the neolib cabal shows how successful they have been at killing alternative ideas as fringe or absurd or dangerous, and suggests that there still is an ideological vacuum; alternative ideas are not "there" enough to be taken seriously despite the ongoing reality, and I'm not sure they will until the current elites are completely pushed out;
  • given that staying in power and doing whatever it takes to achieve that goal is their main competence, I fear that we're going to be pushed into ever more dangerous brinkmanship, as the Republicans have amply demonstrated in recent days. They will not leave without a fight, even if reality is overwhelmingly against them, and I expect obfuscation, distraction and worse to be used to deny or avoid that reality. Quite frankly, the alternative now, just like in the 30s, is either a full break from the past (a new "New Deal") or a move towards fascism and war — the latter being our current elites' only chance of holding onto power.
The question therefore is: will the new President, and the new Congress, be part of the problem or part of the solution? Neither McCain nor Obama have taken the lead in mapping out alternative routes - token adjustments to and/or lukewarm support for the Paulson plan cannot count as leadership. As to Congress, many future members are already in now, and their performance, frankly, is not encouraging. What will it be?

In other words: nothing short of a revolution will do. Can it still be a peaceful, democratic one?

The FT has the opposite conclusion, in their main editorial:

*In praise of free markets*

The financial system has reached the point of maximum peril. After years of profligacy, banks have all but stopped lending to each other as the US Congress decides whether to extend support. If the unravelling of the banking system continues, the economic consequences will be dire. Yet there is an even greater risk: that the politicians now contemplating Wall Street’s follies draw the wrong conclusions and take the wrong decisions, losing their confidence in markets altogether.

It would not be the first time. After the Wall Street Crash, markets were deemed to have failed and US lawmakers attempted to regulate short-cuts through the crisis. The widely-copied Smoot-Hawley Tariff Act quadrupled the effective tax rate on thousands of imports and deepened the “Great Contraction” of 1929 to 1933. The price of popular anti-market sentiment was much higher in some of Europe’s fledgling democracies: fascism.

Yeah, right - the only policy decision of note after 1929 was Smoot-Hawley. Not the regulation of banking and the New Deal. Interesting vision of history...

Consider the Washington rescue package first. Why should taxpayers bail-out millionaire bankers, and what should we force them to give back in return? Those are natural questions but not the only ones. We should also ask whether taxpayers will profit, directly or indirectly, from spending money to shore up the banking system. The answer is “yes”. The system is close to collapse, and the consequences of collapse would be misery for Main Street. Profitable businesses and creditworthy consumers would suffer. A successful rescue would prevent that and there is even a small chance that it would be profitable in its own right. That is the justification for the rescue. Congress was right to scrutinise it – especially its lack of oversight – but has become distracted by a desire to clip Wall Street’s wings.

Yes, let's focus on the short term: it's true that Wall street can take down Main St with it. That would seem like an additional argument for clipping Wall St's wings, not a mitigating factor - but hey, what do I know?

The case for more effective regulation is nevertheless undeniable. It is hard to defend a system where top banking executives walk away with millions in compensation when their businesses are, in retrospect, fundamentally flawed. This looks like a reward for failure. We have witnessed two financial crises – the dotcom crash and the current banking disaster – in the first decade of this century. That is hardly a record which inspires confidence in the current efficiency of capital markets or their transparency.

The current crisis is routinely described as a symptom of deregulation, but it is equally the child of earlier, ill-fated interventions. Subprime mortgages grew because the prime mortgage sector was dominated by Fannie Mae and Freddie Mac, two institutions founded, regulated and effectively underwritten by the government. Securitisation was an effort to sidestep capital requirements. But it also created instruments that few could understand and, in Warren Buffett’s prophetic words, really were “financial weapons of mass destruction”.

Deregulation = bad regulation = government sucks

The chutzpah is quite amazing, really. They pretty much got all the deregulation they wanted, and all the downside protection the financial sector wanted, and now the government is to be blamed because it obyed the financial sector's every wish?

Capital markets clearly need better regulation but policymakers should guard against unintended consequences. Markets are places of trial and, very frequently, error. Their genius is not perfect efficiency, but the rewarding of success and the weeding out of failure. No better alternative has ever presented itself.

Isn't the point we're at today pretty much that failure is NOT BEING PUNISHED????

This is a difficult time to defend free markets. Nevertheless they must be defended, not only on their matchless record when it comes to raising living standards, but on the maxim that it is wise to let adults exercise their own judgment.

Matchless indeed:

Market freedom is not a “fundamentalist religion”. It is a mechanism, not an ideology, and one that has proved its value again and again over the past 200 years. The Financial Times is proud to defend it – even today.

The only silver lining is that, for the first time in a long time, they sound a tad defensive to me...If they feel the need to argue they are not a "fundamentalist religion", we're finaly making progress. yey!

Here is a video from Karl Denninger that is interesting.

**FLASH** The REAL REASON For The Bailout

http://uk.youtube.com/watch?v=GqIFoBXGizc

LOL -- No Banker Left Behind

COL -- 700B of Shanghai junk paper

Karl Denninger is the man. Unfortunately, the Argentinization of America is proceeding right on schedule. Realistically, if you want to predict the actions of the USA federal government on any issue you simply need to look at the effect on the roughly 1200 global billionaires. This is a lot of fun for those guys so they need to push it through regardless of public opposition or the effect on the economy. This is just the beginning.

Also, Paulson is the lead guy, but a lot of "squeaky clean good guys" are out there screaming loudly for this bill-Barack Obama and Warren Buffett are just two of them.

Sold to you.

It's often as much about what is NOT said or written...

Thanks to Mish...

Rep. Brad Sherman On Bailing Out Foreign Investors

Rep. Brad Sherman:

Larry you have to read the bill. It's very clear. The Bank of Shanghai can transfer all of its toxic assets to the Bank of Shanghai of Los Angeles which can then sell them the next day to the Treasury. I had a provision to say if it wasn't owned by an American entity even a subsidiary, but at least an entity in the US, the Treasury can't buy it. It was rejected.

The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20th that it can't be sold to the Treasury.

Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it and the bill has been carefully written to make sure that can happen.

Here is a video clip explaining the foriegn bailout of the banksters with the MSNBC clip emedded near the beginning.

http://www.youtube.com/watch?v=Q4AvbYUu1Mg

It is outrageous that the US taxpayer will bail out Chinese, Japanese, British, Aistrailian, etc., toxic debt.

GROCK, just went there and got this: This video has been removed by the user.

It didn't say anything about the bailout having to include foreign interests in order to protect the derivative market did it?

Hello Ignatz, that is very curious! Yes there is a provision that would allow foreign banks that have an American presence to dump toxic financial instruments onto the "bailout" plan. I am concerned that we are witnessing the clampdown of free-speech.

Found the link directly to his website:

http://market-ticker.denninger.net/archives/596-The-TRUTH-About-The-Bail...

Did the Big-Boyz come down on YouTube? Was it swamping their servers? If so that would be good but if it was the Plutocrats taking him off then the fix is in.

THE FIX IS IN, THE PATRICIAN SENATE CARES MORE ABOUT THE BANKSTERS AND FOREIGN BANKS THAN THE WORKERS AND MIDDLE CLASS.

NO TAXATION WITHOUT REPRESENTATIUON:THE SENATE HAS LOST ITS RESPECT FROM THE AMERICAN PEOPLE, NOW THE HOUSE WILL BE TESTED AGAIN.

Hello Ignatz, that is very curious! Yes there is a provision that would allow foreign banks that have an American presence to dump toxic financial instruments onto the "bailout" plan. I am concerned that we are witnessing the clampdown of free-speech.

Found the link directly to his website:

http://market-ticker.denninger.net/archives/596-The-TRUTH-About-The-Bail...

Did the Big-Boyz come down on YouTube? Was it swamping their servers? If so that would be good but if it was the Plutocrats taking him off then the fix is in.

It's not curious, it's a choice.

If they do not allow foreign banks to liquidate the toxic debt they then no foreigner will touch US assets or the $. All the dollars held abroad will be repatriated and the dollar is toast.

So either they hyper inflate or the dollar is toast, and if they do inflate then the $ is toast anyway.

That is the true dilema and there is now no way out. All they can hope for is to stall for time.

When the crissis hits in full global trade will collapse.

Since the US is importing so much oil there will then be an immediate energy crisis for the US. Followed by war or should I say more war.

Thanks musashi, All the rape you can stand in less than one minute?:)

youtube does other things to hide inconvenient videos - like the complete SNL Palin/Clinton skit video address, which youtube kept replacing with a shorter FOX News report on the skit instead.

I have lost respect for YouTube then.

My son sent me an URL for the SNL Palin spoof: http://www.nbc.com/Saturday_Night_Live/video/clips/couric-palin-open/704...

I just checked it, it still is there.

My son sent me an URL for the SNL Palin spoof: http://www.nbc.com/Saturday_Night_Live/video/clips/couric-palin-open/704...

I just checked it, it still is there.

Denninger is wrong.

It has everything to do with Main Street, with sending your kid to college, with buying a house, a car, the WHOLE AMERICAN PIE.

If Paulson isn't allowed to appease our creditors it is the end of "The American Way of Life".

Don't listen to Denninger or Mish or any of the others because this Bailout is about our ability to retain GLOBAL reserve currency status and therefore dominance, and therefore keep a quarter of what the world has to offer flowing in our direction.

Which they will fail to do but they have to try.

After this failure they have to try to keep the bootie flowing , as outlined in the Economic Hitmans Bible, at the point of a gun.

Which they will fail at also but…

What effect will this have on Peak Oil? HHHMMMMMMMMmmm?

I know, too cynical for you all. Lets armchair QB the political machinations instead. BS!

Revolution

Denninger is sometimes a good read. But this clip is absurd.

The argument that the Bail Out should be opposed because the money will fly overseas is pure demagogery - condescending, trite.

Note he gives absolutely no reason why the US / Bush / Paulson / etc. would do such a thing. If he wants to paint them as evil madmen (which they may very well be) he has to add a little something to his argument.

Adding something would mean describing the situation better, e.g. to be very mild, that global finance is so complex that the appellation ‘foreign’ is meaningless; or, more forcibly, that the bad paper is spread about and some very powerful entities hold huge amounts of it.

In the US, nay sayers are sometimes even clumsier and dopier than the PTB. Shame on them.

Hmmm...so Paulson's refusal and Bush's veto of the plan if the foreign bank provision was removed is not salient. I believe your belief that they would not bail them out is contradicted by their actions. Observe them in action. First they tried to blast the bill through using scare tactics. Then Paulsen said he would brook no changes. Now a part of the bill has been exposed to bail foreign banks. What else do we not know of at this time? Have they been truthful?

I've got a beautiful bridge in Brooklyn I need to sell you ASAP!

Perhaps, (and I admit this the viewpoint of a non-American citizen), if there is to be a bailout plan, why shouldn't it also bailout foreign investors who are suffering the fall-out of the mess created by US financial madness?

I'm not saying I like the bailout. In fact I think that it is indeed just another way to get taxpayers to pay for the mess created by rich and wealthy. The rich and wealthy get bailed out, and there aren't even any provisions in place to make sure this doesn't happen again. It is bascically saying, go ahead, take silly risks, the tax payer will bail you out if things go wrong.

But then again, if there is to be a bailout, why should foreign investors, who are just a much a victim of this US created madness not get bailed out as well?

The problem was not created by the working class in the US, and that is who would have to shoulder the bail out. If foreign investors took a risk of participating in this mess, they also took the risk of enjoying the rewards if it was successful.

The problem here is painting with Broad strokes, The problem started in the US, but only by a small number of folks. the ones who are responsible for this mess are not being held accountable. The ones who will end up paying for it had little to do with it. The idea of further passing on the burden of the global consequences to the working guys and gals who will have to pay for the irresponsibility of the likes of Paulson and Co. is distressing. We should make Wall Street pay for it, nationalize their assets, their McMansions on Long Island, etc, and if that still does not cove the costs, we should demand a hefty price in pounds of flesh from these criminals.

How many of the working class voted for George Bush though?

In a democracy, the voters are responsible for which government officials they elect. Surely that is the idea behind the system.

I'm with you Bob. If people are too stupid to understand the consequences of their votes, they deserve what they get...I'm just sorry me and mine get those consequences as well.

... too stupid to understand the consequences ... they deserve what they get...

Let's just analyze that oft repeated phrase a little more carefully before accepting it from a logical point of view as opposed to caving into it due to its subliminal emotional appeals.

1. If there is one group of people who are "too stupid", then surely there must be another group of people who are "too smart".

2. If there is one group of people who "deserve" bad consequences, then surely there must be another group of people who do not deserve the same.

3. It does not take a whole lot of guess work to understand which groups are the ones the speaker instinctively places himself in without saying so out loud.

4. Also the agreeable listener will automatically place him or herself in certain ones of these groups and "laugh" at the other groups for being too stupid, ha ha, and being "deserving" while subliminally appreciating that the listener is both too smart and wholly "undeserving" of that or any other bad fate that falls upon the "others". (Hurray for our team, tough luck for them other people.)

So with that in mind, let's make a hypothetical list of people who were "too stupid and "deserved" what they had coming to them:

... mentally challenged students who are ordered by their teacher to march off the edge of a cliff and do so just like lemmings ...

... the brainwashed children at Jones Town who drank the "Kool aid" when instructed to do so by their parents ...

... the victims of the Nazi Holocaust who willing marched onto the death trains under the belief they were going to a "relocation" camp ...

... each of us who has ever eaten a hamburger at McD's ...

... each of us who has ever gotten addicted to nicotine ...

... each of us who has ever gotten addicted to caffeine ...

... each of us who has ever vegged out in front of the TV (boob tube) ...

... each of us who has ever voted for Party A instead of B even though there is no real difference and we're going to get what we "deserve" irrespective of which way we vote because many of the games played in this world are tails-you-lose and heads-they-win games ...

So yes, those "others" were too stupid and "deserved" the bad consequences that befell them.
I'm laughing.
You should be doing the same.
Unless of course, you are one of those "too stupid" people or one of those people "deserving" of a bad fate.

Thank you. Dead on. I'm with stupid.

Books on stupid:

Just How Stupid Are We? Facing the Truth About the American Voter
http://www.amazon.com/s/ref=nb_ss_gw_0_9?url=search-alias%3Daps&field-ke...

Dark Ages America: The Final Phase of Empire
http://www.amazon.com/Dark-Ages-America-Final-Empire/dp/0393329771/ref=p...

You've totally missed the point. Voters are not mentally challenged nor in death camps, they are responsible adults. That is the argument for why there should be democracy and not royal prerogative for example. If people give up their hard earned right to select good leaders, and allow a de facto dictatorship, then complain about the poor quality of the leadership - is that not willful stupidity?

"... victims of the Nazis...."

Godwins Rule.

How many of the working class voted for George Bush though?

My working premise is that they were brain washed into voting for the "W" (movie coming soon).
They didn't have a fighting chance because them that know what we fear used that avenue into the subconscious to control how the American working class behaved. It's not a matter of "responsible adults" getting what they "deserve" because they act stupid. It's a matter of people who know how to control the masses through thought manipulation taking advantage of their advanced knowledge in evil ways, just like an instructor who guides special children over the cliff's edge. Why do we always blame the victims? Don't the evil doers deserve some of our attention? Do they "deserve" to get away with their crimes? No.

I totally agree. The bailout is not holding the right people accountable.

All I was saying is that IF the bailout goes through. It seems only reasonable to bailout the foreign investors too.

But yeah, I do agree. Those who created the mess should be the one paying for it. Foreign or US/domestic alike.

They snuck in a provision for the banks to have ZERO reserves. Infinite lending with nothing to back it. This will guarantee that the banks are trusted... Right...

They snuck in a provision for the banks to have ZERO reserves. Infinite lending with nothing to back it. This will guarantee that the banks are trusted... Right...

There is one reason I can think of right of the hat: The owners of the countries mentioned might be really pissed off at having been had with all those beautiful investment vehicles the smart boys & gals at Wall street invented.
They might want some of their money back, and being the rich boys from over there, they could have the clout to get some of it.
The big bullies fighting over the loot of the school, leaving all the kids bruised and battered in exchange for all their money and i-pods&phones.
Pathetic. Pathologic.

Paulson is the messenger.
Acting in his capacity of member of the board of directors of the IMF, not as treasury secretary, this is why he can afford to be so arrogant.

He is Guido with the baseball bat, the senators are the drunk daddy that lost his paycheck at the poker table and likes to keep his knee caps, and the tax payers are the babies crying in their crib for a tit to suck on.

Daddy has no balls and the kids don't want to grow up.

Noizette

I'm guessing all this is to protect the derivatives market and as that is global then foreign banks must be included, but in that case I would think Denninger has a point that the cost shouldn't be carried by the US taxpayer alone if they are carried at all.

"Adding something would mean describing the situation better, e.g. to be very mild, that global finance is so complex that the appellation ‘foreign’ is meaningless."

But "US Taxpayer" is not meaningless.

This bill is a monstrosity.

Whenever you hear some grifter use the words "finance" and "complex" in the same sentence, hold onto your wallet and check that your watch is still on your wrist.

... hold onto your wallet and check that your watch is still on your wrist

Too late ... they're both gone.

Even if passed, give it a week or two and you will be proven wrong.

The hit main street will take in the short term is the exact same with or without the bill, in the longer term it is much worse with the bill.

Passing the bill may buy you a week of dead cat bounces. If that.

I agree. The markets should be hard down this month, in the first of several cascades over the next couple of years. The bill is an opportunistic power grab that will do nothing at all to prevent the great deleveraging that is underway, but will leave a legacy of unaccountable power, ripe for abuse.

I do expect a significant rally into the end of the year though, probably following a temporary bottom (a spike low?) near the end of October. My guess is that the decline would resume, with the beginnings of the next cascade starting in the New Year. 2009 will be the year when Wall Street takes Main Street down with it.

No. Nada. Nyet. My dear Souperman2, it may be the end of "your" American way of life, but not the end of the many many, millions who live a responsible life. American Pie? Well I guess it's "Bye Bye, American Pie, drove the Chevy to the Levee, but the Levee was dry". Dry as in NO MORE FKIN BAILOUTS FOR THE RICH BSTARDS. This Namby Pamby way of thinking, that we can have it all and let someone else pay for it needs to end. Better now, than when we run out of oil.

C_A - You do not understand, THIS IS NOT A BAILOUT.

Yes the wealthy will make out like bandits as they always do but the issue is appeasing the creaditors of the Worlds largest Subprime Borrower, The USA.

If USA looses the ability to borrow then YES the World Will Suffer.

Cheer...... ah screw it.

I think everyone should let others know the problem and write to your local congressperson. They have e-mails. Tell them to vote no on ALL bailout packages or you will vote for whoever runs against them the next time they are up for re-election. They may actually listen to losing their jobs over this.

hey hey tirwin,

I did write my reps, and we do have some leverage over them, but not enough to stop the bill. They are caught in a catch-22.
a) If they vote no and the bill fails, they will be blamed for the economic fallout and it will hurt them at the polls.
b) If they vote yes and the bailout passes but fails to avert catastrophe then they will be blamed at the polls.
There are only two good solutions for getting reelected.
1) Vote with the minority so that the blame falls elsewhere.
2) Vote yes and pray that it works.

Since less than half can be in the minority the majority will vote yes and pray to the free markets or manifest destiny or whatever it is that they really believe in deep down inside, underneath all the spin and PR.


"I am so upset. The Simpsons and their fellow humans voted for your party instead of mine. Obviously they're catching on to the truth."

I think everyone should let others know the problem and write to your local congressperson.

Um,yeah, well, I did. And all three of my congresscriminals have voted for the bailout. I went a step further and updated my blog with info then e-mailed around 25 family and friends about this issue. Looking at my stats from StatCounter, all but 2 or 3 visits have come via The Oil Drum, so... my efforts are failing miserably.

Sometimes I get a big insight or a lot of info from a seemingly innocuous source. This is one of those times. I reached out to 25 people... and nothing. (I don't even know if the few visits not directly via TOD were any of the people I e-mailed.) This is the US in a nutshell.

The party's over.

Cheers

Market freedom is not a “fundamentalist religion”. It is a mechanism, not an ideology, and one that has proved its value again and again over the past 200 years. The Financial Times is proud to defend it – even today.

It is a mechanism, which when viewed through the previously ignored lenses of conservation of mass, thermodynamics, and system complexity, has contributed to increased poverty, resource depletion, climate change, overpopulation, wage slavery, isolation, increased prevalence of disease, and a deterioration in mental health.

It is a fundamentally fairy-tale-based mechanism, because it durably ignores the problems it foments, and refuses to change in the face of mounting contrary experience.

Who is proud to defend Santa Claus or the Easter Bunny? Children.

The Financial Times needs to grow up.

"It is a mechanism, which when viewed through the previously ignored lenses of conservation of mass, thermodynamics, and system complexity,.."

What kind of BS gibberish is that? If I am trying to understand an economic problem I think I look to Friedrich Hayek or Milton Friedman, not Robert Boyle or Lord Kelvin.

"has contributed to increased poverty, resource depletion, climate change, overpopulation, wage slavery, isolation, increased prevalence of disease, and a deterioration in mental health."

Hello? Don't let facts get in your way here. Until recently what kind of governments did China and India have? What kind of government does Indonesia have? Have you checked their populations? Where democracy and capitalism flourish living standards go up and populations decline or go down. What has lifted the greatest percent of people out of poverty in South America? The answer is capitalism & Chile, now the wealthiest country in South America. I suppose you view scientific socialism in the former Soviet Union, Mao's China, Castro's Cuba, and Vietnam as successful? Yeah, that is why all but Cuba have abandoned socialism for capitalism. See India also.

Wage slavery? Try Cuba, everybody makes the same wage from doctors to street sweepers which is not enough to buy the minimum amount of food to exists on. Socialism gives you shortages of sugar and rationing in Cuba and Venezuela, countries that export sugar.

Last time I checked there was a finite supply of petroleum, coal, iron ore, tin, copper, and every other mineral; it doesn't much matter what your politics are.

You might be right about disease, and a deterioration in mental health; as something certainly has affected your ability to discern fact from fantasy.

