CRASH 2008-09 -- first wave

More Debt no FIx--jk
Quotes on our banking system: a forgotten struggle
U.S. Monetary Supply--the root of the Crash
Great Depression, causes and parallels--jk
The Second Great Depression--why-jk
Great Depression and the New Deal
Argentina's Collapse
Asian Crash 97--model for U.S. Crash
NEOLIBERALISM, the globalizers
Robber Barons
Fed Stats--the deception
More Debt no FIx--jk
Financialization and the Bubble/CRASH
Class nature of the CRASH--jk
Obama and the Second Great Depression--jk
Nobel Lauret on the Crash--Stiglitz
Second deed solution--jk
Three Crashes--Models
Financial Crisis, a socialist perspective
Fairness Doctrine overturned yields corporate media
Funny Money Solution--more fed debt
Why We Need Regulation of the Market Place
10 to 1, the Credit Expansion
Fed debt--the debt game
WaMu Give Away by Feds
Offshoring and the Auto Industry
Economic summit November 15th
Figures on the CRASH
Pod Cast of CRASH plus much more

Why We Can’t Finance Our Way Out of the Implosion--jk


Paper folly:

There is a shortage of fools who will dive into the borken bubble of our financial implosion.  It is not like the 1999 bubble in the orient, where world banking and manufacturing could scoop up bargins.  This is a world-wide bust, the funds to do so have evaporated.  Who will buy the next round of t-bills?  Will the tax payer shoulder the current bailout?  To do so means a shrinking amout of consumer spending.  Banks are about loans and interest payments.  The cure they recommend is more loans, and our political leaders have turned to them for the fix.  Thus the Federal Reserve will simply print money and loan it out.  But more debt to the financial instutions overburden with debt is not the fix. 


Like the bell on the cat, the fix that won’t be tried: 

We need an act like that of Hoover's 1930 Smoot-Hawley Tariff Act, affecting 20,000 foreign goods.  Our industry cannot compete with cheap foreign labor.  We must end our trade deficit and outsourcing. We need to make all that we need, then distribute it.  And we also need to lift off our backs the parasitic fanancial behmouth  Wealth is built uopon the backs of labor. 


What is and what was:

We are experiencing the error of allowing the financial sector to direct our economy, and in so doing they became our economy’s largest sector.  Grinding their own ax, they have brought about an expanion of credit and a removal of government oversight.  At the same time our largest companies and the IMF pushed a policy whereby tariffs and other restrictions in the developed nations would be removeed in exchange for permitting them setting shop around the globe.  For example 40% of Chinese manufacturing is foreign owned.  These global companies grew while our country became debt ladden.  The removal of tariffs and other pro-labor laws, the flooding of the labor market with illegals, and the outsourcing of jobs, this has caused a dramatic drop in hourly income (purchasing power).  A prosperous working class and a strong manufacturing sector was the foundation of our economic growth following WWII.  In the 60s growth shifted to the financial sector, and that is a parasitic burden, for nothing is made by them.  Inspite of ever increasing productivity and improved durability of manufactured goods, in real terms the return per hour of labor has shrunk.  In the 50s the husband supported his family.  Now it takes a husband and wife working to support their children and the burden of the expanded financial sector.


The bubble:

With the Federal Reserve Bank requiring only 10% assets to be held, financial institutions were loaded with the funds they borrowed from the Feds.  To unload these funds and thus profit through interest payments, they loaned it out. and out, and out.  Standards of credit worthiness were by necessity lowered. The paper bubble grew and grew; and thus inflated stocks and housing prices.    This bubble was built on loans, and by 06 conditions reversed, starting with falling housing prices.  For both workers and the retired, income was not keeping pace with the cost of essentials.  They filled the gap with credit, until credit reached its limits.  Each contraction cause further contractions.  Jobs were lost in numbers far greater than reported.  Like Yertle the Turtle (of Dr. Suize tale), the condition of those at the bottom has produced a ripple that has brought down the paper-money pyramid.  More loans is not the fix the structure.  We have with the deregulators gone back to the economics of the 1920s and history is repeating itself. 


Teddy Roosevelt's advice that, "We must drive the special interests out of politics. The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being. There can be no effective control of corporations while their political activity remains."

Huffington post at

Mort Zuckerman, October 22, 2008-

Nature of the illness:

Everyone is haunted by the fear our financial crisis might unwind into something like the Great Depression. The world of finance is undergoing a collapse compabable to that which occurred in during the Great Depression.  Federal loose-crdit policies has produced the greatest destruction of wealth in our history. It is sweeping away giant blue-chip financial firms and will cause governments around the world to default on their debts.  Because of a lack of industrial foundation and the impoverishment of the working class along with the continuing power of the world of finance to influence police, this implosion will turn out worse than most pessimistic of us imagine.

Most critically, the financial world is seized by a collapse of confidence. The uncertainty over the value of the securities they hold has led to an enormous risk aversion. Customers, creditors, and shareholders of the major financial firms wonder whether they might survive. Once confidence collapses, there is no telling when the selling will stop. It all brings to mind the story of the economist who walked past a hundred dollar bill and didn't pick it up. When asked why, he responded, "It can't be a hundred dollar bill for, if it were, somebody else would have picked it up by now."

