Wednesday, July 23, 2014

The Panic of 2008

This isn't your father's recession, or as Krugman quipped about 2001 your grandfather's, it is a panic from the 19th century, where a house of cards comes completely unraveled with a bank failure. The fall of Lehman will be the precipitating event for the panic of 2008. Traditional options are dwindling. And  Paulson is fiddling while Rome burns.

It is a panic. The Dow is crashing as I write this. Though it is bouncing back, The pressure to do something is enormous.

How those worked was that banks would lend on some new venture, trade paper back and forth, and then one would go bust. Like Lehman Brothers, for example, then all the criss-crossed agreements would unravel, people would engage on runs on the bank, holders of stocks would dump them to cover the real debts. Right now the belief is that PIMCO and others who insured Lehman's defaults are selling. The even step nature indicates that this is not waves of sell orders coming from many directions, but a dolloped out selling. Someone is selling, and walking away until the next day, so as not to shut the market down. In 1987, waves just kept coming, and eventually the market ground to a halt as it was impossible to process them all.

This is an orderly panic. And it marks the end of the world that everyone reading this has known. Perhaps we can muddle through this one without fundamental change, by printing paper and then standing in place. But in reality we need to make changes, and dramatic ones. We need to green the American spirit, because it is not green supply, but green demandwhich is the key. If people want black things, then "alternative" energy is more expensive old energy. If we want green things, then oil is a boutique fuel for specific purposes.

Yesterday's rapid sell off at the end of the day in New York brought the collapse in share prices full circle. coordinated rate cut did nothing to budge the frozen credit markets which are dependent on recycled petrodollars. The credit crisis is not over, until the petrodollar holders say it is over, or until the Democracies act in concert to change the direction of their economies. This is not about green collar jobs, but about the greening of the developed nations to their spirit.

This collapse is being driven by large players, because it is not coming in waves of selling where one person sells and then another is forced to. It is coming in very discrete jumps. This means that it is a few players who know the limits of the system dumping, and then coming back the next day. The world's equity system is like a bank, and there is a run of one or a few large depositors on that bank. The generally belief is that it is those who backed Lehman debt.

Not only is John McCain meltingdown, and brings the Democrats within shouting distance of 60 in the Senate, but the oil patch bust in Canada may prevent the Conservatives from getting their coveted majority government.. The political fall out is likely to reverberate across elections and take many forms.

But these calculations must stand aside the most crucial step, and that is to cast off the fetters of oil as a previous era cast of the barbarous relic of gold. To do this means to inject fresh dollars into the banking system backed by something. That something, in 1933, was assets on the books. That something in 2009, must be revenue streams. From inflationary silver, the world turned to deflationary gold, from gold, to assets. From assets to revenue.

The reason this is essential is that, but for various tricks with mirrors, we now have deflation. That is, counting the losses of the housing portion of assets, the consumer is facing deflation, and the asset buyer is as well. Why spend today, when when money can be put under the mattress of short term t-notes? That's the problem, there are parties that are breaking the global equities piggy bank, and there s no reason for anyone to invest until the bloodbath is over. Why lend to your competitor today at pennies on the dollar, when you can buy him for pennies on the dollar tomorrow?

Te solution then is to take the money out of Paulson's hands, give it to the FDIC with a simple mandate: buy up banks that are not lending, and then start lending in an ever widening circle between them. "Too sick to lend, is too sick to live." This should be the mantra. Banks lend. If they stop lending, they aren't banks, but electronic bricks.

The way to manage this transition is to flood the world with short term US debt, forcing up short term rates, and then both forcing money out of treasuries, and giving a supply of money to directly lend as an asset base. The FDIC, and not the treasury, should take over banks which are clogging the system, and complete the clean up of toxic waste by a simple expedient: cram down CDS holders to the amount of default insurance that could have been afforded based on they can pay going forward.

As the FDIC insured deposits and subjected banks to examination and control, so to must the new era realize that we are now insuring equities, and thus must charge for crash insurance.