Hayek and Friedman were flying to London form New York, and after toasting their successful policy to cut health care for the benefit of the unwashed masses to develop character, the pilot came on and announced that the plane had lost one of it's engines, but not to worry, as they have 2 and the flight will just take a bit longer. Friedcman turns to Hayek and says "I hope we don't lose the other, or we will never get down"

I think this is the point of superstition based economic models supported by the Hayek's and Friedmans of the world.

I agree that Friedman is an ass, but Hayek gets a bad rap.

If you read "Road To Serfdom", Hayek carefully describes the areas which free markets will be unable to address including, but not limited to, roads, hospitals and care of the elderly. He advocates that these needed services be provided by governments using tax dollars.

Free-market fundamentalist have absconded with Adam Smith and Friedrich Hayek; they put words in their respective mouths, and count on our having not read them. I believe, based on my reading, that Smith(and Hayek) would be appalled by what we justify in his name.

Yeah, as if:
1. Economics does not involve physical materials in the real world, governed by conservation of mass.
2. The recombination and exchange of physical materials doesn't involve energy and thermodynamics.
3. The societal exchange process does not involve systemic aspects of complexity and chaos.
4. Money is a real substitute for any of this.
5. That someone else's suckier-existence makes our suck not suck. That simply because it's worse in Cuba means it's not bad here, or everywhere for that matter.
6. That humans exist independently of the climate that's changing, or the species becoming extinct.

Your idea of economics is centuries old and is being proven wrong on the world stage as we speak. Almost as if it's just another religious fanatic talking.

But I do know where you're coming from, because I was educated to think in the same bullshit way you currently do, and it's totally wrong. And it took years of de-programming to get out of that limited, linear, wasteful way of thinking.

I wish you the best of luck in digging out the bullshit you have in your head. You could begin with "Chaos: Making A New Science", by James Gleick, "The Tipping Point", by Malcolm Gladwell, and "The Black Swan", by Nassim Taleb.

This is close to a thousand pages of material, which you will balk at because of a quick-fix mentality, for which I will recommend "Mastery", by George Leonard, in which he discusses the problems of addressing problems with quick, symptom-based, back-end solutions, as opposed to durable, cause-related, systemic approaches which take longer.

All of these are available at Amazon, P2P filesharing, and probably your local library.

To put it super simple: Financiers and traders groan or laugh and do high fives, “the market shows”, analysts say “the market tells us”, “the market decided”, etc. as if it were God or some superior entity to be obeyed.

Crucial decisions are given over to the collective, averaged accumulation, of a small class of people who ‘bet’.

The position is: the horse who wins is not the horse who wins the race, but the horse who most of the bettors expected to win the race! So you can do away with the horses entirely.

Now, that would be OK if the bettors just stayed amongst themselves, then they would soon see that things average out and their bets aren’t in the long run winning ones.

But these bettors drag in some huge % of ppl in the world who invest their money on the touted favorable odds... and can thru their actions manipulate the odds enough so that profits do come in for some time...

Votes are now at -12. Is there some way to see how many votes have been cast?

At first I was surprised by the leftist domination in the comments, but perhaps I should have sensed it when I got bashed for proposing nuclear power as a solution to our energy problems some time ago.

Why is it that those who worry the most seems to refuse rational solutions?

I am unaware of a way to see total votes but will ask SuperG.
I am pronuclear because I think we need everything we can get, but also pro- addressing end goals before we waste another 10 years of energy.

As to rational solutions, it is pretty evident that in times of crises (and even not), we are not exactly rational creatures, and will grab at anything that puts out the immediate fire. Thats why TOD exists, to try and get knowledge and awareness of the manifold issues that confront an energy constrained planet out in the open and discussed. Social equity - as measured by the GINI coefficient and in other ways - is one aspect of this problem - capitalism will be mightily stretched if 1% of the people hold 99% of the wealth. This is not a 'socialist' site, nor it is a 'capitalist' site - but I think in general, the contributors and commenters here recognize the current model isn't exactly working well...

Thanks Nate. About capitalism - I think wealth distribution isn't very interesting. For capitalists to hold 90% of all wealth is probably better for all than for the government to do it - it is merely a question of how to organize production. Of course we'll be screwed if super-capitalist consumes 90% of all income/production. Thankfully, they do not.

About the model not working well, I think capitalism and markets absolutely does their job. The system churns out products that are in demand in as high quantities that is humanly possible. And if you want to alter production or consumption patterns, all you have to do is regulate and pay the price of the resulting market disturbance.

So, since you can do whatever you want by voting in the right politicians, you aren't really dissatisfied with the system, but with the US voters, right? B/c if you all want to be like my country, Sweden, with $9/gallon of gas due to taxes, a car park with twice your MPG, low GINI and so on, you just have to decide to do this. (There is a price to pay, of course - a price that is bigger than you might think.)

Some of you seem to think that your political system is somehow rigged to make change impossible, but as an outside observer I think that view is partly conspiracy theory, partly contempt for your fellow voters. You can do whatever you like, actually, and I think your political life have a lot more energy and diversity than ours. You are definitely not more restricted than we are, just different.

1)I'm jealous - Sweden has a great deal of things going for it - very low population density (about 1/30 of California), high natural capital, low GINI, etc. Could you please enlighten us (because I have no idea), how you transformed your social system into $9 gas and 80-90% highest tax bracket? Was it in baby steps or all at once?

2)when I say the system isn't working well, I mean the human satisfaction or whatever pyschic measure of well being you prefer, is not improved by the 'churning out of stuff' as you say. Combined with finite resources, and our neural penchant for novelty and competition, this is a fast recipe for overshoot of all materials that matter, including the global commons, irrespective of the political system, as long as it is based on growth. I encourage you to read On the Origins of Energy Addiction (it's long but I (humbly) think worth it). Also check out www.thestoryofstuff.com

3)I don't believe in conspiracies either, but to believe that we could elect a truth-wielding, limits-to-growth-understanding, systems-thinking, EROI-calculating, wide-boundary-thinking, lower GINI espousing, future-generation caring politician in this country, let alone a whole faction of them, goes counter to 'the Peoples' voting interests. Their penchant for immediate gratification (a human one especially prevalent in 21st century USA), would be too strong to allow but a handful of votes for a politician talking about these things. I can't speak for Sweden, but in US, such a person running for public office would be far more likely shot than elected.

Hey hey Nate,

Could you please enlighten us (because I have no idea), how you transformed your social system

There is a simple answer to why Europe and the USA developed different approaches. The frontier, the existence of open space allowed the industrial revolution to progress along a different course in the new world. There is a good book about whether the UK should go the American or European route which delineates the split "the World We're In" by Will Hutton.

Europe allocated all the land a long time before the industrial revolution, so when real problems began to develop they were forced to renegotiate the social contract. The renegotiation was unpleasant though, things like the guillotine exemplify the period. In the new contract individual rights to wealth and property were tempered by the needs of social cohesion. The German constitution, for example, explicitly states that ownership of property incurs a reciprocal responsibility to the community.

In contrast the Americas was completely unoccupied. (ignoring, as we did, the native population) So when the situation became unbearable there was a safety valve, the frontier. If life became too oppressive one could always move west to stake out a claim and materially improve one's lot. This enshrined the primacy of private property in the American mind. The open spaces, wealth of natural resources, and primacy of private property are largely responsible for the suburbs and automobile culture today.

Our revolution wasn't against the wealthy landed elite it was against foreign control, taxation without representation was the phrase at the time. We did manage a limited political restructuring under the New Deal but it was just a quick fix, not a real restructuring. Since it was a political arrangement, not a revolution, those who lost out in the shuffle have resented it ever since.

Should this panic turn into the second great depression, as I think it will, we will witness a fundamental rearrangement of the American system and character. Assuming the country survives it will become a more perfect union, but the process is going to be really ugly.

Just a note about conspiracies. In the English lexicon the word has two meanings. Conspiracy with a capital C refers to cloak and dagger secret societies like the Masons,Illuminati and the military industrial complex. conspiracy with a lower case c refers to things like Enron, WorldCom, Aurthur Anderson, the Bush energy plan, and the military industrial complex. To conspire means to make decisions that effect others without their input or consent which may not be in their best interest. The lower case c variety happens all the time but it is commonly referred to as corruption. The question is where do you draw the line? Most people accept that politicians repay favors for their financial backers and that corporations do things that they shouldn't. Fewer people are willing to accept that the Iraq war was for oil. Fewer still believe that 911 was a false flag event. And only the tinfoil hats believe that some shadow group is trying to destroy the country for whatever reason. The question then is where is it reasonable to draw the line and, more to the point, how do you know what reasonable even means in a world you have no access to?

Yeah well since the tinfoil hat group has been more correct in their prediction than any other group, I'll throw my tinfoil hat in with theirs.

20% unable to find the US on a globe.
50% unable to find "the Iraq" on a globe.
4 million in prison.
Interest on the national debt exceeds $5000 per year for every household above the median income.
Eradication of Habeas Corpus, Posse Comitatus, and most of the Bill of Rights.
Hundreds of tazer deaths, and courts ruling that tazer death is just a sudden death syndrome.
Dozens of FEMA camps, with inward facing barbed wire and turnstyles being built next to railroad tracks. And various sites where tens of thousands of plastic coffins are neatly stacked. On youtube for all to see.
Microwave weapons and sound weapons available and ready to use against the population.

The list just goes on and on. All tinfoil hat stuff.

Nate, some attempts to answer:

1) Well, we don't have 80-90% tax brackets anymore - that was in the eighties. The highest nowadays are around 70%. Actually, we have quite high economic freedom overall, although still very high taxes and rigid labor codes. We are slowly getting even more free, actually.

The taxes on gas and income were done in baby steps, and much of the income tax is hidden, i.e. isn't regarded as a part of your salary. Actually, it is called "employer fee" - a type of newspeak designed to hide the true tax burden. Employers pay 32% of employee salaries (no cap) for social insurance programs.

That may be something for the U.S: Maximize taxes but try to hide them - and make services and social programs as broad and visible as possible. The goal is to try to make as many as possible think they really need the benefits provided. Free schooling, free health care, $100 per kid each month, 80% income insurance in case of health problems or unemployment and so on. Do all that and make the taxes seem low.

2) Happiness research is a new field, and I disagree with some of your statements based on what I have read. I'll try to read your links though.

3) As I said, you are dissatisfied with your fellow voters - not with the capitalist system in itself. But I think you have a political system than you might realize, and that the problems you state will be overcome in time.

I think capitalism and markets absolutely does their job.

The other day I was at an engineering project design review meeting.

The project head was explaining how they designed in special control features into the system to intelligently block out bad things from happening (ala Murphy's Law).

Of course, being a "free markets" guy myself, I laughed quietly to myself at how stupid all those engineers were. Don't they know that the "invisible hand" always comes in to do the right thing? It is a total waste of human intelligence to even bother with engineering, social or otherwise. (/sarcasm)

I'm an engineer too, actually. The systems we build does as instructed - all fault handling need to be explicit as the systems can't really reprogram themselves to cope with unexpected faults. The AIs aren't that far along, unfortunately.

Markets are more like nature itself - they contain sentient beings that are able to learn from mistakes, adapt, reorganize and survive in response to the unexpected. Also, products and companies are subject to the consumers' evolutionary pressure and thus has to adapt or close shop.

Governments can make regulations - to prevent mistakes already made and learnt from. Bear Stearns chairman lost a billion - no one in finance will want to repeat his experience. So the regulations will solve nothing, but will cost us in terms of bureaucracy and inflexibility - and perhaps they will even contain seeds for other crises.

Btw, during 1945-1982, the US were in recession 21% of the time. Then Reagan started to deregulate, and since then the US has been in recession 5% of the time. Volatility has clearly decreased with deregulation and globalization, without any adverse impact on average growth.

Markets are more like nature itself - they contain sentient beings that are able to learn from mistakes, adapt, reorganize and survive [not] in response to the unexpected.

Yes, just like St. Matthews Island.

It's not even leftist per se, as much as it is pure willful ignorance. I looked at that post with the -29 rating, and said "whoa he must have insulted someone's mama". But no, nothing like that. It is amazing to know that the majority of the readers here do not understand the basic principles of the free market.

Nor do they understand that countries and economies are not governed by any economic model; they are governed by Hegelian principles. Mafia rule.

No matter what economic model you follow, if corrupt criminals control it and dumbed down morons vote for it through Hegelian manipulation, then bad things are going to happen. I bet every single person who rated down that post has no understanding of the damage being done right now by the SEC's selective ban on shortselling. I bet they all love it. And they're gonna love being in a bread line too. The disconnect is staggering, even on a site such as this.

1)I full well know the damage being done right now on the short-selling ban. If after it expires on Oct 17 they keep the public disclosure clause for large funds posting to EDGAR, short selling as we know it (and therefore liquidity, confidence and market function as we know it) will be over.

2)what is Hegelian manipulation?

pukeon,

Others can try to cope with what passes for analysis in your rant. I just want to note your ignorance of fact.

The reality is that Cuban doctors earn salaries many times higher than the salary of streetcleaners, they live in nicer houses than the average Cuban, and they travel. I met a very interesting Cuban medical doctor not long ago in Vancouver, B.C., who was there visiting his daughter, a student studying at a local university.

It appears you know even less about India and Indonesia.

Thanks for that perspective Toil...nice rebuttal.

Yeah, like a central driven economy includes the laws of thermodynamics and all that...

Free markets is only the respect for freely agreed contracts, respect for private property and individual responsibility.

Socialist interventions (by the almighty State) like the end of the gold standard, the creation of central banks, created the conditions to undermine free markets and to live in the actual economic La-La-Land, credit expansion without previous savings to support it, massive injections of junk money made out of thin air and all that economic voodoo.

Austrian economics explains it quite well.
A sound money policy, government as an impartial referee, respect for the individual (corporations are not individuals), would put capitalism and free markets under the domain of the public, as it always should have been, and not as an instrument of government corruption for the benefit of a few corporations, notably the financial/military/industrial complex.

A sound money policy would restrain credit expansion without previous savings, adding an incentive to well thought investments, penalizing bad investments and allocating more effectively the scarce resources. It would teach us to live with our means, respect the Natural capital and it´s limits, unlike the recurrent bubbles and the raping of earth promoted by an expansionary money policy.

I wonder why the first greens were called conservationists?!?

The major flaw in this type of free-market model is the belief that markets are 'self-regulating' when they obviously are not.

Free markets are self regulating. If we had free markets in the US you might observe that, but what you are observing are rigged markets, and of course they are not self regulating. Laws were passed to impose the will of government on markets in order to benefit few at the expense of many, and what you are witnessing is what happens when free markets are not allowed to operate, and socialism is substituted instead.

So if you don't like what is happening, please place the blame where the blame is due, and not on freedom.

The rigging of the market is frequently done by players in the market, viz Enron, and countless other cartels, price fixing, unfair competition and monopolies. It actually takes serious external regulation to ensure markets stay fair.

First of all monopolies are created by law. Very few companies have ever achieved "monopoly" status through competition, and those cases have benefit the markets because the player maintaining a dominant market position through competition must continue to please the market, unlike monopolies created by government who do not need to please anyone but themselves.

Cartels, price fixers, unfair competitors, etc, violate the existing laws and don't need regulation, but do need criminal prosecution. (We have laws against murder, so should you be constantly regulated and watched by government regulators to make sure you don't plan a murder?) Regulation just institutionalizes the fraud because it transfers management to regulators who become involved with the offending corporations, setting standards that allow misdeeds and at the same time precludes redress in court by those offended. It is foolish to just keep demanding more of what does not work in response to a failure of what does not work, and that is what demands for regulation and more regulation are. What we need is no regulation other than allowing free markets to work; we have had plenty of government regulation and very little free market regulation because there has been not much free market.

And again, I point out that this problem had its origin in the manipulative imposition of the debt based monetary system upon us by collusion between government and banking interests. This system involves creation of new money by electronic bookkeeping entry and printing press and then loaning of this money to the public and government at interest. If you want to talk about fraud, this is the biggest ever. This system displaced the free market gold/silver money system; even gold was made illegal to own by Roosevelt to prevent the free market monetary system. Because money could be expanded it was, and we went from m2 of $32.2 billion in 1933 to $7,712.9 billion now, an increase of 239.5 times, and the great majority was loaned into existence (a little came into existence to build bank buildings, which if you look around town are some of the nicest buildings around).

Anyone who wonders why we are facing a debt collapse just doesn't understand the monetary system. Particularly on this site, with the prior discussions of unsustainable compounding growth systems should immediately grasp why such a compounding money system eventually collapses. All the regulation in the world cannot prevent such a collapse. And as a matter of fact one of the major interventions into the operations of Fannie came under the Clinton administration which imposed upon them the necessity of making loans to those who could not otherwise afford them, hence the origin of subprime mortgages.

Anyone who wonders why we are facing a debt collapse just doesn't understand the monetary system. Particularly on this site, ... And again, I point out that this problem had its origin in the manipulative imposition of the debt based monetary system upon us by collusion between government and banking interests. This system involves creation of new money by electronic bookkeeping entry and printing press ...

The "Anyone" line is an ad hominen attack rather than a reasoned discussion.

Many of us "are" aware that in the days of the dinosaur there was no money and therefore all of it has been made up out of thin air by use of printing presses, electronic book keeping, etc.

The bank is the government. Don't you yet get it?

Well I suppose my anger at a predatory system bubbles up upon occasion, and I probably should have expressed that part more politely. Thank you for reminding me that one catches more flies with honey than vinegar. However, there was plenty of reasoned argument which you did not address.

I think I quite clearly expressed my understanding that the banks and the government colluded to impose a predatory system on us, and that system is collapsing because it is unstable.

Gold and silver were not made up out of thin air as money, but were mined, and both have had a long histories as stable money, so your comment about dinosaur days has validity only to a fiat or debt based monetary system.

Are you really defending the Fed and fractional banking? And what are you hoping to achieve with your sarcasm? A slap upside the head?

Cheers

"Cartels, price fixers, unfair competitors, etc, violate the existing laws and don't need regulation"

These laws, inter alia, ARE the market regulation - which I said are required to ensure fairness. QED.

You have disproved your own argument.

My take on those calling for regulation is that they have never been involved with how government regulation works. If you ever had any experience with regulators, you would know that this is an unworkable approach.

I am retired, but worked as a CPA and had much inside contact with businesses and related government regulators, including IRS agents, State Insurance Commissioners, State Public Service Commissioners and HUD administrators.

Here are some examples of how it worked which I personally observed or was told in confidence by the parties involved.

A large Florida based insurance company kept a very nice deep sea fishing boat, mainly for use by executives, but it was also used to take out an IRS agent who examined the companies books every several years, with never an adverse finding (I was aware of servers potential tax issues). The examiner from the state insurance commission also liked fishing and also never gave the company any trouble.

An insurance company in Louisiana periodically met with agents from the Insurance Commission's office over lunch or dinner and drinks paid for by the company, plus perks like Sugar Bowl tickets were common.

A regulated gas utility in Louisiana was the worst. A state auditor would announce a visit in advance and tell the company's financial executive what information he needed, which would be prepared in worksheet form by the company. The auditor would spend most of the morning meeting with company executives which consisted mostly of visiting and drinking coffee and eating sweet rolls. The auditor would then be taken to a long lunch with company executives. When he returned he could collect the worksheets prepared by the company to submit as his own work, say his good bye and drive off with a trunk full of his favorite expensive liquors placed in his unlocked car trunk by the company.

HUD regulates subsidized privately owned apartment houses for low income tenants. In order to get rent increases a several month procedure must be followed eventually resulting in HUD's approval or denial of the rent increase. Cost always increased faster than rents, and with the delays in approval of rent increases many of these projects went into default resulting in the government insured mortgage being paid by taxpayers, even in cases where the HUD representative was well intentioned. And heaven help the owner of a project who had an antagonistic HUD employee overseeing his property, because that made it almost a certainty that there would be insufficient rent income to pay operating expenses.

The idea that bureaucrats are your saviors does not correspond to the reality of human interactions.

Couldn't agree more re: the (in)effectiveness of government regulation - this is especially true in healthcare, where I've spent the last two years of my career absolutely dumbfounded at the mediocrity (which leads to poor outcomes) that is a direct function of government regulations. It's a dangerous leap, but I can't imagine government regulation influencing a better set of outcomes in another industry. Forced mediocrity leaves the door wide open for "power" players to both assert personal agendas, collude with other like-minded (and resourced) players, and exploit those trapped by regulation. So back to the premise of revolution, what gets us to a revolution faster: implementing the bailout at the chagrin of the voters, or killing the bailout (and any type of imposter) and watching the ramifications on Main Street?

The idea that bureaucrats are your saviors does not correspond to the reality of human interactions.

No one is saying that government bureaucrats are free of corruption or the final solution to all our problems. Yes, someone has to check the checkers.

But think about this: your large Florida based insurance company has to constantly worry that next year the IRS may send a replacement agent who doesn't like fishing or sweet rolls very much. So they have to keep their misdeeds tempered down to some extent just in case. If there were no government oversight then it would be a free market free for all in terms of corruption and cheating.

Yeah, I have to deal with brainless government bureaucrats also. Therefore I know what you mean. However, the alternative world where there is zero oversight would be far worse.

I agree.

Consider the credit cycle.
Pretend that you are a small bank.
What is your winning strategy?

  • Loan like a maniac while credit is expanding and the economy is booming.
  • Just before the big squeeze comes, withdraw all credit.

This winning strategy is the opposite of what a regulator would want to do.

Matchless indeed:

That's a pretty deceptive graph. By showing a divergence they imply that it shouldn't be that way (or that something is "wrong" because of it).

In reality, that exactly what you should expect such a graph to look like. The income figure is inflation adjusted and per capita... so you should expect it to stay essentially flat. GDP, on the other hand, should be expected to rise with a growing working-age population.

Change either GDP to "per worker GDP" or income to "total income" and the divergence is almost entirely erased.

Huh?

I'll grant the point that GDP also grows thanks to population increases, but that barely explains a couple percentage points in GDP growth over such a period.

But otherwise, you could not be more wrong. The fact is, until the 80s, GDP growth and BOTH per capita income and median wage growth were essentially identical. Since then, average wages have lagged somewhat, and median wages have lagged even more compared to GDP.

This reflects 2 things:
- a lower portion of GDP going into wages (corporate profits being a large gainer);
- increasing inequality within wage earners, as wage increases got concentrated in a small layer at the top, with most others getting nothing.

That graph is absolutely NOT what you'd expect - it's the reflection of massive transfers of wealth from the middle classes to a very small number of very rich people.

