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As the talk of stimulus plans gets louder, I worry that the right lessons will not be learnt. A stimulus is needed, for sure, but how it is done matters actually more, in my view, than whether it happens or not.

The current crisis has a simple immediate cause: too much debt, meaning people living beyond their means and now having to retrench. Stimulating demand via more debt may postpone the reckoning yet once more, but only pushes the problem down the road without solving it, while making it yet again bigger.

The question is: why has there been too much debt? The consensus view of the Villagers is that there has been a "savings glut" in countries like China, Japan and Germany, and countries like the US and the UK were "forced" to absorb these savings by running into debt. This is all too convenient.

The more correct reason is that debt has been used to hide the fact that incomes have been stagnant for too long.

The other core reason is that debt looks and behaves like money, just like real income, and can easily act as a substitute. But debt profits, first and foremost those that control it: the financial world, with its hands on the tap. What's been happening is that, thanks to deregulation, the financial world has been left to its own devices and no limit has been put anymore to how much debt it could create. Excessive debt - for which I use another word: counterfeit money - has been injected into the system and has mixed with "real" income.

And the mix has been shared around, with everybody getting equal shares of real money and counterfeit money. Those that put in real work, got paid partly in real money and partly in junk paper; those that printed debt got back real money for a portion, and junk paper for the rest. Unsurprisingly, this amounted to a large scale transfer of wealth to the money printers.

This has real world consequences (collateral damage if you will), in addition to the growing inequality: more and more people moved fro mte productive economy to the money printing side of the business, and those in the real economy were increasingly squeezed to provide actual value for all. For a long time, the illusion worked well enough, and it looked like overall, wealth was created, even as a majority felt it was running increasingly hard just to stay in place.

As the underying real value creation was increasingly struggling to keep pace with the headline numbers, crack appeared, and the whole edifice crumbled. The counterfeit money has been revealed to be just that, and is turning to dust (however, if the assets no longer exist, the debts that they generated are still there). suddenly, the shrinking real economy is all that's left to support macro-economic statistics, and these look terrible. But those that had grabbed a larger share of the pie thanks to their counterfeit paper are not intent on letting that go, and are fully intent for the pain of the elimination of counterfeit money to be shared a lot more equally than its creation was.

Thus the layoffs, shrinking activity, and economic pain all around.

Government spending can solve that problem, by creating new demand - but it needs to be generated by claims on real assets, not by yet more paper value. Conveniently, there is a way to do that: raise taxes, especially the higher marginal rates, to start moving the redistribution pendulum the other way. It is also essential that the spending be focused on things that are useful to people rather than to corporations and their owners: spending should be focused on social services, basic necessities, investment that will benefit all (energy-use transforming infrastructure like public transport and grid networks, healthcare) and core functions like education.

But the core requirement is to admit that the prosperity of the past few years as fake and inexistent. Acknowledging this does not mean shrinking the economy, it just means measuring it properly, and telling the truth about the Bush years. Most people outside the Village kno it already anyway.

Runaway debt, private or public, is not a sustainable path. And there is an alternative - it simply requires that blame be properly allocated, instead of everybody pretending that this crisis 'just happened.'

See also taonow's diary on a parallel topic: It's all China's fault... Really?

Originally posted to Jerome a Paris on Fri Dec 26, 2008 at 07:07 AM PST.

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  •  Tip Jar - 26 December (348+ / 0-)
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  •  By this: (14+ / 0-)

    Government spending can solve that problem, by creating new demand - but it needs to be generated by claims on real assets

    "Claims on real assets" meaning taxes? It sounds contrary to conventional thinking but may be what is needed. Personally I'd be all in favor of ending the bush tax cuts and implementing a new much higher tax on oil to pay for some necessary changes, single payer healthcare, mass transit and infrastructure repair, but that goes against conventional thinking too. If we continue borrowing like we have been inflation will be back with a vengence.

    CHRISTIAN, n. One who believes that the New Testament is a divinely inspired book admirably suited to the spiritual needs of his neighbor. A. Bierce

    by irate on Fri Dec 26, 2008 at 07:15:31 AM PST

    •  question re: gas tax (8+ / 0-)

      Now that prices have fallen again, there's less of an incentive to purchase more energy efficient vehicles (the projections for automobile purchases in 2009 are already grim).  The gas tax seems like political suicide to me, which is why I can't imagine politicians pursuing it.  Even if there wasn't an immediate backlash there would be once prices started to rise again.      

      It seems as though we're back to square one again, after what, forty years of calling for a comprehensive energy policy?

      What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun.

      by Alec82 on Fri Dec 26, 2008 at 07:21:23 AM PST

      [ Parent ]

      •  Prices will rise again. (17+ / 0-)

        It's just a question of who will benefit. I believe raising the price through a tax increase will cut the demand and stabilize the price for the long term. One way or another high gas prices will return.(I agree that it isn't going to be popular)

        CHRISTIAN, n. One who believes that the New Testament is a divinely inspired book admirably suited to the spiritual needs of his neighbor. A. Bierce

        by irate on Fri Dec 26, 2008 at 07:25:04 AM PST

        [ Parent ]

        •  Reverse Progressive Gas Tax? (6+ / 0-)

          Just a thought here. Maybe a reasonably method for taxing gas is by using a reverse, progressive tax. That is the tax rate increases the lower the base price of gas.

          That way, when the base price is higher the tax percentage would be lower, thus reducing harm to the consumer.

          Crazy idea?

          Political Correctness Police: may your puckered, disapproving lips forever cover your donuts.

          by FeloniousMonk on Fri Dec 26, 2008 at 08:13:32 AM PST

          [ Parent ]

          •  I know that people here in transportation (10+ / 0-)

            have discussed something like this.  Set an amount that decreases as gas reaches a certain threshold.  However there is still a certian minimum tax that needs to be collected from somewhere in order to maintain the roads.

            Some people would like to divorce road fees from gasoline, at least in part and charge people for miles driven.  I find this irritating, because at least a gas tax incentivizes higher mileage vehicles.

            There are bagels in the fridge

            by Sychotic1 on Fri Dec 26, 2008 at 08:35:33 AM PST

            [ Parent ]

          •  That was my thought on Wednesday.... (4+ / 0-)

            ....when I was discussing this issue with my uncle (who works for GM).  It seems feasible enough, although I agree with Sychotic1 that we'll still need a minimum/base.

            What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun.

            by Alec82 on Fri Dec 26, 2008 at 08:38:56 AM PST

            [ Parent ]

          •  Problem (7+ / 0-)

            That just creates an incentive for oil companies to raise prices, since doing so won't lower demand significantly if the price of gas is relatively fixed by the tax. If gas is going to cost a mostly-fixed amount, oil companies acting in their own best interests will try to get a larger share of that pie.

            •  I hadn't pictured it as price stabilization. (0+ / 0-)

              I agree the such a tax should not stabilize the price. I had imagined it more like the income tax in reverse. That is, as gas prices rise, that rise will always show in the final (taxed) price though the percentage would fall somewhat.

              Also, I agree with Alec82 and Sychotic1 that a certain minimum tax would be needed to ensure needs for transportation projects and maintenance.

              Personally, disconnecting transportation from gas prices seems artificial. The use of transportation is currently so closely tied to the use of gas, that it seems illogical any other way. OTOH, as we transition away from petroleum as a transportation fuel, we'll have to come up with a new way to generate revenue that is associated with transportation.

              Political Correctness Police: may your puckered, disapproving lips forever cover your donuts.

              by FeloniousMonk on Fri Dec 26, 2008 at 10:47:05 AM PST

              [ Parent ]

            •  then tax the gas company directly (2+ / 0-)
              Recommended by:
              StrayCat, FeloniousMonk

              when their prices are high and their profits are high, we should tax them to recover $$$ for greenhouse gas emissions. That way either the consumer pays, or the company pays - until the gas price is high and the gas company profits are low.

              In a democracy, everyone is a politician. ~ Ehren Watada

              by Lefty Mama on Fri Dec 26, 2008 at 01:23:31 PM PST

              [ Parent ]

          •  Can you flesh that out a little w/ an example? (0+ / 0-)

            A regressive tax (is that the same as a reverse progressive tax?) wouldn't seem to lower the base price of gas, as the base price of gas isn't based to any great extent on demand, but rather on a speculative price point coupled with a nebulous cost-to-produce floor.

            There are a thousand new ideas in the offing to help us make a better future.  I haven't heard yours before.  It sounds interesting.

            "You may already be a wiener!" Anonymous

            by Terra Mystica on Fri Dec 26, 2008 at 06:40:45 PM PST

            [ Parent ]

            •  What I had in mind is to tax (1+ / 0-)
              Recommended by:
              Terra Mystica

              at the pump just as it's done now. Except that the tax is based on the pre-tax selling price. Just as an example using round numbers (not meant to be close to realistic):

              Pre-Tax Price  Tax%
              $0.00 - $1.50  14%
              $1.51 - $3.00  11%
              $3.01 - $4.50   9%
              $4.51+            6%

              For most of the country these taxes would be high, I know, but again it's just an example. I'm not sure what realistic rates would be.

              It's likely there would be a hardware/software conflict calculating the taxes at the pump, since the pumps may not be set up for that. In the interim, the pump taxes could be changed manually as the prices change. If that isn't practical, some clerical adjustment could be made at the time taxes are reported and paid by the vendor.

              Political Correctness Police: may your puckered, disapproving lips forever cover your donuts.

              by FeloniousMonk on Fri Dec 26, 2008 at 08:15:52 PM PST

              [ Parent ]

        •  The uber-wealthy benefit under... (0+ / 0-)

          inflation and deflation.  Their real holdings Those who are forced to higher and higher debt levels by shrinking income take severe hits when the inflationary economy pops.

    •  Yes, taxes (44+ / 0-)

      debt has created the illusion that you could have government spending without taxes. It has meant too much irresponsible money creation - and much less control on how it was spent, as it cost little to generate.

      There was a study by CATO (yes, the libertarian think tank) that concluded that public spending by the left was actually more responsible than that by the right as it cared about justifying that spending (to defend the taxes that make it possible) and thus ensured that it was done smartly.

      •  I don't believe anything Cato says... (3+ / 0-)
        Recommended by:
        ferallike, Neon Vincent, addisnana

        ...but I'll give them the benefit of the doubt on their conclusion that progressives are better tax spenders.

        My concern is about the even larger question. The free market system has not been around long enough to receive the unyielding devotion it currently receives. Even many progressives (ie Krugman) do not support tax increases.

        Are we really sure that growth at all costs is a good strategy and a system that runs on a fuel of self interest is the best one? I'm the first to admit I have no answers but I am curious why I never hear the questions.

        -7.5 -7.28, What's a guy gotta do to get impeached around here?

        by Blueslide on Fri Dec 26, 2008 at 10:16:46 AM PST

        [ Parent ]

        •  There was an oped done by Michael Kinsley (5+ / 0-)

          in August of 2004 that was very illuminating about the so called "tax and spend" Democrats....Do the Math

          You know how sometimes, when it's really really hot, you get this urge to crank up the old spreadsheet, download a bunch of numbers from the Web and start crunching away like there's no next fiscal year?  
          Me neither. But I did spend a bit of the past week watching the Democratic National Convention on TV, and I needed something to exercise my mind while that was going on. Convention season is the one time every four years when we pretend that political parties matter. In general we have accepted the reality that campaigns for national office have become entrepreneurial, united more by shared political consultants than by old-fashioned parties.

          Is there a difference between the parties that transcends the differences between the candidates? Is one of the parties, for example, a better steward of the economy? One year won't tell you much, or even one administration. But surely differences will emerge over half a century or so, if they exist. With that thought, I headed for the Web. Specifically, I went to the charts attached to the President's Economic Report, released in February. There I downloaded like a madman and then distilled the mess into a few key stats.

          The figures I'm using are from the 43 years 1960 through 2002.This odd stretch of time reflects the years that are included in all of the charts I wanted to use. By doing it this way, I hope to convince you that I didn't choose the years to skew the results. Because the results are pretty interesting. Maybe presidents have little power over the economy. And we know that they must fight with Congress over the budget. Still, elections are based on the premise that whom you vote for does matter. So let's at least en- tertain that assumption for a few minutes.

          It turns out that Democratic presidents have a much better record than Republicans. They win a head-to-head comparison in almost every category. Real growth averaged 4.09 percent in Democratic years, 2.75 percent in Republican years. Unemployment was 6.44 percent on average under Republican presidents and 5.33 percent under Democrats. The federal government spent more under Republicans than Democrats (20.87 percent of gross domestic product, compared with 19.58 percent), and that remains true even if you exclude defense (13.76 for the Democrats; 14.97 for the Republicans).

          What else? Inflation was lower under Democratic presidents (3.81 percent on average, compared with 4.85 percent). And annual deficits took more than twice as much of GDP under Republicans as under Democrats (2.74 percent versus 1.21 percent). Republicans won by a nose on government revenue (i.e., taxes), taking 18.12 percent of GDP compared with 18.39 percent. That, of course, is why they lost on the size of the deficit. Personal income per capita was also a bit higher in Republican years ($16,061) than in Democratic ones ($15,565). But that is because more of the Republican years came later, when the country was more prosperous already.

          There will be many objections to all this, some of them valid. For example, a president can't fairly be held responsible for the economy from the day he takes office. So let's give them all a year. That is, let's allocate each year of an administration to the party that controlled the White House the year before. Guess what. The numbers change, but the bottom-line tally is exactly the same: higher growth, lower unemployment, lower government spending, lower inflation and so on under the Democrats. Lower taxes under the Republicans.

          But maybe we are taking too long a view. The Republican Party considers itself born again in 1981, when Ronald Reagan became president. That's when Republicans got serious about cutting taxes, reducing the size of government and making the country prosperous. Allegedly. But doing all the same calculations for the years 1982 through 2002, and giving each president's policies a year to take effect, changes only one result: The Democrats pull ahead of the Republicans on per capita personal income.

          As they say in the brokerage ads, past results are no guarantee of future performance.

          The beatings will continue until morale improves. -8.50, -6.92

          by ferallike on Fri Dec 26, 2008 at 12:08:03 PM PST

          [ Parent ]

    •  Tax passive income w/exemptions (14+ / 0-)

      Provide for basic exemptions for people who need a basic living off of passive income, but tax the hell out of truly rich people who get richer off of passive income. We allow losses to carry forward, so why not tax passive income on those it can't possibly hurt?

      It's not like the nation has been paying for profligate spending with high taxes. No, we've allowed ridiculously low taxes AND high spending -- using debt. Everybody gets what they want!!!

      Until the music stops.

    •  It does make sense under a Friedman view ... (0+ / 0-)

      ... of money.

      Note that the "claims on real assets" would be things like real production of goods and services, though the things that we most need government to fund are precisely those things that are the most difficult to fund by a claim on the good or service produced.

    •  Claims on real assets (0+ / 0-)

      means the debt is taken on to buy something that is real, brick and mortar real, not something that has value only in an abstract sort of way.

      If the material, labor, overhead and profit to a builder to build a house is $75,000, then the real asset value of that house is $75,000. If you pay $150,000 for the house (not including the price of land in this example) half of the price is the cost of the house, a real asset, the other half is the amount the price has been bid up by gamblers.

      The reason the house is assessed higher than the cost to build it is because neighboring houses have sold for a higher amount, not because they were worth more, but because people were willing to pay more. If people become no longer willing to pay that much, that half of the value disappears. It wasn't a "real asset."  

      However, as long as many people are willing to play the game, that other non-real asset amount acts as if it were real value. Unfortunately, with stagnant wages and widespread anxiety about bankrupcy due to illness or accident or layoffs, people tend to drop out of the game.

      Spending the stimulus on labor, material, overhead and profit for real things will bring the economy out of the doldrums, spending the stimulus on things whose  value is based on faith that the thing purchased has value will prolong the agony and will make the ensuing mark-down to reality that much more painful.

  •  No Anglo disease? (5+ / 0-)

    Really, Jerome, how could you resist using your favorite phrase?

    •  How could he resist alliteration? (2+ / 0-)
      Recommended by:
      Jerome a Paris, Downpuppy

      It really bugs me that "Anglo disease" was a reference to "Dutch disease." Surely, if the coiner of the phrase had been a native English speaker, it would've been called "Anglo affliction." This isn't rocket surgery, people!!

      I want to live in a civilization.

      by SciVo on Sat Dec 27, 2008 at 04:10:02 AM PST

      [ Parent ]

      •  Nurse! 9/16 Ratchet! Stat! (1+ / 0-)
        Recommended by:
        SciVo

        There's a whole 'nother topic (I might have it done by this evening) on the misdirection of the US economy into utter waste.

        We're hard working and productive. That most of us are engaged in labor of utter futility is the real systematic failure.

  •  Isn't all money counterfeit? (6+ / 0-)

    There is no inherent value in the stuff that we call money.

    •  Some of it is tangible... (5+ / 0-)

      ...and can at least be represented by real pieces of paper. Most money creation today, however, occurs through credit, which doesn't even have real paper behind it.

      -7.75, -7.64 www.politicalcompass.org "When the intellectual history of this era is finally written, it will scarcely be believable." -- Noam Chomsky

      by scorponic on Fri Dec 26, 2008 at 07:23:42 AM PST

      [ Parent ]

    •  Yes, to a large extent (32+ / 0-)

      Most lending is indeed money creation - but when banking is regulated and lending follows fractional reserve rules, you know exactly how much money is created and you can thus keep it under control.

      The problem has been that the past 10 years have been spent eliminating all these rules, via lower capital requirements for banks, or even the elimination of the requirement for any capital reserves via the shadow banking system and the move to insurance-style products (like CDSs) that were regulated, if at all, in ways that meant less capital and more leverage.

      So the scale of the counterfeiting changed in the past decade, and that's been at the heart of this crisis as the whole thing comes tumbling down.

      •  Only fraud is counterfeiting. The rest: stupidity (1+ / 0-)
        Recommended by:
        Jerome a Paris

        and corruption.

      •  I still don't understand (1+ / 0-)
        Recommended by:
        Cassiodorus

        how lending creates fake money. If I get a loan from a bank to buy a widget, doesn't the widget maker get real money -- to the extent that it's money that can be converted into paper money by him?

        •  It works like this (20+ / 0-)

          I have $1000 in paper money (dead presidents) to walk around with. I deposit that money in the bank, who then makes a $900 loan to you.

          So, I have a statement saying I have $1000 in the bank, and you are actually holding $900 in paper dead presidents money that the bank lent you. If the two of us get together and compare notes, the total money in the economy is... $1900 (!)... despite there being only $1000 in real money. Each of us will behave as if our money is real and so the economy in general believes we have $1900 even though the base specie is only $1000.

          Capital requirements, lending standards, etc are put in place to make sure this kind of thing doesn't get out of control, but when Jerome says that banks "create money" by lending, this is what happens.