However, to have the revenue going forward, we must create activity to go with this revenue, but it must be activity that will move people to engage in commerce. There has been a great deal of focus on "green collar jobs" but most of these consist of subsidies to make energy more expensively. We have "green collar" jobs which involve "clean coal," which is as much of an oxymoron as "clean soot."

This panic means that the market is saying that everything we have done in the last decade: Iraq War, billionaire building, Homeland Security, Credit Bubble and Housing boom, is worth nothing. The past is being discounted, and only the future has any value at all. It is green demand. That is we must want thing that can be supplied with less carbon. Once we want those things, or demand is directed towards them, green supply of the right kinds can be invested in, and there will be economic activity and jobs that come with that. It's next step is to admit that everything done in the age of Reagan, was only buying time. Japan is now inching closer to the lows of the 1980's. You know, back when people thought that REO Speedwagon was cool. When you could start a fight over VHS and Beta. Those 1980s.

The problem then, is lack of investment supply. Not enough businesses that can pay the real cost of money. While Barry is right about the need to fix the problem, the LIBOR spreads don't suggest lack of credit confidence, they suggest deflationary expectation.

The paralysis in Washington is obvious. In effect, what should be done is as soon as the dust settles from the election, the newly elected President should take power. This can be done formally, by resignation of the Vice President, appointment of the President elect, his approval by the Senate, and then the resignation of the President. Or it can be done informally. But each moment that the white haired madman in the White House clings to power, is another moment that cannot be replaced. Each day like today means trillions of dollars are evaporating, and it will begin bankrupting otherwise healthy institutions who will then have to be bailed out in turn.

If not, the Congress might well show some sense, and do what ought to have been done, and ram through an impeachment. Conviction is more sanity than the public can muster. That would be the threat to Bush to comply: leave and you leave clean, stay and we will impeach you, and humiliate you before history.

At that point the plug will be pulled on interbank lending by the bid process, because the government will own the banks, and will lend. But we are in the deflationary expectation trap: why spend or loan a dollar today, when tomorrow it will buy a great deal more? Liquidationism was part of what created the Great Depression, but a great deal of the old needs to be liquidate. Either this will be through bone crunching deflation, or it will be by creating an monetary system which can expand with a much broader range of economic activity. Part of me wishes that JKG had lived to see this and chuckle.

This is a new epoch, until now the Fed sanitized inflation, and Congress and the President were free to spend. The deficits came at the price of higher interest rates, but we allowed some interest rates to be subsidized, namely housing. Housing was over-developed because it was under priced. Now the Fed is going to have to have interest rates pegged low, because of interest on the deficit, the need to keep housing propped up, the need to directly loan, and the need to provide such stimulus as can be had. Therefore, the fiscal authority will have to control inflation. One reason that politics had been so polarized is that those who controlled the treasury could rob everyone, to pay their constituencies with pork. When this decade we both spent, and had low interest rates, it gave out. Not in the ways that perhaps people expected, but a credit bubble leading to a panic is a perfectly 19th century thing to do.

The time when politicians could spend irresponsibly and allow the Fed to clean it up is over. This doesn't mean budget cutting per se, we are going to be running deficits. The question is what we are going to be buying with those deficits. Presently we are buying a war in Iraq, happy billionaires that get tax breaks that we then pay for by borrowing the money from them. The old style panic happened because in eras of hard money , places where there was hope for vast profits created rushes, for gold for example, or silver. However, as often, they were illusory. Since there was no way to print more gold or silver, or whatever combination was hard money, the only response was to let the panic burn itself out, and then start over again. There is no way to print more oil and the things that make it.

This means that there are three responses. Let it burn. Print money and then try and recoup it later, buy for example, slashing social security benefits. Create a new form of money and recapitalize. Almost everyone realizes that the first will not work, but until there is action, it may happen any way. But the difference between the last two is simple. Do people just make do with less? Or do we create more of something else? If you count in the costs of global warming and oil depletion, we are not really producing GDP, we are robbing it from someone else who will not have oil or not have an environment. The honest thing to do is to radically change direction. But honesty is in very short supply.