But otherwise, you could not be more wrong. The fact is, until the 80s, GDP growth and BOTH per capita income and median wage growth were essentially identical.

Then showing that data would be less deceptive.

a lower portion of GDP going into wages (corporate profits being a large gainer);

And "corporate profits" go to people who risked their income to invest in the company... which is how it should be. So what's the problem? Look at the last year or so and wages have gone up while benefits from corporate profits (i.e. stock returns) have gone way down. That’s they “risk” that balances the “reward”.

And "corporate profits" go to people who risked their income to invest in the company... which is how it should be.

What's your reference for that statement of fiction? Why should the profits of hard work go only to the investors who (may have) put up some of their savings to finance a venture, and none to the wage-earning workers who operate the venture, manufacture and assemble its product, sell it, ship it, track it, and collect payment for it?

Can you point out where I said "none" or "only"?

Why should profits go to the people who took the risk to earn them? How ridiculous a question is that? An employee and employer contract to have a certain job done for a certain amount of compensation (which certainly can include profit sharing if the employee is willing to risk that compensation if the company does poorly). The employee has the option of taking some of his/her money and investing it at risk if the opportunity for such gains is something desired.

Note that unlike the wage-earner, the owner not only has no assurance of income/profit... but can lose some or all of the investment.

Unlike the stock speculator, the wage-earner risks the main years of their life to actually make the company work, on the assumption that they can then retire with the contracted pension. Then when the wonderboyz speculate with borrowed money (if any) and destroy the company, the wage-earner loses both the job and the pension. Would the worker accept such terms, if discussed in advance? Perhaps, if there is no other (legal) way available to make a living, which is the situation arranged for him/her on purpose by those who are out to exploit.

One of the ways that is "arranged" is via the enforcement of a monopoly on the creation of "money". That worker cannot start their own business without financing. Perhaps they should simply "print" money, loan it out, and demand interest on the loan. Illegal, right? How come it's legal for "bankers"? The free market ain't.

Unlike the stock speculator, the wage-earner risks the main years of their life to actually make the company work, on the assumption that they can then retire with the contracted pension.

The wage earner most certainly is not risking something to "make the company work". If the company fails he loses his ongoing income until he finds something else. The capital investor loses the investment. In some cases... everything they have.

And what decade are you living in? Pension? If he has one it isn't much at "risk" (with government backing), but few have one.

Would the worker accept such terms, if discussed in advance?

You don't think it's implied that if the company you elect to work for goes under, you could lose your job?

Perhaps, if there is no other (legal) way available to make a living, which is the situation arranged for him/her on purpose by those who are out to exploit

Oh please. The poor slave laborer. Why do you have such a low opinion of him? That's the only thing he's qualified to do?

One of the ways that is "arranged" is via the enforcement of a monopoly on the creation of "money". That worker cannot start their own business without financing.

Yeah... that's it... the problem is that people can't reap the benefits of property rights without having property? What a shock!

Of course they can start a business without financing... if they have their own capital. Just like the guy who started the company they work for did.

Had the Wall Street Boyz gambled with their own money, we wouldn't be in the fix we are in. It's all about "leverage", i.e., gambling with other people's money. That's not investment.

The wage earner most certainly is not risking something to "make the company work". If the company fails he loses his ongoing income until he finds something else. The capital investor loses the investment. In some cases... everything they have.

This is absolute insanity. The worker risks nothing?

1.Worker works for the company for X number of years at the opportunity cost of working elsewhere. The worker risks not working for a company that will grow, minimum.

2. The worker risks whatever physical/emotional ailments that might arise from the work.

3.The worker risks their time, i.e., their life energy. Also with opportunity cost.

4. The worker risks the company failing, thus losing a job, possibly pensions, stock options, etc.

5. The worker risks being laid off or fired at any time, and possibly at a time when other employment may not be possible due to age, etc.

Etc.

You say some really bizarre things, but this is beyond the pale.

I suppose you are right in theory but in practice I think not. Will bankers be losing money? Will their previous CEO´s be giving back their bonuses from last Christmas?

in the Anglo American model quite often profits don't go to shareholders, but are kept by management for their pet uses, ie takeovers, bonus payments etc. The weakness of the Anglo system is that it separates ownership and control. Managers can be reckless because it isn't their money at stake.

But who hired the managers?

Who knows? But for sure, not the shareholders.

Who knows? But for sure, not the shareholders.

Really? What're these "proxy" thingies I get every year for?

Am I not responsible for the actions of the people I vote for (including who they first and what actions they approve)?

Maybe your proxie thingies are different from mine. I get to vote from a pre-selected (not by the rank and file shareowners, either) list of Board Members. Not the management.

1) Shareholders have the ability to submit their own candidates.

2) The board is the management of the company in many ways.

3) The board selects the people you do consider to be managemnet.

The employees of a company have a more concentrated investment in their place of work than do investors of only money. There are only so many hours in a week that a worker can invest his time. Someone with especially good health and invests no time in his children, other family members, and the rest of the community may be able to split his time between 2 or 3 jobs while money investors can spread their risk among hundreds or even thousands of enterprises. If someone at the top of the company makes a stupid mistake hundreds and even thousands of employees, many of whom are excellent employees, may lose their income, pensions, health care, the chance of their children having a better life, etc. So who takes the bigger chance? The one who invests time and skills in a single company or the investor who spreads his risk among many companies?

The employees of a company have a more concentrated investment in their place of work than do investors of only money.

That's nonsense... but even if true, they are compensated for that investment (wait for it) on exactly the terms they accept. The owner has no such security.

money investors can spread their risk among hundreds or even thousands of enterprises.

That just distracts from the issue. There could be a single owner or thousands.

If someone at the top of the company makes a stupid mistake hundreds and even thousands of employees, many of whom are excellent employees, may lose their income, pensions, health care, the chance of their children having a better life, etc. So who takes the bigger chance?

That's dramatically overstated (unless, again, you assume that the american worker is an idiot with zero actual value - I don't). They "lose" it only until they move to their next job. The owner loses everything he invested.

What "massive transfers of wealth"? If I don't give you an ice cream just like that, have I "transferred" wealth from you to me? In a free economy, transactions are freely agreed upon - including employment and compensation.

No doubt, that is true in a "free economy."

Where in the world does such a thing exist? Not where I live. Not even in my relatively exalted position -- the Government and the insurance companies tell me what they will pay for my services, and I have no freedom to negotiate, nor can I collect more than their imposed payment schedule from patients -- by the terms of their unilaterally imposed contract.

I am free, of course, to refuse to participate with these entities, but the "free market" has seen to it that virtually no one outside their domains has any money -- the "uninsured" are unable to afford "insurance", or much of anything else.

Although insurance companies are free to combine against me to impose these contracts, if a dozen physicians get together to impose some sort of solidarity on the "negotiations" each contract year, then the Federal FTC will see to it that the upstarts are threatened with fines and jail time.

Medicine, like "Defense", and now we see "Banking" is nothing but corporate socialism.

I would be happy to compete in a "free" market. I have never seen one.

This _is_ what a free market looks like- when some players are bigger than the others. and why would you ever think the players would all be equals?
Technology is the very definition of inequality! the whole purpose of technology is to concentrate power. After many centuries with more and more advanced technology, power has been concentrated immensely. Individual people are no longer first class players in the free market. The biggest of the corporations, governments, and other large power structures, are the first class players. Set against them, an individual has no chance at all to compete. This is a free market, it's just that the nice little economics textbook stories about the farmer, the baker, and the village shoe maker, are hopelessly obsolete. In most of the industrial west, we have been able to preserve the _illusion_ of the textbook free market, but it's been just an illusion for most of us for a long time.

The decline in net energy available for civilization, though, will be accompanied by the unravelling of these immense power structures (though they will go down kicking and screaming), and an increasingly level field for competition - at a much lower level of scale and technology..

"Change either GDP to "per worker GDP" or income to "total income" and the divergence is almost entirely erased."

So go ahead and graph it - shouldn't be very hard. However, having looked at the data myself for per capita gdp (http://indexmundi.com/g/g.aspx?c=us&v=67) and median income (http://www.census.gov/hhes/www/income/histinc/p07AR.html) I can see your assertion is wrong. Per capita PPP grew 31.8% while median income grew 23.7% over that time period. I used the "current dollars" from the median income chart, but I'm not sure why it's so different from the 2007 dollars column. If the "current dollars" chart is nominal income, then we should be looking at the other column, which shows median income grew 2.7% in the time period being considered (2000-2007). I am not enough of an economist to know which column should be looked at. But, there are the numbers, check out the validity of your assertion for yourself.

However, having looked at the data myself for per capita gdp and median income I can see your assertion is wrong. Per capita PPP grew 31.8% while median income grew 23.7% over that time period.

Your two statements contradict each other. You claim that the data shows that I'm wrong and then post data showing that the original graph (showing a sharp increase in GDP with no increase at all in incomes) was deceptive.

Take into account that the two use different measures for "inflation" adjustment and the gap is even smaller.

In a capitalist nation, you can't expect the gap to be nonexistent.

I quoted the part of your statement I was taking issue with. 31.8% and 23.7% is not virtually eliminated in my opinion.

"Take into account that the two use different measures for "inflation" adjustment and the gap is even smaller."

I think you have it backwards. Take the difference into account and the gap probably becomes much bigger. But you don't seem keen on backing up your assertions with much argument or data.

I quoted the part of your statement I was taking issue with. 31.8% and 23.7% is not virtually eliminated in my opinion.

Compared to 16% vs zero?

I think you have it backwards. Take the difference into account and the gap probably becomes much bigger.

So you believe that CPI is a smaller figure than the inflation adjustment to GDP?

I am doing your research for you again. See this page: http://www.census.gov/hhes/www/income/histinc/constdol.html

It explains that "current dollars" means not adjusted for inflation. So, scratch that 23.7% rise in median income. As I suspected, the adjusted rise in median income for 2000-2007 was the 2.7% number I mentioned that you ignored.

PPP GDP takes into account both inflation and currency valuation changes. Obviously, the US dollar has suffered quite a bit in the past 8 years in international value, which makes the 32.8% rise in our PPP GDP pretty dramatic (because it rose that much despite considerable currency devaluation). So, median incomes rose 2.7% and GDP PPP rose 32.8%.

So yeah, 32.8% compared to 2.7% still seems to be a bit of a gap ;-)

In a capitalist nation, you can't expect the gap to be nonexistent.

You clearly confuse Capitalist with Corporatist / Fascist.

The US population grew by 6% between 2000 and 2006 whereas GDP as grown by 15%. Corrected for population growth, the GDP per capita would have grown around 8%.

Ok so the "free market" has its problems, but what is the alternative?

The free market may in realitiy be inefficient, but it is more efficient than the alternatives that have been tried over the years. And remember that the modern form of a free market grew out of the peasants revolt in the UK (among other things) in the 1300's after the first Great Plague, as the depopulation gave power to the peasants then working the fields.

The issue is that problems like we are seeing today will always result from a free market, which is why we are supposed to have regulations and regulators, to try to make sure things are pushed in the right direction, and there are floors and caps to prevent excesses, in particular the issue that free markets will allways tend toward a short-termist approach to everything.

The current crisis grown out of a failure of regulation, not the free market mechanisms that caused it (they worked fine, creating new ways of making something more efficient, ie the lending of money).

I suppose it depends how you define "free markets"? How would you describe the US economy in the 30 years after WW2?

I agree with your point about regulation - regulation is needed for free markets to function properly. But we're living in times where any mention of regulation gets you insulted, and all our politicians and pundits see no solution other than yet more deregulation.

The free market has one HUGE problem. It does not exist.

The problems unregulated free market creates have been known and well understood since the Great Depression. This makes it how long... 80 years?

Question: how do we always end up with the same type of crisises, even though we know very well the reasons for them?

Answer: the free market itself naturally creates enormous concentrations of wealth in just a few hands. Over time this economical power turns into political power. Using their obtained political power, those centers of wealth resists any regulation and any measures to protect the long-term public interests.

In short the whole system becomes corrupt. By its nature the so-called free market corrupts the politico-economical system. Therefore it is imperative that the market and private enterprises are a secondary system in a society, remaining under direct public check and observation every step of the way. Any system that loses the primacy of of the public interest is headed for a disaster in the long run.

You may not realize it, but you essentially recommend institutionalized corruption as a cure for ad hoc corruption.

I recommended nothing. Corruption is being fought with laws and institutions to enforce those laws.

There are countries with strong institutions and laws and others where those institutions are being bought and paid for by private interests. It seems to me in US we are having the whole government being bought by the Wall Street gang. Hell our financial minister used to be a chairman of the biggest bank... How is this possible at all?? I think all this was set up long time ago - I would date it at the moment the FED (a collection of private enterprises itself) was established and started persuing its "dual" goals of "growth" vs stability. The purpose of a central bank should be the stability of the financial system! It is not to sponsor some corrupt gamblers or save their asses when they fail on the expense of all of us.

It's not rocket surgery. This has all been clearly sorted out long ago by trial and error. Ask Eisenhower, Roosevelt. EVERY well-functioning market economy needs STONG government oversight and regulation to function properly. Note Canadian economy, where banks were never allowed by regulators to invest beyond the same fixed multiple of their assets and that multiple hasn't changed in decades. Govt. mortgage insurance was and still is restricted to only those mortgages where the buyer puts up a 10% down payment. House values are restricted to what an independent appraiser says, and the appraisers have no incentive to inflate.

Only one Canadian bank, CIBC, had any significant losses in the stupid "Sub-prime" fiasco, $300 million (not a serious problem for them). Serves them right for dipping into the US mortgage market which was OBVIOUSLY out of whack for years.

Also noteworthy, Cdn governments all are running surplus, have been for years, voters demand it. $9.2 billion federal this year. And big automakers say they prefer to locate here because universal medicare takes a huge direct and administrative cost off their books. And BTW, in Canadian medicare, doctors and hospitals etc. are still independent private businesses. Just that they send heir invoices to the provincial gevernments not HMO's. And there's no 25% of medical costs spent on insurer administration either.

THAT's what a free MARKET economy is supposed to look like, not that stupid neo-con nut-job you yanks are running.

And BTW, house prices are STILL gradually going up in most of Canada.

As a Canadian, I think you oversell us a little bit.

Govt. mortgage insurance was and still is restricted to only those mortgages where the buyer puts up a 10% down payment. This is actually not true. CMHC-backed, $0-down, 40-year mortgages have been available for a couple years now, but in response to the US housing crisis, they are being eliminated soon (off the top of my head, at the end of the year, but I could be wrong about the timing).

Only one Canadian bank, CIBC, had any significant losses in the stupid "Sub-prime" fiasco, $300 million (not a serious problem for them). Actually, there's at least $32 billion in asset-back paper that was bought in part by all of the major banks as well as some larger pension plans and other interests, which is currently locked up in a government-mediated plan to convert them, from what I hear, to long term bonds. This is separate from major writedowns that ALL major banks have made in the last year and a half, not just Scotia. But you're correct in that the amounts don't seem overwhelming, if nonetheless large.

Also noteworthy, Cdn governments all are running surplus, have been for years, voters demand it. $9.2 billion federal this year. And big automakers say they prefer to locate here because universal medicare takes a huge direct and administrative cost off their books. All fairly accurate. I'm not sure voter demand for continued surpluses is a dealbreaker, to be honest, but we don't really have a federal party currently strong enough on other grounds to get away with deficits (absent some pressing external justification, like, say, a serious recession...).

THAT's what a free MARKET economy is supposed to look like, not that stupid neo-con nut-job you yanks are running.

It's a mixed market or social market economy. I don't know how you can justify calling it a free market, and I don't know why you'd want to, either.

And BTW, house prices are STILL gradually going up in most of Canada.

Less and less gradually with each month. It's still difficult to say whether this is a levelling or the beginning of a downward slide or something more dramatic. The fact simply doesn't prove your point.

In short the whole system becomes corrupt. By its nature the so-called free market corrupts the politico-economical system.

I have a book called "Saving Capitalism from the Capitalists", written by economists Raghuram G. Rajan & Luigi Zingales.

One thing they point out is essentially what you have just said: the incumbents in an industry can (& frequently do) "...capture the policy-making process and enact anti-market legislation" (p. 201). Furthermore, "the problem is particularly acute for mature firms. Because of their size & past successes, mature firms face limited competition. They also generate tremendous amounts of cash and, with limited legitimate investment prospects in their existing businesses, have no need for new financing," (p. 59). This means they often have very large sums of money to devote to capturing the political processes and further skewing the playing field in their favour.

Unfortunately, their prescription is to open up national borders to international competition, but this simply ignores the fact that all that does is expand the problem to the international level (i.e. you wind up with transnational industries with incumbents that have even larger sums of money to use for subverting the political process in even more regions).

By LevinK: "...the free market itself naturally creates enormous concentrations of wealth in just a few hands. Over time this economical power turns into political power."

I think it is the rigged market that concentrates wealth in just a few hands. The ultimate concentration of wealth was the southern plantation before the Civil War. Was this a free market in employment or a slave system? Without laws (government intervention in the free labor market) to support slavery and return run away slaves, the free market could have prevailed and slavery could not have been enforced.

Historically the most bell shaped distributions of wealth have occurred in periods characterized by freedom, and the most skewed distributions have occurred during periods of slavery (wealth for the few and poverty for the many). Free markets produce a normal distribution; rigged markets produce a skewed distribution. Transfer of wealth to the privileged group is the purpose of, or in some cases unintended consequence of interference in the free markets.

So instead of incorrectly blaming the free market, maybe it would be better to blame this screwing on government laws that rig markets.

In the years of slavery there was also free market, and actually slaves were one of the most critical "commodities".

But I think you were partially right and I was incorrect in blaming the free market; it is capitalism which creates concentrations of wealth, by the simple mechanism that the more capital you have access to, the more economic power you have and the better position you have in the market place. This makes the market "free" only in theory, because in practice one needs copious amounts of capital in order to compete mature and successful businesses.

Natural greed creates concentrations of wealth. Capitalism is just another way of selling the idea to the general public. In communism, the pitch is "everyone will have an equal share", in capitalism it's "everyone has an equal chance to get a bigger share". Neither promises are true of course, and a privileged few accumulate most of the wealth.

I suggest that licensing by government is one of the problems in skewing wealth distribution. In communities where occupations are not licensed, the prices are generally less for those services than in communities where a license is required for example. We have licensing of many occupations "supposedly to protect the public" but the effect is like a union which price fixes and results in unemployment for those outside the union.

Another major factor is the creation of corporations by government. Otherwise those wishing to join in a venture with others would be forced to use a partnership, which both would force partners to be legally responsible for the acts of the business (unlike corporations where the owners have no legal responsibility). Partnerships would not be able to grow to the size of corporations because this would be inefficient, so large businesses would be limited, with the consequence that there would be more competition.

Again I advance the idea that free markets result in a normal bell curve distribution of wealth and controlled markets (controlled by government intervention) produce a skewed distribution. Just look at the proposed bailout, for example, which benefits a few at the expense of the many, further skewing the distribution of wealth.

Again I advance the idea that free markets result in a normal bell curve distribution of wealth

Do you have any evidence for this? Because I have read several different authors propose that power-law distributions are in fact very common in markets. I already mentioned one book to you, "The Social Atom" by Mark Buchanan. Another is "The (Mis)Behaviour of Markets" by Benoit Mandelbrot (yes, of the Mandelbrot set), who actually did his masters degree on price movements of wheat over the last century (since it's one of the oldest data-sets available) His discovery was that price movements in wheat, and as it turns out many other markets - though by no means al - have "fat tails", which is actually a sign of power-law distribution.

Try reading "The Discovery of Freedom" by Rose Wilder Lane, daughter of Laura Ingalls Wilder of Little House on the Prairie fame, and one of the great female libertarian thinkers in the USA along with Ayn Rand. She profiles the majority of recorded history in terms of slavery or freedom and the resulting effect on humankind.

At on time I gathered data on wealth distribution in the USA both in the early days of the Republic when freedom was more prevalent, and again more recently in our more repressive state, just to see for myself, but that was a few years ago and I did not keep the results which mathematically supported my assertion.

But the idea to me seems almost self evident. Look at the microcosm of a Southern plantation pre Civil War and the distribution that such a slave economy produces should be obvious; since freedom is the opposite of slavery, it is logical to conclude that freedom does not produce the same skewed distribution of wealth as slavery does. Look at a typical South American banana republic where government uses force to keep the majority in poverty and themselves and a few land owners in high cotton. If you see a society lacking a large middle class that is another way of saying that wealth is not normally distributed, but skewed in favor of the few at the expense of the many. What was the distribution of wealth in Cuba under Castro or the USSR under the slave system of communism? Isn't the answer obvious?

I don't know what you are talking about when you discuss terms like power-law distribution. How could the historic price movement of wheat (which is cyclical by nature) give any evidence about how wealth in a society is distributed? On the face of what you say, it sounds unrelated.

You're correct in saying that price movements are not inherently related to distribution of wealth. Rather, I was using this as supporting evidence that power-laws are more common in markets than we are generally taught to expect. In fact, it seems that almost everywhere we look we find power-law rather than normal distributions.

For example, on p. 180 of "The Social Atom", Mark Buchanan writes of a statistical analysis of the more than 5 mil. "commercial enterprises" in the USA performed by Robert Axtell, in which it was found that the number of firms having total sales, S, is proportional to 1/(S^2). E.g. there are four times as many companies with sales of $1 mil. as there are companies with sales of $2 mil. Similar power laws have been found for growth rates and firm survival rates. Furthermore, Benoit Mandelbrot, in "The (Mis)Behavior of Markets", on p. 151, notes a power-law in language discovered by Kingsley Zipf, Harvard lecturer and author of "Human Behavior and the Principle of Least Effort", who found that the frequency of words (e.g. in a book) follows a power-law distribution. Comparing intensity and quantity of earthquakes also yields a power-law distribution. These things are practically everywhere we look in both the social and physical sciences.

Now, to directly address your point regarding income distribution, starting from p. 152, Mandelbrot writes of Vilfredo Pareto, the famous economist, who was probably the first to discover the power-law distribution of income (although this particular finding is generally ignored in economics, except in the form of the trite 80:20 rule). As Mandelbrot writes, "Society was not a 'social pyramid' with the proportion of rich to poor sloping gently from one class to the next. Instead, it was more of a 'social arrow' - very fat at the bottom where the mass of men live, and very thin at the top where sit the wealthy elite. Nor was this effect by chance; the data did not remotely fit a bell curve, as one would expect if wealth were distributed randomly."