          •  Actually (21+ / 0-)

            you deposit $1,000 and the bank will be able to lend $12,500 with it (that's what the Cooke ratio, at 8%, means, fundamentally). So you still have your $1,000 as per that bank statement, and the borrower has $12,500 fully creatd by the bank.

            That's how you can have 10-15% returns on equity with loan margins that are close to 1%.

            •  But the loans aren't handed out as welfare (3+ / 0-)

              Loans are supposed to be issued to back new production, new assets, new economic growth. It's when the regulations get too permissive that "too much" money is issued on things of declining worthiness, hence the current situation.

              •  Nobody needs "new production," (6+ / 0-)
                Recommended by:
                Creosote, StrayCat, kurt, phonegery, divineorder, cs

                "new assets," or "new economic growth" in a maxed-out economy which caters to effective demand, demand backed by money.  Those with money have already had enough; those without money cannot buy.  Our economy is already maxed-out nationally, and is becoming maxed-out globally.  Thus economic bubbles serve the purpose of allowing bankers etc. to believe that real growth has occurred when in fact it hasn't.  

                The financial sector has made it its business to believe in the delusion that Jerome wishes to expose, and no amount of exposure by Jerome is going to change that business purpose.  The pretense of growth will continue, because the wealthy financial sector needs to be paid.

                In fact, more growth would only stoke the contradiction OPOL pointed out below -- that between a finite planet and a capitalist system's infinite demand for growth.  So that won't work either.

                "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

                by Cassiodorus on Fri Dec 26, 2008 at 09:53:19 AM PST

                [ Parent ]

                •  The economy is maxed out on the consumption side (6+ / 0-)

                  but our entire infrastructure is falling apart.  Most of the rest of the resources in our economy are poorly allocated including our health care resources, our energy resources and what little we have left of our production resources which are mainly allocated to making instruments of war.  The marketplace is a very poor allocator of resources, as an example I give you a typical grocery store.  Why in the world do we need 200 different types of cereal.

                  •  The infrastructure isn't falling apart -- (0+ / 0-)

                    at least not that I've seen.  The roads still work, the trains still run OK, the hospitals still serve patients, and so on.  The whole problem is that of the marketplace being a poor allocator of resources.

                    "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

                    by Cassiodorus on Fri Dec 26, 2008 at 11:36:41 AM PST

                    [ Parent ]

                    •  You are not looking under the surface (11+ / 0-)

                      Bridges are in disrepair. Oklahoma alone has hundreds of bridges that are in need of maintenance. The vulnerability of the bridge over I-40 at Webbers Falls was an example of underinvestment. Simple protection of the bridge from the downstream side would have prevented the disaster.

                      The bridge in Minneapolis that fell did not even require a collision to collapse. In Arkansas, we have potholes everywhere except on the interstates. Even the interstates have rough patches. The interstates get federal subsidies. Other highways do not.

                      Potholes are a form of vehicle tax. You just pay at the repair shop instead of at the pump or in income taxes. Bridge collapses are a tax on your life insurance and mine. Trains are more efficient at transporting full loads than trucks or busses. Trains are better than planes for passenger trips up to 500 miles. We lack a fully developed train system.

                      The marketplace does not allocate infrastructure expendatures, your vote does indirectly. And ask ER Doc about the marketplace and hospital allocations.

                    •  if you come visit the USA (0+ / 0-)

                      you'll see what we mean

                      It's not a fake orgasm; it's a real yawn.

                      by sayitaintso on Fri Dec 26, 2008 at 01:42:31 PM PST

                      [ Parent ]

                  •  Instruments of war are not privately allocated (3+ / 0-)

                    The government claims a monopoly on purchasing "instruments of war". Even exports of war machines are controlled by export licenses. Try buying a tank or even a handgrenade.

                    This is a fully fascist allocation system in which the government buys from whomever they want according to whatever rules they create. The recent airtanker kerfuffle was an example of the control of government over this process. First Boeing won, then Airbus won, then Boeing protested. McCain wanted and got a "redo" for Boeing.

                    •  Nonsense. McCain pushed the gov into the (0+ / 0-)

                      contract with Airbus. When Boeing made a big fuss, rightfully, McCain made noise for the other side than he had been on so that he would look the hero and would be less likely to be exposed for his work on behalf of Airbus. McCain always takes two sides on every question depending on what's convenient and good for McCain.

                      We are in a time where it is risky NOT to change. Barack Obama 7-30-08

                      by samddobermann on Sat Dec 27, 2008 at 11:18:27 AM PST

                      [ Parent ]

              •  You imply that the root issue (2+ / 0-)
                Recommended by:
                StrayCat, kurt

                is declining underwriting standards.

                I would suggest that declining underwriting standards is, however, simply symptomatic of too much "money/credit" sloshing around looking for acceptable returns -- it is a consequence not a cause.

                Rome is burning ... put down the fiddle.

                by ancblu on Fri Dec 26, 2008 at 09:58:55 AM PST

                [ Parent ]

            •  I still disagree (1+ / 0-)
              Recommended by:
              chocolate cliffs

              you deposit $1,000 and the bank will be able to lend $12,500 with it

              No part of the original $1,000 deposit is lent out as $12,500.  The $1,000 deposit is just a pretext, and once the $12,500 is created, any part of that $12,500 loan can and will eventually serve as some bank's $1,000 deposit.

              Keep justifying.

              "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

              by Cassiodorus on Fri Dec 26, 2008 at 09:47:14 AM PST

              [ Parent ]

              •  I'm not sure how you have formed that (1+ / 0-)
                Recommended by:
                samddobermann

                point of view, but lending of deposits is well understood and accepted practice.  From Wikipedia:

                Fractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) with the choice of lending out the remainder, while maintaining the simultaneous obligation to redeem all deposits immediately upon demand. This practice is universal in modern banking

                Citing:

                1. The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors by Jonathan Golin. Publisher: John Wiley & Sons (August 10, 2001). ISBN-10: 0471842176 ISBN-13: 978-0471842170

                It may be that you are suggesting instead that the $1,000 is just as ephemeral as the monies lent out, but that is another issue.

                http://en.wikipedia.org/...

                Rome is burning ... put down the fiddle.

                by ancblu on Fri Dec 26, 2008 at 10:37:45 AM PST

                [ Parent ]

                •  The banks are not merely lending reserves (4+ / 0-)
                  Recommended by:
                  opinionated, StrayCat, phonegery, ancblu

                  they are creating money (i.e. issuing loans) using reserves as a pretext.  See The Politics of Money, pp. 64-65.  A fractional reserve system requiring 10% holdings, for instance, will allow nine out of every ten dollars (pounds, euros, etc.) to be lent out, and then (after being lent) this money finds its way into the rest of the banking system, where it also counts as "reserves," thus allowing the system as a whole to lend ten times the money now in existence.

                  The distinction to keep in mind is that between bookkeeping money, which exists in banks, and pocket money, which has tangible form in notes and coins.  Bookkeeping money is the type created by the banks.

                  "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

                  by Cassiodorus on Fri Dec 26, 2008 at 11:33:57 AM PST

                  [ Parent ]

                  •  It seems we do not disagree (4+ / 0-)

                    though you emphasize the fungible characteristics of money however accounted for, whereas banking practices themselves have traditionally emphasized the distinction because it is the manner in which the bank's respective assets and liabilities are properly differentiated.

                    To underscore your point, however, one should recall that since 1990 there are no reserve requirements mandated for time deposits (non-transaction accounts).  Moreoever, the 10% reserve ratio, applies only to transaction accounts over $44.4 million. For transaction accounts between $10.3 and 44.4 million, only 3% is required and less than 10.3 million no reserves whatsoever are required.

                    A house of cards indeed.  

                    http://www.federalreserve.gov/...

                    Rome is burning ... put down the fiddle.

                    by ancblu on Fri Dec 26, 2008 at 03:01:59 PM PST

                    [ Parent ]

            •  Not created, but borrowed by the bank from Fed (3+ / 0-)
              Recommended by:
              Jerome a Paris, StrayCat, mrchumchum

              Banks in the U.S. don't create money. They use their deposits as you point out to secure loans at a low rate. They lend at a higher rate. This is the loan margin you refer to.

              I know that Jerome knows this. It is others I am explaining the mechanics to. The term "fully created by the bank" skips a few steps. Retail banks that people deal with need to borrow at a margin. Banks (the Fed) that banks borrow from are allowed to create or even print money. Even money center banks, like Citibank and B of A, need to borrow from a Fed Reserve bank.

              The Cooke ratio is fully controlled at the Fed level. Our (Bush) government had full control over this process and the rules of this process. Bush appointed Bernanke (and Paulson and Cox and their predecessors). They had full discretion over the leverage policies that led to this mess.

              The distinction that even money center banks had to borrow helps explain the problems with solvency of the banks. They borrowed so much that they would have gone bankrupt without intervention, due to the inability of some to repay. The house of cards was ready to fail. But it was avoidable, if the Bush administration had taken their responsibilities seriously.  Wiki Fannie Mae link with discussion of current crisis and causes.

          •  Thanks so much for the detailed reply. (1+ / 0-)
            Recommended by:
            chocolate cliffs

            I understand this increases the money supply, but I guess it's the real/fake distinction I don't get.

            What happens if you take a different case entirely. If I'm a mining company and mine $1000 worth of metal today, I've created $1000 worth of value which didn't exist yesterday. But I get paid by the buyer of that metal with existing dollars with no corresponding NEW money being created -- haven't I effectively shrunk the money supply relative to the amount of value the money supply should be based on?

            The constant creation of new goods and services should require a constant increase of money? No?

            So when one refers to "fake" money, is that  the amount of new money created by lending that is in excess of the amount needed to cover the increase in new goods and services?

            •  Difference I think: Present Value vs Future Value (9+ / 0-)

              Debt or "fake money" as some are calling it is a claim on FUTURE income either by a person or the thing being financed. But cash now for an asset of value, like your metal, is Present Value.

              Debt is only "fake" if the assumed future doesn't materialize. All debt is a calculated bet on the future.

              •  yes (9+ / 0-)

                and debt becomes a problem when you pile more and more of it on the same future.

                •  You forgot the vital bit in the basics (2+ / 0-)
                  Recommended by:
                  Jerome a Paris, opinionated

                  The bank takes in a deposit of $1,000 and against that deposit are allowed to lend $12,500. The lenders use that money (in theory) to buy plant, products or property. When they lend the money, the loan becomes an asset of the bank. Their balance sheet shows

                  Cash Deposit liability            $1,000
                  Loans allowed by having deposit  $11,500

                  Loan Assets                      $12,500

                  In other words, they owe the depositor $1,000 and other banks £11,500 and the borrowers owe them $12,500. Their books balance.

                  This works if the borrowers repay them the loans adding up to $12,500 plus accumulated interest.

                  The problem is that instead of making loans, the banks have been buying pieces of paper with "IOU $12,500" written on them. These are supported by other people's loan assets which were bundled and rebundled so you could not tell what quality of loans they actually represented.

                  Now we get to the current position where instead of being represented by tradition mortgages a comparatively small multiple of the borrower's income on less than 100% of the assessed value which became an even smaller proportion as they repaid and the value of the property increased, banks have been making loans on 100% or more on the assessed value of the property to people who could just about afford their payments. If problem developed - they were sick or became unemployed, they had no cushion and went into default.

                  As more defaulted, the market value of their properties declined. The ultimate safety position for banks was with those traditionally structured loans, there was almost always a greater value in the property than the loans outstanding. Their new lending patterns meant that there was almost always far less. In the past people could walk away from their homes, hand in the keys and the banks could recover their outstanding loans and then some. Now they walk away and owe huge sums because the bank has been forced to sell the house for far less than the outstanding loan.

                  Now when they publish their accounts, the banks need to show their assets and liabilities. Let's say that they believe they will only get 50% of the money they lent out. Our balance sheet now looks like this

                  Cash Deposit liability            $1,000
                  Loans allowed by having deposit  $11,500

                  Loan Assets                      $6,250
                  Loss on loans                    $6,250

                  In short, this bank does not have the money to pay back everything it owes. With the taxpayer picking up the tab to pay the private depositor, the banks which lent the $11,500 will only get assets worth $6,250. They will have to show a loss of $5,250. Because of the private depositor protection scheme, as each bank defaults, the loss goes down by $1000 each cycle.

                  Thus on loans

                  First bank looses   $6,250
                  Second bank looses  $5,250
                  3rd bank looses     $4.250
                  4th bank looses     $3.250
                  5th bank looses     $2,250
                  6th bank looses     $1,250
                  7th bank looses       $250
                  Total bank losses  $22,750

                  Government deposit protection scheme has paid out $7000

                  Now that is an extreme example where the assets go down by half when they are re-assessed. If the value of the assets had gone down by only 10% the cascade would go

                  First Bank looses  $1,150
                  Second bank looses    $150
                    Total banks loss £1,300
                    Government has paid out £1000

                  Again in the real world, the withdrawal of depositors money means the banks have less capacity to borrow so they have to repay. The web of relationships is highly intertwinned and not the linear pattern I suggested by running through the effects of a very large fall in the value of the paper assets.What it does, I hope, demonstrate is the potential cascade or domino effect of one bank going under.  

                  Rosa sat so Martin could walk, Martin walked so Barack could run, Barack ran so our children could soar

                  by Lib Dem FoP on Fri Dec 26, 2008 at 06:57:33 PM PST

                  [ Parent ]

      •  I disagree (3+ / 0-)

        but when banking is regulated and lending follows fractional reserve rules, you know exactly how much money is created and you can thus keep it under control.

        "The rules" don't keep money creation under control either.  See Hutchinson, Mellor, and Olsen's The Politics of Money for more.

        "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

        by Cassiodorus on Fri Dec 26, 2008 at 09:44:43 AM PST

        [ Parent ]

    •  well no (4+ / 0-)

      how much does a piece of paper cost?  So there's some value.  How bout faith and credit of the US govmint, the greatest debtor nation in history that has been lying for 8 straight years?  

      After 8 years of darkness, a great nation chose to reapply power to the beacon of light America stands for.

      by FreeTradeIsYourEpitaph on Fri Dec 26, 2008 at 07:38:07 AM PST

      [ Parent ]

    •  just because value isn't inherent (4+ / 0-)

      doesn't mean there is no value.

      surf putah, your friendly neighborhood central valley samizdat

      by wu ming on Fri Dec 26, 2008 at 08:01:34 AM PST

      [ Parent ]

  •  In otherwords....we've been scammed. (36+ / 0-)

    a large scale transfer of wealth to the money printers.

    Bernie Madoff is the poster boy of our times.
    We once again live in an era of robber barons.
    History will show our downfall was the ability of wealth to corrupt our government and disable our financial immune system.

  •  Getting back 'how it was' is an illusion. (12+ / 0-)

    The bankers will not lead the way out of this...what's left of the 'real economy' is the only hope.

  •  All too true (22+ / 0-)

    A serious tax on speculative (capital gains) income would be a good start, as would a tax on international financial transactions. Policy could target such taxes at the real money, not small players. There seems to be a consensus developing that we need to spend money on real, tangible things, like energy sources and infrastructure, which will have short-term benefits (stimulus) as well as lay the basis for long-term growth.  We also need to be more proactive about raising income for the bottom 80 percent, who are the ones who actually spend and sustain consumption. It's amazing to hear economists even today calling the crisis a "liquidity problem," which it never has been. It's an insolvency crisis, which is a much different animal. Debt needs to become a dirty word again.

    -7.75, -7.64 www.politicalcompass.org "When the intellectual history of this era is finally written, it will scarcely be believable." -- Noam Chomsky

    by scorponic on Fri Dec 26, 2008 at 07:22:28 AM PST

  •  We have had a large scale transfer of wealth from (40+ / 0-)

    the middle and working classes to the richest 1% of us. the rest of us have tried to maintain our standard of living through borrowing. Any solution needs to address the increasingly unequal distribution of wealth and income in this country. There has been a class war, and Bush's base--the haves and the have mores--have won.

    •  Here I blame conspicuous consumption largely. (5+ / 0-)

      Individuals that spent carefully are less vulnerable. "Keeping up with the Joneses" is damaging to the indivdual in making us more vulnerable to financial shocks caused by manipulations that Jerome is talking about.

      The structural manipulations that Jerome highlights are one level. The behavior of individuals is another. It is easy to blame the other and avoid responsibility. More useful is for me to address the portion I can control and vote appropriately to control the other.

      •  I agree that some folks borrowed by put in (23+ / 0-)

        granite countertops and spa tubs, but many people in this country borrowed to get an education and to keep gas in their cars so that they could get to work. The cost of higher education (both public and private) has risen much faster than the overall cost of living. Stables (milk, rice, bread, veggies) have also risen dramatically in price. Rental housing is also expensive and difficult to obtain.

        •  The blind men and the elephant. (6+ / 0-)

          Is a useful parable for thinking of these issues.
          It depends on which piece you have hold of.  In other words there are a lot of things that are true but no one is the whole truth.
          It is true that a lot of people (heavily influenced by relentless advertising) have made really stupid financial decisions - borrowing money they could not afford to buy luxuries and ephemeral junk.
          It is at least equally true that a lot of people have been forced into debt to try to maintain some sort of minimally decent standard of living and provide necessities for their families.
          And it is also true that a lot of people have been forced into debt by events entirely out of their control, like medical catastrophes not covered by insurance, or lack of health coverage altogether.
          But in the aggregate, it all adds up to a culture and economy that have become debt dependant to drive an unsustainable system.
          We need to get back to some old ideas like saving for things you need, paying a decent wage for work, investing in companies that produce real stuff and a genuinely progressive income tax system.  The US economy worked pretty well back in the days when the top marginal tax rate was 90% - a piece of history many seem to forget.

        •  I have no credit card debt and (4+ / 0-)
          Recommended by:
          Sychotic1, StrayCat, Libby Shaw, phonegery

          I like my granite countertop.  

          Having credibility when making an argument is the straightest path to persuasion.

          by SpamNunn on Fri Dec 26, 2008 at 08:19:27 AM PST

          [ Parent ]

        •  One problem is tangible value vs. image (5+ / 0-)

          Even granite countertops and spa tubs have a durable value once installed.

          If I pay higher rent to impress members of my club, that money is gone, never to return to me. My landlord likes it though, because landlord gets a higher rent from me than the next person. The next person has to live a little farther away and pay more for a slightly less desirable place. This works OK, if I can afford the rent and still keep up with everything else-- like staples. But what happens if there is a shock to the system (and my income)? Then I have to move and the next person is settled. So, my former place devalues, because now the system is in trouble.

          Granite countertops are an example of a durable good. Education is human capital and longer term in nature. Staples are short term needs with few substitutes. If things go bad, staples go up in price in the short term, due to necessity. Education (and educated people) may go down in value and durable goods devalue, too.

          Cars are an example of a good that depreciates immediately as you drive it off the lot. Rent is lost money to me, as is interest paid to live above one's means.