Everyone is a liberal now. The question is who is going to be a smart and honest liberal, and who is going to try and  pretend that there is another round of Reaganomics for us all. This is not about paper, but about what kind of society we want to become, and what kind  of people we want to be.

Israel versus Palestine

 I noted this on Ian  blog,  but  will do so here as well.  in the most recent of clashes between Israel and Palestine,  there has been a distinct difference in the number of Israeli dead for the number of Palestinian dead.  while it is not announced,  for this conflict,  to make a difference,  it shows that the Palestinian dead will be enough in four to seven  years to make it so  that clash between the Israelis and Palestinians will be on a more equal footing.  and in 10 or 20 years will be enough to gain a footing.  this may seem a long time,  but the Israelis have time,  as to the best  the Palestinians.

 Israel needs to sue for peace,  or it will be imposed upon  them.  it shall be noted that there is a difference between the Jewish people in Israel,  from the point of view of those who lean their attention away from the Israeli,  which was not the case even 20 years ago.  Benjamin  Netanyahu has played it out,  and his successor will hold the bag.

blog of the day

This is only because I rather like the  the poem which she etched on her front page.

Tuesday, July 22, 2014

Billionaires for Peak Oil (2005)

He's a billionaire, he is a friend of George W. Bush and he believes in Peak Oil. Richard Rainwater, who has made fantastic sums investing in panics and crisis points, feels the coming of a massive transition, and he openly worries about the future of mankind.

