GLOBAL FINANCIAL MELTDOWN

A TRUE CLASSICAL TRAGEDY: OUR ECONOMY IS BUSHED !
Lyndon H. LaRouche, Jr.
October 29, 2008
http://larouchepub.com/lar/2008/3544economy_bushed.html


It is time to be realistic about the situation which will menace the very continued existence of our U.S. Republic, whatever the outcome of the November 4th general election.

What must be addressed in the accompanying report, is the wretchedly corrupted state of the present leadership of the political parties, especially since about February 2006, at a time that the Democratic Party leadership, in particular, had refused to respond to the votes cast by the electorate in the preceding mid-term election " on any leading issue, then, or to the present date.

Similar problems, even critical ones, have existed for our republic during some past times, but the state of our national political affairs during the recent two years has been perhaps the most deadly threat of that type in the entire experience of our nation as a Federal republic. As we go into the 2008 general election, that is the problem which should be uppermost in our mind.

Notably, excepting certain U.S. Presidents, or Vice-Presidents, such as Aaron Burr, whose intentions were those of outright traitors, the outgoing George W. Bush, Jr., after nearly eight years in that office, has created a record for himself, as being, beyond reasonable doubt, the worst excuse for a U.S. President in our republic's history. He was already the worst possible choice actually available when he entered that office, and accomplished little since, except to rise from a complete absence of qualifications for that office, to achieve the more notable status of having been, traitors aside, the most despicable ever.

The disaster of this election has not been accidental. Whatever the developments of the increasingly tumultuous, remaining weeks ahead, George W. Bush, Jr. will go down in the Creator's ledger as the President who did the most in his efforts over eight years, not merely to bankrupt the U.S.A., but to adopt those policies which have amounted to the attempt to plunge the entire planet into what is presently looming as the onrushing threat of becoming the worst dark age in the presently recorded history of mankind.

What prominent political figure of our republic, or any reasonably well-informed foreign nation, could be so stupid, or so craven as to suggest that an incarnate virtual political disease such as President George W. Bush, Jr. could be the author of a remedy for the world's current disasters?

Why were so many citizens, especially the most influential ones, unable to muster the combined wisdom and just plain guts needed to prevent the scheme of the attempted impeaching of former President Bill Clinton, a hoax against our Federal Constitution, which set into motion the chain-reaction of economic and related events which ended with the alleged defeat of Presidential candidate Al Gore, Jr. by an even worse choice, George W. Bush, Jr.?

It is time for the apparent majority of our political influentials to ask themselves, whether their failure to defeat Bush's re-election in 2004, forecast a still worse expression of a continuing national tragedy already clearly in progress, during the still coming days and weeks now immediately ahead. Or, must we fear that what are considered our currently leading political figures, each and all, are simply lacking in the combination of insight and nerve which we require to lead our republic to survival now.

The only remedy for us now, lies in the potential embodied in the uniquely crucial distinctions of our republic's Constitution from that of the form of government found, for example, in western and central Europe, still to the present day. In this moment of the gravest threatened crisis in all modern history, the fate of the nation hangs not so much on the particular personality of an elected President whose very life may be in jeopardy, but on those institutions of the Presidency which persist as Presidents come and go.

I explain:


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What we are experiencing is no mere recession, but a presently accelerating general financial and physical breakdown of the entirety of this planet, which, unless turned around, now, will accelerate steeply into a planet-wide "new dark age of mankind."

It is already clear to those who actually understand the present U.S.A. and world situation, that the present pattern of general breakdown of the U.S. economy, an economic-financial breakdown-crisis which erupted at the close of July 2007, is a breakdown crisis with characteristics similar to, but worse than that brought about in mid-Fourteenth-Century Europe. Now, as then, this menace is represented by a pack of financier bandits fully as rapacious as that pack of Anglo-American financier parasites controlling the circles associated with Wall Street champions rallied around President George W. Bush's U.S. Treasury Secretary Paulson.

Those citizens who understand what is needed now to save our nation from the already onrushing horror, will reject any opinions on our present situation which are contrary to the warning which I have just stated here. This is no mere depression, no mere echo of 1929; it is a general breakdown-crisis of the financial systems of the entire planet.

There are ways in which to bring the world to safety, even from a crisis as terrible as what has been happening, continuously, as I had warned at the end of July 2007.

Therefore, since there will never be a spontaneous recovery of the planet from the presently accelerated general breakdown-crisis of the entire economies of the world, the only hope lies in a return to the kinds of measures undertaken by President Franklin D. Roosevelt from March 1933, onward. Today's pervasive problem lies, chiefly, in the confused, general state of mind of our electorate itself, most of whom think of issues of policy in terms of competing political parties, rather than thinking in terms of the common interest of the past, present, and future citizens of our republic. This non-partisan leadership must not be considered as representing mere factions, but as a whole leading constituency of our Presidential system for times of our nation's existential crises, as now. Our nation " and the world " could not be rescued from the greatest economic crisis in modern world history, unless our government adopts, immediately, the only kind of action which could rescue the world as a whole from the presently onrushing plunge toward a prolonged new dark age.

We of the United States could not save ourselves by options of the U.S. government itself. We require immediate agreement on actions to be taken in concert by such leading nations of the world today as our U.S.A., Russia, China, and India. Without a sweeping change, which eliminates most of the leading trends in economic policy-shaping of those, and other nations, since about 1968, the entire planet, including our own U.S.A., is slipping at a presently accelerating rate, virtually daily, into a total breakdown of the present financial-economic systems of the entire world.

Ours Is Not a Parliamentary System
Even at all times, especially whenever our republic is threatened in an existential way, as now, our citizens should think of the Presidency, rather than as the incumbent President, as the essential element of self-government under the unique, Federal, constitutional system brought into being through the interplay between the coincidental meeting of Society of the Cincinnati and the Constitutional Convention held in Philadelphia at that time.

Our peculiar advantage lies, to a very large degree, in that we are not a European parliamentary system! Nor, is our nation's economy based on the doctrine of the Adam Smith, who was, and remains, to the present day, our enemy of the time of our struggle for national freedom, from that time. We are, by our Constitution's specific principle of a national monopoly on the uttering of public credit, unique among nations in that respect; it is to the essential principle of that uniqueness of our constitutional system that we must turn, when we are being driven, as now, as under the mortal threat from Lord Palmerston's British Empire, to last resorts, again, today.