          Obama wants to invest in useful stuff: bridges, electric grid, and road maintenance. These last a long time and improve life. Ever try to drive somewhere when a bridge is out of commission? It takes longer and wastes energy.

        •  Agreed. (3+ / 0-)
          Recommended by:
          Jerome a Paris, Creosote, antirove

          I went from good debt and a great credit score to bad debt and a bad score in the span of a few months. I had "good debt" (e.g. student loans taken out to get my college degree), but when my student loan lender (fucking Sallie Mae), didn't give me the last loan I needed for the next two semesters I needed to get my degree and/or become eligible for scholarships and such, my debt went from being good debt that would someday be paid back to being overwhelming bad debt with no possibility of my being capable of paying it back, and no job qualifications, which left me unemployed and incapable of paying off my credit cards and similar bills.

          The irony? If they'd just given me one more loan, I would have been able to complete my education and become a productive member of society. :(

          Deyama Toshimitsu! You broke my gaydar! I demand a replacement at once!

          by MiscastDice on Fri Dec 26, 2008 at 10:47:46 AM PST

          [ Parent ]

      •  basic costs rose, while incomes stagnated (13+ / 0-)

        you can focus on the distractions, but the fact of the matter is that getting by costs a lot more as a proportion of wages than it used to, to the point where taking on debt is inevitable unless you were lucky enough to lock in purchases back before asset inflation, or else have a higher than average salary.

        surf putah, your friendly neighborhood central valley samizdat

        by wu ming on Fri Dec 26, 2008 at 08:05:18 AM PST

        [ Parent ]

        •  Greenspan will go down as a pariah (8+ / 0-)

          He ignored inflation in the stock market.

          He ignored inflation in housing.

          He ignored inflation in the financial markets.

          He ignored inflation in commodities.

          And his primary mission: combat inflation.

          So apparently, Greenspan thought inflation was only real if it showed up in the price of groceries and cigarrettes. Way to go, Greenie.

          •  not exactly (16+ / 0-)

            His mission was to fight inflation in wages, and he was spectacularly successful there.

          •  And the Cost of Living index was reformulated to (8+ / 0-)

            exclude the huge jump in cost of fuel, rapid rise in rental and housing costs, and horrific increase in health insurance, huge college tuition hikes, and the corollary impacts of increased costs for fertilizer, transportation, distribution on food costs.  Also, at the same time, the value of the dollar has been reduced significantly, relative to gold -- our 2008 US dollar buys about 30% as much gold ($850/oz) as it did in 2000 ($270/oz) when Bush was president elect, and buys much less oil as well.  And the $USD has sunk precipitously relative to the Euro and other currencies, such as the Canadian and Australian dollar.  Also, the way unemployed statistics are reported was modified to stop reporting those unemployed for longer periods but still seeking full-time work.  And the means of production for many major industries has been encouraged by the Republican tax breaks to flee overseas.

            By pronouncing the propaganda that we've experienced a modest 3 or 4% cost of living during the Republican reign, uncritically relayed by the media, instead of a more realistic cumulative 66% --  they hope to avert the wage earning class of citizens realizing how badly they've been taken to the cleaners and demanding raises -- and even so, they'd claim this should be called inflation -- instead of nationalized wholesale theft from the working and middle classes.

            How many Americans kept up with the actual cost of living and are earning 66% more in 2008 than they did in 2000?  Probably just the top 1% can say this.  How many Americans that had good paying jobs, health benefits with a pension plan, and 'good credit' in the fall of 2000 have lost these (or have seen the value of these been greatly reduced) over the last couple of years, or will lose them by 2nd Quarter 2009?

            We have been getting shafted, they've taken the value of our money, homes, pension plans, health plans to buy bigger shafts, and they're charging us time, materials, interest and penalty fees for the shafting and shaft, and the social costs of so many being so deeply shafted.  Next the Republicans will demand that we be taxed for it in the name of fiscal responsibility and fairness -- to avoid 'class warfare'.  We've been over run by tanks and saturation bombed with deficit spending in the class warfare war, and the bill for this war is being pinned on our tent-door, as the rich build their fortress communities or just leave shore on their mega-yachts.

            When life gives you wingnuts, make wingnut butter!

            by antirove on Fri Dec 26, 2008 at 11:45:30 AM PST

            [ Parent ]

    •  I think that even the haves (3+ / 0-)

      are beginning to feel the pinch, though not to the poine of hunger. Many articles have pointed out  that sales were down at the high line department stores where Sarah Palin preferred to shop. The have mores, of course, are so far ahead of the rest of us that they can afford to lose a lot and still have money to buy anything they want.

      Justice, if not pursued, does not exist.

      by phonegery on Fri Dec 26, 2008 at 12:34:38 PM PST

      [ Parent ]

  •  You are leaving out the fact that (4+ / 0-)

    those Western stagnant incomes are greater than those of over a billion other incomes.

    Those Westerners protected by law are still making out well.

  •  It's not counterfeit if it's backed by something (6+ / 0-)

    And all the money was being "backed" by assumed FUTURE INCOME.

    Counterfeit money is simply fake, not worth the paper or pixels it's made of. Just fake, nothing backing it, never was, never WILL be.

    Debt is real money backed by future production of money. Debt literally pulls money out of the future into the present. That's real, so long as the money in the future gets produced and everyone agrees that it will.

    The problem comes when the future doesn't go according to expectation. That doesn't mean the money was fake -- it means the assumptions were wrong -- and the money becomes worthless.

    It's LIKE fake money when it happens, but there is an important distinction. Not all debt is counterfeit. It becomes however worthless, like counterfeit money, when the future assumptions get so out of hand.

    •  If only the CEOs knew this. (7+ / 0-)

      While they were striving to increase consumer debt driven spending they were also working to reduce future income. Any chance we can get the professors to teach the MBAs to not undermine themselves?

    •  Is it counterfeit when those creating the (0+ / 0-)

      debt to take money in the form of fees while knowing full well that the net debt level was approaching a level that could not in any real world be redeemed by future production?  Most people with an internet connection and a functioning brain knew by late 2006 that the new debt being created could not be repaid by production within the time frame called for in the debt instruments.

      Patriotism may be the last refuge of scoundrels, but religion is assuredly the first.

      by StrayCat on Fri Dec 26, 2008 at 06:56:16 PM PST

      [ Parent ]

    •  In one word: TRUST (2+ / 0-)
      Recommended by:
      TX Unmuzzled, Unnamed Reader

      Money as debt only has value so long as we can trust the obligations will be made good.  This means transparency and accountability in the financial system are essential for money to have any real worth.  When people can't trust the banks' books, can't trust financial regulators' policies and statements, can't trust in the rules being uniformly applied... the value of these debts and thus the value of money itself implodes.  This is the root of the problem.  

      It seems inevitable that a financial collapse, caused by a loss of trust in the money system, would be the end result of a corrupt administration itself created by acts of fraud against Democracy.  

      Trust: it must be restored for any of this to get fixed!

      The intrinsic nature of Power is such that those who seek it most are least qualified to wield it.

      by mojo workin on Fri Dec 26, 2008 at 08:26:59 PM PST

      [ Parent ]

  •  People have forgotten that wealth has two sources (2+ / 0-)
    Recommended by:
    Sychotic1, StrayCat

    money and REAL estate. That is that money used to be regarded as less valuable than other assets. When the economy tanks money disappears but land and buildings remain. Stocks used to be valuable because they were ownership of real estate but they have become desired for the hope of selling them for more than you paid.

    •  No no. Wealth is anything of value. (10+ / 0-)

      You're referring to real assets, which can also consist of commodities like gold, corn, oil, etc. So long as the world's economies value something, and so long as you own it, then you have real wealth.

      But if you own tulips worth $1000 a piece this month, and next month they are worthless, then your wealth just decreased by $1000 a piece of whatever you still hold.

      •  No I literally meant real estate. (3+ / 0-)
        Recommended by:
        cotterperson, StrayCat, phonegery

        If you own land or a factory or something that generates a product its cash value will go down up and down with the economy but the item itself continues to exist. If you bought a perishable item like tulip bulbs only to sell them at a high price then they are not real estate. If you bought tulip bulbs to have tulips in your garden then plant the flowers and enjoy your garden. You are talking about speculation and having the right timing in a bubble market. I was talking about how, in the past when economic crashes were more common, people didn't trust cash as a good measure of wealth.

      •  Necessary things hold value better than non- (8+ / 0-)

        necessary things. The proportion of value of an asset that is directly related to a human need that can not be easily forgone is its bedrock value. The proportion of the value that is related to human needs that are easily forgone is what will deflate. The real value assets are what we should be investing in and we should be limiting investment in assets that are easily forgone.

        One of the assets that is easily forgone is the huge gap in wealth between the top 1% and the rest of the value producing human beings who participate in the economy. We should limit the macro production of this non-necessary, fake, wealth. Ordinary people have been financing this gap with their credit cards at usurious rates, it's high time we tax it back into the economy of necessary things.

        Love = Awareness of mutually beneficial exchange across semi-permeable boundaries. Political and economic systems either amplify or inhibit Love.

        by Bob Guyer on Fri Dec 26, 2008 at 08:30:53 AM PST

        [ Parent ]

    •  um, the first stocks were not real estate (6+ / 0-)

      look up the dutch east india company.

      surf putah, your friendly neighborhood central valley samizdat

      by wu ming on Fri Dec 26, 2008 at 08:06:25 AM PST

      [ Parent ]

    •  Stocks have value, because of the (2+ / 0-)
      Recommended by:
      Jerome a Paris, StrayCat

      future stream of income one expects from them.  When they don't pay dividends, then the expectation of an increased future value of the share itself becomes the rational for its purchase price.  Unfortunately, we bought the sizzle Wall Street was selling, while the steak remained the same size.

      Justice, if not pursued, does not exist.

      by phonegery on Fri Dec 26, 2008 at 01:01:09 PM PST

      [ Parent ]

      •  That's why its a lesser form of wealth. (1+ / 0-)
        Recommended by:
        phonegery

        What ever its dollar value farmland can still be farmed and houses with paid off mortgages can still be lived in. These things have an intrinsic value independent of their market price. Stocks are only worth the difference between the money you spend and the money you get back. Real estate is worth that plus the use you get out of it.

  •  Americans are generally smart enough (6+ / 0-)

    not to bank on 4% returns when inflation is much higher.

    When interest income is also taxed and reducing the return to as low as 2.3%, this makes Americans less likely to save.

    Such a country switchs to a no savings and massive debt economy.

    One thing that can be done is to gradually switch to making interest tax-exempt (except for inflation-adjusted real returns received by the rich and by corporations) and non-deductible.

    This might be done over a ten year period.

    •  so why be in debt at 22 percent (3+ / 0-)
      Recommended by:
      Sparhawk, TX Unmuzzled, Sychotic1

      when that debt is not tax exempt

      what happened was debt was made seductive

      George Bush is Living proof of the axiom "Never send a boy to do a man's job" E -2.25 S -4.10

      by nathguy on Fri Dec 26, 2008 at 08:02:31 AM PST

      [ Parent ]

      •  Much debt (3+ / 0-)
        Recommended by:
        Creosote, kurt, phonegery

        is not by choice.

        If the car that gets you to work needs to be repaired, out comes the plastic.

        If little Johnny is sick, he gets dragged off to the doctor to be made well faster so the number of days of work lost is minimized.

        Also, the 22% rate usually comes after a missed or late payment.

        •  Also, if you get (2+ / 0-)
          Recommended by:
          SingleVoter, kurt

          "free trips" "Free Airline miles" "free cash back"

          they have incentivized using plastic for everything.

          There are bagels in the fridge

          by Sychotic1 on Fri Dec 26, 2008 at 08:41:30 AM PST

          [ Parent ]

          •  You CANNOT buy a plane ticket without plastic (2+ / 0-)
            Recommended by:
            Creosote, StrayCat

            and most forms of long distance commercial passenger transport seems to be requiring a credit card now, and purchase in advance as much as possible.  This enables the surveillance state in that all our larger movements can easily be tracked and reviewed.

            Online internet purchase puts a huge chunk of the economy on plastic or in some form where the purchases are tracked by third parties sharing financial data.

            And now that most fast food places take plastic, there are very few merchants, that we the wage-earning class normally frequent, who do not demand 'time-saving' plastic, prefer it, or at least accept it.

            When life gives you wingnuts, make wingnut butter!

            by antirove on Fri Dec 26, 2008 at 11:55:17 AM PST

            [ Parent ]

      •  Some people (0+ / 0-)

        will gladly pay a premium to have it now.

        I certainly won't.

        •  i concur (0+ / 0-)

          it wasn't rational to not save but to acquire debt.

          rather it was the relative attractiveness of now exceeded the
          attractveness of later.

          George Bush is Living proof of the axiom "Never send a boy to do a man's job" E -2.25 S -4.10

          by nathguy on Fri Dec 26, 2008 at 02:42:53 PM PST

          [ Parent ]

    •  How can you save (5+ / 0-)

      when your income barely covers the cost of living? I'm not talking granite counter tops I'm saying healthy food housing and basic bills. As a small business owner and I mean small we live on what we make. No debt small overhead and yet our income never generates enough to save. If we charged our clients enough to cover health insurance or savings we would not be competitive. Someone in India would be providing the statistics we live on.

      "And if my thought-dreams could be seen They'd probably put my head in a guillotine" Bob Dylan

      by shaharazade on Fri Dec 26, 2008 at 09:02:52 AM PST

      [ Parent ]

  •  That Transfer of Wealth Made the Sponsors of (15+ / 0-)

    those who passed government policy stronger than they've ever been.

    I fear that the trend is not a pendulum but instead a ratchet.

    We shoved an enormous amount of money up to the top; we'll tweak some taxes and government stimulus to create a pause in the transfer before some other scheme is devised to push some more money to the top.

    So many policies that created a comfortably democratic economy through the 1960's are now off the table as too radical-leftist, that I don't see how we have enough tools to do much more for the masses than ease the worst of the pain.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Fri Dec 26, 2008 at 07:35:48 AM PST

    •  Just like the IMF in the 90's around the world. (12+ / 0-)

      Huge capital inflows making the top folks rich, who then flee, then all the capital follows, the debts mount and fall on the shoulders of the remaining poor public, and the nation and its government becomes crippled for a generation or more.

      And the "loan" money never ever even left Washington.

      •  when I think of the criminal element (9+ / 0-)

        all around the world co-opting all the funds that were meant for building new economies in devastated countries (like the Soviet Union after the fall, Africa, etc.), I become incensed.  It truly sticks in my craw that weasels who have no talents except as confidence wo/men are able to siphon off moneys meant for good to contribute to their own excess!

        But it's even more disturbing that our own financial infrastructure has come to operate under the same schemes with the same sociopathic twist.  The days of the business moguls, robber barons, illuminati have surfaced from where they lay as maggots underground working the soil and spread rapidly to corrupt the world economy.  

        This hasn't happened in the last eight years...it's been at work for at least the last 30, with the last 20 being the period of most rapid take-over.  There's been a true loss of moral standards in the business community and there are young people in it today who have never known any different.  It's like they grew up in a mob family and never even knew there was a different way of living and valuing life.

        I feel at least justified for my years of railing out about this to deaf ears when I read/hear the news that it has finally been exposed, but I still feel the helpless sense of rage that we are all suffering from it, will continue to (and it may get a whole lot worse), and that the cabal of evil who implemented this crime against nature will continue to flourish, safely ensconced in their fortunes (whether or not in exile!)

        I want them hunted down and brought to justice with no less diligence than that used to capture the Nazi SS officers after WWII!  Forget bin Laden!

        Find your own voice--the personal is political.

        by In her own Voice on Fri Dec 26, 2008 at 08:59:24 AM PST

        [ Parent ]

  •  If individuals are taxed (2+ / 0-)
    Recommended by:
    theran, StrayCat

    on interest income and nation states aren't, then nation states will tend to eventually become major debt holders.

  •  The problem (15+ / 0-)

    But the core requirement is to admit that the prosperity of the past few years as fake and inexistent.

    Unfortunately no one of substance seems willing to say it. To do so would somehow be to deny American economic, and other, "superiority".

    I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

    by taonow on Fri Dec 26, 2008 at 07:37:59 AM PST

    •  America has only a few competitive sectors (7+ / 0-)

      Higher education, parts of technology, some high-complexity manufacturing, and finance.  

      Generating paper assets is one of our national industries.  Of course people aren't yet willing to realize that it's not all that great.

      "Dream for just a second and then do it!" -- Kolmogorov

      by theran on Fri Dec 26, 2008 at 07:41:32 AM PST

      [ Parent ]

      •  But (4+ / 0-)
        Recommended by:
        theran, Creosote, kurt, phonegery

        Although the "national" industries may not be in great shape, the potential is still there - American innovation!.

        I was talking to my brother who just got back from a genetics conference in San Fransisco. He was raving about the advances we will see in medicine in the next 3-5 years.

        This is a MASSIVE future industry (personalized medicine for one). For the future we need to build the next industries, not keep the old ones on life support. Investments in personalized medicine will save a fortune for the economy but also create a whole new industry involving computers, equipment, technicians, etc.

        I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

        by taonow on Fri Dec 26, 2008 at 07:46:25 AM PST

        [ Parent ]

        •  You don't have to convince me (7+ / 0-)

          But the power elite are deeply embedded in the financial world, and also are the people who hold most of the paper assets, and have the most to lose if they drop in value.

          Another way of thinking about Jerome's main point is that there are two economies: one based on value creation, and the other based on generating and holding debt-based assets.  The latter has been growing very robustly for a long time, and the former not so much.  But the vast majority of people are in the first category, since it's where they can get a paycheck.  

          It's not really a shock that the main points of interface between the two, namely residential RE and 401(k)/pension plans are where things first blew up.

          In this sense, all the bailouts so far are directed towards propping up the paper economy, which is probably impossible.  On the other hand, like you say, the real economy has a lot of potential for growth, if money moves back towards science, education, and infrastructure.

          "Dream for just a second and then do it!" -- Kolmogorov

          by theran on Fri Dec 26, 2008 at 07:53:46 AM PST

          [ Parent ]

        •  Rather bizarre when you think about it (5+ / 0-)

          This is a MASSIVE future industry (personalized medicine for one).

          Despite all the idiocy of the stem cell contretemps, in spite of the horrors of the most irrational health care system in the world and the revolt against intellectual property rights around the world, the thuggish profiteering on biotechnology stocks; the U.S. remains a mecca for biotechnology.

          To top it all off, Obama was the lonely author of a bill promoting personalized medicine.

          Somehow there is hope even in the darkest night.

          Best,  Terry

          •  well we better make sure (5+ / 0-)

            there's a way for the "common" wo/man to pay for these great advancements in medical science.

            If they are only available to the wealthy 1% of the population, or to those who are privileged corporate citizens with health care insurance, I don't believe this will solve the problem.