Interestingly, when plotted on logarithmic paper, all power-laws form a straight line, with the slope of the line corresponding to the power (e.g. slope 2 = square, 3 = cube, etc. in the equation written in the second paragraph). Pareto found a slope of alpha = 3/2, although his data set was rather limited; in most cases it's closer to 2. Also, it should be noted that the gentler the slope, the more even the distribution, so with an alpha of somewhere around 2, wealth tends to be quite concentrated. Mandelbrot also points out that "...according to Pareto's formula, the conditional probability of making a billion dollars once you have made half a billion is the same as that of making a million once you have made half a million. Money begets money, power makes power," (p. 157). This relates to what I wrote back up the discussion regarding the power of concentrations of wealth to corrupt the political process by buying the political leverage to raise barriers to entry or otherwise limit competition, and how this is even acknowledged by some economists, for example in the book, "Saving Capitalism From The Capitalists", by Rajan & Zingales. (As I noted previously, however, their solution to this problem by opening borders to international competition merely expands the scale of the problem as the new, international winners are even larger and wealthier, and therefore also better situated to influence politics, than their once national counterparts.)

Finally, it should be acknowledged that the value of alpha is not the same everywhere; it can and does vary according to local laws, norms & conditions, which I did previously mention in "The Bank Panic". However, it seems to still follow some form of power-law basically everywhere. (The only exception to this may be nomadic hunter-gatherer societies with strict physical limitations on the accumulation wealth, as well as possibly small settlements with norms of redistribution via gift-exchange or something I think I remember Jared Diamond writing about where prospective Big Men would essentially purchase political influence by distributing their accumulated wealth to the other members of their community in exchange for support on some collective decision; any society larger than this apparently seems to have inherent tendencies towards power-law distributions of wealth.) Thus, I'm not sure what kind of mathematical analysis you claim to have done, and while I support the general position that the less influence money has over the political process and the more opportunities for entrepreneurialism exist the less severe the distribution of wealth will tend to be (i.e. the smaller alpha will be), I'm not sure how you can claim to have found a normal distribution of wealth in freer countries; none of the evidence I have read seems to support that particular position.

Look at a typical South American banana republic where government uses force to keep the majority in poverty and themselves and a few land owners in high cotton.

Unfortunately, as I have pointed out, market systems appear to be unstable redistributors of wealth, as the winners of market competitions, particularly in mature industries, eventually accumulate more money than they know what to do with. As a consequence, they generally tend to find it to be an attractive investment to use that money to ensure no new upstarts will take them down by buying support from the politicos. I have read, although I don't have a link at the moment, that numerous large corporations in the USA contribute to both political parties (although apparently slightly less to the Democrats), thus ensuring that no matter who wins, they do by having someone in office who is indebted to them and their funding. Talk about playing both sides! No wonder people like to speak of the Republicans and Democrats as the left and right hands of the same pro-corporate party!

I don't doubt that wealth has more often than not been distributed in a skewed fashion, simply because periods when freedom prevailed have been relatively short in relationship to the total of time, and rulers consistently take an extra share of wealth plus grant similar advantage to their cronies.

Assume you have a society for which you calculate the distribution of wealth; any society with any economic system.

Assume then the government passed a new law requiring each person in the society to obtain an annual permit for $500 in order to get a certificate necessary to be shown grocers when buying food. Further they grant to me the sole franchise for issuing these certificates, allowing me to keep the $500 permit fee for my services.

Recalculate the distribution of wealth one year later, assuming all other things remained the same. I would have a serious increase in wealth, and everyone else would be impoverished to the extent of that transfer of wealth to me. The skew in distribution of wealth would have increased.

In any society, interfering in the existing distribution of wealth by instituting a new control on the market designed purposely or inadvertently to shift more wealth to the few will logically increase the skew. So go backwards instead of forward. Eliminate a control that gives advantage to the few at the expense of the many and the skew should lessen. Eliminate another privilege that grants economic advantage to the few and the skew should lessen some more. Just keep undoing every law, regulation, previously permitted acts of collusion against free market competition, etc., and eventually you should get back to a much less skewed distribution. I think logically you would look like a normal distribution.

In a free market society nobody has advantage other than earned by inheritance (the rule as to inheritance is shirtsleeve to shirtsleeve in three generations), superior skill, superior education, and some luck. If there is no interference by force in the operation of the free economic activity there would be no skew in wealth distribution resulting from grant of privilege.

Another way of saying that there is a normal distribution of wealth is there is a large middle class. Societies with extreme skew have very few people at the top with the wealth, very few in the middle class, and the overwhelming majority in poverty at the bottom. So if you look at the USA in our early history, there was a large middle class. I think it was no coincidence that government was small and the free market was operating well. You hear all sorts of complaints today that the middle class is being economically destroyed, and this is just another way of saying that wealth distribution is being altered. I say the cause is government that has grown from 5% of the economy to 50% and its interference that helps one at the expense of another. Government in my view is the creator of the skew by granting privilege, hence the creator of poverty for the many.

"In a free market society nobody has advantage other than earned by inheritance (the rule as to inheritance is shirtsleeve to shirtsleeve in three generations), superior skill, superior education, and some luck."

This is the Free Market Ideology. It's not true in practice, but that is not the reason for it. The reason for it is to dissuade the common man from revolution, by dangling the carrot of prosperity.

Because of humans desire for relative fitness, they prefer there to be a skewed distribution of wealth as long as they are told they have a chance of getting up the ladder. In most cases, people would be better off by pooling resources, but then there is no relative advantage.

Of course, the problem with promising prosperity is that you have to deliver. This explains why the government is happy to let asset bubbles form.

This is the dilemma of civilisation. No person or sub-group can be trusted to govern with impartiality, yet nor can the collective cooperate for the common good either. Large groups of people appear to be inherently unstable. While large groups can exploit resources in greater quantity, growth and collapse may be inevitable consequences.

The point is that the plantation as a microcosm was a slave system, and the parallel is what you see today on the big USA plantation. It certainly was incorrect of you to blame freedom for concentration of wealth. I don't know what you mean by capitalism, but in my mind capitalism is free market enterprise and that which concentrates wealth is slavery, the system enforced upon us today. Maybe you are thinking that the collectivist system of government control you know from your life experience is free market capitalism, an erroneous conclusion.

Dear Gerome,

First off, thanks for the matchless graph - I have many uses for that.

Second, with the utmost respect for your knowledge and ability I have to offer the following:

What you are currently advocating by another name is creative destruction. In the recent past another individual or at least his cronies, advocated such a position as justification for tearing down despotic regimes in the Middle East. The problem with such an approach is the consequences are difficult to control. I know enough about this situation to believe the consequences of not addressing the problems in the financial markets could be catastrophic. Why are you so certain they would not be?

An election is coming within weeks that should change the political landscape of the US. It is at least conceivable that Democrats, who believe in regulation and helping the little guy, would have a slightly different approach than current administration. Perhaps we can not be so cynical as to believe positions taken a month before an election represent the ultimate purposes of a party.

Daniel

Since both major candidates are not against this bailout do you really think that there is any real difference between democrats and republicans?

Since both major candidates are not against this bailout do you really think that there is any real difference between democrats and republicans?

You are making the implicit assumption that anyone voting for the bailout is a member of -or stooge for, the aristocracy. I submit, that the logic doesn't follow. There are other reasons involving the avoidance of near term destructive economic chaos for supporting some sort of bailout. Given that timeliness is important the best current tactic
is minor modification of the plan, followed long term political and social changes. The shock of this crisis is , I hope, waking up a lot of people to the fact that the aristocracy has been systematically ripping them off. If a seachange of public opinion is really happening, and we get a strong Democratic majority in January, things can then start to change. The recent record of the Democrats has been poor, but IMO this is more the result of the fear of being painted as unpatriotic and or of having fringe views, than of membership in the aristocratic cabal. If they get a more comfortable majority -and especially if they see a dramatically changed center of gravity of opinion among the masses, they will have to change accordingly.

The shock of this crisis is , I hope, waking up a lot of people to the fact that the aristocracy has been systematically ripping them off.

Unfortunately, as Naomi Klein points out in "The Shock Doctrine", shock often actually does the opposite: people "regress" from a more rational and reasoned state to a more emotional and reactive state. Basically, people in states of shock look for leaders or parental-like figures to tell them what to do (i.e. they become child-like). Friedman et al actually advocate using shock-generating events to "turn the politically [edit: should be *impossible*] possible into the politically inevitable", [edit: this is Klein quoting Friedman, p. 7 of "The Shock Doctrine"] where the actions that are taken tend to be based on the ideas that are lying around at the time; they made it their mission to ensure that the ideas available at such times were the ones they advocate (and thus we get massive handouts to the people who created this mess in the first place instead of actions that might actually help the situation).

Now we are seeing the culmination of their efforts on the domestic front. (I'm not saying they necessarily planned this crisis, but they are certainly taking advantage of it.) Naomi Klein is predicting that we can expect that (Shock #2:) the fallout from this bailout package (i.e. the insolvency of the federal gov't) will be used as justification for the privatisation of social security and further cutbacks to social programs.

The good news is shock wears off (unless it's followed by another round of shocks). And *that* is when you can expect people to start looking for the ones who did this to them. You just better hope they aren't fed a massive diet of propaganda in the mean time redirecting their efforts onto some poor scapegoat...

Isn't the assumption that the Treasury can waltz into the market next week and sell $700 billion of stuff and have anybody want to buy it kind of bogus? I'd guess to unload that much crap at once interest rates are going to go ballistic.

Jerome, sorry about misspelling your name, I was so focused on the content.

Isn't the assumption that the Treasury can waltz into the market next week and sell $700 billion of stuff and have anybody want to buy it kind of bogus? I'd guess to unload that much crap at once interest rates are going to go ballistic.

I thought the idea was that they (Treasury) were going to *buy* 700 Bln worth of worthless crap paper, not *sell* it.

True, but to get that $700 billion (considering that it looks like the Fed has already shot the moon and is broke) They either borrow it or start up about a 1000 more printing presses. Either way interest rates go up "to infinity and beyond".

Of course they could always raise taxes, the right way to do it. A surcharge on high incomes wouldn't tank the economy and .... hahahahahahahahahaha. Sorry, I can't keep a straight face.

"on the maxim that it is wise to let adults exercise their own judgment." Who let the children in the free market?

It's reality versus fantasy time.

Reality will win. It always does in the end.

We are already in the 'Post- Bailout Era'. Wow, that was fast! In a US economic 'pond' with a $75 trillion dollar price tag, what's another trillion? Not much.

Some points:

"The lesson is that the financial world cannot behave responsibly, if left to its own devices and thus should not be left to its own devices"

It's not and it won't ... and this is happening automatically. The markets have morphed into self- referencial mode; they are beginning to weigh how the markets themselves function, rather than how the participants in them do. This feedback loop is also self- reinforcing. Like black holes, the dysfunctions become more powerful as more and more planets are swallowed. Oops, there goes another bank ...

Not only the so-called prosperity of the past year was highly unequally shared (see the next point), but it was not even real, as the income and profits of the good years are now dwarfed by the losses of today

First of all, we can see what a 'non-growth' regime looks like; most of us have been living it! This is 'Trickle Up Economics'. Second, the economy is like a tree, the crisis is a systemic starvation of the root. Without surplus being aggregated into the economy from the productive efforts of the root, there is no real wealth generated; no surplus to measure and divide. Wall Street (and Lombard Street) are the branches and leaves, they provide the trappings and the infrastructure to measure and subdivide the wealth that comes from the root. In a good system, investment would flow to the root from above, so that more wealth is generated. This hasn't happened; see Matt Simmons. The 'Bailout' ... is a futile attempt to collect 'surplus' that does not exist ... from the exhausted and under- capitalized root.

the quasi-unanimous support of the Serious People for the bailout, or at least their inability to point out that the current crisis was the inevitable conclusion of the policy framework pushed by the neolib cabal shows how successful they have been at killing alternative ideas

The bailout simply insures that the credit market holocaust will have to burn itself out. The government is doing what it has done for the past twenty- five years, rendering itself irrelevant.

It would not be the first time. After the Wall Street Crash, markets were deemed to have failed and US lawmakers attempted to regulate short-cuts through the crisis. The widely-copied Smoot-Hawley Tariff Act quadrupled the effective tax rate on thousands of imports and deepened the “Great Contraction” of 1929 to 1933. The price of popular anti-market sentiment was much higher in some of Europe’s fledgling democracies: fascism.

That remark is simply incorrect.

Yes, let's focus on the short term: it's true that Wall street can take down Main St with it.

Wall Street's monster will take down all the streets before it runs out of planets to swallow.

The case for more effective regulation is nevertheless undeniable. It is hard to defend a system where top banking executives walk away with millions in compensation when their businesses are, in retrospect, fundamentally flawed. This looks like a reward for failure. We have witnessed two financial crises – the dotcom crash and the current banking disaster – in the first decade of this century. That is hardly a record which inspires confidence in the current efficiency of capital markets or their transparency.

The system of 'trickle up economics' eventually starves the entire system itself of funds. However, never underestimate the cynicism of any markets' participants.

Isn't the point we're at today pretty much that failure is NOT BEING PUNISHED????

Be patient, Grasshopper ... all will be punished. This is a market clearing event, all speculators will be wiped out. Look up Richard Whitney, the 'White Knight of Wall Street'.

The only silver lining is that, for the first time in a long time, they sound a tad defensive to me...If they feel the need to argue they are not a "fundamentalist religion", we're finaly making progress. yey!

We are all now sinners in the hands of an angry market.

Jerome - I agree with your main tenets. But with abundant energy supplies and increased population, is it surprising at all that wealth disparity has continued to widen? (Wall St is the current demon, but over history there have been many others). All this talk of Wall St vs Main St presupposes that if Wall St money were somehow distributed evenly over Main St, there would be greater social cohesion, less problems with consumption, problem solved, etc. But I think it is more complicated than just wealth transfers - the inclination to be 'better off' is, and always has been, a relative vs. an absolute, phenomenon.

In Positional Externalities Cause Large and Preventable Welfare Loss, economist Robert Frank outlines our social inclinations for relative positioning and rank, (a trait with solid evolutionary origins - inclusive fitness). He performed an experiment asking people whether they would prefer a 4,000 square foot house in among 6,000 sf houses, or a 3,000 sf house in and among 2,000 sf houses. The vast majority of respondents chose the smaller house that was 'relatively larger' to their neighbors than a bigger house (i.e. 'more'). (if you doubt the science of this survey, just answer the question yourself).

Frank further states:

In males, concentrations of the sex hormone testosterone appear to have a similar relationship with local rank. Reductions in local rank tend to be followed by reductions in plasma testosterone levels, whereas these levels tend to rise following increases in rank. A player who wins a tennis match decisively, for example, experiences a post-match elevation in plasma testosterone, and his vanquished opponent experiences a post-match reduction. As with serotonin, there is some evidence that elevated concentrations of testosterone facilitate behaviors that help achieve or maintain high local rank.

There is now vast academic literature pointing that more is not better (reference list in above pdf a good start). In order to address feasible future social structures, don't we need to incorporate new knowledge about our core drives for outcompeting (relative vs absolute), and thus change what we compete for to something with a smaller footprint? Clearly we need to get some bailout package passed, but it is going to be a short term fix, if that - we need to start getting to the root of the problem(s), else they will just manifest in different guises in short order.

Oh I agree about what our underlying human nature can lead us to behave - but that probably reinforces my point rather than weaken it: public policy should work at mitigating these trends, rather than encouraging them.

If money is the arbiter of all things, people will work towards maximising their hold of money, and billionaires will work to become bigger billionaires than the others.

The point about bringing the financial sector down to size is fundamentally a point about what values we have as a society: money (ultimately measured on an individual basis, and inevitable leading to 'net present value' analysis of all human activity, winner-take-all behavior, 'the poor have what they deserve' mentalities and Thatcher's "society doesn't exist"), or something else.

In fact, as we discuss peak oil and other resource constraints, it is worth asking how the prism of money maximisation is compatible with things like resiliency and sustainability...

*dupe*

What if money is the arbiter of all things, but it is only that way because we agreed to it?

And what if we add in the understanding that money is an abstract illusion that only represents the exchange of real-world things and actions needed to maintain a society, like food, water, shelter, tools, skills, and mutual support?

Barter was resilient. Barter plus money was perhaps more resilient. Money alone is efficient.

Money may have once been a useful tool, but I propose that the tool is breaking from the strain of misuse.

SOME SCIENTISTS CLAIM THAT HYDROGEN, BECAUSE IT IS SO PLENTIFUL, IS THE BASIC BUILDING BLOCK OF THE UNIVERSE. I DISPUTE THAT. I SAY THAT THERE IS MORE STUPIDITY THAN HYDROGEN, AND THAT IS THE BASIC BUILDING BLOCK OF THE UNIVERSE.
----FRANK ZAPPA

Jerome what your saying is important. And its important because this money maximization seems to have been going on for some time. I think you can reliably look at the devaluing of the dollar vs gold in the 1930 then leaving the gold standard entirely in the 1970 with a full fiat money regime or the petrodollar becoming well established in the 1980's. With any exponential the first doubling s are lost in the mists of time and it takes a while to become obvious. Certainly by the 1980's the fiat petrodollar trade was in full swing.

Whats important is that the huge and mutual decision to play games with money has distorted the economy now for almost forty years. Its lead to globilization which itself is driven by the currency games. In fact the more you look the more you realize that our current economy has be on a warped path for a while. The entire economy seems to be driven by the ability of the current construct to keep wages low and replace wage gains with increased access to credit.

Its the sharecropper model or company store economics on steroids.

Its amazing in a lot of respects real wages remain stagnant savings are wiped out by inflation and credit is abundant and cheap. Real money flows ever faster directly to the top with little real investment. If and investment has to be made in the real economy its done via debt not cash.
So companies themselves become indebted sharecroppers just like their employees.

Now to your point about bringing the financial sector down to size the question I have is in todays world is their really any other sector ?

It looks to me like the worlds economy has successfully been transformed into a appendage of the financial sector with barely any real economic activity left.

Its gone we now only have a financial economy thus the impact of peak oil and its deflationary effects will probably eventually hit far harder then most realize.

The key in recognizing that the real economy has been completely subjugated is to recognize that the long period of cheap oil resulted in no real financial gain for the masses. This is the key in understanding how throughly corrupted our economy has become.

More noteworthy about the 1980's than any change in currency policy was the rise of "Reaganomics" and "trickle-down economics".

I think the big thing was sweeps came in about that time I'd have to look but banks became able to sweep checking accounts and lend the money.

http://spruce.flint.umich.edu/~mjperry/money11.htm

But yes trickle down economics where part of the game. But its a continuous evolving situation.
It looks like it took time to establish the fiat currency game following WWII.

In any case baring some insanity housing should eventually be cheap enough to buy soon and if we see insanity then it will be cheap soon thereafter.

I'm going to eventually buy what I can for cash when I can and work on getting uninvolved in this mess and grow some tomatoes. I'll keep watching it with fascination but the more I learn the less I'm interested in participating in whats going on even as a simple consumer.

Hey there memmel, I've got some lentils, fava beans, cucumbers and amaranth growing right now. I just planted some potatoes and carrots and built a couple of very crude "hoop houses" out of 2x2's and Schedule 40 PVC pipe for when the weather gets colder.

You mention fascism downthread as the natural progression of a growth economy, and that one of the outcomes of fascism is the disenfranchisement of ever-increasing portions of the population. What risks do you see in the near future for those who have gotten out of debt and who are trying to acquire the means to be self-sufficient? What about those who are trying now as communities to create safety nets?

Good question.

Obviously if you own property you run the risk of having it confiscated either directly or via a taxation scheme or some sort of eminent domain approach. But thats something you have to always deal with since people really don't own property.

This suggests both trying to not be to rich so your a target so don't buy the largest house in the village. Also be careful if your poor and property taxes are burden. I'd have to guess your better off in this regard being somewhat outside the city. But its really a tossup as long as your holding s are similar to your neighbors and match the average your probably safest.
Mediocre seems to be the rule. Also if you have the money you may be better off investing it in a more rural small escape or townhouse in town then putting it all in one piece of land.

But again the best protection is to hide in the herd it seems.

Near future surprisingly I think things will go fairly well for people without debt. And by near future I tend to think the next five years. As long as having your property depreciate is not the end of the world. We have this huge financial bubble to blow off and it will take several years to unwind say 2-3 years. As it does future growth will be curtailed and some jobs lost but I think most people will be able to find employment at ever lower wages for some time.

This means I expect the daily living economy or real economy to trundle along for a while at least 2-3 years with food and gasoline getting ever more expensive and houses and cars ever cheaper. In about 2 years I expect oil to be at 300 a barrel and finally we will start seeing a real breakdown as the poorest members of society are simply unable to cope with the cost of gasoline and we start getting some serious migration starting in the US.

This will start causing social problems. In the interm for most other people who are not out of debt they will lose their homes and cars suffer all kinds of financial problems etc as the wealthy start taking assets in masse. I think however because they will be flooded with homes and land thats dropping in value I just don't expect them to go after homeowners outs side of some probably hefty increases in property taxes. However this increase is offset by falling property values and it will dampen new purchases driving prices even lower. The state will end up with more and more abandoned properties on its books. So overall your probably ok.

The biggest risk in the US is I think a lot of the migration will be back towards the larger cities and I suspect that a lot of people who live near areas of interest for developers creating new high rises for the wealthier people and tenements for the poor will get their property taken. So I think you will see that any confiscation is localized and directed towards what where formally ghetto's.

So in general I just think that most property won't have a lot of value so you probably don't have a lot to fear.

Sorry for the long winded explanation but its something I think about a lot. About the only way you can really escape is to own some land free and clear thats large enough to provide a significant amount of your food. This can readily be done on 1 acre of decent land if not less.
You don't need a large spread. And you also have to balance out the costs of getting into town vs the amount of land so its a big trade off. Also you have to think some about defensibility. If your too isolated this is a bit dangerous.

My own final analysis is your best bet is to have a house in a small town on a large lot that has a railroad with travel to a larger city that will have jobs if you need one possible in less than 1 hour by rail. It does not have to have commuter rail right now it will later.