"Peak oil" theorists posit that global production is at or near its historic ceiling and will begin a long, inexorable decline. They worry that America is not ready for the downturn, for skyrocketing prices and even shortages. Savinar's site's opening line is, "Civilization as we know it is coming to an end." Rainwater has been checking it every morning since September, when his personal anxiety alert level moved to orange. "I can almost pinpoint the date," says Moore. "It was right after he read that book." In August a friend gave Rainwater a copy of The Long Emergency, a dystopic view of the future written by ex-Rolling Stone writer James Kunstler, otherwise known for his passionate dislike of suburbia. Taking peak oil as a given, Kunstler argues that Americans have been "sleepwalking" through the end of a "100-year fossil fuel fiesta." The problem, he points out, is not that the world will run out of oil tomorrow, but rather that the lack of growth in oil production will wreak havoc on a global economic system predicated on perpetual expansion. Kunstler's "long emergency" is a decidedly unpleasant interval during which the world--and Americans in particular--must adapt to a post-oil regime of scarce energy and economic stagnation, a time of likely wars and the disappearance of all-American things like Wal-Mart and cul-de-sac homes 45 minutes by minivan from the office.
It's about time to go over the big picture on this again, because supply worries are only a fraction of the picture.
The problems with the petro-economy are threefold:
The Supply Problem
  1. There is the bandwidth supply problem - namely, not only is there a limited amount of oil, but there is a limited oil bandwidth, a bandwidth that will peak. This is the first part of "Peak Oil"
  2. Not only will quantity, in both absolute and bandwidth terms decline, but quality will decline, and reliability of discoveries will decline. We will have to go farther and father and take bigger and bigger risks to find smaller and smaller fields of lower and lower quality oil. This will require more and more expensive infrastructure - platforms, more refineries, coal liquification, superheavy oil extraction, kerogene blasting, tar sand strip mining - to convert this lower and lower stream of carbon based fuels.
  3. Not only with quality and quantity decline, but diversity of sources will decline. More and more of the oil that is left will be in fewer and fewer hands.
The Sink Problems
  1. Global Warming. As humans burn more and more carbon, then the molecules that are produced - Carbon Dioxide, Methane, Nitrous Oxide - raise the global level of surface temperatures. This leads to:
  2. The Hydrologic Shift - a warmer earth has a different configuration of stable activity of rain and ocean currents. It is water - vapor, liquid and even ice - which stores and moves most of the heat. As water patterns shift, this will exacerbate the effects of temperature change. High storm years like the 2005 Atlantic Hurricane Season will be worse.
  3. Health effects - it has long been known that the petro-economy produces unhealthy levels of particulates, smog, ozone and other forms of "air pollution". As the mechanization of the world accelerates, these health effects will accelerate.
The Dependency Problems
  1. Direct dependence on oil for the food supply. Nitrogen based fertilizers and mechanized agriculture supply most of the world's calories.
  2. Manufacturing dependence on oil. The fact that we can extract far more energy from petroleum than it costs to produce is the source of our current prosperity. Our economy basically takes energy out of the ground and turns it into people running around making themselves happy, or at least too tired to be unhappy.
  3. Maturity problems. The petroleum economy is mature, it is not producing incremental technological improvements in efficiency. In fact, take out computers (which are a response to high energy costs) and the world is largely where it was 20 years ago in terms of its extractive energy density. This isn't changing any time soon: new generations of motors are far more complex and will take time to bring on line.
The Economic Problems
  1. The aggregate of limited bandwidth, maturity and population means that in a continued petroleum economy there is a limited number of people who can be affluent, that number is below the current total world population.
  2. The aggregate of limited bandwidth, concentration, dependence and maturity means that more and more control of the world's economic system will flow to the holders of surplus oil.
  3. The aggregate of the Sink and Supply problems means that attempts to get around the supply problem by, for example, nonconventional natural gas, coal and nonconventional oil, will accelerate global warming and its costs. This is a policy bind, where the more one solves the supply problem, the more one creates a sink problem.
  4. The aggregate of dependence, maturity and concentration means that it is very difficult to get sufficient investment in transitioning the economy until such time as there is a catastrophic meltdown of the economic system, with its attendent resource wars.
That's just the overview, which is why the people on the extreme end of the alarmist spectrum are making dire predictions. They aren't out of line - the last three Europeancentric world conflicts have all had the transition of energy systems as a key component of their continuation. That is, acquisition of energy was a key part of the reason for continued conflict, and the limits of the old energy system - which includes subsistence agriculture - were often a reason for going to war in the first place.
The last energy transition is not reassuring - in the late 19th and early 20th century, internal combustion began to replace steam power. The coal economy of that time could not keep very many people in affluence - though it could keep more people in affluence, and many more people alive than the previous mechanical water/wave economy. The 1899-1918 period saw a series of conflicts which could be labelled "the last of the rock wars" - the last wars over access to coal and gold, the two key commodities in the coal age. Coal ran the economy, and gold measured the economy. Since wealth was created by digging rocks out of the ground and turning them into things, gold was a good measure of the flow of raw value into the society, and therefore a good incentive to productivity.