            Find your own voice--the personal is political.

            by In her own Voice on Fri Dec 26, 2008 at 09:04:34 AM PST

            [ Parent ]

            •  Have You Considered (2+ / 0-)
              Recommended by:
              In her own Voice, mrchumchum

              advances in medicine can save on expenses rather than otherwise?

              Disease is very costly.

              Efficacious drugs that can save on hospitalization and disability, surgery and lifelong dependence, without untoward side effects are quite positive.

              The copycat drugs of Big Pharma that make minimal advances and require vast expenditures to show minimal advantage, if any, over currently marketed drugs are quite different from, say, vaccines that prevent the disease in the first place or actually cure diseases.

              The idea behind personalized medicine is to address the patient's particular genetic makeup rather than demanding one size that fit's all.  Failure to do that is responsible for a hefty percentage of total hospitalizations from drug reactions.

              The FDA currently has little liking for such medicine and is tied generally to the concept of mass marketing of one drug for all.

              Best,  Terry

              •  Real health can be very inexpensive (2+ / 0-)
                Recommended by:
                In her own Voice, mrchumchum

                Disease is very costly.

                I heard the other day about how Medicare money is used up in Long Term Acute Care for severely or terminally ill patients to the extent of hundreds of thousands of dollars per patient.

                Most of the predominant diseases in the US today are the rich people's diseases .... like heart diseases, cancer, obesity, diabetes. If everyone learned to breathe properly, take enough exercise, eat in proper quantity and of proper quality, got enough sleep and rest, people will be much healthier and the cost of medicine will drop precipitously.

              •  Yes, I would consider that in a world where (0+ / 0-)

                such is the goal of the leadership structuring our economy.

                Find your own voice--the personal is political.

                by In her own Voice on Fri Dec 26, 2008 at 02:04:52 PM PST

                [ Parent ]

                •  There Are No Real Good Answers Ever (2+ / 0-)
                  Recommended by:
                  Jerome a Paris, In her own Voice

                  Just the right questions.

                  If this won't date me, nothing will.

                  When I was in college, I had a roommate who lived in terror of appearing before a committee that would  choose which one of ten people might live.

                  You see my roommate had had a kidney disease.  Dialysis was rare and expensive.  Only a tiny minority could be saved if the disease advanced.

                  The country made a decision to invest in treatment for all that needed it.

                  That decision was hardly without controversy.  Those going on dialysis were expected to be permanently disabled.  The cost was enormous.

                  IMO the cost was worthwhile.

                  With hindsight, I think most would agree today.  But some of us were given a certain perspective beforehand.

                  I frankly pitied the people on the committee even more than the "condemned" who would appear before the committee.

                  Today...

                  I don't want to think too long about what the decision would be today.

                  Best,  Terry

            •  The opposite (1+ / 0-)
              Recommended by:
              StrayCat

              It is thought that within 2-4 years you will be able to get a complete sequencing of your genome for under $500!!! Considering what it costs just to talk to a doctor, that is a very minor amount for a product that can be used for a lifetime to help figure out which drugs or treatments are worthwhile. It actually makes medicine more accessible.

              I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

              by taonow on Fri Dec 26, 2008 at 12:21:47 PM PST

              [ Parent ]

              •  I would like to be optimistic (0+ / 0-)

                about these medical advances and their diminishing cost. However, I have just been involved in my daughter's process of in vitro fertilization where some very advanced techniques are used to enhance production of ova, harvest them, fertilize and attend them, then analyze which are most viable and transfer them into the potential mom who is all along taking hormones to enhance her receptivity to their implantation.  The rest of the embryos--the less viable are then fast-frozen with newly advanced techniques which have a very good success rate for being unfrozen and remaining viable for use in the future or if this pregnancy doesn't "take".

                These wonderful advances in altering the patient's chances of moving beyond the limits of their own genetic make-up have not become less costly.  They are outrageously expensive and unavailble to all but those who have the $$$ to pay.  I am thankful my daughter and her husband are ones who can afford this complicated, highly advanced procedure, but there are multitudes who couldn't begin to afford it.

                I am concerned that without a change in the ethics of our economy, in the minds and hearts of those who hold the power to rule about how the economy works, all the advancements in the world won't change how the health care system works.

                Find your own voice--the personal is political.

                by In her own Voice on Fri Dec 26, 2008 at 02:03:24 PM PST

                [ Parent ]

                •  Dr. Smith (that was his name, really) (0+ / 0-)

                  showed us the lab where the Guilford wafer was manufactured manually, one at a time, and discussed the frustration in trying to automate the process.  

                  The tiny balls were pressed in a machine like a waffle iron and had to be scraped out as it once was with waffle irons.  Somehow teflon nor grease nor anything else they could come up with helped.

                  Those balls were later pressed into wafer form to be inserted in the cavity left after a cancerous tumor was excised from a brain and slowly decayed dispensing poison to regrowth of a tumor.

                  Innocently this naif asked about European revenues.  Dr. Smith was kind.  He patiently explained that European national health care plans wouldn't pay for re-operations, the only operations for which the wafer was approved.

                  Americans with brain cancer could maybe live weeks longer with a second operation for a terrible cancer. The end would remain inevitable while the cost of extending life for a few days was enormous.

                  For what?

                  Later the polymer wafers were approved for initial operations and, I suppose, became available in Europe and elsewhere.  

                  Sick Americans bore the entire cost of development for a modest (at best) improvement in treatment and paid far more for treatment if they even had access to health care.

                  America will not continue to be so profligate nor so careless with the way it treats sick people.

                  At least I think not.

                  Or maybe just hope so.

                  Best,  Terry

  •  Americans and English (1+ / 0-)
    Recommended by:
    kurt

    tend to own homes.

    This means thay can provide security for debt easier than in other countries.

    One way to curtail non-purchase housing-secured debt is through homestead protection laws like Florida's that bar using the family home as recourse for any debt other than that used to purchase the home.

    •  The bank owns the title for most Americans (9+ / 0-)

      not the 'home-owner'.  We've tended to move every 5 to 7 years to keep income from job flowing in, and few of us ever pay off a first mortgage--at least not until very late in one's career, after all kids have 'real' jobs and move out.  So, most Americans live in homes the banks own, and they have a market value that is used to peg present-value 'equity' position and property taxes, but you have to take equity loan (second mortgage) to access that, which tends to delay by at least another decade when Americans actually become home owners.  

      But because we live in bank-owned home, we're encouraged to believe we are middle-class...when traditionally, being middle-class means you own your home clear and free, and you have an income and savings sufficient to cover you through sickness and retirement.  

      We've been led to believe that living paycheck to paycheck  (dual income), in a 4,000 square foot McMansion with its $400,000 mortgage, and carrying $60,000 in auto-leases, plus college loans and charge card debt adding up to another $40,000 to $100,000 or more, even though both are receiving a salary for working 45 to 60 hour weeks, isn't actually middle class...a rude awakening for those beguiled into becoming wage-slaves handing nearly all their real income to the financial industry, and have promised most of their future income as well.

      When life gives you wingnuts, make wingnut butter!

      by antirove on Fri Dec 26, 2008 at 12:09:47 PM PST

      [ Parent ]

  •  Right medicine, wrong diagnosis (15+ / 0-)

    The prescription (higher taxes on the wealthy) is correct.  The reasoning is false (money not backed by anything).  

    Debt IS an asset.  When the rich (i.e. the investor class) get richer demand for assets goes up.  The supply of financial asset must increase to meet the increased demand.  Supply is increased by both (1) creating of new assets (debt) and (2) bidding up the price of existing assets (asset bubbles).  Asset bubbles and increased debt eventually lead to financial crisis.

    For forty years income inequality was artificially flattened by very high marginal tax rates; there was no potential to generate a financial crisis.  Once pre-New Deal inequality levels were restored by the end of the 1990's financial crisis was inevitable.  One bubble collapse would be followed by another until one of them generated a crisis.

    Now we will have recurrent bubbles and crises every 1-2 decades unless extreme tax rates are restored.

    •  You are probably right (8+ / 0-)

      that the lack of high taxes has allowed the accumulation of wealth that has lead to financial asset bubbles. Yes indeed.

    •  Add to this tightly coupled global econ (3+ / 0-)
      Recommended by:
      Creosote, kurt, In her own Voice

      We're seeing that the world's economies now, unlike in the 30's, are very very tightly coupled. So the price of oil was bid up this year to $140/b and is now down to $35/b. What accounts for this? Well, derivative trading for one. But also, when the US demand fell off a cliff, then so did the income of the Chinese, and so on and so forth. And it happened quickly. There was no "decoupling" (not yet anyway on the way down, the way up may be a different story).

      So I think the potential for more rapid bust-boom dynamics is now in place. The world in its froth toward unfettered globalization has overcome and removed most of the firewalls that could have protected this kind of international crisis to some degree.

      •  Hockey stick supply curve (5+ / 0-)

        Oil supplies are constrained tightly. The curve starts low on the left and gradually rises-- untilit hits the maximum rate of supply. Then demand takes the price up rapidly.

        We are in a brief period where the demand has shrunk. Next time demand takes off, the price will go higher still. Unless, we change the supply by investing in renewables. Leave the shiekhs sucking on the oilwells.

        Quote from Thomas Friedman: "Former Saudi oil minister Sheik Ahmed Zaki Yamani once said, 'The Stone Age didn't end because we ran out of stones.' The oil age will not end because we've run out of oil. It will end because people invent alternatives."
        Time 10 Qs for Friedman
        Yes, I know he is not popular here. Please Don't Falme Me! :)

    •  Huh? (0+ / 0-)

      Sweden, with quite a low level of income inequality, still managed to have a major financial meltdown. As did Japan. And we managed to have the S&L crisis in the 1980s too. But to give you the benefit of the doubt, I did a little digging into the data.

      Did we reach pre-New Deal income inequality through the end of the 1990s? I'm not really sure about that but even if we did, it was at a much higher standard of living than the 1920s. I went to the US Census Bureau to look up the gini coefficient (measure of income inequality) to find evidence for your assertions. Unfortunately, their data only goes back to 1967. The coefficient indicates that income inequality has increased in that period but the highest increase was by far from 1981 to 1993 during the Reagan-Bush years. However, it has been relatively flat until then (rising from .45 to .46 between 93 and 2007).

      So if we reached pre-New Deal levels of inequality, it would have been 1993, when the gini stabilised. We have had the tech bubble and stock market bubble and the housing bubble so it seems that your argument is plausible. But the previous examples of crises in other countries with low income inequality give me pause. I think there would need to be a whole bunch of more proximate causes for us to fall over the cliff in this way. My opinion is that if there was adequate regulation and supervision, many of the other problems would not have coalesced to form this crisis.    

      •  Reply (0+ / 0-)

        Here is an article I wrote that has data on income inequality since 1947.  Here is an excellent source for inequality data  http://www.nber.org/...
        They give average income for the top 1% and bottom 99% for 1918-2000, obtained from tax records.  I calculated the ratio of top% to bottom 9% and averaged over periods

        1917-1920 18.5
        1921-1930 20.2
        1931-1940 18.2
        1941-1950 13.0
        1951-1960 10.1
        1961-1970 8.9
        1971-1980 8.6
        1981-1985 9.4
        1986-1990 13.3
        1991-1995 14.9
        1996-2000 18.2

        The pre-1940 values range from 16.4 in 1920 to 23.6 in 1928.  The 1945-1980 values range from 8.4 in 1973 to 13.0 in 1946.  The post-1980 values range from 8.7 in 1981 to 20.4 in 2000.  Since 2000 the data in my article suggest that rich/poor ratios have risen about 6% which would suggest about 22 today.  The average value in the pre-1930 period is 19.7.  We did not reach this level in modern times until 2000.

        As for Sweden and Japan, minor bubbles still occur even with low levels of income inequality.  Here in the US we had the 'tronics mania in the late 1950's, the 'go go" era in the late 1960's, the Hunt brothers attempted corner of the silver market in the late 1970's and other episodes of minor bubbles.  None of these bubbles posed any systemic threat to the world economy, unlike the 1929 New York stock market crash or the present crisis in American mortgage securities.  The Swedish and Japanese events also did not affect the center of the world economy.

        Mania is always possible, it is simply a matter of psychology. In the US, the stock market has regulated itself (or been regulated?) in such a way as the give the most stable and highest returns of any stock market in the world.  

        The way the US stock market does this, is by the appearance of periodic secular bear markets. I discuss this in an article here http://www.safehaven.com/...

        To see a real life application of this idea see my recent article from 20 November: http://www.safehaven.com/...

        I bought heavily that day because it was the first time the market reached a level consistent with a bear market bottom.  Although we can certainly go lower than we did that day, and probably will, we don't have to.  By reaching the level it did on that day, the market has done what it needed to do to further the secular bear market process.

        As you can see, what had happened on the stock market is perfectly normal, even predictable (I did so years ago, although I thought it would happen in 2010 instead of 2008 and so remained invested after stocks started falling in 2007).

        Anyways one of the peculiar things about the post war era is how lackluster the postwar bull market was.  Economic performance was the best it has ever been.  Inflation was low, interest rates were low, yet the valuations at the secular bull market peak in 1966 were the lowest (by far) of the eight secular bull market peaks over the last 200 years.

        The reason was an extremely cautious market pyschology.  How did that come about.  Check out figure 7 in this article: http://www.safehaven.com/...

        Despite the best economy in history and the biggest bull market in history (up to that time) the richest guys didn't get any richer.  In such an environment it makes sense to make careful investments like Warren Buffet (one of the rising stars of the era) and not engage in bubble foolishness. And when bubbles occurred they were short-lived collapsing and hurting the fools involved. So the market elders could write books poking fun at the excesses of their less erudite peers.  All this served to prevent mania and financial crisis.

        My guess is that high taxes, which prevented the accumulation of vast fortunes produced this caution.  It make market players poorer and more cautious and the society at large benefitted from this.

         

  •  No, Jerome, raising taxes (1+ / 0-)
    Recommended by:
    sustainable

    during a severe recession is NOT a viable solution.

    Your conception of money in this case is what is limiting you.  Money is, essentially, a promise to pay.  If a government is sufficiently credible in its capacity to take from some and give to others -- as is the US, for example -- then it is not necessary to raise taxes in order to create claims on real things.  Governments that can do so, such as the US and Japan, should simply create debt because of their unlimited capacity to make good on their debts, and thereby increase aggregate demand for real things.

    Aggregate demand has fallen now because the credibility of privately created debt -- M3 and above, for example -- has largely evaporated due to the collapse in counterparty confidence.  This loss in money supply and consequent loss in aggregate demand called deflation needs to be filled by public debt in order to restore aggregate demand and reduce job losses.

    •  A recipe (2+ / 0-)
      Recommended by:
      bigchin, keikekaze

      ultimately a recipe for disaster

      The Coming Cash Tsunami

      I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

      by taonow on Fri Dec 26, 2008 at 07:57:59 AM PST

      [ Parent ]

    •  Well (5+ / 0-)
      Recommended by:
      cotterperson, Creosote, nicta, bigchin, Bronx59

      the exeamples of stagflation in the 70s and the massive spending by the Japanese in the 90s would suggest that large-scale public spending are not really part of the solution.

      •  Stagflation (2+ / 0-)
        Recommended by:
        TX Unmuzzled, sustainable

        Let's look at stagflation.  Is it really a threat right now?  It is if you assume that the supply of money has not been reduced signficantly by the current financial crisis.  That is, if you believe that most of the money that caused a boom in US housing prices and eventually commodity prices was accounted for by the M2 stocks in the world.  

        However, if you believe that M3 or above was causing the excess of debt, mostly created by private creation of money (as you argued) through lenders essentially lending to each other and inflating both assets and liabilities on their balance sheets, then you also have to believe that the current crisis has resulted in the destruction of much of that privately created money.  This means that there is no reason that inflation must necessarily follow public replacement of the now-gone privately created money.

        Not every country can do this, and the fall in the Euro means that Europe might be very limited in this aspect.  But the US is not limited because of its goverment's apparently superior political credibility to be able to take from some and give to holders of US-backed debt instruments when necessary -- i.e. power.

        •  I think we lost incredible amount of this (2+ / 0-)
          Recommended by:
          Creosote, truong son traveler

          But the US is not limited because of its goverment's apparently superior political credibility to be able to take from some and give to holders of US-backed debt instruments when necessary -- i.e. power.

          That was used to be, even under Bush I. Surely under Clinton. Under Bush II, it has substantially deteriorated.

          Sure, the US gov will not default but what they will do is to print a lot of money (and they don't have gold to back it up). The world now know that the US is drunken and just printing money to spend with no intention of fiscal responsibly (not to say Bush actively devalue the dollar policy for export, stupid).

          And part of the power you mentioned come from the appetite for dollar nominated assets. Watch out China. They are coming, with trillion in surplus. And if they ever move their finger, they will create a financial tsunami in the US more than the current crisis, with their near trillion US treasury holding. You think they can't flunk a trillion dollar? That will not kill them but surely wreck the US.

          Our only hope is that Obama will fix the mess Bush created.

          •  But not relative to everyone else, (0+ / 0-)

            which is the key.  That is why the US dollar has rocketed up in value since the crisis began while all other currencies, such as the euro, have dropped.  At the end of day, there simply is no power comparable to that of American political authorities right now, so the rest of the world banks, literally with the US government by buying US government debt.

            •  we'll see (4+ / 0-)

              the dollar rise in recent months was linked to the one-off sale of foreign assets by dollar funds. It's unlikely to be moe than a blip hen you have more than $8 trillion of new liabilities taken on board the balance sheet of the Fed in a few months.

              •  No, not the right interpretation (0+ / 0-)

                the dollar rise in recent months was due to the fact that no other political entity has the clout of being able to protect the wealth of a promise to pay that the US government does.  The dollar will fall again when people stop valuing such protection and start looking for higher reward/higher risk assets.

                You have to ask yourself, "Why was there a one-off sale of foreign assets if the problem was obviously centered in the US economy?" The answer is that people dumped assets that had less credible political guarantees than US treasury notes.

      •  Hey Jerome . . . have you read (1+ / 0-)
        Recommended by:
        Jerome a Paris

        Cities and the Wealth of Nations by Jane Jacobs, and if so, what are your thoughts about it?

        "The great lie of democracy, its essential paradox, is that democracy is first to be sacrificed when its security is at risk." --Ian McDonald

        by Geenius at Wrok on Fri Dec 26, 2008 at 09:04:07 AM PST

        [ Parent ]

      •  Are you saying that large-scale public (1+ / 0-)
        Recommended by:
        Jerome a Paris

        expenditure is not going to get us out of this mess because it didn't work in Japan in the 1990s?

        Then I'd have to disagree with you massively. One of my projects in the 1990s (as an economist) was to follow Japan and the East-Asian countries. The Japanese did a lovely snow-job of putting out all sorts of fiscal stimulus plans but the problem is that each successive plan would include projects that had previously been announced but not implemented, so the hit was never as big at it seemed. It became a game with a Japanese colleague and myself to see who could most quickly separate the old 'water' from the new. But just as Japan was spending its way out of depression, the government implemented an increase in the consumption tax in 1997, plunging the economy into recession again.