It is through constitutional authority to launch the sweeping replacement of failed monetary-financial systems, such as those of Britain and most other nations, that we, our nation, and our constitutional republic, alone, are presently capable of initiating the reform needed to launch an immediate recovery of the nations of the world from the presently onrushing avalanche of general breakdown-crisis of the planet as a whole.

Therefore, the crucial question which we must ask ourselves, is: are we capable of using the President to be elected, presumably, on November 4th of this year, to effect immediately the needed reforms needed both to save our nation and its people? Neither of the prospective President-elects actually has the qualifications for initiating that urgently needed, timely reform on which the continued existence of our republic depends.

Therefore, let us ask a somewhat different question: could the Presidency of our republic use the elected President as the constitutional instrument which could launch that urgently needed general economic reform?

The answer is "Yes." Will that Presidency, which is a mass of institutions and persons gathered around the policy-shaping and other relevant institutions be willing, and capable of mobilizing the needed remedies, where a mere individual President would probably fail? That is the question, a question of far, far greater importance than any individual likely to become the President of our republic by the time of the January next inauguration.

What we must avoid, as if our republic's life depended on it " as it does " is to reject all of the kinds of compromises being cooked up around the President Bush Administration, or similar mish-mash concoctions proposed by sundry interests and institutions abroad. The survival of civilization requires the immediate adoption of nothing different than the reform, based on replacing the inherently failed design of European-style monetary systems, by the U.S. Constitutional principle of a U.S. constitutional credit-system.

The needed reform will fail unless that specific condition, the junking of international monetary systems, in favor of a Hamiltonian credit-system, is treated efficiently as axiomatic. This requires the included, leading role of the U.S.A., in a small group of leading world powers, such as Russia, China, and India, in agreeing to a principled design of that specific, Hamiltonian, Franklin Roosevelt type. If that is done, and conducted in service of the equitable interests of the nations of the world, we can come successfully out of what would otherwise be, very soon, a general breakdown of every economy in the world over a period of perhaps generations to come.

For such a long-ranging challenge, no mere President, as a personality, could efficiently represent the people of the United States. For this form of problem, we must rely on the Presidency of our United States, rather than any mere President temporarily occupying that office.

My job, as my forecasts of events have now shown my competence to be presently uniquely competent, is to act to mobilize what represents the too-little understood, implicitly immortal institution of the U.S. Presidency as such, to craft that commitment by our republic, which is presently so urgently needed to rescue the world as a whole from the follies which have ruled the world, most emphatically, since the dumping of the legacy of President Franklin D. Roosevelt over the course of the 1968-1981 interval. It is not a merely passing President, but the immortal institution of our implicitly immortal Presidency which is required to commit us to our part in crafting the indispensable new commitment to the hopeful future destiny of humanity as a while.


STUBBORNNESS WORSENS WORLD DEPRESSION.  WILL THE GREAT CRASH HIT AFTER NOVEMBER 17?

Helga Zepp-LaRouche
http://larouchepub.com/hzl/2008/3544crash_nov_17.html

The way things stand now, there are grounds to fear that the New Bretton Woods summit which French President Nicolas Sarkozy has organized to take place on Nov. 15 in Washington, will not lead to an adequate result. It could easily turn out as one high-ranking banker, quoted in the French newspaper La Tribune, imagines it will: that Nov. 17 will be a "black, black Monday." But there could also be a "black Monday," a "bloody Tuesday," and a "horrendous Wednesday," soon to be followed by a total collapse of the world financial system. The only possible way to prevent that from happening, would be prompt agreement on Lyndon LaRouche's financial reorganization proposals, as set forth in his latest paper, "A New Dark Age Is Now Near: Today's Brutish Imperialism."

This gloomy prognosis is based on a number of factors. All indications are that neither the Bush Administration, which is heavily infested with former Goldman Sachs associates, nor British Prime Minister Gordon Brown, have any intention of agreeing on an actual reorganization of the bankrupt financial system. Bush was against the idea of the newly elected U.S. President taking part in the summit; and since there's nothing to contradict the estimation of Les Echos that Wall Street is throwing in its lot with Obama, despite McCain's good connections there, this really doesn't make much difference. But even those who are equipping the IMF with a "Global Regulation Strategy" " which simply means imposing one or two more rules on the bankrupt system " are totally misestimating the situation.

Because the idea that, after neo-liberal economic dogma has totally failed, the nations of Asia and Latin America will once again permit themselves to be subjugated by a global IMF dictatorship, is an absurd one. On the one hand, in the days leading up to Nov. 15, a number of summits will be held by groups of nations, ranging from Mercosur, to the Shanghai Cooperation Organization, to the G-20, etc. Participants in these summits will attempt to formulate their national interests within the context of the new financial architecture. The Asians' experience with the IMF during the 1997-98 Asia crisis does not exactly inspire trust in this institution, even if it has "reformed" and that includes Turkish Prime Minister Erdogan's recent declaration that he will not permit the IMF to "strangle" the Turkish economy.

While spin doctors in political circles and in the media continue to debate over whether the economy is gradually slipping into a "recession," or whether "the worst is over" (Robert Mundell), the facts speak an altogether different language: The real economy is in free fall. Freight transport rates for solid goods i.e., grains, ores, and coal have declined by 90% (!) over the past three months. In the past few weeks, China has not imported a single ton of iron ore. The Baltic Dry Index, which measures freight costs per vessel, has fallen by 92% since the beginning of this year  i.e., trade in raw materials has declined dramatically. The China International Capital Corporation Limited reports that orders for new ships have declined by 66% worldwide.

Now that the auto sector has collapsed worldwide Daimler, for example, is halting production of the Mercedes for five weeks for the full extent of the collapse in steel production is becoming clear. Arcelor Mittal, the world's biggest steel producer, expects to close 13 of its blast furnaces in Europe during from mid-November through the end of January. More than 60% of China's steel industry is running at a loss, and smaller firms are closing their doors, since the price of steel in China has collapsed by 30-40% since June. In the south of China, more than 50,000 small and medium-sized firms have declared bankruptcy. This shrivelling of industrial production has consequences for agriculture and for consumers' purchasing power. Prices for soybeans fell by 50% in the last three months, and grain by 20-30%.