The first world war made it clear that the rock economy was doomed. The great war machine of that economy - the battleship - was both useless - naval power was indecisive at Jutland and in sufficient to force a landing at Gallipoli - and awe inspiringly expensive in gold terms. It bankrupted major industrial nations, whose economies could not support the war machines that their economies required to have in existence.
Even during the war, the First Lord of the Admiralty was looking forward, and found it in oil. The British fleet could not cruise, because he had been behind the drive to make it a petroleum fleet, and there wasn't enough oil for it. After the war, Winston Churchill set about finding the oil to run the ships that held together the empire. On land, the "taxi cab army" saved France, proving that mechanized transport was valuable in war. But the petroleum age would develop its signature weapons - again at the behest of Churchill - in the form of the tank and in the form of the fighter plane, which he would champion later.
The tank is a creature of combustion - diesel or petroleum. In the 1930's Nazi Germany, and Adolf Hitler in particular, placed their faith in a petroleum military, and a petroleum economy. There was only one problem: Germany did not have access to sufficient petroleum, and "synfuels" as we would now call them, were prohibitively expensive to produce. So war was inevitable. After they had cannibalized much of the stored wealth of the coal economy - by liqudating the people who held it and stealing their money - the Nazi's aimed for the oil fields of Southern Russia, and came to their end at Stalingrad, the city that was the key point for holding these resources.
The pattern was noted by Wavell at the time "it is about oil, ships and planes: oil to fight the war, ships to move the oil, planes to protect the ships, and oil to run the ships and the planes. Since we (the allies) have the oil, the ships and the planes, we will eventually win." Thus he regarded the middle east as a key theatre, since that is where Hitler could have gained access to enough oil to sustain his war effort.
This transition then resulted in a series of escalating conflicts, and global conflict with pauses from 1914-1952, when the last of the boundaries from World War II was settled by main force in Korea. The total deaths run well over 150 million from the wars,  rise of totalitarian states designed to control the flow of mechanized economies, and assorted famines and atrocities. It created a billion years of human misery. An amount of suffering lived, laid end to end, that would stretch backwards into the age where life was not much more than squirming slime.
One of the reasons people are complacent now is because of the survivor's illusion - that is, we are made it, or are the descendants of people who made it. One reason for the centrality of the Holocaust experience is that it disrupts this illusion - the Jews who escaped Europe are people who made it, but who saw their friends, fathers, mothers, relatives - not make it. There are at the boundary between the quick and the dead.
The question is "where are we?" After all, by the mid 19th century, even as the coal economy was getting established, the misery that it created, the limits on its expansion, and the dangers of allowing "decadence" to knock the few off the top of the perch, were well known. Dozens of figures - from Marx to Wagner - warned of what came at the end of that historical age: conflaguration. They were right, merely not for a long time. It would, in fact, take 60 years for these warnings to begin coming to pass. And the longer they took, the more they were disregarded. Up to the very day that "The Great War" broke out, the prevalent view was that economic and political inter-relatedness made war unthinkable.
I recount this not to make a prediction of a half century of resource wars, or a "third Thirty Years War" to use a Churchillism - he referred to 1914-1945 as "the second thirty years war" - but instead to underline the very simple and empirical observation that cataclysmic transitions occur, that one has occured in living memory, and the echos from it ended only in 1989 with the collapse of the USSR. Only now are China and India embracing the mechanized economy.
We often refer to "industrialization" but this misses the revolutionary nature of mechanization - engines small enough to replace individual people - down to the size of lawn mowers. Mechanization is the source of the "liberation" which the modern era feels, and the source of the huge surplus in society which we take for granted. This surplus allows sexual freedom, personal freedom and political freedom. People can, literally "vote with their feet" to find better places.
If there is a limit on mechanization, then there is a limit on affluence. There are "ins" and "outs". People who live outside of the mechanized economy struggle along on the surplus, and the rigidity, of the rock economy, or even worse, of the subsistence economy that it replaced.
Since petroleum puts a limit on mechanization, and our economic expectations - our money system, our financial system and our political promises made - rest on the continual expansion of the mechanized economy - something has to give. Either the environment gives out as we over sink, the sources give out as we over consume, or the promises give out - and we have to slash living standard so that everyone can get a piece of the mechanized economy's dwindling surplus.
This then is the case for alarmism - if we don't run out of oil, we run out of air. And we run out of both before we run out of people who want into the system. And because our monetary system is based on the ability of people to become affluent mechanized consumers and workers - there isn't enough money on the planet to meet our promises, which rely on expanding the economy indefinitely at over 2% per year.