        For reference, please see Krugman's Return of Depression Economics and Adam Posen's Restoring Japan's Economic Growth.

        On your larger point about raising taxes in the US at this point, I would also vehemently disagree. We need everyone who can to keep spending at a time like this and the economy is agnostic about who does it, just that it happens. We can meet a redistributive agenda through expenditures -  spend more on the poor. We are already doing that through automatic stabilizers but it can also be done through new programs.

        I agree that there was a lot of what you call counterfeit debt out there. But that is the toxic stuff that the banks need to get rid of so they can unfreeze lending. There will be asset destruction as a result (and also a result of the multiplier effects of a slowdown in consumption and trade) but assets won't be completely destroyed and there is an important role now for government to prevent asset destruction and create new assets through expenditures on public goods.

        You are right that the current leverage model that we have, particularly in the financial markets, is bogus. Reserve and prudential requirements will need to be tightened. Ratings agencies will need to be carefully supervised. Borrowing to buy shares will be a thing of the past. The risk models that we use will need to be seriously overhauled and then thrown out and there should be a difference between Las Vegas and Wall St.

    •  you know what's not a viable solution? (12+ / 0-)

      trying the same basic pattern that dug us into this hole.

      surf putah, your friendly neighborhood central valley samizdat

      by wu ming on Fri Dec 26, 2008 at 08:10:57 AM PST

      [ Parent ]

    •  Of course you raise taxes in a recession (12+ / 0-)

      That is an old conservative cant by people who are equally opposed to raising taxes in an expansion.

      Our policies have led to the massively disproportionate accumulation of wealth, which is accelerating.

      To tax that ill gotten hoard for the purpose of spending on public goods is the logical fix. If that is deflationary to the goods and services of the luxury market, I will shed no tears.

      •  No, even liberals like Krugman (1+ / 0-)
        Recommended by:
        Fire bad tree pretty

        and leftists like Stiglitz are speaking out against raising taxes now.  You don't need taxes to affect re-distribution.

        •  Sort of. (2+ / 0-)
          Recommended by:
          Jerome a Paris, StrayCat

          You don't need taxes to affect re-distribution.

          Strictly speaking, you're right; as a practical matter, however, raising the top marginal rates is the quickest way to acheive redistribution.

          "If the stars should appear but one night every thousand years how man would marvel and stare." Ralph Waldo Emerson

          by mftalbot on Fri Dec 26, 2008 at 12:10:14 PM PST

          [ Parent ]

          •  But it comes with a high cost (0+ / 0-)

            both politically and economically.  You need at least some support from the rich to raise their taxes, and the rich are a lot less rich after the financial crisis, having, on net, transferred a lot of their wealth to homeowners who won't repay their debts, so focusing on raising taxes just puts an unnecessary obstacle to more pro-active ways of stimulating the economy and re-distributing income.

            •  Why do you need (3+ / 0-)
              Recommended by:
              Creosote, mftalbot, StrayCat

              the support of the rich, exactly?

              •  Because the rich have veto power (0+ / 0-)

                Here's a way to look at it, looking at the history of European welfare states.  Can you name a welfare state development in Europe that did not occur without the support of at least some segments of the rich?  Or, another way of putting it, can you name a welfare or redistribution program in Europe (or anywhere) that does not specifically serve an interest of some segment of the rich as well as the interests of whatever poor it might also benefit?

            •  To whom? (2+ / 0-)
              Recommended by:
              Jerome a Paris, StrayCat

              You know, there was a time when Democrats like Harry Truman were not afraid of saying "The Republicans are the Rich Man's Party, while the Democrats are the Party of The Common Man."

              Here's the thing: fuck the rich. They've been doing just fine for the last 35 years, getting richer and richer and richer, while no one else has gotten a raise.

              The top marginal tax rate during the administration of that notorious Leninist, Ike, was 91.5 percent. That is not a typo. It resulted in it not being worthwhile to make 300 times as much as your lower paid workers, because taxes would eat up the portion of your income that could be described as obscene. The fifties were not exactly a time of breadlines and hardship. There was a broad and solid middle class.

              "If the stars should appear but one night every thousand years how man would marvel and stare." Ralph Waldo Emerson

              by mftalbot on Fri Dec 26, 2008 at 02:38:20 PM PST

              [ Parent ]

            •  It sounds like you just want to protect the (3+ / 0-)
              Recommended by:
              Jerome a Paris, Creosote, mftalbot

              present unwarranted free ride that the rich have paid Congress to legislate for them, and claim that the unwashed failed to pay their debts out of something other than desperate necessity.  Adding the cost of unnecessary wars, rampant was profiteering, stock and other financial scams aided and abetted by the rich and their Congresspeople, their Bushies and comatose regulatory agencies, it is clear to me, at least, that we are where we are today because much of the wealth created by 93% of the citizens of this country was stolen outright by those now claiming that taxes on the wealthy would be economically disastrous.
                 In fact, the repeal of Glass Steagal, and the Gramm economic fantasies are at the root of the death of the US financial sector, while the rampant theft by government officials has looted the Treasury.  I doubt that we will ever know how much was stolen, by whom, and where it went.

              Patriotism may be the last refuge of scoundrels, but religion is assuredly the first.

              by StrayCat on Fri Dec 26, 2008 at 07:28:03 PM PST

              [ Parent ]

              •  No, I don't want to protect the present system (0+ / 0-)

                But it's important to point out that in Europe where Jerome speaks so glowingly of income equality, there is no taxes on capital gains and the tax rates of the wealthy are only marginally higher than those of the middle class, who bear most of the burden of their welfare state expenditures.  There's a reason for that: it's politically sustainable.

        •  No taxes because the wealthy will just turn over (1+ / 0-)
          Recommended by:
          StrayCat

          willingly a generous portion of their massive gains from the last 8 years?  Even if they offered to pay off the national deficit it doesn't make up for the horrendous losses in jobs, the actual leaps in inflation, loss retirement security, esculating health and education costs, etc.  The pay check earning classes (and former pay check earning classes) have been robbed blind.

          The operative fear is if we were to heavily tax the wealthy now, they bag up their 'investment' money and flee the reach of our IRS, exit the country, sailing in their mega-yachts for their duchas in Switzerland, Carribean islands or Dubai.  

          But since any such new taxation on the rich would require that our rich members of Congress pass such laws against their own interest, this just isn't likely unless there were to be massive public outcry and demonstrations, along with a stiff and measurable revolt against the banking system.  You don't have to be really radical, just move, where possible, your assets to community owned credit unions, where your member shares (in savings) are voting shares and you own a piece of the credit union.

          When life gives you wingnuts, make wingnut butter!

          by antirove on Fri Dec 26, 2008 at 12:23:39 PM PST

          [ Parent ]

          •  You're not quite getting the new problem (1+ / 0-)
            Recommended by:
            JT88

            Before the crisis, the problem was that the wealthy just took their tax cut and moved it overseas in search of higher returns, thus negating much of the supposed economic stimulus it was supposed to provide.  Now, however, during the crisis, no one is putting wealth overseas anymore.  It's all coming to America because of the political protection to wealth that American political authorities can provide like no one else can.  (That's why the US dollar has gone up so fast and why treasury bonds can go for 0% interest.)

            This means that the rich (which includes Chinese exporters among other non-Americans) are self-taxing themselves already, and the only thing American political authorities have to do is direct it toward lower income people by coverining social services losses that US states and localities all face next year due to their balanced-budget policies.

            •  The new rich (0+ / 0-)
              often just provide a service.

              They are often managers of other people's money.

              The money is no longer theirs to take.

              They extract periodic fees and can set up shop whereever there is good telecommunication service,

              There are more mutual funds than listed companies I believe.

            •  Well, the money went overseas because Congress (0+ / 0-)

              made it ok to go offshore and avoid taxes, yet maintain all the advantages of US corporate existence.  In fact, if the financial and governmental sectors do not work for all of us, it must be torn down and rebuilt.

              Patriotism may be the last refuge of scoundrels, but religion is assuredly the first.

              by StrayCat on Fri Dec 26, 2008 at 07:31:35 PM PST

              [ Parent ]

        •  Redistribution is only one part of the (0+ / 0-)

          equation.  The income to the government of real, earned money, even if only a fraction of the amounts in question are earned as in Jerome's position in the diary, is necessary to keep the value of money in balance with the productive capacity of the economy.  If it's all just created, whether by the Treasury or by the Fed, unwanted inflation is certain.

          Patriotism may be the last refuge of scoundrels, but religion is assuredly the first.

          by StrayCat on Fri Dec 26, 2008 at 07:17:29 PM PST

          [ Parent ]

          •  That's a problem (0+ / 0-)

            for the long term, not during a economic crisis like now.  As Keynes said, "In the long run we'll all be dead," in order to make his point that government spending by increasing public debt was necessary during the last Depression.

    •  Not all taxes. Jerome said (7+ / 0-)

      tax on higher bracket. Not middle class. Not small business owner.

      I am saying taxing the billionaire at 40% and their children can still live comfortably for 1000 years. Mind you, that is the same under Clinton and similar to other advanced countries like Germany and Britain. Not something unreasonable.

      Of course, if you are a Republican, then goes the mantra "I don't trust gov with my tax money". But like it or not, we need to pad that 3 trillion Bush created and money will not come from vacuum.

    •  What then happens when we end up (0+ / 0-)

      in either an inflationary situation where the value of all that printed money declines rapidly or in a deflationary spiral that sucks down demand and chokes off the ability to create and move goods?

      Patriotism may be the last refuge of scoundrels, but religion is assuredly the first.

      by StrayCat on Fri Dec 26, 2008 at 07:10:34 PM PST

      [ Parent ]

      •  The solution to deflation is (0+ / 0-)

        to print more money, i.e. take out public debt.

        Inflation will result from doing that, but only if there is a substantial net increase in money relative to real goods and services.  Since the credit crisis occured, there has been a net decrease in money, since the supply of money is a function of banks lending to each other, which has been greatly reduced over the last year relative to what's being produced and consumed.  This means that deflation is the problem now, not inflation.  

  •  What about a tax on trades? (3+ / 0-)
    Recommended by:
    cotterperson, TX Unmuzzled, kurt

    in the stock market? When the financial giveaway bailout was first floated around there was an idea somewhere of adding a 1 penny tax on every trade, incredibly negligible for individual the trader but added up as a whole a huge revenue cash cow, what's the trading volume on the NYSE every day, it's in the billions no?

    "People place their hand on the Bible and swear to uphold the Constitution. They don't put their hand on the Constitution and swear to uphold the Bible." --J.R.

    by michael1104 on Fri Dec 26, 2008 at 07:57:41 AM PST

    •  Anybody trading on pennies should not be (1+ / 0-)
      Recommended by:
      Roger Snows

      trading. This is a very sensical idea. If someone is trading penny stocks or taking high high high leverage positions where pennies matter, then they shouldn't be doing it.

      I'm open to an argument to the contrary, but this is just commone sense.

  •  most measures of GDP (7+ / 0-)

    are fake.

    or subject to infusions of fake signal.

    instead of measuring the hard things, the Fed uses cash flow
    as a measure of economic activity.

    this allowed wall street trading volume to "fake" economic activity.

    George Bush is Living proof of the axiom "Never send a boy to do a man's job" E -2.25 S -4.10

    by nathguy on Fri Dec 26, 2008 at 07:58:46 AM PST

  •  Hopefully we won't fall for gas being lower (2+ / 0-)
    Recommended by:
    cotterperson, antirove

    we still need to have alternative energy.  People are already buying big suvs again. Gas could go up faster than it went down.

    When the value of the dollar goes down, it hurts people who have savings. It can cut the buying power of their money to nothing almost.

  •  And so we're becoming... (3+ / 0-)

    ... the Daily "Jerome à Paris"!

    Comment çava, Jerome?

    "The river always wins" - Mark Twain

    by Land of Enchantment on Fri Dec 26, 2008 at 08:13:14 AM PST

  •  Consumer Behavior (23+ / 0-)

    There is a mostly forgotten book by economist James S. Duesenberry, "Income Savings and the Theory of Consumer Behavior" (1949, reprinted 1967) that is worth reading.

    He did an analysis of what happens to consumers when their income drops. In general they attempt to maintain their standard of living as long as possible. This means borrowing, using up savings and similar measures. His theory has to do with their expectation that the drop is only temporary and if one allows oneself to slip into a lower socio-economic class then it will be hard to get out again.

    This seems to have been what has happened over the past few decades. People have gotten poorer, not just because their earnings have stagnated, but because they have lost wealth. For example it used to be the norm that parents would pay for much of their children's higher education. Now students paying for their own education is much more common. The wealth that would have been set aside for this has vanished from the working generation and the debt moved on to the next.

    There have been similar hidden impoverishments in areas of health care and retirement.

    The idea that people have been using their homes as ATM's or running up their credit card debt just to afford another widescreen TV or SUV is a rightwing-fostered exaggeration, in line with the prior generation's creation of the "Cadillac driving welfare mom".

    In each case the theme is that it is the personal irresponsibility of people and their lack of moral fiber which is at fault rather than systemic problems with the economic and social structure.

    In fact this idea is so popular that it remains the guiding principle of the libertarian wing of conservatism. Violations of labor laws, shared monopolies, corruption in big industry and government is ignored and the blame assigned to the weakest and most defenseless. It a game that has worked for hundreds, if not thousands, of years.

    Those like, say, Socrates or Jesus who pointed out the fallacies of the systems always ended up in a bad way. We don't seem to murder social critics anymore (at least in the west), but the forces of wealth still do whatever they can to marginalize them.

    •  I would recc you a thousand times. (11+ / 0-)

      They created a fallacy of scarcity to drive prices up.

      People were not going into debt to maintain an artificial standard of living.

      People were going into debt to live.

      This is where tearing down the infrastructure forced people into spending their own money in addition to taxes.

      Like most, I went into debt for medical expenses and car repairs, things that cannot be negotiated.

      We can all eat beans and drive less. And we do. But some items must be paid for.

      By any means necessary.

      I'm sick of hearing it was my personal greed that caused this. It wasn't mine! It was theirs.

      And in classical Wingnut fashion, they are projecting their greed onto me.

      WereBear
      Pootie fan? Me too! Check out my cat advice blog.
      The Way of Cats

      by WereBear on Fri Dec 26, 2008 at 08:34:10 AM PST

      [ Parent ]

    •  Hmmm (0+ / 0-)

      He did an analysis of what happens to consumers when their income drops. In general they attempt to maintain their standard of living as long as possible. This means borrowing, using up savings and similar measures.

      So when people do not adjust to their new situation, what is that other than lack of personal responsibility.

      Just because people do it, does not make it blameless!

      I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

      by taonow on Fri Dec 26, 2008 at 09:50:42 AM PST

      [ Parent ]

      •  studies (3+ / 0-)
        Recommended by:
        Jerome a Paris, Creosote, phonegery

        Unlike you Duesenberry was not making a moral judgement, just presenting the facts based upon his analysis of the available data.

        That he also hypothesized about the reasons for such behavior does not make this a moral judgment either.

        People may not curtail their spending for a number of reason. The most obvious is that very little of one's spending is really discretionary. You still have to pay the rent, utilities, medical insurance and bills. You still have to put gas in your car if you don't live where there is alternative forms of transportation.

        If you cut back on discretionary spending (as many seem to have done over this Christmas season) the effect on individual households is minimal.

        I'll tell you what, write down everything you spend money on and see how much you can save by becoming frugal. The average family spends 14% of their income on food and 5% on entertainment.

        Now how much are they going to save when times get rough? Do you think that a 10% cut will really amount to much? That's why what Duesenberry found is relevant. And its even more relevant now than it was in 1949 since mandatory costs have increased as a percentage of household spending.

        •  Moral (2+ / 0-)

          I'm not sure I'm making a moral judgment. I don't spend what I don't have.

          People have forgotten that it is a good idea to have a "cushion" between their lifestyle and the possibility of it not continuing as before. That's not a moral issue, its a common sense financial issue.

          As for curtailing spending we have done about all we can do for now. No cable, no cell phone, no eating at restaurants, very little meat, turn down the temperature at night, turn down the temperature during the day, shorter showers, limited car trips etc.

          I've done all those things despite the fact that I can still afford them, for now. Cutting them out now allows me to keep the financial cushion I want in case really bad times come.

          Next on the list, if things continue to worsen, would be taking in a boarder (student). You lose some privacy, but it does bring in some money.

          I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

          by taonow on Fri Dec 26, 2008 at 11:13:03 AM PST

          [ Parent ]

      •  People counted on growing equity positions (3+ / 0-)
        Recommended by:
        Jerome a Paris, phonegery, scotths

        in rapidly rising housing value as their primary financial security and it was esteemed the height of personal responsibility to take prudent advantage of this 'fact' and 'invest' in the biggest home for which a couple could qualify for a mortgage.

        For the last several decades the trend upward in home values was as sure as stocks and deemed more secure and far better than earning interest on savings--which inflation could deflate while home values steadily climbed during inflation.  

        Our tax code encouraged 'home ownership' which in reality meant taking out as big a mortgage as one could afford now and in the future (ARM incrases).  Then, with the 'equity' we bought big cars via second mortgages, financed college with them, paid sudden health costs costs with them, tried to ride out short recessions with them, all done presuming home values would unfailingly rise and erase the debt.  Home values rising, especially in nice desirable suburbs, was believed the safest and most reliable investment a person could make for the last several decades.  

        So, since the mid-1960s, many would have argued that 'personal responsibility' would demand that one find any reasonable and possible way to jump on this automatic escalator ride to great equity wealth, via paying the bank for a very nice home.  It was understood as a win-win-win situation for mortgage payer, local banks and communities.  All you had to do was work hard keep earning paychecks sufficient to pay the mortgage, get a promotion or two in time to keep up with ARM increases, mow the lawn and do painting and upkeep, and you'd be a big sure-fire winner in 'The American Dream'.

        If you asked a majority of home owners if they believe that someday in the next few years their homes will again rise in value over the mortgaged amount, recovering lost equity value, I'm sure you'd find a majority who still hold on to this belief or really want to believe this.

        When life gives you wingnuts, make wingnut butter!

        by antirove on Fri Dec 26, 2008 at 12:43:12 PM PST

        [ Parent ]

    •  Mhammed pointed out the flaws too (0+ / 0-)

      But being smarter than the average prophet, he got out of town just before things got too hot for him. (Then he returned ten years later with an army at his back.)

      Yes We Did! Yes We Will!

      by TheOtherMaven on Fri Dec 26, 2008 at 10:49:13 AM PST

      [ Parent ]

    •  Actually, I agree with you and this IS real (4+ / 0-)

      If you fall into a lower socioeconomic strata, it IS often hard to near-impossible to dig out, and the lower you go, the worse it becomes, especially if you become homeless or something similar.