All of this has produced an unprecedented credit squeeze in which banks are refusing to lend to other banks, much less to businesses and individuals. This squeeze has had a particular impact on the newly unregulated emergent shadow banking system made up of mortgage lenders, investment banks, broker-dealers, hedge funds, private equity funds, money market funds, structured investment vehicles and conduits. Many of these names we have never heard of before but cumulatively, they now provide a majority of America's financing. They are not banks but they act and seem like banks. They borrow short and invest long, mostly in illiquid securities; they have more debt in relation to equity than banks but have lacked, until recently, both deposit insurance and the support of the Federal Reserve as the "lender of last resort." They do not have deposits but have relied on roll-over, short-term funding obtained through borrowing in the money markets that has left these firms vulnerable to disruptions in the money markets. To the extent that they have bundled these investments into securities that were sold to the markets, they were are also vulnerable to mark to market losses when these markets, or their securities, start falling.

This quickly wiped out the banks' capital base and ended their roll-over funding. The functioning of the credit markets was brought to a virtual halt. Even worse, there is a quiet run on hedge funds and private equity funds ongoing that threatens to bring the shadow banking system to its knees. Now the question is whether this will produce an economic contraction on Main Street comparable to the Great Depression.

The inescapable bad news is that a serious recession is inevitable given the damage to the financial sector, as well as in the degree to which business and the general public has been traumatized by collapsing stock prices and the daily headlines. But this does not mean we are bound to have a spiraling recessionary dynamic comparable to the thirties. The unprecedented debt American families and businesses have assumed will continue to constrain the easing of the credit crunch. But we have avoided some of the mistakes of 1929.

Take monetary policy. This time the Treasury and the Federal Reserve moved quickly and positively. They understood that when banks lose money they have to shrink their balance sheets and since bank assets are its loans, this would mean a drastic reduction in credit and worsening business conditions. The Fed has sought to ease the credit crunch by injecting over $1.5 trillion into the financial system and, most recently, added another $250 billion directly into the banks to re-liquefy them, plus increasing deposit insurance, extending it to money market funds, aggressively lowering interest rates and, importantly, doing that in concert with the other major economic powers.

In the early 1930s, the Fed refused credit to bankers and forced more and more of them to sell assets in a frantic dash for liquidity. Some 10,000 commercial banks, or 40%, failed between 1929 and 1933 compared to only 20 this time. Many people back then stopped using checks and conducted transactions in cash. The money supply declined by more than a third, creating a major contraction of credit.

The contrast in fiscal policy is equally dramatic. A generation of economists inspired by John Maynard Keynes in the 1930s taught us that the government should not try to run a balanced budget in a crisis of demand, as both Hoover and Roosevelt did. This time the government is running a $500 billion deficit to stimulate demand, and next year it will exceed $1 trillion. Orthodox adherence to the gold standard in the thirties didn't help, compared to a free floating US dollar today that has declined by 16% on a trade weighted basis. Another critical fiscal difference is that the federal government today has more sway. It makes up 21% of GDP compared to just 3% in 1929. On top of this a large component of GDP is devoted to health and education that is substantially decoupled from the problems of the private sector, not to mention that the Social Security program adopted in 1935 today provides unemployment benefits. All these contribute to maintaining the real economy. By the time FDR took over (1933), the economic entrenchment had begun to feed on itself and turned a serious recession into the decade of the Great Depression.

We still have in place Social Security and unemployment to slow the doward spiral.  But other things are much worse than during the Great Depression.  Household debt rose from about 50% of a $3 trillion GDP in 1980 to over 100% of a $13 trillion GDP today. The debts of the financial world, which amounted to 21% of GDP in 1980, soared to 120% of GDP by 2007. The financial world's unprecedented accumulation of debt in relation to equity sometimes with over $30 of debt for every $1 of equity means that small variations in their asset values, which once produced profits, have now brought them huge losses. 

Much of this debt takes the form of securities and derivatives that remain on their balance sheets. In fact, another systemic risk and one that cannot be measured is based on the opacity and complexity of these exotic securities, mainly credit default swaps and derivatives that remain mainly on financial balance sheets exceed $50 trillion. Debt requires payment of interest, the fainancial institutions act as a great vacccum cleaner.  As long as debt rose, prices on stocks and and properties rose.  Now the combination of falling property and stock prices, reduced consumer demand, rising unemployment, tightening credit, falling wages, and a lack of confidence by the consumer, the banker, and the business community, all these entail that a major correction is under way, one which will likely rival the Great Depression.

Then there is the housing bust. The current crisis in housing has an important history. When the Fed tried to respond to the bust in the year 2000 and 2001, that is when the Internet bubble burst, littering the country with bankruptcies and layoffs -- not to speak of investor losses of more than $1 trillion -- the Fed rapidly increased the money supply to offset these losses and slashed short-term interest rates to 1%, the lowest in 45 years. The result was the greatest housing boom this country had ever encountered. From 2002 to 2006 housing values appreciated at the astonishing rate of 16% per year compared to only 3% for the 55 years between 1945 and the year 2000. We finally came to the point where it was impossible for the typical American family to buy an average priced house using a conventional 30-year mortgage.