The techno-sloptimists say "we will just put hydrogen in our cars!" they assume that if we simply replace oil with "alternatives" we will be fine. First many of these alternatives are still running into the sink problem - burning liquidified coal is still burning carbon into the atmosphere. Second many of the alternatives aren't. Hydrogen, even at its most generous, is not a replacement for petroleum. Hydrogen combustion is a transport mechanism, not an energy source. We don't mine hydrogen and get more energy out, and won't until we have hydrogen fusion.
The second problem with technosloptimism is that it fails to account for the costs in a different way: namely the financial systems assumptions about how much future economic activity there is to slice up. If we "alternify" the economy, we spend much higher fractions of GDP on energy. That effort comes out of someplace. If that someplace is future investment, then there is less future. Lest I sound like an unreasonable pessimist, I will point out that the US savings rate has slalomed down since the peak oil event of the 1978-1986 period. People in the US show a demonstrated propensity to sacrifice long term investment to maintain short term consumption of various kinds.
The third response - the first one being denial, and the second one being imperium - is austerity. One hears it in every such discussion. The problem with austerity is that it is both not a Nash Equilibrium - that is, there are actors who can improve their position unilaterally - and it requires massive austerity to work. In fact, one may accurately describe it as "neo-Maoism" after Mao's attempt to build a China without an internal combustion economy.
Neo-Maoism is rhetorically popular because it is conceptually simple: shut it all down, and live on solar, wind and water. The problems here are myriad. First, it doesn't get rid of the problem, second it requires a two billion people slash their standard of living, and move out of the cities, because in a neo-maoist economy, cities are simply not economically sustainable. This sets off a vicious circle - no cities, no innovation, no innovation means that the society stagnates. Not only do things get bad, they stay bad. Then comes the part where they start cutting the hands off of intellectuals.
Am I a prophet of doom? Not really, looking at the technology I see that it is possible to put together a different kind of society, one that does not involve denial, imperialism, technosloptimism or mega-austerity. However it does require a shift in our fundamental ways of doing business. It requires shifts in politics, economics, technology - and art and culture as well. It requires a shift in our monetary system to measure these changes. The view that we can either "swap out" the old technology for new, or that we can just "shut down" the old economy and live without it are not supportable by the numbers. The "Swap out" models all produce too much CO2 for supportable levels of affluence. The "shut down" models all produce too little GDP to sustain current populations. We can only pursue either if someone is willing to pick out a couple of billion people who aren't going to make it to the otherside of the transformation.
Thus the only real option is radical transformation. We can do this in one of the relatively easier ways, or we can do it in one of the much harder ways, after a series of increasing conflicts culminates in the long worried about "World War III". Radical transformation is difficult and painful, because it means that people who expected to get rewards by slam dunk methods aren't going to get them - and if there is anything people don't want to give up, it is no brainer profits. Radical transformation is also uncomfortable, because it means recognizing that the entire artistic capital of an age is, well, antiquated. Those who are well paid by the current system will not want to give up either their privileges, or their uninterupted corridor to power later on. Those who are outside will often not realize that there are painful tradeoffs involved in being inside.
We stand at a cross roads - either the US can make a big bet on the phony fuel economy - get one more half generation out of the petro-economy at the cost of trillions of dollars in wars and capital - or we can decide to radically restructure the economy around telecommunications, electricity, substitution away from carbon and a political system that has the mandate to guide this transformation. One road leads to a war with China, as the supply/sink limits are reached, and the only possible way to mediate them is to fight over them. The other road leads to a generation of political difficulties, and it is unpalatable to many whose idea of life is going from their big house to their big truck to their big job so they can retire in style to the Sun Belt.
But politics is often the choice between the unpalatable and the catastrophic. And the reward for making the change is simple - liberty. Liberty of a kind that no inhabitant of the pyramid world can know, a society with the vast weight of the pyramid is off of a person's back, and we have a freedom to pursue our goals in ways which are as unimaginably unconstrained as the automobile was to the people of the horse and buggy world.
However, first we have to deal with the problem of American Thermidor which is how we convert oil into land, land into money, and use the money to buy more oil. We also have to realize that a shift in the monetary basis is coming and this means a change in constitutional order. We are at the bottom of four great challenges in the 21st century.
The answer is a transformation of society as radical as the modern and post-modern were - and as radical as the victorian was. Everything will be different. Our houses, our transportation, how we make a living, our means of exchange, our sense of ourselves in our political and social context. This change is the important one, because all of the others will be worked through as the result of it.