      I'm also sick of the mindset that says "if only the poor were more thrifty they wouldn't be poor, and they spend on luxuries." Most of the luxuries the poor spend on are things that wouldn't even matter to a middle-class person: $1 or 2 on better-tasting food, taking a bus somewhere instead of walking, THAT sort of thing.

      IMO, the issue that makes poverty (and especially homelessness/health issues/car problems/etcetera) so "sticky" is that for poor people, money is immediate and much more. For example, if you're homeless and yet not so bad off you're staying in a shelter, you might try to hang on by staying in hotels: depending on where you are, that can be $50-78 a night. If you're homeless, you probably don't have a place to cook, which means you'll eat out and even McDonald's costs around $5 for a reasonable meal.

      Meanwhile, if you have a $1500/mo place, you're roughly paying $20 a day (and much less if your rent is lower than that) AND you have a kitchen which means your weekly grocery bill can stay under $50.

      Only problem is, that $1500 is demanded at once, and so is that $50-75 for groceries. Someone in dire poverty or even on the edge of poverty won't have that.

      In another example, health care and auto care as a two-for-one, let's compare a poor person and a rich person in a car accident.

      Rich person cracks up one of his 15 cars after getting drunk. He's got good health insurance and good car insurance, and even a lawyer on retainer. Maybe he has a fine to deal with, and/or higher insurance rates, but really, it's just a little notch in his finances, nothing to really worry about.

      Poor person was on the other end of that car accident. Poor person has no or very limited car insurance, no health insurance, and no legal assistance except for the free or the truly sleazy. EVERYTHING will be an expense of its own, from the emergency room to the car repairs to whatever else, and it will be an immediate expense demanding immediate payment or threatening to ruin an already low credit rating.

      It's not lack of thrift that damages the poor: it's lack of access to non-immediate opportunity and to the things that protect most non-poor people from the tyranny of immediacy and exposure to risk.

      Deyama Toshimitsu! You broke my gaydar! I demand a replacement at once!

      by MiscastDice on Fri Dec 26, 2008 at 11:18:40 AM PST

      [ Parent ]

      •  Poverty Pricing (0+ / 0-)

        You are right on the money MiscastDice.

        Just to throw in an addition - pricing for goods in general (groceries, etc) are higher in lower income areas because of lack of transportation and mobility in the community.

        In effect, if the available places to shop are limited, prices are increased. It is yet another way that lower socio-economic groups are exploited.

        This occurs in  very rural areas as well as inner cities.

        The goal of life is living in agreement with nature. - Zeno

        by yellow dog in NJ on Sat Dec 27, 2008 at 06:43:45 AM PST

        [ Parent ]

  •  How can 'wise' government spending fix (7+ / 0-)

    the problem of stagnant wages?  The U.S. government cannot directly or indirectly create jobs that pay decent, livable wages for everyone forever.  At some point private industry has to assume that responsibility. Why hasn't that happened and what can be done to make it happen?  Case in point - at the same time the company I work for has been laying people off, shutting down offices, reducing hours, eliminating 401K matches, etc., in the U.S. and Canada, it's been increasing its employment force in Chennai, and ramping up training of that workforce to move even more work offshore. This has been going on all over the U.S. for years - and it's continuing to happen in the midst of this crashing economy.  What can the government do to truly encourage the creation and maintenance of good paying permanent, private jobs here and discourage (if not penalize) the off-shoring of jobs that pay decent, livable wages? (Before off-shoring became so popular the company was enamored by the concept of permanent temporary employees which seems to me like just another way of avoiding paying decent wages and any benefits to a permanent, local workforce.)  

    It's been proven beyond all doubt that a U.S. economy based on debtor consumers is not sustainable.  But how do we convince businesses that that it's in their interests to pay its workers better, that labor is not a "cost" but a value?  

    •  Another case of the tragedy of the commons (1+ / 0-)
      Recommended by:
      xylonjay

      One could make good wages come with rights to sell.

      Those who wish to sell $X of product must buy the right to sell $X of product off $12 to $25 wage earners.

      Somebody making $12/hour in a factory in the US (likely) or China (no way in hell) might get $36/hour in rights to sell.

    •  People making less than $12/hour (0+ / 0-)

      might only get rights to sell equal to their actual income.

    •  There is no right to sell (0+ / 0-)

      created by paying very large hourly compensation.

      This means rights to sell become valuable.

      The more lopsided the economy becomes, the more valuable the rights to sell become and the more important it is to pay good middle class labor compensation.

    •  Not fixable (7+ / 0-)

      We live on one planet, all 6.5 billion of us.

      The US can not remain an island of prosperity/wealth forever. In the globalized world (and there is no going back) "the others" will try as hard as possible to catch up, and whether that happens sooner (with US corporate help), or later (on their own), it will happen.

      The unspoken reality is that the world can not support everyone at the US standard.

      I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

      by taonow on Fri Dec 26, 2008 at 09:37:34 AM PST

      [ Parent ]

      •  Unless, of course, . . . (1+ / 0-)
        Recommended by:
        Creosote

        The unspoken reality is that the world can not support everyone at the US standard.

        . . . unless, of course, the total human population of the world is smaller by several billions than it is now.  Just a little reminder of what's really at the root of most of our problems.

        "If elections really changed anything, they would be outlawed."--Emma Goldman

        by keikekaze on Fri Dec 26, 2008 at 12:01:33 PM PST

        [ Parent ]

      •  Yes, globalization, over time, will continue (1+ / 0-)
        Recommended by:
        Creosote

        to be a wealth equalizing force, wealth flowing basically from West to East.

        If we look closely we can see the previews. Expect wars to be fought to slow it and prevent it from happening. In fact we are seeing this now.

    •  Tariffs? (1+ / 0-)
      Recommended by:
      Jerome a Paris

      Slap whacking high tariffs on any and all products made overseas, so that it becomes cheaper to pay local Americans good wages than to ship the factories and the jobs overseas and import the finished goods?

      That's how we DID business for most of our history. And things started going horribly wrong only AFTER we started getting rid of the disincentives (ie tariffs).

      Yes We Did! Yes We Will!

      by TheOtherMaven on Fri Dec 26, 2008 at 10:53:46 AM PST

      [ Parent ]

  •  I am a naif when it comes to finance... (16+ / 0-)

    but I have been given to believe that:

    a)  capitalism based on continual growth has run its course and is unworkable as a viable economy for the resource-constrained future - and that no amount of tinkering will make it viable

    b)  the hyper-consumerism based on item a is also a fatally flawed and unsustainable way of life

    c)  the old system cannot really be salvaged and a new one will have to be invented that considers limited resources, global warming, increasing population, peak oil, etc.

    Any thoughts on these matters Jerome?

    "The truth shall set you free - but first it'll piss you off." Gloria Steinem

    Iraq Moratorium

    by One Pissed Off Liberal on Fri Dec 26, 2008 at 08:16:11 AM PST

    •  Capitalism is still a viable system. (10+ / 0-)

      Unregulated capitalism is not.

      So much of the financial world acts like Capitalism is a sick lamb; it must be gently cosseted, shielded from harsh regulation, and nurtured along until it can be sheared for profit.

      When, in fact, Capitalism is a raging dragon; incredibly powerful, but only with restraint can it be used for good.

      Left alone, it will burn down the whole village.

      WereBear
      Pootie fan? Me too! Check out my cat advice blog.
      The Way of Cats

      by WereBear on Fri Dec 26, 2008 at 08:36:58 AM PST

      [ Parent ]

      •  I fail to understand how it is still viable... (11+ / 0-)

        based as it is on unlimited growth on a finite planet.  What am I missing?

        "The truth shall set you free - but first it'll piss you off." Gloria Steinem

        Iraq Moratorium

        by One Pissed Off Liberal on Fri Dec 26, 2008 at 08:42:30 AM PST

        [ Parent ]

        •  The unlimited dependence on natural resources (7+ / 0-)

          is the real unsustainability of the current system. We have a long long way before we have a problem with fitting people onto the planet, and the economy is a social function.

          If we don't get our consumption of natural resources under control, however, yes this system is highly unsustainable.

          If the entire world lived to the same standard as the USA, we would currently need 3 planets.

        •  Mines on the moon? (1+ / 0-)
          Recommended by:
          In her own Voice

          That doesn't help with water and soil and &c problems though.  

          I sometimes draw on what they used to tell me in Sunday School when I was little.  About the Sea of Galilee vs. the Dead Sea.  That the fatal flaw is trying to accumulate, rather than letting things flow through.  (Just a thought, not a full-blown argument.)

          "The river always wins" - Mark Twain

          by Land of Enchantment on Fri Dec 26, 2008 at 09:07:55 AM PST

          [ Parent ]

        •  limited resources is part of the equation (1+ / 0-)
          Recommended by:
          Jerome a Paris

          It is limited resource driven capitalism. The role of politician is to steer capitalism to value the fact that resources are limited i.e.

          - Obama : green jobs get money, pollution pays money. Inefficiency loses money, efficiency books profit. That is capitalism! but at work for the good.

          vs.

          - Bush: drill more oil, unlimited resources, dolls out money for banks and Haliburton.

          •  LOL! (1+ / 0-)
            Recommended by:
            One Pissed Off Liberal
            - Obama : green jobs get money, pollution pays money. Inefficiency loses money, efficiency books profit. That is capitalism! but at work for the good.

            Anyone with eyes can tell you that the "green" economy as such will simply serve under such plans as a supplement to the old, polluting economy, which nobody will risk collapsing because they're all hooked on the growth paradigm, and its parasites need to be continually paid off.

            The delusion here is in believing that only minor adjustments need to be made to fix things.  Try again.

            "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

            by Cassiodorus on Fri Dec 26, 2008 at 10:00:45 AM PST

            [ Parent ]

            •  it will be slow, not one day change! (1+ / 0-)
              Recommended by:
              sustainable

              may take decade. Decade! But it is a first step, unlike Bush.

              First carbon trading, then raise fuel standard. Then tax pollution. I believe some are already in place, though at small scale. The value will increase over time if proper policies are in place.

              Not one day or one year. Will take time.

              Sure, we can talk cynicism and bureaucracy all the time but what I am saying is what I see as an improvement Obama can make.

              •  When climate change wipes out what is left -- (0+ / 0-)

                of our shattered ecosystems, it will not take a decade to happen.

                Hurricane Katrina did not occur over the course of a decade.

                Sitting back and waiting for Obama to act is a path to disaster.

                "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

                by Cassiodorus on Fri Dec 26, 2008 at 10:30:40 AM PST

                [ Parent ]

                •  no worry (0+ / 0-)

                  climate change is real but with respect to geological time frame measured in thousand years to hundred thousand years, we are still lucky to have several decades before things can be very difficult to reverse.

                  Katrina is terrible because of Bush's utter failure but in terms of actual weather, it was not something unusual.

                  I do my part as I can. I can't change the fuel standard. I was talking about a bigger picture with Obama, which he can do as president.  

                  •  That's not what the climate scientists are saying (4+ / 0-)
                    Recommended by:
                    tacet, Creosote, Lopez99, yellow dog in NJ

                    we are still lucky to have several decades before things can be very difficult to reverse.

                    Maybe the world has a decade to deal with the problem, if not only eight years, which is what Mark Lynas gives.

                    At any rate, there is probably enough carbon dioxide already in Earth's atmosphere to lead to global ruination -- read Petit et al. for the standard variance in CO2 levels, from 180 ppm in the deepest ice ages to 310 ppm in the hottest hot ages.  We are now, according to NOAA, at 385 ppm.  The unfreezing of Arctic methane hydrates (which was, they think, characteristic of the runaway greenhouse effect of the Permian/ Triassic boundary) has already begun.

                    And the most important thing to remember about abrupt climate change is that the climate change itself will merely arrive as the last, fatal knockout blow to a world society which has weakened ecosystem resilience around the world in all sorts of other ways: deforestation, the rape of the oceans, agricultural soil runoff, etc.  Abrupt climate change is not a problem that can be dealt with independently of all of the other ways in which ecosystemic balances have been disturbed and are, thus, leading to ecosystem simplification, with catastrophic effects for society.

                    "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

                    by Cassiodorus on Fri Dec 26, 2008 at 11:12:15 AM PST

                    [ Parent ]

                  •  You base this opinion on what? (1+ / 0-)
                    Recommended by:
                    One Pissed Off Liberal

                    Others think we've already passed a tipping point - particularly as manifest in Arctic ice cap.  But mainly because that's the most visible and irrefutable sign.  And it has that nasty feedback loop to it soon.

                    But really, what's your source on "several decades"?  Based on what?

                    "The river always wins" - Mark Twain

                    by Land of Enchantment on Sat Dec 27, 2008 at 02:11:27 PM PST

                    [ Parent ]

        •  It's the capitalists here who are missing -- (2+ / 0-)
          Recommended by:
          Creosote, One Pissed Off Liberal

          the essential facts.  Nicely done OPOL.

          "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

          by Cassiodorus on Fri Dec 26, 2008 at 09:57:09 AM PST

          [ Parent ]

        •  Don't confuse Capitalism with Consumerism. (3+ / 0-)
          Recommended by:
          Aquarius40, phonegery, sustainable

          Capitalism is letting free agents have some say in where their capital is invested.

          They look for working companies who will pay a dividend.

          Classically.

          This rewarded companies who stayed solvent long term and punished "bad actors."

          Since Reagan, the stock market has not acted this way. It rewarded behavior that was not tied to assets, like slashing work force, skipping the R&D, and letting the company's capital get risked with tricky investments.

          This behavior kills the companies, but plumps up the bottom line, and thus, the stock price.

          It drove corporate monopolies, which are not good business, simply lazy business.

          And because they were not making good products and being satisfied with a customer coming back for them at some point, they pushed Consumerism, which is simply buying things to keep the wheels turning, not because they have intrinsic value or are a real improvement... simply to keep the financial wheels greased.

          It's a short term solution, and we're run into a wall.

          WereBear
          Pootie fan? Me too! Check out my cat advice blog.
          The Way of Cats

          by WereBear on Fri Dec 26, 2008 at 12:34:50 PM PST

          [ Parent ]

      •  You haven't addressed OPOL's objection (1+ / 0-)
        Recommended by:
        Deward Hastings

        Infinite demand for growth vs. finite planet... hello?

        "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

        by Cassiodorus on Fri Dec 26, 2008 at 09:37:17 AM PST

        [ Parent ]

      •  It is ill done (1+ / 0-)
        Recommended by:
        phonegery

        to keep a dragon chained for roasting your meat. (Old Darkovan proverb, according to Marion Zimmer Bradley.)

        Yes We Did! Yes We Will!

        by TheOtherMaven on Fri Dec 26, 2008 at 10:55:28 AM PST

        [ Parent ]

  •  Welcome (5+ / 0-)

    one and all to the Depression. I believe the N. Korean's have the best recipe for tree bark soup.

    For any of the new folks who wonder why Jerome goes directly to the rec list? This is it. Straight talk from a banker.

    Common Sense is not Common

    by RustyBrown on Fri Dec 26, 2008 at 08:17:05 AM PST

  •  You don't tax accumulated wealth to spur the (0+ / 0-)

    economy, you encourage it's use (through spendng).  

    Having credibility when making an argument is the straightest path to persuasion.

    by SpamNunn on Fri Dec 26, 2008 at 08:17:49 AM PST

    •  Taxing IS spending, . . . (0+ / 0-)

      . . . as governments maintain themselves by spending the revenues they raise--the revenues don't just sit in vaults somewhere.  If the government is wise, during an economic downturn its spending will be targeted toward problem areas of the economy more efficiently than could ever be managed by random individual consumerism.

      "If elections really changed anything, they would be outlawed."--Emma Goldman

      by keikekaze on Fri Dec 26, 2008 at 12:16:27 PM PST

      [ Parent ]

      •  The government doesn't create capital. (0+ / 0-)

        It spends it.  

        It's not the role of the government to manage the vagaries of a capitalist economy to the degree our government is about to manage the American economy.  Mortgage banking as a social program was not a success, was it?    

        Having credibility when making an argument is the straightest path to persuasion.

        by SpamNunn on Fri Dec 26, 2008 at 12:22:10 PM PST

        [ Parent ]

  •  Love the word "simply" in yr conclusion (3+ / 0-)
    Recommended by:
    Jerome a Paris, shaharazade, etbnc

    it simply requires that blame be properly allocated, instead of everybody pretending that this crisis 'just happened.'

    Well? Shall we go? Yes, let's go - a new dawn rises.

    by whenwego on Fri Dec 26, 2008 at 08:20:26 AM PST

  •  Instead of new war demand, social demand.... (4+ / 0-)
    1. Preorder 30,000 new handicapped vans to give to each disabled Iraq, Afghanistan vet (~$150b)
    1. Pay tuition for spouse/children of each Itaq war death (~$225m)
    1. Provide preschool vouchers for all children from 4 to 6 (~10m children, ~700,000 teachers).
    1. Subsidize solar roof tiles throughout the West and Southwest.

    Create demand that gets people working and attacks those with high startup costs.

    HR 676 - Health care reform we can believe in.

    by kck on Fri Dec 26, 2008 at 08:24:14 AM PST

  •  another contributing factor? (5+ / 0-)

    John Kenneth Galbreath's notion of how capitalism "privatizes the profits and socializes the costs"

    On an environmental scale this is easy to see, as it is after any major hurricane or earthquake when the taxpayer inevitably subsidizes the insurance industry.  On Wall Street it takes the form of "incorporation" and "going public".  Risk is borne by the shareholders, while profits are largely enjoyed by the corporation's actors.  Do you think the wizzards of Wall Street would have engaged in the sort of risky investment schemes that they did if their own personal fortunes were the collateral?   Or if they didn't know, in their heart of hearts, that whenever the consequences of their machinations become FUBAR, the Fed will come riding over the hill?

  •  How long before we get a fully-fledged argument (5+ / 0-)

    from Marxian economics? Labor theory of value, the capitalists driving the workers into poverty and unable to buy the goods that are produced, the state as the instrument of the ruling class?  It's all there for a fine new restatement based on late 20th Century experience.

    "Food. Can't live without it. Can't live with it."

    by zackamac on Fri Dec 26, 2008 at 09:23:45 AM PST

  •  I have said all my life (1+ / 0-)
    Recommended by:
    yoduuuh do or do not

    that this country needs more socialism and Russia needed more capitalism.  Well, Russia, with its oil reserves and recovering economy, is doing ok now . . .  We still have to fix ALL of our problems.

    ...do the elites...actually believe that society can be destroyed by anyone except those who lead them? - John Ralston Saul -

    by Silverbird on Fri Dec 26, 2008 at 09:29:07 AM PST

  •  "counterfeiting money"? (5+ / 0-)

    Jerome, if what the deficit-spenders are doing is "counterfeiting money," then they've been doing it since the US declared itself unable to meet its Bretton Woods gold-standard obligations back in 1968.  Do we really want to go down that road?  Shall we return to the economy of gold-fetishism?