If you want more land then you should buy land thats in walking distance from the town.
This land would be good for row crops and you could put a trailer on it to live in or its enough land rent it or have a hired hand work it.

That seemed like the only way I could come up with a sort of balanced solution that gave you the most options. You can have a garden and get to work if you have to and have land for row crops.

And alternative is to have a larger parcel outside of town but be in the position to rent in the town or city if you have to to make money. This brings up the issue of schooling if you have children it may be either home school or your responsible for transport if your too far away. So for children being in town seems better. Of special concern would be medical emergencies you could readily find that you no longer have medical care outside of town.

All of this of course depends on your circumstances but my current best decision seems to result in a home in a smaller town with rail access to the city on a double lot. But I have school age children and I know for a fact I'm not the worlds best farmer I'm a good gardener but thats not the same as real farming. So all the above is assuming that your not planning on doing commercial farming.

My opinion on that is your probably just as well off with a smaller plot in town and doing intensive farming vs 5-10 acres. I think if you want to live in the country you need to go all the way and get 40-100 acres so you have a chance at living off your farm.

Again sorry for the long random post but I think about this a LOT !

The only real way out of this is for people that own their land homes and shops free and clear to create a new localized ELP community based on renewables. Our founding fathers did not restrict voting to landowners originally out of spite but because this was the only group that could speak its voice without worry and coercion. In my opinion this same group of small landowners will eventually be responsible for us creating a new sustainable economy. It may be now it may be in 100 years but my gut tells me that this how we will throw of tyranny in the US exactly like we did originally with England.

Memmel - Although I really cherish your big picture thinking I think you simply discount the shear magnatude of population, displacement, unemployment,dissatisfaction, etc.

The mess will be more than one can plan for and avoid by putting on a pair of wellies.

Cheers!

Not really in a fascist society people that become disenfranchised are stripped of their wealth and generally moved to camps etc. Generally outside of a serious revolution occuring fascist societies are quite orderly unless your one that happens to fall between the cracks.

Assuming we are headed for fascism people would simply disappear. I'd guess we will bring something like debtor work camps back for example.

From my reading of history at least from what I can tell fascist societies had very little in the way of social disturbance and on the surface at least looked quite peaceful. Since fascism includes a type of capitalism with its wealth benefits secret police and spies and informants do particularly well under these regimes and disgruntled elements are quickly rooted out.

Look at the US we are sliding quickly into this sort of situation and you have few people protesting it.

That sounds logical but god I hope your wrong.

I'll keep watching it with fascination but the more I learn the less I'm interested in participating in whats going on even as a simple consumer.

That's the direction Fitts goes with Solari, isn't it? And more prosaically, Hamas, Hizbollah and the earlier Jewish kibbutz models as well. The state provides no services - if it even exists - so people have to build their own proto-states, communities and markets. A tall order. But it's pretty damn clear Wall Street Barry, Bankruptcy Bill Joe, McCain or Palin - makes no difference - their only job is to rip off the many to feed the few.

Trying to opt out is a terrorist act. And all of this falls out of Peak Oil and declining energy resources.

cfm in Gray, ME

I think Solari came to the same conclusion I did. However I'm much more of a watcher now of the debacle thats our economy. I really plan to opt out so I don't "care" if you will about it all that much.

I think they are on the right track to some extent but you have to look beyond the politics and problems of today and focus on what your going to do next.

Generally this means assuming pretty much a barter economy at first.

I'd be interested in ideas for the average guy. What is a good idea for Joe Sixpack, who see's the tide turning. Tonite the tide is turning big time. He's not going to make it to a farm overnight. He's got kids, a mortgage and some credit card debt. His energy charges are going up and cutting into his free cash. Things are getting tight. He did install a wood stove but the chimney set him back hard. He's a little late on some of credit cards.
Got the snowmobile and atv sitting at the end of the driveway up for sale but nobody seems to be buying. The pick up is parked and using the little 4 banger to go back and forth to work. Work is not real stable. He's not real skilled but a hard worker and loyal. He follows the news but it doesn't seem to really affect him, or at least he doesn't see it when it does. He actually works very hard and watches the game on his day off and reads stories to the kids before bed. He and his wife are starting to argue more over money. He's not in a hurricane area but he has been buying a little extra food each week, as much as his budget can spare, but the phone calls from the late credit cards are really getting annoying. His credit rating just keeps dropping even though he really has not changed anything.

What should he do in his new world?

Don in Maine

Sounds to me like he needs to invest in himself. Use his spare time to learn how to grow food and fix things so that he can barter for other goods in his neighbourhood. Come to think of it investing in yourself has always been a good idea.

Nick.

Some comments re. Joe:

1. He isn't serious about surviving. If he was, he'd be paying attention. He's going down with the ship.

2. He isn't serious about getting rid of his debt. This could be via selling stuff or reducing his expenses. No doubt he has cable TV. He won't die without it. Heck, maybe he should sell the house and take the loss or declare BK and get it over with.

3. He has no philosophy of life. He (and his wife and family) needs to develop one. What is truly important, what is nice and what can be discarded.

If he got serious about surviving, I'd suggest:

1. Read some appropriate books such as Patriots - Surviving the coming Collapse by Rawles, Reinventing Collapse by Orlov, Encyclopedia of Country Living by Emery, etc.

2. Pay attention to what is occuring. Find as many sources of information as possible. Live a reality-based life.

3. Find some like-minded people with whom he can discuss issues, concerns and actions.

4. Establish a survival mentality. The psychological changes necessary are hard to achieve - and impossible in a short time span.

5. Decide upon how the future is likely to play out and act accordingly. Yea, we all know that no one can predict the future but it has to be done!!. Of course it's a crap shoot - that's life in a changing world. He could be wrong but at least he will have tried and probably be ahead of everyone else.

6. Finally, develop a coherent plan of action; a written plan outlineing each step, the time frame in which they will be accomplished and their cost.

There's lots more but that's probably already too much for Joe.

Todd

Edit to get rid of excess underlining

we need to start getting to the root of the problem(s)

I agree and have posted elsewhere on TOD on why I think this is just the beginning of a financial avalanche: link.

IMHO, the USA federal government is attempting to stop an avalanche with a white collar picket fence made of 700B little twigs. This is a useless gesture. Throwing twigs and taxpayers in front of this avalanche is not going to stop it. We need to get to the root of the problem.

prefer a 4,000 square foot house in among 6,000 sf houses, or a 3,000 sf house in and among 2,000 sf houses. The vast majority of respondents chose the smaller house that was 'relatively larger' to their neighbors than a bigger house (i.e. 'more'). (if you doubt the science of this survey, just answer the question yourself).

I'd pick the smaller home too, but it's still way too big. Ten homes plus mine in the former would be 64k sq ft while ten plus mine in the latter would be only 23k sq ft. In the latter, my relative position vs the polar bear and the planet as a whole is far better than the former. I guess I have to read the report; the question couldn't have been framed so poorly.

cfm in 1200 sq ft home

Jerome - I agree with your main tenets. But with abundant energy supplies and increased population, is it surprising at all that wealth disparity has continued to widen? (Wall St is the current demon, but over history there have been many others). All this talk of Wall St vs Main St presupposes that if Wall St money were somehow distributed evenly over Main St, there would be greater social cohesion, less problems with consumption, problem solved, etc. But I think it is more complicated than just wealth transfers - the inclination to be 'better off' is, and always has been, a relative vs. an absolute, phenomenon.

In Positional Externalities Cause Large and Preventable Welfare Loss, economist Robert Frank outlines our social inclinations for relative positioning and rank ...

Not that complicated; It has been a policy of the United States government since the early 1980's to subsidize and encourage debt. It has done so for an obvious reason; the government itself was and is the world's greatest debtor. Encouraging debt is in the US government's interest. Substituting debt for savings was the main spring of Ronald Reagan's 'Supply- Side Economic Policy' and remains policy at all levels both here in the US and the Eurozone, to this very minute.

In a low-inflation/low- rate regime (which we have been in ... since 1982) the price of debt to the government is essentially zero ... the interest cost of money is less than the rate of inflation. This appeared to be a better 'Niewe Deal' than taxation- and- balanced accounts and far more popular. So long as the debt could be refinanced the principal didn't ever have to be repaid. Backed by the non-relevant 'full faith and credit' (taxing authority) of the US government, many were eager to lend, particularly persons and businesses overseas.

A consequence has been impoverishment of the many with debt, both individually and collectively.The only essential to sustain the system is to keep primary and interbank interest rates low at all costs.

Low interest rates are pernicious. Without subsidy (401K and other, similar tax-exempt plans) there is no return on savings and there consequently are no savings. What is happening now is the result of the systematic and long- term starvation of our economy of capital; represented by the aggregated savings of the greatest number of productive citizens.

Disagree? Look around and see the crumbling, obsolete infrastructure with your own eyes.

At the Main Street level, the savings are substituted with more debt availability. Obviously, the debt load of individuals cannot be reinvested and the calculus of compounding (of interest on debt) works to depress the aggregate earnings of Main Street as a whole, even if the nominal earnings of individuals continue to rise.

During the Great Depression the aggregate savings rate of Americans was 15%. Today, it is ZERO. A depression, now ... is a truly terrifying prospect.

To replace the aggregated capital, various forms of leverage have been substituted; derivatives, off- balance sheet vehicles, single- and multi- party self dealing. Instead of investment leading to productive return, there is gatekeeping and fee- seeking, as these provide the only returns in a 'non- yield' environment.

The markets become gambling casinos before they bacame abattoirs. Because of non-existant return and zero savings, there is simply insufficient capital available for investment here in the US.

This is the kernal - the radioactive core of our current financial predicament.

From a world-wide perspective, the lack of a 'yield mechanism' - a decent rate of return on safe investments - means that the offshore capital that would alleviate our crisis will remain offshore.

Sad, really ...

How did the researchers know that the person questioned did not simply prefer a smaller (or larger) house?

When I looked at the question, the size of the house was the basis for my answer - given that the qualifiers (size of neighbours' house) had no direct impact on me. (ie rephrase the question: a red house if neighbours were blue; or a green house if neighbours were yellow.)

If the qualifier were something which affeccted me, like noise or crime, my choice might be determined more by the qualifier than to the choice I was given.

Al

Ooops! may not be evident, but this is in response to Nate from Waaaayy up :)

Another point to flag: the "too big to fail issue".

In Europe, the recent bailouts are creating banking behemoths: Lloyds taking over HBoS, Fortis forced to sell the ABN-Amro network to, in all likelihood, one of the only two other major retail banls (ING or Rabo) in the Netherland - and we know this is not over.

The incredible concentration of banks in recent days should give us pause:



Why The Biggest Banks Will Only Get Bigger
The three biggest banks in the country are now bigger than ever, with a combined 31% of all U.S. deposits. Bank of America leads the pack with 10.99% of all U.S. deposits. J.P. Morgan trails only slightly at 10.51%. And Citigroup ranks as the only one of the big three below the 10% cap, with 9.8% of all U.S. deposits.
Wells Fargo is a very distant fourth with just 4% of all U.S. deposits.
What we are looking at right now appears to be the beginning of an unprecedented concentration of banking power in the U.S. that was aided by the destruction of the federal cap on bank deposits. The cap prevented any bank from making acquisitions that would give it more than 10% of U.S. deposits.

A commenter to that article notes the same about the UK:



A similar position will exist in the UK. Once the dust settles we too will have three goliaths, Barclays, HSBC and Lloyds TSB. Most people in the UK will have their savings or mortgages with these three banks. Most businesses and entrepreneurs will have loans from these three banks. The power within our economy will be concentrated amongst three Boards of Directors who will have enormous responsibility. It may well mean a significant long term lack of competitiveness amongst these lenders which will lead in turn to worst deals for home owners and individuals. It will be a long time before financial entrepreneurs enter the market and take on these giants to give us back a real choice. The question we must all ask ourselves is how much choice can we really give ourselves, knowing what we now know. For the truth is we are all to blame for what has happened,. We took the fruit from the Garden of Eden and bit into it in the form of cheap loans, mortgages, and re-mortgages for that nice shiny car. We got greedy and bought property to rent out to others and will pay for the consequences for many years to come. In the UK we will have to put our trust in the FSA to be the guardians or our rights and to make sure we the people get a fair deal from these giants of capitalism. In time real choice will come back, and that will be a good thing; but when it does, we must all think back to 2008 and keep ourselves in check.

And these become REALLY 'too big to fail', and can blackmail governments, and the economy in general, even more easily than before.
This should not be tolerated.

IMO, size is the problem. Not only can huge corporations blackmail entire societies because they are "too big to fail". Huge corporations are also able to buy whatever legislation they want, whether it is bailouts or bankruptcy "reform" or what have you. Allowing corporations to become huge corrupts both democracy and capitalism, and we're seeing the terminal stages of that now.

Size certainly is a problem, for example last weekend Fortis bank was failed-out by the Benelux governments to the tune of 11.2bn Euros. Its assets are greater than the size of Belgium's annual domestic economic output. It's problems were caused by buying ABN last year (as part of a consortium) for 24bn Euros.

Yesterday the Irish government gave a guarantee covering the largest six banks for an unlimited amount. Again this represents a multiple of the GDP or almost 10 times the current national debt.

Not to be outbid, over in Iceland they raised this even further to about ten times GDP (sorry don't have the figures to hand at the moment so going from memory).

Meanwhile the consolidation gives rise to some more potential lucrative deals. LloydsTSB agreed to buy HBOS for 0.83 Lloyds share per HBOS share. Today LLOY closed at 250 while HBOS were only 148.10 which is lower than 250 x 0.83 = 207.5. So, an easy profit of almost 60p ??? Or is the deal going to unwind???

Reading the latest draft of the "Emergency Economic Stabilization Act of 2008" (note the year, will there be another one next year?:-) i see that it gives an opportunity for say JPM to buy a foreign bank with lots of toxic crap and sell it on. See "PREVENTING UNJUST ENRICHMENT...This subsection does not apply to troubled assets acquired in a merger or acquisition". Will they have the nerve to try it on? Oh yes it's morning again (for some).

But don't forget rich bankers have it hard.
http://www.thedailymash.co.uk/news/business/lehman-execs-to-lead-slightl...

Allegedly to help pay for this lifestyle Bank of America CEO Ken Lewis who earns a modest $6M per annum sold shares or exercised share options in the last 2 years their. I make it around $232M trousered.

With regard to the second FT quote, what's happened/going to happen to RBS?

Peter.

We need a new Teddy Roosevelt to "bust the Trusts" the large accumulation of power and capital to the very few. Secretary Paulson is not the guy to do it.

The effects of concentration have not been closely examined. None of the rescue packages contain any clue about de-constructing the industry and creating some diversity. The consolidation that took place prior to the crisis added tremendous pressure on bank managements. The stakes of the 'bets' placed by the banks in financial markets kept getting larger ... and the leverage involved amplified risk. With a less diverse approach to strategies the conceptual failure of a single management 'trend' is replicated elsewhere.

Ths issue of 'too big to fail' does not mean these organizations cannot. It is very possible that Citigroup will fail as a large part of its balance sheet includes billions of off-balance sheet 'assets' that it cannot sell.

The three banks are all vulnerable and should they fall they leave a vacuum ... filled by the government, which knows little about banking or finance. The endgame of the current crisis would leave one, giant marginally insolvent bank ... which would weigh on the rest of the economy like a millstone ... before it too collapses.

The US economy looks more and more every day like that of the Soviet Union in its terminal decline; centralized institutions propped up by a discredited and unpopular government with a pauperized labor force, crumbling infrastructure and military adventures gone awry. The Soviets needed foreign capital when the crunch came and they couldn't raise it. If the US continues down the current 'crisis mis-management' road, it will be in the same situation ...

Mortishead, writing in 'The Times', suggests that the banking model is completely broken, and since the LIBOR rates that banks charge each other are now above the rate at which firms can issue bonds at, the banks should be short-circuited:

There is, however, a supply of liquidity available in the corporate sector, the proceeds of years of strong corporate profits and the build-up of reserves. This money could be tapped if there was a market that functioned effectively to match those flush with cash with firms requiring short-term funds.

This is the proper function of banks. It is what they were created to do - match borrowers and lenders - but these institutions have erected on top of that simple business a tower of investment activity that has nothing to do with being a simple clearing house for funds. So overburdened are these banks from their activities as principal investors, as opposed to simple money agencies, that they have destroyed their fundamental purpose, to be effective conduits of funds.

http://business.timesonline.co.uk/tol/business/columnists/article4856620...

Is this practical?
It sounds relatively simple to set up, but that appearance could be a purely a result of my lack of knowledge.

There was once a law that one bank could not control more than 10% of the U.S. market. Seems like the FED and Treasury are making up their own laws as they go without Congress. Raiding the Federal Treasury bailing out once business after another without appropriation or uniformity.

Why is this socialist crap published on The Oil Drum?

Because I'm a Contributing Editor of the Oil Drum?

Do you have a fact- or argument-based rebuttal of what I wrote, or do you have only insults ('crap', not 'socialist') to offer?

If one wants to talk about "socialism," the bailout itself is socialism (for the rich).

Or as some have said, "No Wall Street tycoon left behind."

Unless the government gets to own the banks afterwards it's more like fascism than socialism.

I prefer to call this an exercise in fascism because the bailout represents government working hand-in-glove with big business to protect the monied elite at the expense of the general population. In fascist systems, government is "owned" or at least controlled by private interests and thereby acts in its favour.

In 1942 FDR said the following:

The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power.

As near as I can tell fascism is the natural endpoint for growth economies without revolution.
Only revolution redirects them but fascism or is really just the lender taking control. See my longer post down thread.

We have reason to be troubled by the current events but I think its important to understand that we probably have no way to prevent them from occuring outside of revolution. Also your missing the insidious socialism part of fascism. Its one reason that real fascism is so successful since it actually takes on a lot of the structures we consider socialist.

The next stage after our current debacle is disenfranchisement of various groups as the overall pie gets smaller people will be placed in the untouchables class and stripped of their rights and property. Generally this is how these things play out. The system starts eating itself as you will.

Whats fascinating is that this actually ends in my enclave scenario which is really cool. The final rulers take enough resources and impoverish enough people to create a sustainable enclave if they control the urge to go into ruinous wars.

Its really interesting that you end in the same solution regardless of if you do it in a human and open manner or in a despicable manner the political route cannot change the conclusion all it can do is increase the amount of horror and misery that occurs during the process.

And as we have seen from history the depths of horror and misery possible have no bounds or bottom. Given that its surprising that people go along with the fascist route. I think that the simplest answer is ego everyone really believes that its someone else that won't make it they are special. When the personal ego becomes ascendant then we are doomed to fascism.

This actually makes a lot of sense since fascism is really just a ponzi ego scheme which is the alter ego if you will to the more realistic communalism or shared ego approach perverted to become communism.

Its pretty wild that we have the similar sharpening of ideologies which proceeded WWII and probably WWI. Its like the communal human if you will is stuck socially and cannot progress.
I guess we probably won't until we admit the finites of our underlying planet.

Looking farther back it seems that even after thousands of years of civilization we have barely progressed with tolerance and equality only existing during the best of times.

If we did not know that balanced more renewable civilizations where possible if rare it would be hard to live in todays world.

Fascism, which is nowadays commonly associated with authoritarianism, jackboots, prisons, camps, restrictions of business, of free speech, discrimination, and so on, is not right or left wing (e.g Pinochet / Stalin) but an extremism of the center. (Nazi means national socialism.)

Usually one thinks of the center as a kind compromise or balance or reasonable position, a bit left, a bit right, a bit state controlled, a bit not, etc. but it has its extremes as well - and these are generally a melding (lack of separation) of business, industry, Gvmt., education and law. Usually presented as for the good of all, social advancement, emancipation, national renewal, and financial gain (most often thru war / colonialism / the creation of groups that can be robbed.)

All the powerful strands of society (religion often as well, see Mussolini who was a-religious and loathed the priests, he could not do without the Church..) are co-opted together for a drive forward.

Noizette perfect definition and its why I say its the natural end of a expansionist economy.
Excellent way to put it kudos.

Given that our world is fairly full we can expect the creation of groups that can be robbed to play a big role in the future of the US.

I did a long post above on property but at least this time around the wealthy will be swimming in suburban homes and commercial real estate so I think we won't see the the government confiscating a lot of land and homes. They just simply won't need it in the US. If they do it will be for political reasons.

Ok, so are contributing editors encouraged to contribute any old ideological stuff, non-related to energy? Perhaps I have just misunderstood The Oil Drum's purpose, in which case I apologize.

Of course I can do a rebuttal, if you wish:

* The financial world hasn't been left to it's own devices. The current crisis is due to particularly democrat decisions to make Freddie and Fannie (which are state/private hybrids) give more loans to poor people, without demanding down payments. Please google "The Community Reinvestment Act" of 1995, a Clinton year. Also, another big culprit is the irresponsible monetary policies of Greenspan - the low interest rate he set to combat the last slow-down resulted in an enormous expansion of money supply, which fueled the bubble in real estate.

* Your graph shows median wages. If there is an inflow of low-skilled workers to the US, and if more people are employed due to growth, that will add workers at the low end of the distribution and the guy who was the median before has moved along. Also, as far as I know, benefits hasn't declined overall, quite the opposite, which is one reason median wage hasn't increased.

* The financial markets hasn't just created growth and prosperity during the recent bubble - they have been instrumental to growth and prosperity for since the dawn of capitalist society. But I do believe the US financial sector has grown too big, much like your judicial system. They take up too much of GDP and could be simplified somewhat, by deregulation or by smarter regulations.

* Free trade has brought enormous benefits to the American people. One thing that is often overlooked is that inflation has been lower for the goods the non-rich consume, in part thanks to Chinese imports. Financial deregulation we have seen too little of. There are literally tens of thousands of pages of regulations in place. You should be glad of your labor freedom - European countries such as mine have sky high youth unemployment and also fail to employ immigrants and give them a chance of working their way up.

* There are no real alternative ideas, no, because freedom and spontaneous organization isn't only just, it also gives rise to improvements and robust prosperity.

* The "New Deal" put "Great" in the "Great Depression". Why you envision either socialism or "fascism and war " as the only possible outcomes of policies of economic freedom is beyond me.