In this age of (collapsing) globalization, the shrinking volume of freight transported is an indicator of the state of the real economy. Alongside the above-mentioned figures for shipping, sales figures for heavy trucks are also telling. In the third quarter, net sales of Volvo trucks plunged by almost 100%, from 41,970 to a mere 115. New orders for large trucks worldwide declined by 55%.

Empty Praise for the Free Market
The financial crash has been ravaging the real economy for some time now, and if the Bank of England just now says in its Financial Stability Review, that the instability is as big as it has "ever been in human recollection," it becomes clear how dangerous the politicians' and bankers' bull-headedness can get such as at the recent "financial summit" in Frankfurt, where instead of taking their own incompetence as the fitting opportunity to resign from their posts, they couldn't get beyond empty appeals to, and praise for the free-market economy.

The rate of collapse is bound to increase, with new chasms opening up daily, whether in the position of hedge funds, which have to dump their assets because terrified investors want to pull out their money; or in the so-called emerging markets. Hungary, for example, recently negotiated a $25 billion package with the IMF and the EU, after its currency went into free fall a sum which goes more for saving Western banks involved in Hungary, than for the people, who will be subjected to tough austerity measures. In this connection, Switzerland and Great Britain could easily turn into new Icelands: Swiss banks' short-term liabilities are now 13 times greater than the country's GDP; Iceland's were only five times bigger.

Thus it should be clear to every normal person, that unless a new world financial system is immediately put onto the agenda, humanity will be threatened with a fate which the yuppies and profiteers of today's system could not have even remotely anticipated. Only an orderly bankruptcy procedure, whereby the probably hundreds of quadrillions of derivatives would be wiped out, can solve the problem. The speculators detest this solution more than the devil hates holy water, but that should not prevent governments from putting precisely this onto the agenda for Nov. 15.

If we compare the trillions that have been thrown down the gullets of banks which have run out of money, to the paltry sums allocated to the developing countries, then we see that the protagonists of this system are bankrupt not only financially, but morally as well. So, for example, out of the $12 billion which was demanded at the Food and Agriculture Organization conference in Rome in early July, only one ridiculous billion has been allocated. And meanwhile, aid to developing countries has declined massively, and even out of what remains, the greatest portion is eaten up by administrative costs, climate protection, humanitarian assistance, and military deployments.

Participants in the Nov. 15 G-20 summit in Washington will be answerable to history, if they pass up this opportunity to put a real New Bretton Woods, in the spirit of Franklin D. Roosevelt, onto the agenda. The consequences of such a failure would be not only the early collapse of the world economy, with billions of people dying of starvation, but also incalculable social chaos in the G-7 countries chaos which would be uncheckable even with the Mussolini solutions envisioned by some.

While in Italy and France, an open and expanding discussion is under way on a New Bretton Woods system, up to now the media and politicians in Germany have been united in their efforts to prevent this debate from occurring. This includes the dictatorial repression and slandering of the program of the BuSo in this country. If this is allowed to continue, the guilty parties will surely not enjoy the fruits of their actions. There is only one reasonable solution: Lyndon LaRouche's ideas must be immediately put up for public discussion.

BLACK FRIDAY?

Mike Whitney
http://www.informationclearinghouse.info...e20985.htm

Panic has spread to stock markets around the world. A massive sell-off, which began when Henry Paulson announced a $700 billion bailout for the banking system, has turned into a global stampede. Shares fell sharply across Europe and Asia for fifth straight day following a 679 drop on the Dow Jones. Nearly $900 billion was wiped off the value of U.S. equities in just one trading day. The Chicago Board Options Exchange Volatility Index, the "fear index", soared to a record 64. Credit markets remain frozen. Libor, London interbank offered rate, nudged up slightly on Thursday night, signaling even greater resistance to lending between the banks. Until there is relief in the credit markets, stocks will continue to slide. But trust has vanished. The 50 basis points rate cut that was coordinated with foreign central banks has had no effect. The market is being driven by fear and pessimism. Friday is shaping up to be a bloodbath on Wall Street.

White House press secretary, Dana Perino said yesterday that President Bush will address the country on Friday morning:

"He will assure the American people that they should be confident that economic officials are aggressively taking every action to stabilize our financial system. The Treasury Department is moving quickly to use new tools to improve liquidity, which is the root cause of this problem."

Bush still believes that the problem is "liquidity" rather than "insolvency". When liabilities vastly exceed assets, liquidity does not help. The bad banks need to be closed so the good ones can be strengthened with capital injections.

New York Times columnist Paul Krugman said, "Last month, when the U.S. Treasury Department allowed Lehman Brothers to fail, I wrote that Henry Paulson, the Treasury Secretary, was playing financial Russian roulette. Sure enough, there was a bullet in that chamber: Lehman’s failure caused the world financial crisis, already severe, to get much, much worse."

Lehman's credit default swaps, (the derivatives which Warren Buffett calls "financial weapons of mass destruction") will be "unwound" on Friday. It could be a "non event" or it could trigger another sell off; it is impossible to know. If tens of billions of dollars are drained from already weakened balance sheets in counterparty deals that have turned sour, the market will react violently. Wall Street is on tenterhooks waiting for the news from Lehman.

There is general agreement among economists about what needs to be done to stabilize the financial system. The banks have to be recapitalized, deposits have to be guaranteed (beyond the $100,000 FDIC limit) and additional stimulus has to be provided to increase consumer demand. Otherwise the United States will face another Great Depression. Too much time has been wasted on Paulson's failed bailout for G-Sax and his friends on Wall Street. Buying the bad assets of underwater banks does not fix the problem. The banks need capital so they can resume lending and transmit credit to consumers and businesses.