    When the bankers create the money supply, Jerome, we are not fooled.  All of the money they create is "real" insofar as none of it is any less real than any other stack of bills or clump of computer pixels.  Real?  Fake?  Money is a social convention, and "as a banker" your obligation, clearly, is to mystify the matter of a debt-based monetary system and of fractional reserve banking so that our faith in money is held intact.  

    For my part, I think my best interests are served by spitting in the high priests' faces, and that, seemingly, includes you.  Money is a claim upon labor-power, and since this claim lies properly in the hands of the people who produce the labor-power, i.e. the working class, and not in the hands of bankers, your "money" is illegitimate as such regardless of how much or how little "counterfeit money" is being produced.

    "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

    by Cassiodorus on Fri Dec 26, 2008 at 09:36:05 AM PST

    •  This is exactly what has been happening.. (1+ / 0-)
      Recommended by:
      Jerome a Paris

      Jerome, if what the deficit-spenders are doing is "counterfeiting money," then they've been doing it since the US declared itself unable to meet its Bretton Woods gold-standard obligations back in 1968.

      •  Read the Hudson book (2+ / 0-)
        Recommended by:
        Jerome a Paris, Creosote

        which I reviewed and which I linked to the above post.  Hudson's book will explain why the gold standard survived so long.

        The main reason the US clung to a gold standard after World War II was that it was able to confiscate much of Europe's gold immediately after the war, and thus store up enough gold to meet demand even as the expansion of the money supply proceeded throughout the '50s and '60s.  This standard was ditched in '68 because the US government's bargaining position had been lost by that time.

        We are not going back to a gold standard, not with the present-day bargaining position of the US government.

        "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

        by Cassiodorus on Fri Dec 26, 2008 at 10:22:46 AM PST

        [ Parent ]

  •  very nice diary, jerome (2+ / 0-)
    Recommended by:
    Jerome a Paris, Creosote

    must more sensible than count down to $200 oil :)

    I like this,

    This has real world consequences (collateral damage if you will), in addition to the growing inequality: more and more people moved fro mte productive economy to the money printing side of the business, and those in the real economy were increasingly squeezed to provide actual value for all. For a long time, the illusion worked well enough, and it looked like overall, wealth was created, even as a majority felt it was running increasingly hard just to stay in place.

    I am not saying banking and finance is not important. Just saying they have to be properer valued and the real economy (be it goods or services) get more attention vs derivative trading (aka Bush economy).

  •  personal debt, taxes, and sustainable systems (0+ / 0-)

    I've been calling since September for $10,000 to every American taxpayer to pay off short-term/revolving debt, or in its absence longer-term debts such as mortgages and student loans. In the absence of any debt, that payment would be a straight stimulus to the taxpayer.

    Thanks to other Kossacks, the plan also dictates that the money be repaid by tax increases over a longer term (10 to 20 years), with that money being recaptured for sustainable infrastructure and social system improvements.

    Does this plan, the $10K Solution, mirror what you're saying here, somewhat, or am I imagining that?

    The one thing that I'm missing is a fix for the absence of living wages, but I'm sure brighter minds could work that out.

    •  Thanks for offering! (0+ / 0-)

      I've been calling since September for $10,000 to every American taxpayer to pay off short-term/revolving debt, or in its absence longer-term debts such as mortgages and student loans. In the absence of any debt, that payment would be a straight stimulus to the taxpayer.

      You're going to pay off my debts for me?  I'll send you an address and you can send payment forthwith.

      "It all makes perfect sense/ Expressed in dollars and cents/ Pounds, shillings and pence" -- global anthem, from Roger Waters' song "Perfect Sense"

      by Cassiodorus on Fri Dec 26, 2008 at 10:02:13 AM PST

      [ Parent ]

      •  I'll tell you what. (0+ / 0-)

        It's our system as a whole that did it, and we, a country, as a whole, need to fix it.

        You are as responsible as I am.

        Pony up $500 per taxpayer (average, but would be distributed differently to reflect "fair" tax scale) per year over 20 years to set things in motion with a $10,000 payment today.

        How do you argue that the massive failure of others will leave you unaffected, and that you are not responsible for others, even if they have lived unwisely? Especially if things should progress their worst?

  •  The Pentagon's yearly stimulus package (1+ / 0-)
    Recommended by:
    kurt

    Proposed New Year's resolution: whenever we discuss once-in-a-life-time the economic stimulus packages, let us always mention that the Pentagon gets a "stimulus package" year in year out of the same order of magnitude.

  •  Living beyond their means? (3+ / 0-)
    Recommended by:
    Jerome a Paris, Creosote, kurt

    That sounds so republican. living is living beyond people's means, with the amount of greed that exists this unregulated private sector. I'd rather think of it as prevailing wages being too low, especially when people can't afford education, healthcare etc, along with many other thing, including housing.

    •  This depends on where you live. But in all (3+ / 0-)
      Recommended by:
      mftalbot, nio, phonegery

      fairness, even people making too little were all to quick to take the home equity loans being pushed on everyone so they too could afford granite counter tops.  Accordingly, I suspect "living beyond our means" is an appropriate phrase in this context.  

      I suspect it isn't appropriate  to "blame" people for living beyond their means.  When we have a society, media images, and banks all telling us we should have certain things we don't need (granite counter tops), people will find themselves being consistently pushed to live beyond their means.  I have found it very hard to resist these messages.  

  •  The answer is a conditioned default (1+ / 0-)
    Recommended by:
    xylonjay

    There is a good article in the NYT on this issue today, and it indicates significant complicity on the part of many of our major trading partners in this mess and especially the Chinese.  This mess was created by a cabal of both foreign and domestic paper-creators, (as distinguished by people who create wealth).  They should get what any other predatory creditor would get in a bankruptcy trial - butkus.

    I may sound like the ugly American in this , but I think at this point we tell China and the others that they will immediately re-value their currencies dramatically upward, become truly democratic politically and economically and help us and the rest of the G8 re-establish a level playing field in trade going forward OR we WILL default on all debt held by those who are not our friends.

    If they don't like it, well, that is what our nuclear arsenal is for.

  •  Xmas over.....gold does its lttle 'pop' thingy. (1+ / 0-)
    Recommended by:
    taonow
  •  What has struck me throughout this crisis (6+ / 0-)

    are all the "experts" who start off by saying something along the lines of "Credit is the backbone of a strong economy."

    And then the other nonsense we keep hearing is that de-regulation is good at encouraging the so-called free market.

    These two assumptions have been disasterous to capitalism.

    Credit is NOT the backbone of a capitalistic society. PROFIT is the backbone. Without profit, a business has no reason to exist. But with CREDIT it can continue on its sorry way, giving consumers inferior products because with CREDIT it has unfairly beat out all its competitors. It becomes more important for a company to have a huge credit line than it does to make a superior product. It is allowed and even encouraged to become TOO BIG TO FAIL. This, as it turns out, is NOT the free market of true capitalism.

    Credit and financial markets MUST be regulated to prevent credit abuse and unfair business practices.
    We need to see more companies using their own profits to re-capitalize their companies.

    We need to see them return to the old days when they chased profits by making a better mousetrap than the store next door. We need to see the store next door turn around and (using profits saved from previous years) make an even better mousetrap in the coming year. Yes, this is harder and dicier than just borrowing one's way to big corporatehood, but it IS a return to the true backbone of a capitalistic society, one where both businesses AND consumers win.

  •  Real Wages, Real Wages, Real Wages! (8+ / 0-)

    The question is: why has there been too much debt? The consensus view of the Villagers is that there has been a "savings glut" in countries like China, Japan and Germany, and countries like the US and the UK were "forced" to absorb these savings by running into debt. This is all too convenient.

    The more correct reason is that debt has been used to hide the fact that incomes have been stagnant for too long.

    That's exactly it.  Real wages peaked in America in 1974 and -- with the major prolonged exception being during the Clinton years -- have been heading downward ever since.

    The Cons don't like to talk about Real Wages, and try to counter it with talk of "hedonics", or the "But our parents didn't have iPods or laptops when they were our age!"  They also didn't have $100,000 in credit-card debt and million-dollar mortgages, either.

    Visit http://theuptake.org/ for Minnesota news as it happens.

    by Phoenix Woman on Fri Dec 26, 2008 at 11:45:58 AM PST

    •  Not to mention the increase in the number of (1+ / 0-)
      Recommended by:
      Creosote

      dual income households.  When married women started to work in increasing numbers, the effective income increase hid, to some extent, the lack of growth in all incomes.  Now with the unemployment rate going up, the loss of either income in a dual income family will push them into hard times.

      Also, a dual income family is essentially  working 80 hours to support a middle income life style, which required only 40 hours of middle income work to support a family  in the fifties and sixties.

      Justice, if not pursued, does not exist.

      by phonegery on Fri Dec 26, 2008 at 04:49:58 PM PST

      [ Parent ]

  •  Thanks for this paragraph: (4+ / 0-)

    And the mix has been shared around, with everybody getting equal shares of real money and counterfeit money. Those that put in real work, got paid partly in real money and partly in junk paper; those that printed debt got back real money for a portion, and junk paper for the rest. Unsurprisingly, this amounted to a large scale transfer of wealth to the money printers.

    Three cogent sentences explaining exactly what's gone on in the U.S. (and elsewhere) since Reagan.  I vaguely grasped the vast wealth transfer before, but this makes perfectly clear exactly how it was done.  Now I get it!  And thanks, Jerome, for the enlightenment.

    "If elections really changed anything, they would be outlawed."--Emma Goldman

    by keikekaze on Fri Dec 26, 2008 at 11:49:14 AM PST

  •  Uh...nope current crisis is not "too much debt" (0+ / 0-)

    For a executive summary of why the current crisis is not "too much debt", you can listen to Nobel Prize winning economist Robert Solow explain it on PBS interview.

    US and citizens do indeed have high amount of debt but that is not what is causing the current problem though it may be making it worse.

    1. Housing bubble burst resulting in multiplier losses due to repacking of the reduced value mortgages.
    1. The real estate losses sucked the credit liquidity out of the system so legit businesses are now forced to cut back because they can't get the operating funds.
    1. Businesses cut back, layoff, people stop spending and recessionary cycle continues.
    •  Maybe...But... (0+ / 0-)

      ...too much debt (and there is too much debt) will stop the current resuscitation (trying to get people to take on even more debt) efforts from succeeding.

      I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

      by taonow on Fri Dec 26, 2008 at 12:13:55 PM PST

      [ Parent ]

    •  Debt (0+ / 0-)

      Isn't "housing bubble burst" just shorthand for too much debt?

      And in the consumer area, tightening credit standards are what's tanking car sales.

      A collapse of a debt bubble, shrinking the effective money supply, is the only thing that can explain deflation which is happening despite hundreds of billions of bailout money being "injected."

      •  Nope. Liquidity crisis not same as "debt". (1+ / 0-)
        Recommended by:
        phonegery

        Housing bubble is investing in item that has lower market value than it cost.

        No different than the 2000 stock market bubble.

        The problem in both cases is that underlying asset was of lower value than what the investor paid causing a liquidity crisis when market caught up.

        •  Let me put it this way (0+ / 0-)

          We do have a liquidity crisis. That means that there is money around but noone wants to spend it - deficient effective demand. 3-month US treasuries are hovering at around zero, which means that people are scared to losing their capital - too scared to invest to make a profit in case they lose it. Consumers are scared to spend because unemployment is soaring and the might be next.

          What is underlying this problem? Debt. Homeowners because many are in negative equity or facing the interest rate hikes on their ARMs that may cause default and foreclosure. Individuals and institutions who bought those mortgage-backed securities (MBS) that are now worth cents on the dollar because the risks were incorrectly evaluated by ratings agencies. Financial institutions that decided that they didn't really need to hold reserves and could lend 30 times their asset base. Shadow bankers who decided that they could engage in transactions more suited to Las Vegas than Wall St.

          I don't do appeals to authority. There have been many emiment economists that I have agreed with.

    •  Perhaps to some extent, but (1+ / 0-)
      Recommended by:
      Fire bad tree pretty

      Main Street businesses are cutting back because the 70% of the GDP provided by consumer spending is cut back.  All the liquidity in the world will do no good if there are no credit worthy borrowers to buy the  70% of the gross domestic output of goods and services.

      You can't push a string.  You can't make people spend money they don't have.

      Justice, if not pursued, does not exist.

      by phonegery on Fri Dec 26, 2008 at 04:55:43 PM PST

      [ Parent ]

  •  Consumer Debt vs. Corporate Debt vs. Public Debt? (1+ / 0-)
    Recommended by:
    taonow

    Jerome: Curious to get your thoughts as to whether all leverage is pretty much the same in this regard, or whether in fact your analysis (which rings true to me) really applies mostly to consumer debt (and that portion of government debt which is funding consumption-type activity rather than true public investment)?

    In other words -- as I know you're well aware given your "day job" structuring alternative energy investments -- a business investment can be structured in an enormous number of different ways, each of which may have differing consequences in terms of the economics of the investor's return, the tax law treatment, protection of the investor if the whole deal goes belly-up, etc., etc.: there's straight-up common equity and straight debt (fixed or floating) at the two ends of the spectrum, and in between you run the gamut from still rather simple interests like convertible bonds and participating preferred equity all the way to do-it-yourself complicated waterfall arrangements in an LLC (e.g., "first you get your initial investment back, then I get the next $1m of profit, then you get allocated the next 75cents out of every dollar until you've earned an 8% return on your initial investment, then above that we split everything 35/65" and the like).

    But it strikes me that if this is truly a business investment (whether carried on through a corporation, an LLC, a Dutch BV, or what have you), at the end of the day the "project" or the "business" really either is (or is not) making an economic profit (or incurring losses), and however fancy the stakeholders got in their formulations, all they are is different ways to divide up that economic return.  And whether you call it debt or equity really doesn't matter much at the end of the day...  (And even a genuinely "overleveraged" and balance-sheet-insolvent business, that just means that the debtholders are economically in the position we normally think of as occupied by the common equity -- a fact that is often made real in legal terms as well as in economic terms when a company reorganizes in chapter 11 with the equity getting nothing and the debtholders taking over equity ownership of the company). -- and having more or less debt or equity in a business's capital structure is really just a way of dividing up the economic returns of the same underlying investment is different ways, and to talk about a corporation or a structured project "living beyond its means" is sort of a meaningless thing.

    By contrast, consumer debt strikes me as a categorically different beast -- here being "overlevered" as a consumer really does strike me as a form of either intertemporal wealth transfer (and maybe intergenerational wealth transfer, if the younger generation assumes the debts of the older -- as they certainly do in the case of government debt, if not personal debt) on the one hand, or if the endgame is a massive default by debtors, a different sort of wealth transfer (which savers/lenders would certainly view as not very different from the kind of "wealth transfer" we call "theft").

    So while the massive runup in consumer debt in the United States really does strike me as a major deal (and I agree that it's done much to disguise the stagnating real incomes of middle-class Americans), I'm not convinced that the capital structure of multinational banks and other corporations has much relevance to it, although it has become convenient shorthand in the mainstream press to refer to the problem of "too much debt" without distinguishing between consumer debt and business debt, and thus talking about companies needing to delever as a first step to solving the problem.

    (which leads, if nothing else, to people confusing a bailout of an "industry" with a bailout of "shareholders" -- I'm all for acting with due speed to help save jobs in Detroit, and I'm aware of possible reasons why just letting the normal Chapter 11 process play out might not work in this instance, for instance -- but I don't see what giving a windfall to GM's shareholders has to do with anything relating to saving GM as a going concern...)

    Not sure this really adds anything, but curious to get your thoughts...

  •  So true. However, I don't think (2+ / 0-)
    Recommended by:
    Jerome a Paris, Creosote

    we properly recognize how much productive (wealth creating) capacity has been pulled out of the US economy and not been replaced with a commensurate amount of new productive capacity.  Prisons instead of schools.  Armies of medical insurance clerks instead of health care providers.  Every New Deal stimulus buck stimulated the US economy -- we won't see that level of multiplier effect regardless of how stimulus funds are deployed.

    What FDR giveth; GWB taketh away.

    by Marie on Fri Dec 26, 2008 at 12:35:45 PM PST

  •  The main point of Gov't. debt through a fiscal (2+ / 0-)

    stimulus program is to replace the lack of private invesment that is occurring. As the economy contracts, the public sector takes up the slack in consumer/investment debt which is NOT going to occur because of the contraction. The fact we get much-needed infrastructure, energy (renewables), and hopefully health care investment is frosting, so to speak.

    I hope obama uses the current crisis to take care of the lack of public investment which has occurred over the last thirty years. That public investment, coupled with social safety net spending -- unemployment, food stamps, training/education -- should help immensely to re-inflate a deflating economy. If it doesn't, we're screwed for the next four years.

  •  Endgame (3+ / 0-)
    Recommended by:
    Jerome a Paris, Creosote, tonyahky

    I think most of the Wall St barons know that we have reached the mathmatical limits whereby we cannot finance more debt.  It has been the world's greatest ponzi scheme for too long and we are the marks.  In the end we are going to have to put a lot of pressure on our politicians and people in government to reign these wizards in and return the stolen goods.

  •  Correct (3+ / 0-)
    Recommended by:
    Jerome a Paris, ggwoman55, rockhead

    "The more correct reason is that debt has been used to hide the fact that incomes have been stagnant for too long."

    Thank you! This is reality for most people but we kept hearing the drivel that we weren't in a recession long after our paychecks stopped being adequate.

    Nance

    •  And who controls debt in the country? The Fed (0+ / 0-)

      But debt profits, first and foremost those that control it: the financial world, with its hands on the tap.

      The Fed has their hand at the tap.  You know -- they are that group of private bankers that wrangled monetery control from Congress about 100 years ago.  They are not controlled by any branch of the government.  Sure the president appoints the head of the Fed, but they still have the power to tell him and any other elected official to "stick it" if they want (witness their non-reply to a FOIA request by Bloomberg press to see where the TARP money is going).

      I just love how so far, the solution to this crisis has been to give piles of money to the ones that have f-ing ruined us.  Thanks a lot Congress.  Thanks a lot Sen. "Suspend my Campaign" McCain.  Thanks a lot Mr. "I took $13 Mil. from Wall St." President-elect Obama.

      You wanna know what Obama's gonna do about all of this?  Go to OpenSecrets.org and look at his top contributors for your answer.

      Wages, it all gets down to wages.

      That government is best which governs least. Henry Thoreau

      by rockhead on Fri Dec 26, 2008 at 01:57:12 PM PST

      [ Parent ]

      •  Abolishment of the Fed (0+ / 0-)

        ...is not very high on the list of progressive priorities. It's rather an ultra-right kind of thing, historically.