* Revolution won't work, really. The world doesn't function without it's infrastructure, and one part of that infrastructure is the financial system. If you can't bring about change in small incremental steps, none of which make the situation worse, we are stuck with what we got, whether you like it or not. A collapse of infrastructure will mean mass death - I guess that is why we debate peak oil all the time here. But, as I said, the capitalist financial system is an infrastructure almost as critical as the oil one. And capitalism and it's financial system will be here when oil is gone.

Attacks on CRA-based lending are a thin veneer for racism. CRA sponsored banks and lenders have a lower default rate than non-sponsored institutions. Nice try, though. I'll leave the rest of your points to be torpedoed by other commentators.

I leave it to you yanks to quibble about your respective skin colors and what nuances benefit from which policies.

Lower default rate? Well, this is still a sub-prime mortgage crisis, you know. These loans have helped fuel the real estate bubble and now when the bubble is bursting, such debt is particularly risky and lose value, so banks have to mark down their assets and may go bankrupt as a result. That's what we're seeing here.

Well, this is still a sub-prime mortgage crisis, you know.

Weasel wording. If CRA mortgages don't default, they're not contributing to the crisis. And The CRA was passed by a Republican controlled congress before Clinton could sign it.

Wrong. They are contributing, as I said, since they added to the bubble and are now toxic debt. Well, shame on the complicit republicans, then.

You're apparently not American, so I'll politely correct a few factual points:

Greenspan is a Republican, appointed by the Republican Ronald Reagan.

Benefits _have_ declined overall. Pensions and medical benefits have both been drastically cut back over the last 15-20 years.

And finally, the Great Depression was quite great enough before the New Deal. If there hadn't been _Hoover_villes, Roosevelt would most likely not been elected to start the New Deal.

Why do you consider you statement about Greenspan a "correction"? I've not said anything about his affiliations. I hold that what he did when he played yo-yo with the interest rate (and thus the dollar and the global trade flows) was political in nature, as opposed to "free market". Fortunately, ECB policies are more sound - they don't talk of manipulating growth and employment and instead focus on curbing inflation and keeping monetary supply in check.

No, benefits hasn't declined, at least not cost-wise. Y2000, 72.6% of total compensation was wages/salaries. Y2007, this had gone down to 69.8%. The rest are benefits. This means benefits increased about ten percent, assuming salaries kept still in real terms. (Do the math.) Most of the increase was health insurance, that went up from 5.6% to 7.8% of total compensation. It's all here.

And sure, the depression was bad before FDR, but he deepened and prolonged it. It didn't need to take a decade.

IMO the relevance is there because when global oil depletion really bites it looks like it is clear that the global elite have no intention of mitigation at all. If their perception is that the destruction of the USA or UK is necessary then the politicians will push through policies promoting that destruction. Simply put, currently for the citizens of those two countries the respective governments are not even neutral-they are active participants in the destruction IMO. You might not be aware, but on TOD there is a lot of discussion of how e.g. the USA should/could mitigate peak oil-this assumes that the federal government does not actively fight mitigation.

Through over-platonifying, words like "socialist", "communist", and "cult", can be used to bypass rational judgment and emotionally sway readers into a desired mode of thinking.

If I were to call you a troll, I could be guilty of the same procedure. Accurate, but guilty.

So how about we stick to the details and systemic aspects of the post? Is there anything of substance you have to add?

This is troll behavior. Move to remove.

"Why is this socialist crap published on The Oil Drum?"
Because money/power and energy/power are linked?
Try drilling for oil without money. Try getting people to invest without a "return".

The banking issue will be a defining issue for this generation. I see no way to put this problem back in the bottle. This global spending spree is over, now the bill is due and "taking responsibility" is always something someone else should do.

I'm quite optimistic that we are very screwed.

D-

I am reminded once again of one Ayn Rand's quotes (of course ironically enough she was an energy cornucopian):

One can deny reality, but one cannot deny the consequences of denying reality

The underlying premise that the government and most people are operating under is that we can have an infinite rate of increase in our consumption of a finite fossil fuel resource base, so high energy and food prices are temporary. Therefore, the goal is to patch things together until the good times return. Of course, if one accepts the premise of a long term accelerating rate of decline in net oil exports, the bad times have only just begun--at least for those who cling stubbornly to the auto centric high consumption suburban lifestyle. And, if one accepts the net export premise, the reduction in the supply of available credit for most purposes, especially for discretionary spending purposes, actually makes sense.

I saw a Chevy Suburban yesterday that had a number of McCain bumper stickers, plus the two following bumper stickers:

Democrat votes caused $4 gas
Drill Here; Drill Now; Pay Less

Of course, you have to love the irony of someone driving a SUV that gets about 12 mpg in the city blaming restrictions on drilling for high gasoline prices (especially when the US is the most highly drilled area in the world).

Short term outlook. The defining characteristic of the U.S. from 1980 on.

Yes, try getting people to invest without a "return". Exactly my point. So why all the socialist crap?

Surely, you must be referring to the corporate "socialist crap" Bush is foisting on the American public.

Because that capitalism crap is doing such a bang-up job ;)

I would say because it is well known that facts have a liberal bias.

(liberal = socialist in the eyes of the extremist right-wing in the USA today).

Jeppen,

Socialist crap? $700 Billion in public money for banks that pay $40 million dollar year end bonuses to it's salesmen and you think a call for trust busting is socialist crap? You're missing your daily Rush installment....Hurry, before your brain melts.

Sometimes, it's just so hard to be even a little bit civil.

What "trust busting"? You obviously didn't read the same post I did. Yes, the $700G was part of the socialist crap the original poster advocated, along with his critique of free trade, labour freedom, low taxes and so on. As well as his call for socialist revolution.

("Rush installment"... It took me a few seconds to get that. I'm not American, so I have a hard time with such references, sometimes. Wikipedia says he's conservative - I'm libertarian.)

I have no objection to this discussion being brought up on The Oil Drum, although I do agree it is a reflection of socialist orientation; but then so many of the on topic "remedies" for peak oil are socialist proposals also.

It seems that many have been well indoctrinated into collectivism as a preferred way of life. This is unfortunate because we face a life and death struggle as the collapse of the industrial age unfolds for want of energy to fuel it. Historically, freedom has produced the most productive periods and slavery has produced stagnation and human suffering, plus a concentration of wealth in the hands of masters. If the majority are straddled with the burden of being plundered by those in power it certainly will reduce their ability to fend for themselves, and civil disorder (civil war or revolution) will be a likely consequence to add to the suffering. The current financial collapse is a consequence of the system of plunder and control and not free markets. The proposed solution is just a reflection of how this system works and how to plunder the many at the expense of the few.

Aggravating the situation is the tendency of people to huddle together in times of crisis and look for big daddy to take care of them. Look at the response of the US Congress after 911 in giving dictatorial powers to Bush. Maybe it is time for a little courage instead of a little more "mama come wipe me."

I think this is an important discussion because the political structure will in fact be as important a factor in how peak oil plays out. I personally am not optimistic about either of these systems having a favorable outcome.

I'm a fan of Representative Marcy Kaptur, one of the leaders of the "No-Bailout Act." She gave a brilliant 5-minute speech on C-SPAN, you can view it here (scroll down the page to the video):

http://www.ingovogelmann.com/tag/glass-steagall-act/

I'm a fan too [from the UK]. Can she not be President? Or does it not work like that...??

Could the massive fluctuations on Wall Street stocks be caused by a limited money supply much like we see huge jumps in price on a resource with a constrained supply? Left to its own devices, will this lead to fluctuations as big as a gambler with a bad habit?

Considering the amount of Stock that Wall Street holds is it not conceivable that Wall Street is deliberately selling to drive the market down to panic the Congress and the citizens to try to force the Congress to pass the Bailout Bill? [Legalized extortion?]
And after they panic the rest of the market to sell cheap they can set the bottom of the fall by startinig to buy back in (buying the now depressed stocks at very bargain prices) and making a hugh financial profit from the exercise [On top of the Bailout Bill?]
I got out of the stock market 3 years ago and have no intention of getting back in until the stock market is a fair market - Not in my lifetime?

One of the things that I find most worrisome about the package is the easy way lawmakers want to get an equitiy stake in companies. I'm OK with nationalizing some things if they are to be run to enhance the general welfare, but I don't think we should have an equity stake in a business that we need to regulate. The potential for favoring the businesses we own over those that we don't in our regulation is very real and essentially destroys perceptions of a fair playing field where competition can be a mechanism to boost efficiency.

Rather, we get the coporatist collaboration between government and certain favored businesses which is characteristic of the system developed by Mussolini. That we are moving very far in this direction seems most evident in the fact that failed banks are leading to agglomerations, arranged by the government, with no clear consideration of anti-trust issues that would normally happen during a merger.

I think that you are correct that we need to set a limit on the size of banks and really any corporation. One way to do that might be to revoke corporate charters after a period of 60 years or so.

Chris

As alluded to above, and in many other places on TOD threads, that is the main worry for a lot of us out here. What difference does it make, really, if a relative handful of individuals make astounding sums of money -- ultimately, they can only spend a limited amount on themselves, so through foolishness and death, most of the money will eventually be returned to the pool.

But if instead of giving it to individuals, it is given to virtually immortal creations of industry and government, then the power shifts have long duration, and we are in for generations of misery in the human population-- perhaps to be stopped only by the destruction of the entire biosphere.

Rather, we get the coporatist collaboration between government and certain favored businesses which is characteristic of the system developed by Mussolini. That we are moving very far in this direction seems most evident in the fact that failed banks are leading to agglomerations, arranged by the government, with no clear consideration of anti-trust issues that would normally happen during a merger.

So for me, the question always returns to why is this happening? Is it foolishness and greed, with no consciousness of the consequences, heedless of future catastrophe, or is it rather, intentional? Does the global elite really want to perch on rocky outcrops over a sea of misery? Are Haiti and Argentina and the Republic of Congo in some sense happening on purpose?

Maybe there is no answer, but if there were, it would seem to require different strategies-- depending on which it is-- to try to overcome this race to the bottom.

In a recent post, the author Joe Bageant described a revealing exchange he had with a financier and a developer (scroll down a ways):

http://www.joebageant.com/joe/2008/09/no-one-is-looki.html

The economist developer, when asked the same question, "Why not bail out the American people, instead of the fat cats?" was more honest:

"Doing that would have unintentional consequences."

"Like what? You're an economist, so tell me."

"Well, I don't know. That's why they are called unintentional."

"So why should the American public be perpetually and increasingly in debt?"

"Because debt is the source of American wealth."

"Wealth for whom?"

"Obviously for those who understand the system and have the know how to use it to its best purpose for all concerned."

"Won't that devalue the dollar over time?"

"Sure, but if you've got enough dollars it doesn't matter. Look at how African dictators live, despite that their nations' currency is worthless."

Hmmm, maybe the global elite does want to sit on that perch....

One thing that I agree with current president about is that envy is not a good response to the wealth spread. It is bad for the soul. But, whereas he says this to try to belittle people whose sense of justice has been offended, I tend to go with St. Paul and Lao Tzu and say that inducing people to envy via ostentatious display is something to be avoided.

If what is happenning is intentional, if people wish to induce envy, then it is surely banal as well: http://www.iep.utm.edu/a/arendt.htm#H6 The producers of rich and famous TV programs and the makers of commercials are just doing their jobs. So are the CEOs.

Chris

Amazing. In an effort to 'sweeten' the bailout, a TAX CUT has been added. WTF?

And then, a 150% increase in FDIC insurance. The fund is already heading toward insolvency. The ONLY reason this was considered is that as banks consolidate, people who have savings sprinkled $100K at a time in multiple banks may find that they now have much more than $100K in one bank. At that point, the prudent person would move some money elsewhere. But wait, you can't allow these shining knights like BOA or JP Morgan to lose deposits. They need the leverage to buy more banks!

As for the root cause, I agree with that Denninger guy: it lies in China and the Middle East threatening to dump their dollars, followed by oil being priced in Euros. The irony of this is that this might happen anyway, but first they get to dump their bad assets! We're pretty screwed, aren't we?

The tax incentives are things that have been in the works all year and which everyone wants to pass. But, this is a power play by the Senate against the House leadership because the tax incentives are not payed for elsewhere in the tax code. I'll quote me from yesterday's Drum Beat because I've been going over some of these issues with the House Majority Leader's energy aide Mary Frances Repko over the last year or so: http://www.theoildrum.com/node/4592#comment-415476 The republican principle in the dispute is Sen. Grassley. These comments are about renewable energy tax credits, but the tax policy issue is somewhat the same for the others.

I think my representitive, Steny Hoyer, is really pushing to have everything in tax policy balance because he is very worried about all the defict spending we are doing. The popularity of the tax credit extentions makes them a place where his push to at least stabilize the deficit spending can get some attention. It is worth noting that originally the savings were taken in energy by reducing oil company subsidies but have now been shifted to closing some loop holes in corporate taxes that the corporations say need closing.

The republicans claim that the need to pay for tax policy shouldn't be applied to something that continues a tax credit that has been on going. This is a little silly because the whole point of putting a time limit on such credits is to evaluate periodically if they are still needed. When the sector in booming, it is going to pay for all its early credits is abundance. So, the credits are an investment which should pay off big time. We know that the credits will end and at that time they will be used as an offset in the opposite direction. In fact, renewable energy generation will undoubtably be taxed in the future because it is going to be so cheap that it won't hurt the economy to milk it a little. We want to get to that point sooner which is why we have credits now.

Perhaps the solution is to take a page from the republican playbook and recast all of this as an insurance program. All energy companies would pay a premium to ensure future energy supplies and renewables would get payments based on the fact that they will be there in the future. Once the whole system is renewable, the premiums and the payments all fall on renewables so there is not a lot of reason to retain the system. None of it is done on the tax books, just like the insurance idea for the financial bailout. This would pretty much automatically reduce the "subsidy" for renewables at the point when it is no longer needed. This is pretty much the way we fund the future availability of bank deposits through FDIC insurance so it might have some appeal. Perhaps renewables are too important to be left to tax policy?

Chris

I should add that this is now one energy bill that McCain won't be able to duck when it comes to voting. They should have added Renewable Portfolio Standards in as well since he'll be showing up at least.

Chris

"Quite frankly, the alternative now, just like in the 30s, is either a full break from the past (a new "New Deal") or a move towards fascism and war — the latter being our current elites' only chance of holding onto power."

The question therefore is: will there be a new President?

Of course, there will be a new President! Elections will come around every two years for the House, every four years for the President, and every six years for the senate -- just like clockwork.

But who winds the clock? Who reads the time? The main reason for voting for Obama is that he is better-looking.

What is most striking to me is the yawning gap, no gulf, between the opinions of the insiders and the population at large over the bailout. (Which the insiders now school us not to call a "bailout." Yes, sir! )

Also, we must keep in mind that what ever bailout package is adopted, it will not solve our short-term economic problems. We are in the middle of a slow-motion train wreck that began about one year ago. (One way to measure it is the adjustment of housing prices, which tend to be slower on the down side.)

Since the pain will be ongoing, the main priority of the politicians is to set themselves up for the subsequent round of blame game (instead of reaching for consensus).

Absent any sensible policy from government (not likely), economic actors are left on their own (households, firms, banks). They will do what is rational individually, which is to pull back from spending and lending. This will have a depressing effect collectively.

Hence, the medium term outlook is not positive.

The oil market see-saws between expecting recession with its declining real demand for oil and inflation that results in dollar dumping that pushes up the dollar price of oil.

Once again, no mention of the fundamental flaw in our so-called free market. The fact that our world economy is dominated by LIMITED LIABILITY corporations should give you some insight into how it's supposed to work.

Markets work when you pay for a service or good. When entities participating in a market are getting something for free (liability insurance for all owners), the market is fundamentally undermined.

It's right in the name folks, just look at it for a second:

"limited liability"

Until corporations pay for this insurance, this kind of meltdown is completely inevitable, no amount of oversight will prevent it.

This morning we see Textron and Sunrise Senior Living get added to the 'no-short-sell' list. Apparently IBM, GM and anyone remotely related to finance is raising their hands. But aren't ALL companies related to finance? The rules regarding short selling have changed overnight many times this year. It has reached the point where any firm that uses money to transact business can gain entry onto the short sale ban list. Smart money managers in the investment community will start researching the non-financial names on the list to find the reason why such companies believe they need protection. As usual, these seat-of-pants rule changes will have unintended consequences. In this case, non-financial companies seeking protection on the short sale ban list have marked themselves as businesses that require additional due diligence by the investment community. In the same vein, when Washington finally passes some plan, expect some ballsy financial firms to emulate their smaller relatives and opt out of the program as a show of strength. Again, the point is that the rule change itself will have the unintended consequence of delineating between the strong and weak companies.

In the end all this regulation is not only socializing our markets, destroying confidence in the long term capital flows needed for energy (and other) investment, and but ultimately restricting what is public and what is government turf -but without a long term plan. I predict by 2012-14 individuals (and non-energy companies) will no longer be able to trade or invest in oil and gas. (It will be an interesting question what they do to people that hold existing long term (e.g. 2016) contracts.)

Going to be very interesting tomorrow night whether they stick to the original plan of a 10 day ban on shorting financials. There has been a complete boycott of shorting ANYTHING by the big hedge funds for fear of reporting. That will change Friday if SEC sticks to original plan (I am guessing they won't - and will extend the ban - why else would they be adding new names to the list every day?)

In the end all this regulation is not only socializing our markets, destroying confidence ...

Markets are entirely social entities - defined and structured by society and government in a cultural context, presumably by law and regulation that insures fair play. It seems to me the problem we encounter is that our markets are not socialized, but privatized and marked by huge asymmetries of power and information; for all intents and purposes they are rigged at many levels. Our markets are not social; they are sociopathic. To survive, let alone prosper in such an environment, rewards sociopathic, perverse behavior.

That our markets have turned into little more than a flavor of legitimized gambling may well pose a problem for many already bought into the system at fictional prices on fictional terms. Tough.

Still, I agree that the regulations will probably add to the "loss of confidence"; that's because the regulators and regulatory process are so owned by the corpos and piranhas that they function more as parts of a criminal cartel. That "confidence" is a societal value: trust.

cfm in Gray, ME

BEWARE BAILOUT RD 11, NEW SHADE OF LIPSTICK

By David Swanson
SNIP:

I want a bill immediately to ban predatory mortgage lending, ban states from preventing cities from restricting predatory lending, and commit the federal government to allowing states full freedom to restrict predatory lending.

I want a bill establishing a maximum wage at 10 times the minimum wage, and including all forms of income in that calculation (and raising the minimum wage how ever much required to pass the bill). I want the tax system created by that bill to pay for any necessary bailouts, and want such bailouts enacted and overseen by Congress.

I also want a Tobin tax on all transactions in finance, insurance, and real estate, including currency transactions.

I want Congress to haul fraudulent bankers into Washington and force them to testify, fire them without compensation as part of any bailouts, and refer them to the Justice Department for prosecution.

I want serious regulation of Wall Street.

I want a five-year moratorium on foreclosures, and a bailout of homeowners equal to any bailout of bankers.

And, finally, I want $700 billion invested in green energy jobs immediately, to be paid for by a tax on carbon emissions.

In fact, I would like to see all of these steps included in a single bill called the "Honest Emergency Economic Stabilization Act of 2008."

Somebody explain to me why that wouldn't be a good move for our economy and a smart political step for those who propose it.

The incredible concentration of banks in recent days should give us pause:

I think you hit the nail on the head Jerome !!!

Not wanting to go into speculation about the convenience of this disaster, but GS and Morgan must be laughing all the way to their Secret Money Accounts. Wipe out the competition and then pickup the bits for next to nothing with a sweetener fro Paulson.

If interest rates are required on debt (because it encourages paying it back) I want the proceeds to offset taxes, cover losses, and pay for modest administration of banks.

I want the money supply to be rather stable, rather than structurally require expansion, and in proportion to the scale of the economy we need to curb overshoot.

I don't want private corporations and individuals reaping huge rewards for "letting their money work for them."

The real problem is quite simple. The American economy lives on debts it cannot repay. Regulation will not pay American debt, and deregulation will not pay it. A bailout will only post the evil day when it becomes obvious the obligation cannot be meet.

There is no need to repay it; only to make the payments at least so long as the lenders agree. And the lenders have little choice if they want a return.

Japanese interest rates are near zero. Where is Mideast oil money going to be put to work outside of the U.S.? The amounts are so huge that no other entity can absorb the funds. And the Chinese have to buy dollars to keep their currency from rising. Then they are faced with the choice of holding them without interest or lending back to the U.S. at 4%. They prefer the latter despite all the complaining.

And Americans, use to cheap gas and high living, are willing borrowers to keep the game going. All Americans care about is being able to make the payments whether it is car, house or national debt. They know in the long term the debt will become worthless due to inflation and the real suckers are not the borrowers but the lenders.

That right there is the crux--

Who is taking the risk? The borrowers or the lenders? I suspect that in the end, the lenders will call in their loans. America will become a subsidiary of its creditors.

Either way, there will be suffering ahead. But I can only applaud the demise of unbridled consumption. Maybe the forests and the fish will have a sporting chance to grow back a little.

Just how are the foreigners going to collect if we don't pay? Cut off our credit so we can no longer buy their cheap goods and put their own people out of work? How will those Chinese billionaires defend themselves from hundreds of millions of unemployed workers who have been schooled in Marxist ideology? What could the Japanese do? With their own economy shrinking at near zero interest rates they may pay us to borrow their money. The Oil Arabs may need our dollars more than we need their oil just to keep their growing populace at bay. At best the lenders may have to settle for fractions of a penny on the dollar. More likely they will just agree to accept a devalued dollar and a fixed exchange rate to keep BAU a little longer.

Unfortunately the Bushies have long ago blown their credibility with the American people and even members of their own party. I'm just not buying the hype about this so called financial crisis and certainly not agreeing with the supposed solution. The real solution is good paying jobs for the homeowners who are upside down on their mortgages. The real problem is Wall St's insistence on maximizing profits at the expense of everyone who breaks a sweat to earn their daily bread.

The beauty of the system (designed long-time back at Bretton Woods) is the in fact lenders (e.g. China, Japan) have not a lot of choice but being lenders until the end. This implies taking the hit of inflation surcharge which borrowers are free to impose on them by simply expanding their own money supply.

Now if lenders decide to stop/reduce lending:
1) Their debtor may collapse. This will hurt both their holdings and their main trading partners and result in a depression.
2) The more subtle result is they will stop accruing the large surpluses needed to prevent their own currency and capital markets from speculative attacks coming from the very same financial hubs they are crediting.