Former head of the FDIC, William Isaac summed it up like this:

"I was opposed to the bailout bill, mostly because I don't think it will work. The banks -- taking $700 billion of bad loans out of the banks doesn't help get banks lending again. It just solves some problems in some banks. And it doesn't have any leverage to it. If the Treasury were to put that same $700 billion and used that to invest in bank capital, the banks can loan $10 for every dollar of capital, roughly, which means that the Treasury would be creating $7 trillion of new lending capacity in the banks. And that is vastly superior to buying $700 billion of problem loans. It just -- it will really give some punch to the economy. It will get banks back into the lending business..... And to do that we need to get some capital back in there."

Isaac added: "The other major thing they really need to do... They really need to have the FDIC declare that there is a financial emergency. And when the FDIC does that, the FDIC should announce that during this period of crisis, all general creditors, all depositors, insured and uninsured, bondholders in our banking system, will be protected if a bank fails. And that, I think, will get the inter -- the financial markets working again and get banks willing to loan to each other again."

Nearly one third of all deposits ($2.5 trillion) are not insured under present FDIC guidelines. If these deposits are not insured, as Isaac says, there will continue to be a slow run on the banks which is why the credit markets are paralyzed.

Much of this week's volatility in the market is the result of program trading (many sell orders were automatically executed when the Dow hit 9,000) and massive deleveraging in the hedge funds, the secretive $1.7 trillion industry. As credit gets tighter, the funds are unable to roll over their short term debt and have been forced to dump their assets in an illiquid market at firesale prices. This explains the recent see-saw motion in the stock market; the huge 2 to 3 percent intraday swings (positive/negative) This has added to the fear of smaller investors who have left the market in droves for the safety of US Treasuries or cash. That's why the dollar has strengthened even though the Federal Reserve is printing money at a furious pace. The inflationary effects will not be apparent until the destruction of credit abates.

The biggest danger we face in the short term, is a run on the financial system. Calm must be restored if we want to avoid another depression. Investors have already pulled a record $72 billion from stock and mutual funds, and put the money in US Treasurys and government-insured bank deposits. If the trend continues, the financial system will collapse. This is where leadership and credibility really matter. The Bush administration's record on these issues is dismal. If the government overreacts and limits bank withdrawals or closes the stock market; the sense of desperation and panic will only grow. That increases the likelihood of rioting and violence, which is what took place in China just this week.

The falling stock market reflects the mood of the country as a whole. Confidence in the system is at an all-time low. The government has lost the moral authority to rule. People have lost faith in everything. Bush has created a tinder box which could explode in flames at any time. It is a dangerous situation.

BLACK FRIDAY: False alarm or Armageddon?

The econo-blogs were abuzz all night Thursday. The prevailing feeling is that Wall Street will suffer historic losses on Friday and that this will mark the end of America's dominance as the lone superpower. As always, economist Nouriel Roubini provided a chilling analysis of the present financial malaise:

Nouriel Roubini: "The US and advanced economies’ financial system is now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system... and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.

At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in US stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown....

When... even the most radical policy actions don’t provide rallies or relief to market participants, you know that you are one step away from a market crack and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls, cascading falls in asset prices well below falling fundamentals and panic is now underway." (Nouriel Roubini's Global EconoMonitor)

There's a way forward but it will take a lot of digging out and a vision of the future that doesn't center on Wall Street.


A SOLUTION?
Paul Craig Roberts

Readers have been pressing for a solution to the financial crisis. But first it is necessary to understand the problem. Here is the problem as I see it. If my diagnosis is correct, the solution below might be appropriate.

Let’s begin with the fact that the financial crisis is more or less worldwide. The mechanism that spread the American-made financial crisis abroad was the massive US trade deficit. Every year the countries with which the US has trade deficits end up in the aggregate with hundreds of billions of dollars.

Countries don’t put these dollars in a mattress. They invest them. They buy up US companies, real estate, and toll roads. They also purchase US financial assets. They finance the US government budget deficit by purchasing Treasury bonds and bills. They help to finance the US mortgage market by purchasing Fannie Mae and Freddie Mac bonds. They buy financial instruments, such as mortgage-backed securities and other derivatives, from US investment banks, and that is how the US financial crisis was spread abroad. If the US current account was close to balance, the contagion would have lacked a mechanism by which to spread.

One reason the US trade deficit is so large is the practice of US corporations offshoring their production of goods and services for US markets. When these products are brought into the US to be sold, they count as imports.

Thus, economists were wrong to see the trade deficit as a non-problem and to regard offshoring as a plus for the US economy.

The fact that much of the financial world is polluted with US toxic financial instruments could affect the ability of the US Treasury to borrow the money to finance the bailout of the financial institutions. Foreign central banks might need their reserves to bail out their own financial systems. As the US savings rate is approximately zero, the only alternative to foreign borrowing is the printing of money.

Financial deregulation was an important factor in the development of the crisis. The most reckless deregulation occurred in 1999, 2000, and 2004. See Roberts, http://www.electricpolitics.com/2008/10t...emony.html

Lax mortgage lending policies grew out of pressures placed on mortgage lenders during the 1990s by the US Department of Justice and federal regulatory agencies to race-norm their mortgage lending and to provide below-market loans to preferred minorities. Subprime mortgages became a potential systemic threat when issuers ceased to bear any risk by selling the mortgages, which were then amalgamated with other mortgages and became collateral for mortgage-backed securities.

Federal Reserve chairman Alan Greenspan’s inexplicable low interest rate policy allowed the systemic threat to develop. Low interest rates push up housing prices by lowering monthly mortgage payments, thus increasing housing demand. Rising home prices created equity to justify 100 percent mortgages. Buyers leveraged themselves to the hilt and lacked the ability to make payments when they lost their jobs or when adjustable rates and interest escalator clauses pushed up monthly payments.

Wall Street analysts pushed financial institutions to increase their earnings, which they did by leveraging their assets and by insuring debt instruments instead of maintaining appropriate reserves. This spread the crisis from banks to insurance companies.

Finance chiefs around the world are dealing with the crisis by bailing out banks and by lowering interest rates. This suggests that the authorities see the problem as a solvency problem for the financial institutions and as a liquidity problem. US Treasury Secretary Paulson’s solution, for example, leaves unattended the continuing mortgage defaults and foreclosures. The fall in the US stock market predicts a serious recession, which means rising unemployment and more defaults and foreclosures.