We Happy Few: Why It Is Time To Vote for Teachout/Wu

Tuesday, July 22, 2014
We Happy Few: Why It Is Time To Vote for Teachout/Wu

On great occasions of the state, we think about the victories we have won and lost, about the turning of the tide, about the great pausing of the state in its motion towards the perfect. We like to think that it is time, and then it is done. But before this time rolls onwards, at first pass to gain momentum, a few great moments must pass where there will be defeat before there is victory. There will be times of great injustice, before there are times where justice prevails. Times that are unjust will be storm and struggle, before the tide has turned. It was easy to attend the victory parades in times past, but much harder to maintain resolve before times yet to come. And yet these are the times which will try the souls of men and women, to test them, to imagine what is right, as opposed to doing what is safe.

This is one of those times, and you can see the race where that will be apparent, the Governor's race for the State of New York.

We like to think that Lincoln was the man who really made America in his image, and it is right to do so. But before Lincoln ran, and even before the party he ran for was in being, John Quincy Adams ran, not as one of the leaders in the race, which he had been destined for, but one of the also-rans in his day. He garnered only one percent and a little bit more. But that one percent was to say that slavery was wrong. And he and a few other like-minded men, because only men could vote in that election, stood up to be counted to say so.

We remember the great American Mexican war, but what do we celebrate? A victory? No, we celebrate the defeat that was the Alamo. We celebrate not the victory which ended the war, but the defeat which started the war. And it is right that we should do so.

During long cold years of the late 1800s, there was a party, and some of its principles ring true today, and were later adopted. This Populist Party was right in so many ways, though wrong in some others, that if you listed them in today's printed word, they would stand out as true, where the Republicans and Democrats would be false.

Do we celebrate the victory, or do we relish the steam of defeat of Pearl Harbor?

This is the time we live in, where some people will say that they do not mind if everyone votes correctly, in the narrow sense that one vote will be better than the other, that their vote will not be wasted on a losing candidate and detract votes from their party's possible winner. But in the long view of history, it will be the wrong way to have voted. It will be wrong because it will preserve only a glimmer more of the reality. If you only vote once, then it would be the right way to vote. But they do not vote only in one election, only with one set of dice to play. We vote with many elections in front of us, and there is a moment where we say that enough is too much, we are going to vote the right way, come what may.

Zephyr Teachout has been here before. Back when no one thought he had a chance, Howard Dean selected her as one of his followers. And they nearly won out. And thus she is trying again, to gain a foothold in a corrupt election process, where money is the primary commodity. Tim Wu demands that all people have equal rights to access, of whatever site they want. These are principles which are at the bedrock of the times, just as long distance telephony was the site of previous battles in yesterday year.

In a very real way, Teachout/Wu has already scored victories, because even though she has not been elected, she has shown that she will take the fight to her opponent. And by doing that she has already won the victory of sorts. Because in the usual course of things there would not even be a whisper of protest. She is playing with House money already, and there is so much left to do.

So we happy few, know that it is time to say that we have had enough. We happy few will be remembered, even if there is defeat at hand, because those who will come after us will say that they would have been with us. It is easy to say, and it may in fact be true, for the people of later times will be different. But here and now, it is our time to shine, and prove that we can do this, and though the future will say to us that they would have been with us, only we shall know that we, we happy few, were there upon a star, that lived straight on until morning.

Then we will know what John Quincy Adams, and Daniel Boone, and all of the great beginners of history knew, that just around the bend, there are battles yet to be won and lost on this day. Because know this: the hallmark battle of this age is for the nomination of the Democratic party, and all that it stands for. Know also this: the clock is now ticking, and once it grinds down there will be victory. And it may come sooner than people expect. And they will not, from above, know that there is yet one more of them to join their ranks.

The ends of history will follow in their footsteps. They are young, many too young to vote, or to tell what is right from wrong. But when they vote, they will see that there is nothing to hold us to the best, but ourselves. Then they will vote for the one choice which will be apparent, for the one choice that will be right, so help me God.

Posted by Stirling Newberry at 00:13

and excellent post

blog of the day

This time it's a photo blogger,  with some of his shots,  though by no means all of them,  are quite good,

Monday, July 21, 2014

The Way Forward [Updated: Obama announces opposition to a blank check.] (2008)

Let us speak of rights and reason. Of rights we have to begin from the final humiliation against a free people a proposal to grant dictatorial powers to an outgoing administration. In effect, the ability to hide all of the financial wrong doing of the last 8 years.

However, what is important now is a solution. What we need now, is reason in action, as we already have reason to act.

[Updated: Obama has announced opposition to the principles of the Paulson plan. Details after the fold.]