In short: they are screwed both ways.

The bottom line is: China, Japan, South Korea etc. would love to be able to get rid of their dollar holdings; however they can not, as long as the dollar is the world reserve currency. It's true that the euro emerges as an alternative, but EU and US economies and financial systems are so tightly coupled that this turns to be a false choice.

China's game has nothing to do with dollars. Their game has to do with real wealth - oil, minerals, fertilizer, and other raw materials for development. By gulling the USA into national suicide they guarantee their supply of real wealth while manufacturing runway for them to make an orderly transition to sustainable development.

Nothing else matters.

This is giving me goose-pimples as I try to look at it through the combined lenses of Joseph Tainter and Jared Diamond, who have both written about the collapse of complex societies.

Tainter's primary thesis is that collapse is the result of a disconnect between the government and what it can do for the people; people becoming increasingly independent of the government as it acts more and more to preserve its own interests -- namely, its own survival.

Diamond's primary thesis is that collapse is the result of a people continuing to value methods/traditions/ideals that are long past the point of being profitable and in fact have become deleterious to the society.

So, I guess I pose a question: is it possible that we are seeing both of these thesis start to play out: 1) Uncle Sam is in bed with Wall Street because it's in the politician's best interests to support themselves rather then those that they serve, and 2) We continue to promote the "invisible hand" of free markets as the solution to all our ills when, in fact it has failed miserably in the health care industry, the equitable distribution of wealth, etc.

-SCordry

Thanks for bringing Joseph Tainter and Jared Diamond to the fore scordry.

Yes, the psychology of previous investment make humans overvalue loss versus gain so in real terms institutions, political parties, and individuals will irrationally try to hang onto a losing situation. Are we there yet? I don't know but it doesn't look good. The concentration of economic wealth and political power leads to decreased economic justice, a squeezing of the middle class and a complete trouncing of the working class.

Unfortunately I see the invisible hand giving the american workers a very visible F*ck you.

You are not valued in Amerika anymore. Your jobs are shipped overseas. Amerikan Companies are internationalized, i.e. they just see the US as a place to sell, just a market to be cynically exploited, not employ workers or increase the US wealth to all. They pay little taxes and now we see the end point where the US taxpayer is being fleeced again by the international financial elite. We are a golden goose that has been robbed of its eggs and starved so that Paulson and his cronies can make 500 million WITHOUT PAYING ANY TAX on it while workers have to pay all kinds of taxes on their income.

Welcome to the new financial fuedalism! Your politicians work for the international monied elite not for you.

Where are the new Trust-Busters? Where are the new political forces to reign this crap in?

You are referring to the "Invisible Fist" rather than the "Invisible Hand"---
Hands suggest work and production, the fist represents the power of finance extracting wealth from the working class--
You know, the difference between user value vs exchange value is always taken with a fist.

I think the invisible hand is becoming a more visible finger

Oddly enough, I just came across this book review.

"Her new book Depletion and Abundance is a call for communities, families and individual citizens to mobilize in the creation of a “New Home Front” in America (analogous to the Home Front that existed during World War II)." The book is by Sharon Astyk.

See http://energybulletin.net/node/46713.

(Of course, this "back to the farm" theme is a common one among Peak Oilers.

And for the punters:

(I'll take Bank of America but might take Queen of England at long odds)

I strongly recommend watching the movie Zeitgeist. I think it contains some overstretched conspiracy theories, but with one of the theories there I agreed:

The credit bubble that was a prerequisite to the Great Depression was deliberately created and facilitated by the FED, so that the huge banks and players could profit from the bust and buy the small ones for penny on the dollar. Many insiders made huge money shorting the market too.

Now they are doing the very same thing 80 years later. The difference this time is that the credit bubble is global, so this time the US of A has all the temptation to choose hyperinflation instead of defaults and deflation to clear its debts. But not before the predators on Wall Street get whatever they can in the mess that follows the credit collapse.

A few sane Reps. got together after the vote and came up with a very short and to the point bill they introduced as The No Bailouts Act. Here is DeFazio's letter introducing the legislation.

As The Oregonian notes, news of The No Bailouts Act is being given the blackout treatment by the usual culprits. It's just this sort of behavior by the Propaganda System that proves how deep the fix is in. I think most of the Reps who voited against the Bush/Paulson extortion bill will back the No Bailouts Act provided it gets support from constituents; but of course, the constituents must know about this alternative, but that information is deliberately being withheld from them.

A "Free Market" is supposed to enjoy a free flow of information so the best decisions are made. It's quyite clear that such a market is a chimera.

The most important lesson is that our money is bank debt. Your checking account is a debt of your bank; your savings account is a debt of your bank; US currency is a debt of the Federal Reserve Bank. You can't go to a bank and get anything for it except a different form of debt, such as when you "cash a check" and get Federal Reserve Notes in return for your bank's checking account debt to you. Of course for now, if someone else is willing to give your some real goods or services in exchange for the bank debt you hold, as when you write them a check, then you can get value for this paper.

If, or perhaps I should say, when the banks fail, you will first hand learn the lesson of debt repudiation. If government manages to bail out the financial system, then your might alternatively learn about debt devaluation as purchasing power of your debt based money diminishes.

A lesson you probably will not learn is that the debt based money system is a fraud, simply because this fraud is carried out in the open, and you have become accustomed to thinking this is normal and acceptable. This is fraud (counterfeiting) because banks have the privilege of creating new money by either bookkeeping entry (checking account creation) or by printing press (Federal Reserve Note printing) and then loaning this newly created "money" out to the public and government at interest. Not only is wealth transferred out of your pockets by interest payments, but it is also transferred out of your pockets seripticiously by the diminished purchasing power of "money" as more and more is created.

Anyone who thinks the Federal Reserve is part of the free market does not comprehend what freedom in economic life is. Slavery much more accurately describes the money system we have now.

A free market system of money is based on honesty, and gold and silver are honest money in the sense that they cannot be created out of thin air, but must be mined at great expense when the market demands more money by making mining profitable. When the market does not demand more money, mining is unprofitable and ceases. If gold and silver coins circulated as money, inflation of the money supply would be difficult. Banks under a free market system would be required to hold gold and silver equal to any warehouse receipts (paper or electronic) they issued upon receipt from customers; they could not loan out customers gold or silver to a third party with honest 100% reserve requirement. This would mostly eliminate the possibility of bank failure since they would just be warehouses, charging you a small fee to hold your gold and silver. This would not preclude the existence of savings and loan type institutions (which could be subject to failure) where customers could risk their money by depositing it with the institution to be then loaned out to those wanting to borrow. Such a system would eliminate the ability of banking institutions to create credit out of thin air, and capital would come from savings, not dishonest debt creation.

At the base of the current financial crisis is a faulty money system based on debt. Huge amounts of new money could be and were created to loan out. Under the Clinton Presidency, laws were passed that resulted in the previously government created monsters, Fanny and Freddie, making many bad loans. Then, because interest rates were historically low (artificially set by the FED), financial firms started making bets on these loans in order to increase their profits, and the many bets actually would up with face values greater than the original loans, so that not only are the original subprime loans at risk, but the leveraged bets may ultimately be what takes down the financial system. Maybe a few years in the future it will become more evident that the derivatives are the more significant problem.

I have no objections to financial firms taking risks, but I do have a problem with banking and brokerage firms in fiduciary positions doing so, and I certainly have a problem with government passing on the losses of these firms to citizens.

My take is that energy problems acted as a detonator to set off the explosion (implosion) of the faulty, predatory, and fragile debt based money system. The contraction of the economic pie will likely be in proportion to the debt expansion since the last collapse in the 1930's. Any future attempt to re-expand the economic pie will be constrained by lack of fossil fuels and any adequate substitutes. Richard Duncan (dieoff) was correct in his framework, but not his timing.

A addition to the invention of the debt based money system, government also invented corporations. These are two faulty inventions, and we should reject both. If people want to join together in business, then they can form partnerships where the partners are responsible for the bad acts of the partnership and can be held accountable, unlike corporations. This would also limit the size of business organizations and make concentration of economic power more difficult. When those of us who survive this mess pick up the pieces, hopefully we will at least have learned the lesson that corporations and debt based money, two creations of government, are evils to be avoided.

Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.

William Shakespeare, Hamlet, Act 1 scene 3

We need to consider the LAW OF UNINTENDED CONSEQUENCES.
This why I don't believe Congress should be running the show on this one.
I'd welcome a Czar in Warren Buffet or Paul Volcker to do the job of Financial Dictator--but Paulson-Bernanke-Bush is an idiot with zero cred.

Unfortunately, Bushco will never release their deathgrip on America.

You just saw Buffet buy $5B worth of GoldmanSachs. Smart move. Goldman might not be worth that, but it keeps Paulson's phalanges off of the rest of his portfolio.

Buffet bought $5 billion of preferred with 10% interest with a conversion option to purchase common at $115 a share as reported at the time, and I think a better deal than stock IMO.

Hi, Jerome

You are not alone. Many other knowledgeable experts are repeating variations of the same theme that you expressed in writing that:

"The consequences of the financial crisis are so dire that the lesson here should not be that a bailout is necessary (it is, at this point)..."

But isn't that theme really only HALF of a complete statement? To make it a whole thought it should be something like: a bailout is necessary to avoid collapse of credit based markets and a consequent global Great Depression."

I for one consider that it is on our own best interests (borrowing the vernacular of President Bush) to 'Let this sucker go down'.

In other words, a global Great Depression is preferable to continuing business as usual because business as usual is worse than odious. I terms of peak oil, environmental degradation, etc., it is quite literally suicidal.

Additionally, consider ramifications of the point you raised in saying...

"...the current crisis was the inevitable conclusion of the policy framework pushed by the neolib cabal shows how successful they have been at killing alternative ideas as fringe or absurd or dangerous, and suggests that there still is an ideological vacuum; alternative ideas are not "there" enough to be taken seriously despite the ongoing reality, and I'm not sure they will until the current elites are completely pushed out."

I'm quite certain that giving these elites a trillion dollars to do with as they will not push them anywhere but farther up their increasingly fortified hill of power.

Indeed, how could Paulson and his team mates resist using that money to not only enrich themselves, but to obliterate their opponents? All they gotta do is nothing.

So, why does Hank Paulson get to choose who lives or dies? Does anyone mistake this guy for a boy scout?

Has anyone considered the ramifications of giving an unaccountable individual such unprecedented power? He could pauperize, without even the stroke of a pen, any financially vulnerable enemy, or instantly enrich any friend... including himself. And let us not forget his personal record as pirate captain at Goldman. Think he was worth the billion dollars he clawed in? Having achieved almost unimaginable wealth he now asks for raw power. The title Secretary of the Treasury does not make him a different man.

The whole thing reeks of the same audaciously ruthless opportunism that gave us the uber-fascist 'Patriot Act' (the Mother Of All Misnomers) following September 11.

Wall Street wants to play by 'Calvin & Hobbs' rules... that is, to create and change rules on the fly to assure that "I win and you pay."

Let's say I borrow a ridiculous sum to purchase an exorbitantly overpriced MacManion in the 'burbs, and then I default on the mortgage payments. Four consequential things result:

1) The lender repo's the house.
2) I don't have to pay for the house I no longer possess.
3) The lender suffers a little financial pain for making a bad loan.
4) The price of houses, credit, etc. gets incrementally adjusted (houses prices, for instance, might get edged downward by a tiny increment.)

Under Paulson's 'Calvin and Hobbs' solution (i.e. the trillion dollar handout) all but one of those consequences are WAY different.

1) I still lose the house (why am I not surprised that this part stayed the same?)
2) I (and every other US taxpayer) keeps on paying for it
3) The lender suffers no paid at all. Quite the contrary. They're as happy as a pocket full of clams.
4) The price of housing keeps climbing skyward. Forever.

Am I illustrating the problem clearly here? What I'm trying to say is that the so-called "root cause" of the so-called "financial crisis" is NOT the root cause, and it ain't a financial crisis.

It's not a credit crunch, meltdown, or any other red-herring buzz word, either

It is nothing less than a CONTROL crisis of the first magnitude.

It is a battle to determine WHO CONTROLS the price, payment and enforcement of responsibility in credit based purchases.

Financial tycoons (Paulson chief amongst them), having stretched the elasticity of the existing system to its breaking point, can maintain power in only one way: by moving their business OUT of the messy and painful choice filled world of the marketplace ... and INTO the office of the Secretary of the Treasury. We don't CHOOSE to pay taxes. We are made to.

They are cornered. They will not give up without a fight to our death, and the only place we stand a chance right now is in the House of Representatives. Make them believe that if they don't protect us from the Government Sector today, you'll put them back in the Private Sector on November 5.

Hi D.Benton_Smith,
You are on the money. This is a POLITICAL crisis. The monied class of Plutocrats want to have total control of the financial instruments of the US and world. If they lose and the people reign them in they even might have to pay taxes on their billions.

D.B.

You make some great points. Unfortunately I think the problem extends beyond the risk of the mortgage being paid or defaulting. I am quite confused and befuddled by most of this, but as I understand it, the mortgages were bundled, rated, tranched and sold into investment instruments of alphabet soup names like CDO and MBS, etc. If things had just stopped there, your comments would be spot on. But through the magic of fractional banking, creative accounting and fiscal alchemy, these were cloned like trace DNA to replicate to many times their original size into a Derivatives market that pushes over $500 Trillion. This seems to be the real snag. As some percentage of the base investment instruments may fail, the blending, slicing, dicing, creation of Julian Fries, and multiply of same, it is virtually impossible to know the percentage in any of the Derivatives which link back to a tangible physical address. And these were conjured up during an upswing in the market and over values, and now no one knows how to value them. Without knowing their real value, there are few buyers, and with few buyers the price is quite low. The whole mess seems to have ballooned in some artificial way creating a massive illusion of some wealth that never existed, but to admit that would create a massive loss for someone to swallow. The problem is that the the folks with the smallest voice, the American tax payers seem to be getting volunteered by our elected officials to pick up the tab.

I am truly stunned - but not surprised - by the add-ons the US Senate has put into their version of this "bailout bill" - which is in itself added onto another unrelated bill.

It's kind of like when you know a loved one is going to die, but when they do it's still hits you in the gut.

Bailout bill redux

The bill adds provisions to the House version - including temporarily raising the FDIC insurance cap to $250,000 from $100,000. It says the FDIC may not charge member banks more to cover the increase. But that doesn't prevent the agency from doing so to cover existing concerns with the fund, according to Jaret Seiberg, a financial services analyst at the Stanford Group, a policy research firm.

Instead, the bill allows the FDIC to borrow from the Treasury to cover any losses that might occur as a result of the higher insurance limit.

The bill also adds in three key elements designed to attract House Republican votes - particularly popular tax measures that have garnered bipartisan support.

It would extend a number of renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels.

The Senate bill would also continue a host of other expiring tax breaks. Among them: the research and development credit for businesses and the credit that allows individuals to deduct state and local sales taxes on their federal returns.

In addition, the bill includes relief from the Alternative Minimum Tax, without which millions of Americans would have to pay the so-called "income tax for the wealthy."

The debate over extending AMT relief is an annual political ritual. It enjoys bipartisan support but deficit hawks on both sides of the aisle contend the cost of providing that relief should be paid for. Others argue it shouldn't be paid for because the AMT was never intended to hit the people the relief provisions would protect. Nevertheless, lawmakers pass the measure every year or two.

The revised bailout bill also includes a "Mental Health Parity" provision, which would require health insurance companies to cover mental illness as it would physical illness.

You are right to be stunned, and thank you for listing some add-ons I was not aware of.

The ability of Congress to vote on legislation that includes unrelated items is a fundamental flaw in the U.S. government.

How can we solve a problem if we don't focus on the problem. Increasing the amount of FDIC insurance is not relevant to the proposed bill. It is simply a political tool designed to add complexity to the core legislation to the benefit of politicians and the special interests they pander to. It's also designed to protect the political careers of politicians who will point to such add-ons as justification for voting for the bill.

We will NEVER fix our economic system if we don't start fixing the fundamental problems. The first step is to forbid Congress to vote on bills which contain components that can be voted on separately. Every piece of legislation must rise or fall on its merits. Adding "sweeteners" or "poison pills" is unethical. If we do not force our Representatives and Senators to act in an ethical manner, there is no reason to debate solutions to the current economic crisis and all those that will inevitably follow.

We get what we pay for. We are paying for many legislators who don't act ethically. We deserve the consequences if we allow the status quo to continue.

Insanity: "Doing the same thing over and over again and expecting a different result."

My view is that the argument of bailout or no bailout is a deflection away from what we should be talking about, debt based monetary system or gold/sliver based monetary system.

If you understand that it was the imposition of a faulty, predatory, and unstable monetary system that is at the base of the current problem, then it is clear that reinstitution of a free market monetary system (gold and silver are money) is the solution. Bailout or not is meaningless, except that bailout further penalizes innocent participants.

"debt based monetary system or gold/sliver based monetary system"

- there are additional possibilities. Read Richard Douthwaite, for example.

I agree with you that this is the time to talk about the problems with a debt based money system RULED BY PRIVATE INTERESTS.

However, I don't follow the gold/silver thread. Mining is an incredibly energy intensive and polluting process. To spend our resources going after metals to expand a money supply seems bizarre and counter productive.

Personally, I don't mind a fiat money system as long as it isn't structurally required to grow and doesn't unduly reward private interests over public interests. Who gets access to credit in this system is determined by bankers beholden to public trustees, and the bankers are paid a salary, not by commission.

Mining goes on now, As for gold, most that was ever mined is still above ground in one form or another. Silver is another case since much was used up in industrial processes that disbursed it in small quantities around the planet.

It does not really matter how much is available, however, because the relationship between the supply of gold available and the quantity of goods to be purchased sets the price in gold where the transaction takes place.

I point out that the Soviet Union had a fiat money system ruled by "public interests", meaning managed by bureaucrats, and their currency habitually depreciated from printing. Your preference for a government managed system fails to take into account human nature; if it can be easily printed it will. If you do not want a system of money that grows, then why would you trust government, elected or appointed, to keep the supply stable, when you have a surefire method, of limiting supply, energy intensive costly mining.

As far a pollution, that is a separate problem easily managed with jail sentences for polluters and lawsuits against the mining company by those bearing the pollution.

I was talking to Wharf Rat at the store in town yesterday. Neither of us could come up with anything positive about what is coming down. In fact, all we see is doom and gloom on the horizon. As is mentioned up thread, everything proposed is just tinkering without addressing the underlying causes.

We are both of the opinion that time is of the essence to batten down the hatches. For me, this goes far beyond ELP. People who are not seriously prepared will be in a world of hurt, probably the rest of their lives.

Todd

Edit to add: I look at our economy in the same light as we do with petroleum, i.e., there is a minimum level of activity needed to keep the "system" going. What I foresee are cascading failures at all levels including government activity (from loss of revenue). Unlike Greer, I do not foresee a slow, step-wise collapse but rather a rapid collapse over the period of a few years.

The level of nervousness, the sounds of wailing and knashing of teeth, the clamour from all quarters, leads anyone paying the least bit of attention to the conclusion of WAR. Call it sabre rattling of a class war. Frame it as a gathering of armies to battle over dwindling resources. But however you view it, war is the best way to describe it.

I see the politicians have assembled and posture above the field for ease of executing strategy. I wittness the bankers, with pen and checkbook, ready to fund the fiasco and lend lucre for gain of intrest for the ensuing mayhem. Here I view the masses of foot soldiers, marshalling forward and opposing each other.

Of the three groups presented before me on this glorious day....I feel pity for the masses arrayed who will suffer the carnage... I feel rage for the politicians who sent the masses to it....I fear the bankers the most...for their pens and greed that funded and underwrote the contract chiseled in stone
and signed with blood...

"Who was the criminal you saw that day, can you identify him here"? (I was questioned)

"The banker you're eminence, there he is before you" (I answered and pointed towards the beast)

The relationship between energy flow and the economy is deep and only now becoming better understood.

As for where this all can go (perhaps after a revolution! or perhaps as a result of wise leadership) is that wise choices need to be made in how humans go forward governing themselves on many fronts.

Might there be a sapient (wise) form of governance?

One voice of reason:

Bank Loans Have Not Dried Up

Contrary to many comments, consumer and industrial loans actually increased in the latest week. Troubled giant banks have cut back on lending, but smaller banks have picked up the slack. Consumer and real estate loans dipped insignificantly through Sept. 17, remaining much higher than they were a year earlier.

There are five locally owned banks in my county. Four of the five president/owners live in this same county. They are solvent. They are making loans. I asked my local bank president for his honest opinion on the bailout. He said (and he was a WDC lobbiest for a time) that this will not help out county. It would not help our mainstreet. We are too small and didn't take risks with our neighbors' money. He still felt that something had to be done.

Funny. After this long talk I got a letter in the mail. The bank voted to contribute to a community foundation I'm helping start....

Small is beautiful.

The Tree of Capitalism is watered by the Blood of Bankruptcy.
-- From Calculated Risk

Chris Puplava's Wed Market Wrapup had some interesting quotes and charts.
http://www.financialsense.com/Market/wrapup.htm

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of dollars in circulation, or even credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is the equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Bernanke, Ben S.
November 21, 2002

Ben's been increasing those dollars and the balance sheet of the Fed as never before, shown by the charts below.

The annual rate of change of the Fed's balance sheet is higher than it was during the Y2K crisis.

The Senate will be voting on the $700 billion bailout package very soon and I expect that it will pass as it only requires a simple majority of just more than 50%. The House will vote on Friday and will probably pass the bailout. There will probably be many more bailouts this year and next. These bailouts will continue to devalue the real purchasing power of the US dollar, causing food and energy prices to rise further.

Chris Puplava summarises the situation is his market wrapup.

So there you have it. Credit markets remain frozen, the Federal Reserve is dropping B-52 dollar bombs (devaluing our currency), household net worth is declining, incomes are falling, and jobs are being lost to the tune of over a half million year-to-date. The economic tanker is clearly in recessionary waters that will not be calming until at least next year. What the Federal Reserve and government do from here will decide the depth and duration of the current recession but make no mistake, an economic recovery will not take place until next year as the economy will not turn on a dime.