In place of a liquidity problem, I see an over-abundance of debt instruments relative to wealth. A fractional reserve banking system based on fiat money appears to be capable of creating debt instruments faster than an economy can create real wealth. Add in credit card debt, stocks purchased on margin, and leveraged derivatives, and debt is pyramided relative to real assets.

Add in the mark-to-market rule, which forces troubled assets to be under-valued, thus threatening the solvency of institutions, and short-selling, which drives down the shares of troubled institutions, thereby depriving them of credit lines, and you have an outline of the many causes of the current crisis.

If the diagnosis is correct, the solution is multifaceted.

Instead of wasting $700 billion on a bailout of the guilty that does not address the problem, the money should be used to refinance the troubled mortgages, as was done during the Great Depression. If the mortgages were not defaulting, the income flows from the mortgage interest through to the holders of the mortgage-backed securities would be restored. Thus, the solvency problem faced by the holders of these securities would be at an end.

The financial markets must be carefully re-regulated, not over-regulated or wrongly regulated.

To shore up the credibility of the US Treasury’s own credit rating and the US dollar as world reserve currency, the US budget and trade deficits must be addressed. The US budget deficit can be eliminated by halting the Bush Regime’s gratuitous wars and by cutting the extravagant US military budget. The US spends more on military than the rest of the world combined. This is insane and unaffordable. A balanced budget is a signal to the world that the US government is serious and is taking measures to reduce its demand on the supply of world savings.

The trade deficit is more difficult to reduce as the US has stupidly permitted itself to become dependent not merely on imports of foreign energy, but also on imports of foreign manufactured goods including advanced technology products. Steps can be taken to bring home the offshored production of US goods for US markets. This would substantially reduce the trade deficit and, thus, restore credibility to the US dollar as world reserve currency. Follow-up measures would be required to insure that US imports do not greatly exceed exports.

The US will have to set aside the racial privileges that federal bureaucrats pulled out of the Civil Rights Act and restore sound lending practices. It the US government itself wishes to subsidize at taxpayer expense home purchases by non-qualified buyers, that is a political decision subject to electoral ratification. But the US government must cease to force private lenders to breech the standards of prudence.

The issuance of credit cards must be brought back to prudent standards, with checks on credit history, employment, and income. Balances that grow over time must be seen as
a problem against which reserves must be provided, instead of a source of rising interest income to the credit card companies.

Fractional reserve banking must be reined in by higher reserve requirements, rising over time perhaps to 100 percent. If banks were true financial intermediaries, they would not have money creating power, and the proliferation of debt relative to wealth would be reduced. Does the US have the leadership to realize the problem and to deal with it? Not if Bush, Cheney, Paulson, Bernanke, McCain and Obama are the best leadership that America can produce.

The Great Depression lasted a decade because the authorities were unable to comprehend that the Federal Reserve had allowed the supply of money to shrink. The shrunken money supply could not employ the same number of workers at the same wages, and it could not purchase the same amount of goods and service at the same prices. Thus, prices and employment fell.

The explanation of the Great Depression was not known until the 1960s when Milton Friedman and Anna Schwartz published their Monetary History of the United States. Given the stupidity of our leadership and the stupidity of so many of our economists, we may learn what happened to us this year in 2038, three decades from now.


WHO GOT BAILOUT MONEY SO FAR?

Reuters
The Treasury Department's $700 billion bailout plan, also known as the Troubled Asset Relief Program (TARP), is one of the main U.S. tools to address the financial crisis.

The Treasury Department on October 14 set aside $250 billion of the program to buy senior preferred shares and warrants in banks, thrifts and other financial institutions. Half that money was allocated to nine big banks, the Treasury Department has said. Another $38 billion has since been earmarked for regional or small banks, according to statements from individual banks.

On Monday, the department announced its single-biggest TARP investment -- $40 billion in American International Group -- which the government said would not come from the $250 billion bank capital program.

The TARP has so far committed the following funding:

AIG $40 billion

JPMorgan $25 billion

Citigroup $25 billion

Wells Fargo $25 billion

Bank of America $15 billion

Merrill Lynch $10 billion

Goldman Sachs $10 billion

Morgan Stanley $10 billion

PNC Financial Services $7.7 billion

Bank of New York Mellon $3 billion

State Street Corp $2 billion

Capital One Financial $3.55 billion

Fifth Third Bancorp $3.45 billion

Regions Financial $3.5 billion

SunTrust Banks $3.5 billion

BB&T Corp $3.1 billion

KeyCorp $2.5 billion

Comerica $2.25 billion

Marshall & Ilsley Corp $1.7 billion

Northern Trust Corp $1.5 billion

Huntington Bancshares $1.4 billion

Zions Bancorp $1.4 billion

First Horizon National $866 million

City National Corp $395 million

Valley National Bancorp $330 million

UCBH Holdings Inc $298 million

Umpqua Holdings Corp $214 million

Washington Federal $200 million

First Niagara Financial $186 million

HF Financial Corp $25 million

Bank of Commerce $17 million

TOTAL: $203.08 billion

INSURANCE COMPANIES

In addition to the TARP program's $40 billion capital injection into AIG, the Federal Reserve is providing the company with up to $112.5 billion in separate loans and funds for asset purchases. Aid to the huge insurance company came after counterparties and rating downgrades forced AIG to post large amounts of collateral for its credit derivatives positions.

Some other insurers are interested in cash infusions, but must own a thrift or bank in order to qualify under the terms of Treasury's current capital injection program.

BANKS, LENDERS

The TARP program set a November 14 deadline for smaller banks to apply for capital injection funds remaining in the pool of $250 billion. The deadline will be extended for non-publicly traded banks.

The government's preferred shares will pay dividends of 5 percent annually for the first five years and 9 percent after that until the institution repurchases them. Participating banks must comply with Treasury restrictions on executive compensation, which limit tax deductibility of senior executive pay to $500,000. They require bonuses to be "clawed back" if earnings statements or gains are later proven to be materially inaccurate and prohibit "golden parachute" payments to senior executives.