        As for the current situation, the Fed is showing it doesn't have much control over the credit situation right now, with rates at 0% and credit still locked up (banks and individuals hoarding). The control is rather the old-fashioned one: "I won't lend you money because I'm afraid you won't be able to pay me back." That consideration goes far beyond the Fed.

        •  It's understandable that (0+ / 0-)

          abolishing the Fed is not high on the list of progressive priorities because it's the Fed that allows Congress to borrow against our future to pay for progressive programs.

          It's this not so tacit agreement that has driven the federal government for 100 years.  

          The father of modern Democratic Progressivism himself saw his own complicity in the turning over of our nation's monetary system to the robber baron's of his day (Morgan, Carnegie, etc.)

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

          Seems the current Democrats are carrying on that grand tradition of being fooled by the robber barons.  Or maybe they aren't being fooled, maybe they are in on it?

          That government is best which governs least. Henry Thoreau

          by rockhead on Fri Dec 26, 2008 at 09:42:45 PM PST

          [ Parent ]

  •  American middle class created virtual wealth.. (1+ / 0-)
    Recommended by:
    teixeira ca

    by means of using credit cards, second mortgages, and other credit based 'products.'  All of it pushed, marketed, and sanctioned by the banking industry.  And, of course, driven by American's need to 'feel rich.'  Wasn't there a VISA Citibank commercial a while back that had the theme 'live richly?'

    So American's willingness to use credit, and lots of it, not only gave them a virtual income that was beyond reality, but also, in my view, helped mask the fact that prices for just about everything had increased far beyond reality---from cars, to homes, to electronics, to clothes.  The credit card was the buffer, so was the second mortgage.

    In taking so much debt, we've essentially paid even more, given 22% CC interest rates, or high APRs on home loans and second mortages, not to mention installment debt.  Seven year car loans at 10% ??   is a car worth all that extra money?  Same for a house.

    Will Americans suddenly decide to stop paying huge product markups AND to finance it on 23% credit cards?  Will Americans decide that cars are too expensive and stop taking loans on them?  

    Only if totally strapped will they stop. But for now, a lot are strapped---and this is what Congress and the banks are not taking into account. I cannot afford a 55,000 dollar GM Tahoe, or even a 24,000 dollar Malibu--unless I take a long term loan, and I won't do it.  

     

  •  excellent diary (2+ / 0-)
    Recommended by:
    Jerome a Paris, Creosote

    This is the key point to the economic problems we face.  People who actually work for a living need to be rewarded for that work.  Without this change, the Obama years may slip into a repeat of the Clinton years - better than Bush/Cheney, but without the real changes that are absolutely necessary for long-term stability and sustainability.

    I keep pushing an article from The Baffler #17 called The Rule of Law in Shambles by Thomas Geoghegan.  It is excerpted from his 150 page book The Law in Shambles.

       Consider this single fact:  It took ten years, almost all of the nineties, for the median family income to get back to the same level that it was, in real terms, in 1989.  But in 1999, when we got to the same income level we had in 1989, this same "median" family had to work...six more weeks a year.

       To keep from falling, our middle class had to work, for free, six more weeks a year.  Not a few more hours: six more weeks!  (By the way, maybe it's worth pausing to say: No wonder our GDP keeps shooting up, what with so many people working for free.)  And all this unpaid labor tends to undermine the rule of law.

       Why?  The economist John Maynard Keynes put it best: "Nothing corrupts a society more," he wrote, "than to disconnect effort and reward."  That's what did in the old Soviet Union: No matter how hard people worked, they could not get ahead of those who did not work at all.

  •  Right on target (2+ / 0-)
    Recommended by:
    Jerome a Paris, Creosote

    What has happened in America is a vast transfer of wealth to the top - and debt is one of the ways it has happened. An economy driven by consumer spending is not necessarily the most desirable state of affairs, but it would make a little more sense if the consumers actually been allowed to earn more money to do that consuming. Instead, the growth in the economy over the last 30 years has been siphoned off by the top, and the rest of us have had to make do with more and more borrowing to maintain the illusion of prosperity.

    While this was going on, what was happening with that money? It was NOT being spent to reindustrialize America with technologies and manufacturing for the 21st century, or on infrastructure like Super Trains, Super Tubes for the Internet, a modern electrical grid, etc.. The actual physical manufacturing base has largely been off-shored, along with the solid jobs with benefits that go with it. We no longer produce the goods people want to buy elsewhere in the world - we import them, and we use credit to pay for them.

    The money that has been siphoned up, instead of being reinvested in real world needs, has been shuffled into a chase for still more money. Deals upon deals, leveraging up the wazoo, black box investment schemes - and now the financial quantum flux is resolving into a much lower ground state for the whole system.

    If we just try to restore the system to what it was, we'll only end up deeper in the hole in the long run.

    "No special skill, no standard attitude, no technology, and no organization - no matter how valuable - can safely replace thought itself."

    by xaxnar on Fri Dec 26, 2008 at 01:55:01 PM PST

  •  Thank you Jerome and many of you (5+ / 0-)

    who have posted comments.  I am no economist and I must admit I get dazed and confused when trying to wrap my head around the recent economic melt down.  Reading this diary and many of the comments certainly has helped tremendously.  Thank you all for taking the time to inform those of us who are not econ or finance majors.

    It seems that unfettered, unregulated, wild west cowboy capitalism must be avoided at all costs.  

  •  The End of Debt (4+ / 0-)

    The problem is simply that countries like the U.S. have been spending through their accumulated wealth. When we opened the borders to unrestricted trade, we allowed all the wealth-creating jobs to flow out of the country. This means that we were no longer creating wealth here, we were spending it. To support that, we created more and more creative ways of allowing people to go into debt. We also lifted (multiple times) the public debt limit for the U.S. government.

    We've spent it all.

    We would have run out of money anyway, but of course, the Bush policies of overspending (to fund wars) and cutting taxes for the super rich has radically sucked money out of the spending classes in the country, making the day of reckoning come that much sooner. (Maybe a curse; maybe a blessing.) This ran the pump dry, so to speak, and stimulus packages will only help to the degree that they put some fluid back into that system.

    But the long term solution has to be to bring wealth-creating jobs back to the U.S. (and other developed countries) so that their currencies don't just evaporate. How long can we go on spending? We buy our services from India, our goods from China and our oil from various dictatorships around the world. (And now, Canada, at a horrific cost to the environment.)

    We've borrowed against our assets until they didn't have any more head room. And then those assets deflated, leaving us high and dry.

    So, the stimulus had better be geared to creating wealth-creating jobs and those jobs had better pay at least a living wage (probably around $70K a year in the area I live in) or there will not be any lubrication for the economic engine. And, if we are smart, we'll look at the kind of world we want to live in (one with much lower use of fossil fuels, better public transit, a less toxic environment, well-educated citizens working in meaningful jobs that pay well) and spend the money to get there. Regardless of where we spend it, it will end up in the economy. The trick is to inject it where it will create jobs and make us a future worth creating.

    And the super rich will go along because they will find that without an economy, all the money in the world won't save them.

  •  Right, so if it's a liquidity crisis.... (0+ / 0-)

    ....shouldn't the states be allowed to start making their own currency, analogous to Ithaca hours?

  •  You have to take is one step further (1+ / 0-)
    Recommended by:
    Jerome a Paris

    The biggest reason the prosperity was fake was because of the economic inequality between the West and the parts of the world that make our goods.  The debt allowed us to go on living well - and while there are plenty who struggle here, it is nothing compared to many nations.  Why should China, etc allow us to live better than they do?

    This is something no one wants to talk about, even some of the liberal economists I follow.  In a global economy, our standard of living is unsustainable.  The debt was just the last gasp of allowing it to continue.  Because no one wants to admit the problem, it's going to wind up being even worse than it would have been.

    Want a progressive global warming novel, not a right wing rant? Go to www.edwardgtalbot.com for a free audio thriller.

    by eparrot on Fri Dec 26, 2008 at 04:05:40 PM PST

  •  Reaganomics (2+ / 0-)
    Recommended by:
    Jerome a Paris, petral

    The more correct reason is that debt has been used to hide the fact that incomes have been stagnant for too long.

  •  Presumptions (2+ / 0-)
    Recommended by:
    Jerome a Paris, Persiflage

    Most people presume that over a "correction," things will get back to the way they were. This is not going to happen because the way things were is unsustainable.

    Many people "in the know" presume that there is going to be a very deep correction but that the world can eventually pull out of this. Maybe, but this will just postpone the inevitable without wholesale restructuring.

    However, some people are of the view that this event marks a peak, and civilization is going to take a prolonged hit due to the combined economic and environmental crisis that is just beginning to unfold. Such people realize that even the experts have no idea how this is going to play out, and there are a whole lot of land mines to get through.

    There is little doubt that the problems will be much simpler to solve if EVERYONE cooperates in meeting the challenges. However, that is very unlikely, especially if things get increasingly bad, as it seems will happen. At a certain point, it's every constituency for itself.

    We are facing the probability of a massive systemic breakdown over the coming several years. The world will be extremely fortunate to escape mass starvation in the third world, extreme hardship in developed countries, collapse of major industries, currency turmoil, and widespread social unrest, if not military conflicts.

    It is possible that reflating can prime the pump of the credit-based economy for one more round. But that will just postpone the bill coming due and add to it. There has to be a major restructuring both economically and environmentally, and these two are inexorably linked. This will require revising our way of life radically.

    Live unity, celebrate diversity.

    by tjfxh on Fri Dec 26, 2008 at 04:22:59 PM PST

  •  Regarding the earlier comment I posted (0+ / 0-)

    Here's an experiment I'd like to see someone do (and not just because I would happily volunteer for this experiment just to save my own skin).

    Give someone poor either of the following, whichever would benefit them most: a bankruptcy that actually really does wipe the slate entirely clean as in ALL debts are legally written off forever (including student loans, fines, fees, credit cards, payday loans, ANYTHING) or a one-time gift/grant/whatever of $15,000 with absolutely no strings attached EXCEPT that the money has to be used for rent or transportation or some combination of the two.

    The only requirement is that this person has to be observed for 10 years. Not observed in the sense of probation or parole or legal requirements, just watched to see if/how they dig out of poverty given the tools the rich already have.

    I think we'd see a lot of people do exactly that.

    Deyama Toshimitsu! You broke my gaydar! I demand a replacement at once!

    by MiscastDice on Fri Dec 26, 2008 at 05:05:52 PM PST

  •  This crisis didn't "just happen" and you bankers (3+ / 0-)
    Recommended by:
    Jerome a Paris, SingleVoter, sully18

    know that far better than anyone else.  Why?  Because you helped create the problem...with usurious interest rates on credit cards and loans to people who should have been denied  but, rather, were not only given loans but also seduced by interest only loans (many with prepayment penalties) that would escalate sharply in 2-3 years. Realtors and appraisers were also in cahoots with lenders to facilitate all this...

    The broader financial community saw opportunities to diffuse it's possibly bad loans by creating and selling "consolidated debt offerings" that also earned them a nice commission.  Those who purchased these piles of trash often re-packaged and resold again and the insurance industry got into the party by insuring the debt instruments.

    When the banks and investment houses got into a liquidity and equity squeeze...the shit finally hit the fan...and the result poured over into the rest of the marketplace.  No cash = No credit...no loans...no orders...no business...equals layoffs=more bankruptcy...even for people who were responsible borrowers.

    Where has all the bailout money to the banks and investment houses gone?  They WON'T say and our current feckless occupants of the Fed and White house aren't inclined to force them to disclose.  Meanwhile...we're being systematically financially raped.  New credit card regs...not enforced until 2010....the list of examples of Congressional fecklessness is long and dreary.

    Meanwhile...gird your loins...this is gonna get a LOT worse before it gets better.  

    The longer I live, the clearer I perceive how unmatchable a compliment one pays when he says of a man "he has the courage to utter his convictions." Mark Twain

    by Persiflage on Fri Dec 26, 2008 at 05:23:44 PM PST

  •  I like this diary.It makes sense to me. (0+ / 0-)

    I still can`t believe that no one has been held responsible,and the banks after receiving billions of dollars cannot even account for the money they were given.I think everybody`s nuts.

    •  I'm trying to imagine a Frenchman (0+ / 0-)

      saying that it's hard to imagine the King hasn't been held responsible in 1788.

      By 1789 it becomes easier to imagine.

      If a depression is a prolonged recession, what's a prolonged depression? A Dark Age... welcome home...

      by Paul Goodman on Sat Dec 27, 2008 at 05:30:44 AM PST

      [ Parent ]

  •  No subject. (1+ / 0-)
    Recommended by:
    Jerome a Paris

    there is an alternative - it simply requires that blame be properly allocated, instead of everybody pretending that this crisis 'just happened.'

    Good luck with that.  Blame has already been properly allocated.  We know who did what and how they did it.

    Here's the elephant in the room: the entire economic system is calibrated in numbers, for which there is no credible evidence of their existence in the first place.  It might as well be calibrated in unicorns.  People, by contrast, are real.  The solution, and only solution, is to recalibrate economics in terms of human beings.  (This was twenty years ahead of its time twelve years ago.  Now it's only eight years ahead.)

    ======
    Peace. It's cheaper, and more fun. We've already tried everything else.

    by USexpat Ukraine on Fri Dec 26, 2008 at 07:58:03 PM PST

  •  simple immediate cause = unregulated investment, (0+ / 0-)

    enabling criminal fraud

    This time it's personal.

    by apostrophe on Sat Dec 27, 2008 at 03:57:08 AM PST

  •  Manufactured Irrational Desire... (2+ / 0-)
    Recommended by:
    Jerome a Paris, Paul Goodman

    The problem is the overwhelming percentage of the economy dedicated to Manufacturing Desire.

    People believe they make purchasing and investment and savings decisions rationally. They don't.

    The solutions should be focused on the incredible amount of money put into Manufacturing Irrational Desire using the most sophisticated psychological tricks ever discovered. Even when we are aware of the tricks and manipulations, we fall for it. We consume huge and growing amounts of natural resources,and bubble our economy with debt, all because of a Consumer-Targeted Propoganda machine which is largely irrational.

    The need to educate, to legislate and to analyze the abandonment of our founding freedoms is overwhelming.

    And, coincidentally, it is the same problem we face in politics. America has bee duped by its own feel-good exceptionalist propoganda about itself.  

    Figures don't lie, but liars do figure-Mark Twain

    by OregonOak on Sat Dec 27, 2008 at 04:31:46 AM PST

  •  It's All Been A Fake (2+ / 0-)
    Recommended by:
    Jerome a Paris, Paul Goodman

    The last eight years have been a total fake. First the presidency of Bush has been a fake. The wealth has been fake. The currency has been fake. The money has been fake.

    Time for a little reality!

    "Remember that long-ago news conference when George W. Bush couldn't think of any mistakes he had made? Unbelievably, he still can't." Eugene Robinson

    by wild hair on Sat Dec 27, 2008 at 04:50:37 AM PST

  •  Obama is repeating what Bush did (1+ / 0-)
    Recommended by:
    krnewman

    it was wrong then, it's wrong now.

    Time for change.

    If a depression is a prolonged recession, what's a prolonged depression? A Dark Age... welcome home...

    by Paul Goodman on Sat Dec 27, 2008 at 05:28:41 AM PST

  •  Why do you have to bailout credit default swaps - (0+ / 0-)

    I dont understand why we the tax payers have to bailout the credit default swaps or AIG---why dont you just let it just be junk out and fail and put in books as bad debt ---and if credit is needed--the govt can step in to supply the money to banks to lend it out.

    DONATE! McCain=Bush 3rd Term--US worst nightmare; Stop Republican obstructionism- Elect a Democratic Majority.

    by timber on Sat Dec 27, 2008 at 05:42:03 AM PST

  •  Fake money (0+ / 0-)

    Speculative stocks, hedge funds, credit default swaps, etc caused fake profits and fake income  for which Madoff et al manage to change to real money for themselves.  

    Now we the taxpayers are putting value to this fake financial instruments and again giving these robbers real money while taxpayers are again being bilked out .   It is like transferring wealth from the middle class to the wealthy robber barons.

    Shouldnt we just let these fake financial instruments die out and the world economy live with the real money.  And let those who indulge in these financial instruments get their due--bankruptcy.

    DONATE! McCain=Bush 3rd Term--US worst nightmare; Stop Republican obstructionism- Elect a Democratic Majority.

    by timber on Sat Dec 27, 2008 at 05:47:20 AM PST

  •  Spinning Debt (0+ / 0-)

    I largely agree with Jerome.  But I refuse to put it in a "them versus us" meme.  And I certainly don’t think the US government prints money to pay it’s debts.

    The private debt Jerome talks of was created using the life savings of real people, not some magic printing press.  That is, the very real savings of individuals, pension funds, etc. was used to pay the builders and home sellers.  The homeowner has the debt as they did not have the capital used to buy the house.  The mortgage is now worth considerably less to those who lent the money because the home buyer can’t make his promised payments and the collateral (the home) is worth less than the money the lender paid for it.  We not should pretend that real money used to buy the houses in the first place came from anywhere but from savings.  What went wrong was that not enough of the savings where kept in reserve and the home buyers did not put up enough their own savings in the transaction.  Deregulation failed big time here.

    I whole heartedly agree that wages must go up.  This is the least painful solution to the problem.  If we can trigger staggering inflation in everything except housing, the home owner will be able to make his payments.  The home owner will loose money when inflation adjustments are made and the lender will also loose money after inflation.  But people will keep their homes.  And we will all suffer from the in ability to keep up from the investor Jerome (and John Boy) to the burger flipper making in excess of $10 per hour.  Still, it is our best hope because homeless people is unacceptable.

    One final note about printing money.  The US government does not generally print money to expand the money supply.  It sells bonds to people willing to buy them.  These bonds do not provide any collateral at all – that is the lenders don’t get the Washington Monument if the government defaults.  This no collateral loan creates the "money".  And the lenders are willing to do this because they trust the government will in fact raise taxes to make the required payments.  Yup, tax increases are inevitable although some of the increased revenue will hopefully come from wage inflation.

    So, except for deregulation there are no villains here.  Just stupid people wanting more return on their investments than was reasonable to expect.  This includes the lenders as well as the buyers.  And both will lose big time no matter what. And deregulation allowed them to be stupid.

  •  And just what part dod Credit Default Swaps play (0+ / 0-)

    in this whole thing?

    If the Banks hadn't literally gambled on these things, this would have been a fairly ordinary event.

    You are correct about low wages over a protacted period being an underlying weakness in the whole structure and this needs to be addressed with a lot more than some new low paying jobs building bridges.

    In the US we need to manage globalization with an eye on protecting all the stakeholders, not simply enriching the super rich even more.

    To be sure we need some short term wage  and job relief but in the long term we need to fix this country's terrible education system.

    We are on the verge of going backward in time to when only the rich got educated and everyone else could look forward to subsistence living.

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