As such, any market bounce produced from reaction to the bailout legislation passing or some other government action will fade as quarterly earnings misses (losses), job losses, rising unemployment, and falling consumption reports come in.

The Senate just finished voting on the $700 billion bailout and the results are:

For 74
Against 25

Next comes the House vote.

These bailouts will continue to devalue the real purchasing power of the US dollar, causing food and energy prices to rise further.

Except the bailout moves so far have NOT decreased the purchasing power of US dollar. Inflation is moderating AND the dollar has been strengthening against other major currencies, including an 18% drop in the Australian dollar and a 12% drop in Euro since bailouts began earlier this summer.

In a weird sort of logic, these bailouts are 'bad' for the fundamentals of US (long term) but good for US dollar short term, as the majority of derivatives worldwide are denominated in dollars - deleveraging means demand for dollars to pay off debt.

The amount of dollars printed by FRB and Bernanke CAN be (not necessarily WILL be) dwarfed by the amount of credit leaving the system. We're talking 10s of trillions. That would be deflationary.

Thanks for your comment, Nate!

Here are some charts that might interest you.

Inflation is moderating

If inflation is measured without government manipulation to lower it, then the CPI is about 13%/yr, which is far too high.


http://www.shadowstats.com/alternate_data

the dollar has been strengthening

The US dollar may have strengthened in the last couple of months but that's probably only a short term response. The USD index has moved from 72 to 80.
http://quotes.ino.com/chart/?s=NYBOT_DX&v=dmax

The long term trend of the US dollar, if further bailouts and money printing continue, is down.

The amount of dollars printed by FRB and Bernanke CAN be (not necessarily WILL be) dwarfed by the amount of credit leaving the system.

A contraction of credit is more likely to show up as price deflation in assets like houses. Simultaneously, Bernanke printing excess money will cause money supply inflation which will, in turn, show up as consumer price inflation. The retail CPI is manipulated downwards. However, the headline PPI, a more realistic measure of price inflation was a very high 9.6%/yr in August 2008.
http://www.economicnews.ca/cepnews/wire/article/118864

It is true that the amount of credit, $29 trillion, is much greater than the money supply as measure by MZM or M3. The three chart below are from http://www.nowandfutures.com/key_stats.html

The rate of credit growth has dropped recently from about 10%/yr down to 6%/yr.

Credit, Short Term

The money supply, measured by M3, is still growing at about 14%/yr, which is similar to CPI of 13%/yr in the first chart above.

Money Supply, M3, Long Term

Here is a chart showing money supply, M3, and credit added together. The combination is still growing at a high 9.5%/yr, significantly down from its high of 12.5%/yr earlier this year.

Money Supply, M3, and Credit, Long Term

The $700 billion bailout package was just passes by the US Senate a few hours ago with a good majority of 75 to 24. The House will probably pass the bailout package this Friday. However, $700 billion won't be nearly enough.

In order to make the US economy return to "normal" growth requires high credit growth to continue. Credit growth has slowed down to 6%/yr. The average credit growth since 2003 has been about 9%/yr. The money supply/treasury securities could be used to compensate and artificially increase this rate back up to 9%/yr. This would require 3% of $29 trillion current credit or about $9 trillion worth of money supply increase including bailout packages for 2009. M3 is currently increasing at about $2 trillion/yr. That's still $7 trillion short or ten times the size of the yet to be passed $700 billion bailout package. Then there's 2010.

The US consumer will not continue consuming like they did the past several years. A deep recession is not only inevitable but is required to reduce asset prices, as the artificially high credit growth rate, partly created by artificially low Fed interest rates, has come to an end.

The Government will probably a pass a few more $700 billion bailout packages, leading to higher money supply, creating much higher price inflation for energy and food. Asset deflation is likely to continue.

Ace: Great summary as usual. The overwhelming irony is that the USA needs a huge government supported investment program focusing on rail, nuclear, wind and solar. This is the ideal timing for such an endeavor. Most agree that a few trillion of taxpayers money is going to be spent in any event since the bill has been revised-obviously the logical approach would be to add an extra trillion (since the bank funding is non-negotiable) and get the real economy rolling again, with a positive focus toward the future. Naturally neither candidate will even whisper such an idea.

Ace,
Thanks for the charts. I am unclear whether we agree or disagree.

When I said CPI is moderating, I meant since July when all this began - that is not reflected in the SGS stats. There is also this graph from their site:


Which shows a sharp drop off in M3 since July (and I imagine continued in September)

This morning Merrill Lynch said that oil prices will fall to $50 if the we have a global recession (Bloomberg). I agree that we would need to have 7 more bailouts (at least) to replace the liquidity lost from this credit crisis - whether and how that happens will dictate whether we have inflation or deflation - at THIS stage of the game, I am betting deflation - with inflation of the sort you predict in food and energy to come many years down the road. (Corn, wheat and soybean prices have crashed since July). But it depends on what the government does. Also, its not like the US is the only country with these credit problems - Europeans banks have higher gearing ratios and are likely in even more trouble. I don't know how it works in Australia. IOW, the dollar might suck, but just like in most US presidential elections, it may be the 'less bad' choice.

In any case, inflation or deflation question is really not helpful in the end, other than to draw the constraints on policy. I think Brian T nails it - what an opportunity to inject money into the economy with massive alternative energy project scaling!!, (rather than tax breaks on childrens wooden arrow manufacturers)

Nate,

I would urge the house not to pass this legislation unless it includes incentives for buggywhip manufactures. Also, the playing field needs to be leveled some more. We need a 39 cent excise tax per shot in each buckshot shell. The archery industry has been at a competitive disadvantage for too long!

Chris

The moderation in inflation has everything to do with the fall in the oil price. If you are PO-aware - and many people outside TOD will become kind of when the famous November report by the IEA is released - you know that the respite in the oil price will be short-lived.

From a PO-aware viewpoint, it's critical to keep in mind that most of the talking from economists, politicians, etc. about the financial/housing crisis comes from people who have no idea that the money/houses in question is/are being spent/built on the slopes of the Vesubius, and that the volcano is about to erupt. (A comparison drawn from Matthew Simmons' latest presentation.)

FWIIW, I (as "RealThink") conveyed the above and other related thoughts on the last thread at Brad Setser's blog.

In 1989 the RTC took over failed Savings and Loan Associations, banks, etc.

They bailed out the depositers and then they sold off the assets of the failed banks (real estate properties taken in foreclosure). Then they disbanded themselves. They did not give the failed CEO's stock options, bonuses, and expense accounts, they fired them. The better capitalized banks survived and carried on. The FDIC does not insure investment banks or other businesses.

http://research.stlouisfed.org/fred2/series/BORROW?cid=122

Take a look at this data of the total borrowing from the Fed Reserve since 1919.

We've been in uncharted waters for months. I sent this same graph to my staff last July.

I'm sorry I don't know how to insert the graph.

St Louis Fed FRED graph linear

may be better on a log scale:
St Louis Fed FRED graph log

Thank you John for posting these charts.

If a bank borrows, it does no effect on the banks capital, hence no effect on its solvency. If it borrows from the Federal Reserve, such borrowing does add to the banks reserves. Reserves are just assets the bank holds to cover demands for "cash" from customers and to cover clearing of checks. Principally reserves are held in the form of Federal Reserve notes in the banks vault, and checking accounts the bank holds with the Federal Reserve bank or correspondent banks.

So bank borrowing like described in the charts improves the banks liquidity and nothing else. So why would banks need improved liquidity? This is because banks are experiencing demands on these reserves. Either people are going to banks and withdrawing currency, or they are transferring their checking account to banks that they deem to be more safe than their current bank, resulting in some banks needing reserve infusions.

Bad loans being written off by banks would not require the addition of reserves, because bad loans affect solvency, not liquidity.

My only conclusion from these charts is that there is an as yet unreported run on banks. Unless there were lines in front of your bank, how would you know what they are experiencing? Unless you looked over the shoulder of your bank's bookkeeper, how would you know how to understand what is happening?

Hi Henry,

If they ever come out with a TV show called "CSI Wall Street" you shall be the star. Nice job of pulling the key omitted datum from a jumble of information.

I just did a quick survey of half a dozen friends (completely unscientific, I realize) and found that they were all applying the same surreptitious strategy that I was:
We have all been quietly but steadily moving money out of large banks (that offered suspiciously high interest rates on money-market-based checking accounts for example), and into hopefully safer places.

In my case, I've been moving funds to small local banks, straight cash, a REALLY cheap fixer-upper house and junk silver coin. One way I've quietly emptied an account was by simply keeping the would-be deposit as cash, while continuing to use the account to pay bills and make purchases.

I will bet dollars to doughnuts that we aren't the only ones. It's not exactly a "Run" on the banks; more of a "Make it look innocent by whistling a care-free tune STROLL on the banks."

In further support of your hypothesis, notice that the association of community banks got its wish list written into the "New & Improved" bail-out legislation by raising the amount of FDIC coverage from 100 G's to 250. Now why would they go to all that trouble unless they were feeling some pain in the deposits department?

Every time the carnivores devise new ways to eat us whole, we adapt with new survival strategies to save at least one arm and a good leg. Eventually our covert adaptations will become so widespread and common that government directives will not be implementable at all... and we shall have the chaos so many seem to be yearning for.

I suspect your wrong about the cause of this run on the banks and also why you can't see it.

The run on the banks is caused by people draining their savings to pay mortgage debt and CC debt.
I suspect a lot of it is from small time real estate speculators still holding on to properties and draining cash every month.

Also I suspect people are furiously cashing out their 401k's for the same reason. This drain of money from 401 k's will force private pension plans to sell assets to meet liquidation demands.
This is on top of the natural roll over as the baby boomers retires. Needless to say a lot of liquidity is being drained from the stock market right now because just about everyone is either borrowing or cashing out their 401k plans at the moment.

Its going to get a lot worse before it gets better.

From the WSJ - http://online.wsj.com/article/SB122212664298765183.html

Investors Pull Money Out of Their 401(k)s
Hardship Withdrawals Rose
In Recent Months, Plans Say;
SEPTEMBER 23, 2008

T. Rowe Price Group Inc. in Baltimore saw a 14% increase in hardship withdrawals in the first eight months of this year, compared with the same time last year. Boston-based Fidelity Investments says the number of workers with hardship withdrawals rose 7% from April through June, compared with the same time period a year earlier. Principal Financial Group Inc., in Des Moines, Iowa, says that requests for hardship withdrawals are up 5% this year through Sept. 18, over last year, and that the withdrawal amounts are larger.

Hi Memmel,

Plainly you are right. The reasons for my own "'stroll' on the bank" are not the norm. I have zero mortgage or CC debt, and my few investments are all tangible things in my personal possession.

The whole idea of storing an abstract belief such as money as if it were a cache of acorns always struck me as excessively optimistic, and I put money in banks only because it had to go somewhere and banks were more secure than stuffing it under the mattress.

Probably everyone has unique reasons for draining out of various institutions what they had previously poured in, but the effect is very much like a run on the banks... minus the clamoring mobs (so far)... and it's just amazing how the effects cascade and reinforce each other, such as with the 401k's as you described.

Yes, things are going to get worse. Right now all we have is growing alarm. It's going to be a whole lot different and far less academic when alarm turns to actual pain... like that old joke about how it's not the long fall that kills you, it's the sudden stop at the end.

Some talking head on MSNBC - I think - last night coined the phrase "Bank Walk" where people who exceeded the current FDIC insurance limits were "walkign" their exposure out of one bank to others.

Thus the thinking goes the increase in the FDIC limits in the "new and improved" Senate version of the bailo - I mean - rescue bill woudl stifle the bank walk.

Pete

Can this be rendered in constant dollars per year? Fewer, but much larger, banks would still impact the overall economy significantly.

If I might offer a naive, "common sense" take on this, I will say that I am not persuaded that the MBS / CDO tranches are virtually impossible to evaluate, as ptoemmes suggests.

Financial industry promoters like CNBC would like us to believe this. They are pushing for a bailout of their sugar daddies.

Rather, the banks do quietly get offers to buy the (essentially) junk bonds, but they find the offers unacceptably low as these junk bonds really are junky.

And so, the banks hold out for a much better offer from Uncle Sam.

Should the government bail them out or just let them fail?

The more I hear about this, the more I am inclined to say, let them fail in the hope that are other more prudent banks will be able to pick up the pieces and keep operations going.

Does anyone know anything about Credit Default Swaps ?

I've been reading that there is something like 45 Trillion Dollars
worth of active Credit Default Swaps which will dwarf the current
crunch + bailout.

Can anyone shed any light on this ?

cheers,
Louis.

The CDS market is valued at more like $62 trillion. It's a house of cards full of counterparty risk and the inevitable meltdown will indeed dwarf anything we've seen so far.

See The Resurgence of Risk - A Primer on the Developing Credit Crunch:

Rather than selling the risky securities, banks could also keep them, and the cash flows they generate, but insure them against default through a Credit Default Swap (CDS) – swapping the risk of default for a cash payment. The underwriting institution can then aggregate the CDS income stream into pools, themselves divided into tranches with different risk profiles. These synthetic CDOs are based, not on cash flows derived from borrowing money, but on cash flows derived from insurance premiums paid to cover the risk of mortgage default. Institutions can even insure against the risk of default on securities they do not own – creating synthetic CDOs and effectively shorting subprime mortgages or risky corporate bonds while once again hugely expanding supply of leveraged credit. Any default could therefore result in claims to underwriters many times as large as the supposed value of the underlying securities.

The danger is that underwriting institutions willing to accept huge amounts of risk in exchange for apparently being paid to do nothing, may not actually have the ability to pay out on default. The original institutions did not seem to ask too many questions of those to whom they had readily assigned the risk of default, but risk does not go away merely because one institution has paid a fee to another. The risk guarantee is only as good as the credit worthiness of the guarantor, and one commentator has described many credit default swaps as being guaranteed by Madame Merriweather’s Mud Hut in Malaysia.

IMO the whole problem with the bailout isn't the 700 billion-the problem is that the 700 billion does nothing to address the problem. One wonders how many trillions will be transferred from the taxpayer to the connected until this program runs its course. I have no idea, but right now 10 trillion would not surprise me, given the aggression of the support and the control of the politicians.

You are right the failout doesn't address the root causes which IMHO are leverage is far too high and nobody knows what a bank is really worth because OTC deals are not measured and other level 3 assets ... are off the balance sheet.

I have proposed we need to fix these underlying problems otherwise we the tax payer can keep throwing billions into the black hole to little effect. By some reckonings we have already ponied up a trillion dollars.

So we need to limit the leverage allowed (ten times?) and this needs to be done over an agreed period with penalties for delays. All deals must be on the balance sheet and properly valued by a truly independent authority not one that is paid by the issuer. By doing this it will encourage fresh capital.

Over the coming weeks the CDS market faces its biggest test as billions of dollars worth of contracts on Fannie Mae, Freddie Mac, Lehmans and WaMu are settled. An auction is scheduled for next Tuesday to evaluate a price for Fannie Mae and Freddie Mac CDs. Estimates are that payments on Lehman's bonds could be as much as $350bn. I fear that some underwriters have insufficient capital and will simply go bust when the claims are made.

Any default could therefore result in claims to underwriters many times as large as the supposed value of the underlying securities.

If I understand correctly, mortgage lenders were expecting to make money on foreclosures with a return several times the initial loss from the failed loan, do I understand correctly? do they really expect the taxpayer, whose home has been foreclosed for some, to pay for this?

That would seem to be the plan Khebab. And I would assume that as soon as the assets are written down against the taxpayers' account they will gladly step back in and take them off our hands and regain those handsome cash flow positions. Just a cynical guess on my part.

Rockman your not cynical enough :)

They can play this game all the way down.

Sell bad loans to the US Gov. Buy them back at pennies on the dollar. Foreclose with a vengeance and make a really nice profit on the foreclosure sale. If they are in the loans say 10% of book value they can sell the house for 50-75% off and make a handsome profit.

Loan the money to the knife catcher.
Sell loan to the feds.

Buy back loan later at pennies on the dollar.
Foreclose on new FB.

Rinse and repeat.

They can do this until the house is not worth the overhead of processing. And then they can probably stiff the fed with the handling fee.

Underlying all of this is that with the US Government backstopping the houses and eliminating the losses your going to see the largest drop in home values ever seen.

Why give out a loan with a small down payment and long repayment time when you can buy bad mortgages from the Feds for pennies on the dollar and make 50-100k or more a pop. And do it two or three times before the house is worthless ?

The CDS market is valued at more like $62 trillion. It's a house of cards full of counterparty risk and the inevitable meltdown will indeed dwarf anything we've seen so far.

This presumably means that the next series of collapses will be
the insurance companies/market.

Presumably AIG was the first pebble thrown into the sea and tidal
wave is yet to come. Just as Northern Rock was initially seen as
a singular event before it became apparent that most banks
faced the same issues.

Best of luck everyone.

I find it totally incredible to conclude that AIG is actually in financial peril right now. The only way AIG would reach that point would be out of a conscious design to get there, with a goal in mind. What would such a goal be? Why would Hank Greenberg want AIG to be "rescued" by the Fed Govt? AIG has long held a reputation in the insurance world as the most ruthless and most protective of its own assets. It would not invest heavily in derivatives unless there were counter investments with absolute sure return in a quantity sufficient to mitigate any losses from volatile vehicles like derivatives.

The only way for AIG to be in need of rescue is if that were part of a plan. Insurers of AIG's size and caliber don't react in the moment. They plan very long-term. They are the most conservative branch of the financial services segment of the global economy. AIG was one of the very most conservative in the field.

This isn't mismanagement. This is a design.

The long comment by D Benton Smith above is pretty much a bull's eye on what's happening here. Academic, "professional" and shadetree economists can quarrel over their technophilic jargon-laden pseudo-issues that have faux-importance and ersatz-relevance, but the truth is far more bare, and won't tolerate stupid debate over the number of angels dancing on a pin head.

This comment, I mean -- http://europe.theoildrum.com/node/4584#comment-415967

Greenberg was forced to resign from AIG some years ago. He blames the present management for not controlling risk correctly in this CHarlie Rose interview: http://www.youtube.com/watch?v=WDOl5TrnfMQ

Chris

Chris,

Hank Greenberg would commit suicide before he allowed power to actually be wrested from him. I'm aware of what Eliot Spitzer supposedly decreed and obtained. I'm also well aware of what Hank Greenberg retains as influence over his sons, who run various AIG subsidiary entities. He's no more disconnected from AIG than Dick Cheney is divested literally from Halliburton/KBR. On-paper separations of power are not the same as lack of influence and directive authority.

No way AIG could be tanked in 2 years' time. No way on earth.

I'd suggest revisiting The Charlie Rose Show's purpose -- disinformation, propaganda, sales. As one with a background in what dweebs call "intelligence," Hank Greenberg knows the value of public declarations which serve one purpose, while behind the scenes other machinations are afoot.

Here's what I think more likely going on here:

http://carcinofun.blogspot.com/2008/09/wreckerd.html

http://carcinofun.blogspot.com/2008/10/more-wreckage.html

I understand that Greenberg still holds stock in AIG. But, I doubt he wants to see it become worthless.

One thing I've noticed about the crisis is that the US Government is very exposed now to the financial consequences of a nuclear accident. The Price-Anderson liability could make the US insolvent should it be called on. Perhaps AIG is large enough that it could take on that liability and be reprivatized. That would be a very large new account and we might see some of the worst plants shut dowm owing to unacceptable risk. Vermont Yankee and Indian Point come to mind as uninsurable outside of the Price-Anderson scheme.

Chris

Chris -- That's it exactly, he doesn't want it to become worthless. But ponder this: what gives it the most worth? What about this scenario:

- Greenberg, along with many in his position (leader of globally powerful financial services entity), could see the rapid decline in the value of the US Dollar.

- This means he can't sell AIG to something like a big Swiss insurance entity (which most likely was his pre-death plan), so how can he get max liquidity from his life of hard, viciously competitive work spent growing AIG?

- AIG has been entwined with the CIA for a long time. Global corporate business intelligence is something that insurance companies have access to -- that is how they underwrite coverage for such businesses, and AIG insures a lot of huge businesses around the world. Such intel is hyper-valuable to the CIA and that's where the intermingling of CIA and AIG comes into play. Imagine if the CIA had access to everything AIG knows....

- Hey, there's an idea! The US Govt "rescues" AIG from a "financially perilous" situation. But wait. AIG is strong and stable. How could it become "financially perilous" if it's been growing for a long time with a super-conservative financial management approach?

- Hey, another idea! We get Eliot Spitzer to "remove Greenberg from power" and then the newly empowered leader of AIG will invest heavily in derivatives (known to be tanking!) without doing the usual counter-investment to offset possible deriv-based losses. Actual AIG value goes well beyond its booked losses, of course, but the average American (including the average Congresscritter) doesn't know this much about insurance entities.

- Okay, Eliot. I was a bad boy. Remove me from power. I deserve it.

- Say, Lizzie, get Hank Paulson on the line. I have an idea.

Uh huh.

As a market matter, on the global insurance market, actual insurer value is not related to its investment strategies. Poor investment strategies only make insurers vulnerable to take-over. The true value of insurance business is in these divisions:

sales (brings in premium dollars, enables the whole game)

underwriting (intel on prospective insureds is very valuable, and you don't even have to issue a policy!)

and the big winner:

claims handling (all of insurance is based on this aspect of the business)

AIG is powerful in all 3 areas. That is where its value lies. Not in its investment portfolio, but in its intellectual capital.

Credit default swaps are written overwhelmingly on investment grade credit. And your 62 trillion figure is dimensionless ... there's easily 62 trillion in insurance of conventional assets outstanding... is this 62 trillion at risk? Notional value isn't the same as value at risk.

According to testimony of a Senate banking committee member, the government loosened restrictions on investment bank capital requirements before this happened. Legislation to try to get lower income people to buy houses without credit worthiness hurt them and the banks. Credit rating organizations may have given excessively high credit ratings to unworthy individuals as a separate problem needing fixing.

Most of the bad securities the government is shopping for with the bailout plan are owned by the large investment banks that either failed or are in a greatly weakened state. The bailout plan might not help the person trying to get an auto, business, or college loan. It is mainly reserved for those thousands employed by investment banks who lost hundreds of billions by buying bad debt. It does not bailout the FDIC insured banks that might fail, nor does it capitalize them. There is no gaurentee the investment banks will not turn around and lose hundreds of billions more.