OTHER COMPANIES

Struggling automakers General Motors Corp, Ford Motor Co and Chrysler LLC have requested tens of billions of dollars in Treasury aid under TARP. However, the Bush administration says the TARP program was designed by Congress to help the financial service sector, not the auto industry.

REMAINING TARP MONEY

The remaining $350 billion in TARP funding can be accessed only after the White House formally notifies Congress. U.S. House Financial Services Chairman Barney Frank has said that if the initial banks participating in the program do not use the money for lending, Congress could block authorization of the final funding.

LICENSED KLEPTOCRACY FOR YEARS TO COME
The ABCs of Paulson's Bailout
Michael Hudson
http://www.informationclearinghouse.info...e21066.htm

"Treasury Secretary Paulson’s bailout speech on Monday, October 13, poses some fundamental economic questions: What is the impact on the economy at large of this autumn’s unprecedented creation and giveaway of financial wealth to the wealthiest layer of the population? How long can the Treasury’s bailout of Wall Street (but not the rest of the economy!) sustain a debt overhead that is growing exponentially? Is there any limit to the amount of U.S. Treasury debt that the government can create and turn over to its major political campaign contributors?

In times past, national debt typically was run up by borrowing money from private lenders and spent on goods and services. The tendency was to absorb loanable funds and bid up interest rates on the one hand, while spending led to inflationary price increases for goods and services. But the present giveaway is different. Instead of money being borrowed or spent, interest-yielding bonds are simply being printed and turned over to the banks and other financial institutions. The hope is that they will lend out more credit (which will become more debt on the part of their customers), lowering interest rates while the money is used to bid up asset prices – real estate, stocks and bonds. Little commodity price inflation is expected from this behavior.

The main impact will be to reinforce the concentration of wealth in the hands of creditors (the wealthiest 10 percent of the population) rather than wiping out financial assets (and debts) through the bankruptcies that were occurring as a result of “market forces.” Is it too much to say that we are seeing the end of economic democracy and the emergence of a financial oligarchy – a self-serving class whose actions threaten to polarize society and, in the process, stifle economic growth and lead to the very bankruptcy that the bailout was supposed to prevent?

Everything that I have read in economic history leads me to believe that we are entering a nightmare transition era. The business cycle is essentially a financial cycle. Upswings tend to become economy-wide Ponzi schemes as banks and other creditors, savers and investors receive interest and plow it back into new loans, accruing yet more interest as debt levels rise. This is the “magic of compound interest” in a nutshell. No “real” economy in history has grown at a rate able to keep up with this financial dynamic. Indeed, payment of this interest by households and businesses leaves less to spend on goods and services, causing markets to shrink and investment and employment to be cut back.

Banks cannot make money ad infinitum by selling more and more credit – that is, indebting the non-financial economy more and more. Government officials such as Treasury Secretary Paulson or Federal Reserve Chairman Bernanke are professionally unable to acknowledge this problem, and it does not appear in most neoclassical or monetarist textbooks. But the underlying mathematics of compound interest are rediscovered in each generation, often prompted by the force majeur of financial crisis.

A generation ago, for instance, Hyman Minsky gained a following by describing what he aptly called the Ponzi stage of the business cycle. It was the phase in which debtors no longer were able to pay off their loans out of current income (as in Stage #1, where they earned enough to cover their interest and amortization charges), and indeed did not even earn enough to pay the interest charges (as in Stage #2), but had to borrow the money to pay the interest owed to their bankers and other creditors. In this Stage #3 the interest was simply added onto the debt, growing at a compound rate. It ends in a crash.

This was the flip side of the magic of compound interest – the belief that people can get rich by “putting money to work.” Money doesn’t really work, of course. When lent out, it extracts interest from the “real” production and consumption economy, that is, from the labor and industry that actually do the work. It is much like a tax, a monopoly rent levied by the financial sector. Yet this quasi-tax, this extractive financial rent (as Alfred Marshall explained over a century ago) is the dynamic that is supposed to enable corporate, state and local pension funds to pay for retirement simply out of stock market gains and bond investments – purely financially and hence at the expense of the economy at large whose employees are supposed to be gainers. This is the essence of “pension-fund capitalism,” a Ponzi-scheme variant of finance capitalism. Unfortunately, it is grounded in purely mathematical relationships that have little grounding in the “real” economy in which families and companies produce and consume.

Paulson’s bailout plan reflects a state of denial with regard to this dynamic. The debt overhead is self-aggravating, becoming less and less “solvable” and hence more of a quandary, that is, a problem with no visible solution. At least, no solution acceptable to Wall Street, and hence to Paulson and the Democratic and Republican congressional leaders. The banks and large swaths of the financial sector are broke from having made bad gambles in the belief that money could be made to “work” under conditions that shrink the underlying industrial economy and stifle wage gains, eroding the market for consumer goods. Debt deflation reduces sales and business activity in general, and hence corporate earnings. This depresses stock market and real estate prices, and hence the value of collateral pledged to back the economy’s debt overhead. Negative equity leads to bankruptcy and foreclosures.

By increasing America’s national debt from $5 trillion earlier this year to $13 trillion in almost a single swoop by taking on junk loans and other bad investments rather than letting them to under as traditionally has occurred in the “cleansing” culmination of business crashes (“cleansing” in the sense of clean slates for debts that cannot reasonably be paid), Paulson’s bailout actions increase the interest payments that the government must pay out of taxes or by borrowing (ore printing) yet more money. Someone must pay for bad debts and junk loans that are not wiped off the books. The government is now to take on the roll of debt collector to “make a profit for taxpayers” by going around and kneecapping the economy – which of course is comprised primarily of the “taxpayers” ostensibly being helped.

It is a con game. Financial gains have soared since 1980, but banks and institutional investors have not used them to finance tangible capital formation. They simply have recycled their receipt of interest (and credit-card fees and penalties that often amount to as much as interest) into yet new loans, extracting yet more interest and so on. This financial extraction leaves less personal and business income to spend on consumer goods, capital goods and services. Sales shrink, causing defaults as the economy is less able to pay its stipulated interest charges.