Then the housing bubble burst. Housing prices have dropped roughly 30% and the decline is continuing. Plummeting house prices mean more foreclosures, more homes on the glutted marketplace and a further house-price slump. There are 15 million homes today with negative equity where the mortgage exceeds the home's value and it may rise to 20 million over the next few months. Most of them have mortgages that now exceed the value of the homes by over 20%. If half these people drop the keys in a box and walk away, the losses will be in the trillions and may well destroy the equity in our banking system. That is why it is critical to find ways to keep foreclosures to a minimum. The entire attempt to re-liquefy the financial system could be undermined by this collapse in housing prices.

These are substantial threats and for all the measures (belatedly taken) distrust remains. American policymakers have seemed to be responding at an ad hoc, unfocused fashion, not fully taking into account the looming insolvency issues and the frightening complexity of the bundles of exotic securities. It is fair to acknowledge that they've been dealing with a crisis on a scale not seen before, and one that unfolded with terrifying speed. But the fact remains that by the time they acted, measures that might have re-stabilized the markets were ineffective. Robert Brusca of FAO Economics, captured it well when he said, "There is sense that if policymakers were surfers, they would have missed every wave."  {Inaction is the mantra of neocons, who believe that the free market is a self-correcting system, and that intervention in the long term makes things worse.}

Lehman's bankruptcy is a case study in government ineptitude. It was the $785 million of losses on Lehman's securities that pushed the value of the assets of a major money market firm below their $1 per share paid value, described as "breaking the buck." This caused $400 billion to be taken out of money market funds in a matter of days, while the rest of the funds were frozen in anticipation of further withdrawals. Banks were relying heavily on these funds for their commercial paper and the result was a spiral of illiquidity. The Lehman decision prompted the following from the French Minister of Finance, "Horrendous!" an assessment echoed by many others. It remains puzzling that our Treasury officials did not foresee that the Lehman failure would not be just another failure, but a catastrophic failure undermining faith in the system. After Lehman, all remaining trust vanished in the financial world. Money market and interbank lending froze virtually completely. The spread on credit default swaps rose to levels that caused fear and speculation.

What next?

Here are some proposals:

1. We must have a quick and efficient way to sustain more banks with capital injections, not just the major banks, using appropriate information gathered by bank supervisors.

2. We need to expand the definition of banks to extend appropriate regulatory regimes to the shadow banking system.

3. We will have to oblige the newly defined banking system to build up equity capital when their lending is expanding, for financial busts too often follow credit booms.

4. We must establish a standard for risk management and risk assessment covering mortgages, derivatives, debt, and even equity and especially on new financial instruments.

5. The Fed will have to continue to guarantee interbank borrowing by banks eligible for recapitalization to reactivate the interbank lending market and reduce abnormally high rates of interest on loans that float above the LIBOR interbank rate.

6. If there is to be a fiscal stimulus program, it should be primarily in infrastructure and not on tax cuts: these tend to be saved and not spent (and Obama's are more of a new entitlement program to people who don't pay any tax at all)

The danger is that politicians, who have little understanding of the financial world, may draw the wrong conclusions from Wall Street follies and make the wrong decisions, as they try to revive our financial system.

We must get this right. The new administration must draft the best of our national talent into shaping and administering these new policies. Otherwise the recession will not be U-shaped and relatively short. It will be L-shaped and extend for many unnecessary years


Comments on “What Next” (above)

Where is the funds to come from to keep the system afloat?  Points 1,2, 5, and 6 call for trillions of dollars.  The government has an unsustainable debt.  More debt is not feasible.  More taxes means less consumer spending—not good.  Foreign investors there aren't:  they are dealing with their own economic implosion, and the U.S. is no long a safe investment haven.


There is a fundamental ideological problem.  The inroads of corporate based faith in the self-correcting market place has resulted in the removal of the restrictions which brought us out of the Great Depression and produced an unpresidented growth of income for those who labored following WWII.  Our politicians are still committed to the free-maket system. With the weakness of labor and the power of the globalizers and their corporate media, the needed changes are not coming in the next decade.  The prognosis is bleak, a radical economic restructuring like that which brought Germany and Italy out of a much deeper collapse than occurred in the 1930s in the U.S, this is not on the horizon, nor is there a New Deal Democratic Party. 

We can only hope that the Democrats will morph into the butterfly that will eat the leaves of financializaiton and build a cacoon to hatch strong labor. 


Teddy Roosevelt's advice that, "We must drive the special interests out of politics. The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being. There can be no effective control of corporations while their political activity remains."

Don’t miss the collection of Pod Cast links


Nothing I have seen is better at explaining in a balanced way the development of the national-banking system (Federal Reserve, Bank of England and others).  Its quality research and pictures used to support its concise explanation set a standard for documentaries--at  The 2nd greatest item in the U.S. budget is payment on the debt.