This phenomenon of debt deflation has occurred throughout history, not only over the modern business cycle but for centuries at a time. The most self-destructive example of financial short-termism is the decline and fall of the Roman Empire into debt bondage and ultimately into a Dark Age. The political turning point was the violent takeover of the Senate by oligarchic creditors who murdered the debtor-oriented reformers led by the Gracchi brothers in 133 BC, picking up benches and using them as rams to push the reformers over the cliff on which the political assembly was located. A similar violent overthrow occurred in Sparta a century earlier when its kings Agis and Cleomenes sought to annul debts so as to reverse the city-state’s economic polarization. The creditor oligarchy exiled and killed the kings, as Plutarch described in his Parallel Lives of the Illustrious Greeks and Romans. This used to be basic reading among educated people, but today these events have all but disappeared from most people’s historical memory. A knowledge of the evolution of economic structures has been replaced by a mere series of political personalities and military conquests.

The moral of ancient and modern history alike is that a critical point inevitably arrives at which economies either adopt hard creditor-oriented laws that impoverish the population and plunge downward socially and militarily, or save themselves by alleviating the debt burden. What is remarkable today is the almost total failure of political leaders to provide an alternative to Paulson’s bailout of Wall Street from the Bear Stearns bankruptcy down through the government takeover of Fannie Mae and Freddie Mac to last week’s giveaway to the banks. Nobody is even warning where this destructive decision is leading. Governments ostensibly representing “free market” philosophy are acting as the lender of last resort – not to households and business non-financial debtors, and not to wipe out the debt overhang in a Clean Slate, but to subsidize the excess of financial claims over and above the economy’s ability to pay and the market value of assets pledged as collateral.

This attempt is necessarily in vain. No amount of money can sustain the exponential growth of debt, not to mention the freely created credit and mutual gambles on derivatives and other financial claims whose volume has exploded in recent years. The government is committed to “bailing out” banks and other creditors whose loans and swaps have gone bad. It remains in denial with regard to the debt deflation that must be imposed on the rest of the economy to “make good” on these financial trends.

Here’s why the plan for the government to recover the money is whistling in the dark: It calls for banks to “earn their way out of debt” by selling more of their product – credit, that is, debt. Homeowners and other consumers, students and car buyers, credit card users and their employers – the “taxpayers” supposed to be helped – are to pay the repayment money to the banks, instead of using it to purchase goods and services. If they charge only 6 per cent per year, they will extract $93 billion in interest charges – $42 billion to pay the Treasury for its $700 billion, and another $51 billion for the Federal Reserve’s $850 billion in “cash for trash” loans.

If you are going to rob the government, I suppose the best strategy is simply to brazen it out. To listen to the mass media, there seemed no alternative but for Congress to ram the plan through just as Wall Street lobbyists had written, to “save the market from imminent meltdown,” refusing to hold hearings or take testimony from critics or listen to the hundreds of economists who have denounced the giveaway.

Hubris has reached a level of deception hardly seen since the 19th century’s giveaways to the railroad barons. “We didn’t want to be punitive,” Paulson explained in a Financial Times interview, as if the only alternative was an enormous gift. Europe did not engage in any such giveaway, yet he claimed that England and other European countries forced his hand by bailing out their banks, and that the Treasury simply wanted to keep U.S. banks competitive. Wringing his hands melodramatically, he assured the public on Monday that “We regret having to take these actions.” Banks went along with the pretense that the bailout was a worrisome socialist intrusion into the “free market,” not a giveaway to Wall Street in the plan drawn up by their own industry lobbyists. “Today’s actions are not what we ever wanted to do,” Paulson went on, “but today’s actions are what we must do to restore confidence to our financial system.” The confidence in question was a classic exercise in disinformation – a well-crafted con game.

Paulson depicted the government’s purchase of special non-voting stock as a European-style nationalization. But government’s appointed public representatives to the boards of European banks being bailed out. This has not happened in America. Bank lobbyists are reported to have approached Treasury to express their worry that their shareholdings might be diluted. But the Treasury-Democratic Party plan invests $250 billion in government credit in non-voting shares. If a recipient of this credit goes broke, the government is left the end of the line behind other creditors. Its “shares” are not real loans, but “preferred stock.” As Paulson explained on Monday: “Government owning a stake in any private U.S. company is objectionable to most Americans – me included.” So the government’s shares are not even real stock, but a special “non-voting” issue. The public stock investment will not even have voting power! So the government gets the worst of both worlds: Its “preferred stock” issue lacks the voting power that common stock has, while also lacking the standing for repayment in case of bankruptcy that bondholders enjoy. Instead of leading to more public oversight and regulation, the crisis thus has the opposite effect here: a capitulation to Wall Street, along lines that pave the ground for a much deeper debt crisis to come as the banks “earn their way out of debt” at the expense of the rest of the economy, which is receiving no debt relief!

Paulson shed the appropriate crocodile tears on behalf of homeowners and the middle class, whose interest he depicted as lying in ever-rising housing and stock market prices. “In recent weeks, the American people have felt the effects of a frozen financial system,” he explained. “They have seen reduced values in their retirement and investment accounts. They have worried about meeting payrolls and they have worried about losing their jobs.” He almost seemed about to use the timeworn widows and orphans cover story and beg Americans please not to unplug Granny from her life support system in the nursing home. We need to preserve the value of her stocks, and help everyone retire happily by restoring normal Wall Street financial engineering to make voters rich again.

European executives who steered their banks into the debt iceberg have been fired. England wiped out shareholders in Northern Rock last summer, and more recently Bradford and Bingley. But in America the culprits get to stay on. No bank stockholders are being wiped out here, despite the negative equity into which the worst risk-taking banks have fallen or the prosecutions brought against them for predatory lending, consumer fraud and related wrongdoing.

Government aid will be used to pay exorbitant salaries to the executives who drove these banks into insolvency. “Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes,” Paulson pretended – only to qualify it by saying that the rule would apply only “during the period that Treasury holds equity issued through this program.” The executives can stay on and give themselves the usual retirement gifts after all, prompting Democratic Congressman Barney Frank to complain about how weak the Treasury restrictions are. “Compensation experts say that the provisions, though politically prudent to appease public anger, will probably have little real impact on how financial executives are paid in coming years. They predict banks will simply pay higher taxes and will find other creative ways of paying their executives as they see fit. Some say there could even be a sudden surge in compensation as soon as the government program ends, in a few years, leading to eye-popping numbers down the road. … When Congress limited the tax deductibility of cash salaries to $1 million, for example, it simply led to an explosion in stock options used as compensation and even higher total payouts.”

And speaking of stock options, the government shortchanged itself here too, despite its promises to ensure that it will shares in the gains when banks recover. Senator Schumer went so far as to assure voters that “under any capital injection plan that Treasury pursues, dividends must be eliminated, executive compensation must be constrained, and normal banking activities must be emphasized.” This was mostly hot air. England and other countries have insisted that banks not pay dividends until the government is reimbursed. The idea is to avoid using public money to pay dividends to existing shareholders and continued exorbitant salaries to their mismanagers! But the terms of the U.S. bailout is made simply call for banks not increase their dividend payouts – a policy they most likely would follow in any case in view of their earnings crunch.

Schumer verged on the ridiculous when he proclaimed: “We must operate in the same way any significant investor operates in these situations – when Warren Buffett invested in Goldman Sachs and General Electric in recent weeks, he demanded strict, but not onerous terms. The government must be similarly protective of taxpayer interests.” But Buffett obtained a much better deal for his $5 billion investment in Goldman Sachs, including warrants to buy its stock at a price below the going price when he helped rescue the company. Likewise in England, the government took stock ownership at low prices before the bailout, not at higher prices after it! But instead of exercising its warrants at the depressed prices where bank stocks stood at the time Paulson detailed the bailout terms, the U.S. Treasury would be able to exercise its warrants (equal to 15 percent of its investment) only at prices that were to be set after the banks had time to recover with the Treasury’s aid. Existing stockholders thus will benefit more than the government – which is why bank stocks soared on news of the bailout’s terms. So the government does not appear to be a good bargainer in the public interest. In fact, Paulson may be guilty of deliberate scuttling of the public interest that, as Treasury Secretary, he is supposed to defend.

Given his financial experience, Paulson had to know how deceptive his promise was in placing such emphasis on the government’s stock options, the sweetener that has made so many executives fabulously wealthy: “taxpayers will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions,” he explained. But the “reasonable return” is only 5 per cent annually, just above what the government typically has to pay, not a rate reflecting anything like what the “free market” now charges Wall Street firms with negative equity. The government’s $250 billion in preferred stock will carry a dividend that rises to 9 per cent after five years, with no limit on how long the loan may be outstanding.

All I can say is, Wow! If only homeowners could get a similar break: a reduction in their interest rate to just 5 per cent, rising to a penalty rate of just 9 per cent – without the heavy penalties and late fees that Countrywide/Bank of America charges! By contrast, German banks that receive a public rescue will pay “a fee of at least 2 per cent annually of the amount guaranteed. The U.K. will charge 0.50 per cent plus the cost of default insurance on a bank's debt.”A British banker wrote to me that “the government offers 12 per cent preference shares, and ordinary shares at an absolutely huge discount to asset value to provide the cash.” But the U.S. Government agreed to exercise its stock options at the post-bailout price, not the price prior to rescue. It even gives up most of these options if the banks do repay the Treasury’s loan. On the excuse of encouraging private Wall Street investors to replace government “ownership” and “intrusion” into the marketplace, banks can “cut in half the number of common shares the government will eventually be able to purchase. That can be done if a bank sells stock by the end of 2009, and raises at least as much cash as the government is investing.”

These bailout terms suggest that what Wall Street wants is pretty much what colonialist Britain achieved for so many years in India and Africa: puppet leaders with an imperial political advisor, in America’s case a Secretary of the Treasury and a vice-regent as head of the Federal Reserve System. But what the rest of the economy needs is a genuinely free leader able to impose better and more equitable laws to write down debt, not build it up and bail out more bad loans. Within the present administration itself, Sheila Bair, head of the Federal Deposit Insurance Corporation, complained in a Wall Street Journal interview that she didn’t understand “Why there’s been such a political focus on making sure we’re not unduly helping borrowers but then we’re providing all this massive assistance at the institutional level.” She “described painstaking efforts made by lawmakers in crafting the federal Hope for Homeowners program to make sure it limited resale profits for borrowers who received affordable home loans,” by giving the government a share of the rising sales price.

The imbalance between creditor demands and debtors’ ability to pay is indeed the problem. Paulson claimed in his Monday address that he needed to get to the root of the economic problem. But in his view it is simply that the banks “are not positioned to lend as widely as is necessary to support our economy. Our goal is to see … that they can make more loans to businesses and consumers across the nation.” As he explained in his Financial Times interview, “for the first time you have seen an action that is systematic, that is getting at the root causes” of the financial crisis. But his perspective is remarkably narrow. It denies that the problem is debt above and beyond the ability of the economy at large to pay, and higher than the market price of property and assets pledged as collateral.

Creating a system for the banks to “earn their way out of debt” means creating yet more interest-bearing debt for the economy at large. Mortgage loans are what is supposed to restore high housing prices and office costs – precisely what caused the debt meltdown in the first place. Despite Paulson’s and Ms. Bair’s characterization of the present crisis as merely a liquidity problem, it is really a debt problem. The volume of real estate debt, auto debt, student loans, bank debt, pension debts by municipalities and states as well as private companies exceed their ability to pay.

Shortly after Paulson’s Monday speech a Dutch economics professor, Dirk Bezemer, wrote me that: “In my thinking I liken it to a Ponzi game where in the final stages the only way to keep things going a bit longer is to pump in more liquidity. That is a solution in the sense that it restores calm, but only in the short run. This is what we now see happening and – despite the 10 per cent stock market rally today – I am still bracing myself for the inevitable end of the Ponzi game – suddenly or as a long drawn out debt deflation.” He went on to explain what he and other associates of mine have been saying for many years now: “The actual solution is to separate the Ponzi from the non-Ponzi economy and let the pain be suffered in the first part so as to salvage what we can from the second. This means bailing out homeowners but not investment banks, etc. The qualification to this general appr...