It would give Paulson not only the power to buy assets, but put terms in place which would make legal investigation of those arrangements impossible, and these contracts could not be questioned in a court of law. It is the Authorization for Use of Military Force, Protect America Act, and war spending votes all rolled into one. Having seen that it cannot assume theunitary executive since the Supreme Court rejected it, they are now turning to Article III to get a trembling Congress to accept it. There is a crisis, but there is no catastrophe. Even when the physical nexus of the financial world was directly attacked, there was no need for this kind of unlimited spending power.

The outlines of that solution are beginning to be accepted. It is a simpler, and broader, solution than has yet penetrated the minds of the interiors of power, because it is not about how to pay for a clean up within a functioning system, but how to change the system itself.

This is not a financial crisis in the end, as the Paulson Proposal shows, but a constitutional moment, where the very mandate of government is in play. Paulson wants the tax payer to be the fool of last resort, the group of people stupid enough to buy things that no one else on the planet is stupid enough to buy. We have reached the currency crisis which the election of 2000 implied would come. If we do not solve it now, it will only recur, in a worse form, soon enough.

The gut reaction on the Paulson proposal is a resounding Hell No. The word reviled is not to strong.

Even the University of Chicago's finance department cannot swallow the monster that has crawled from the cabinet.However Luigi Zingales mentions the key point. What is clogging the restructuring of debt are lynch pins that tie speculative money to ultimately scarce assets that cannot grow any farther. In the case of the Great Depression, that asset was gold. Gold could no longer grow as fast as the economy, debts pegged to gold hobbled the global economy. FDR dispensed with this, and the Supreme Court agreed. Ultimately the government must enforce contracts, and contracts which bring an end to government itself, must, therefore fall.

It is self-evident, or at least has been to Americans since we were Americans and not British subjects in America, that government is instituted by the people, however construed, for the good of the people. There have been three long struggles since that moment. The first has been to acknowledge that all people are members of The People, the second is to establish broadly the good which they have a right to expect,  and the third is to provide more perfect instruments for the first to pursue the second.

Governments then have a basic mandate to enact the good, they have mechanisms to effect that mandate, one of which is money, and they have a relationship to the people which constitutes the meaning of government. The Paulson Proposal is, in effect, an amendment to the Constitution, which states that the executive, in its sole discretion, has a mandate to prop up the financial sector at whatever cost, without review. It states that it has the mechanism of unlimited and unfettered spending power. It asserts a meaning which is foreign to virtually every part of the political spectrum, libertarians, conservatives, centrists, liberals, and socialists alike have balked at this vast grab of power which violates separation of powers, accountability, and virtually every other principle advanced for the protection of a Democracy. This much is obvious, and is obvious to millions of people. The Paulson Proposal is a demand for economic servitude.

However, it is not enough to reject the wrong. It is important to assert the right, as, in the famous words of perhaps our greatest president, God gives us the grace to know the right. It is not enough to reject the Paulson proposal, but to assert that there is a clearer and better way forward.

The Red Queen's Race

The first step to doing this is to explain the present crisis clearly. This is because people are often aware of the lesser crimes that were instrumental to the greater crime, but not their meaning. It would be like banning shifting into reverse, because that is what the get away car did to escape from the mafia paid homicide. Many of the individual actions which have led here are neutral, or if not neutral, incidental, to the problems themselves. If not these mechanisms, then some others would have been taken. It is not wrong to ban some of the particulars, but only if, importantly, the root cause is also addressed.

The particular financial crisis began, so it is said, from sub-prime mortgages going wrong. This is in correct, in that those mortgages existed because of inflated money supply. That inflated money supply existed because of ultra-low interest rates produced by the Fed. Those interest rates existed because of the necessity of using them to pay for the Iraq war without increasing taxes on the wealthy.

However the Iraq war was not a individualized lurch rightward, nor were many of the actions which have led to this crisis taken by Bush. Glass-Stengall was repealed by Clinton, not Bush. Much of the financial system deregulation was written by Bob Rubin, not Hank Paulson. From this it has been theorized that there is a conspiracy of bankers out to suck the life out of the ordinary people. If only it were that simple.

The reality is that the reason people of both reactionary and progressive impulses alike have walked the road of perpetual consolidation, we are now down to two major investment banks from five, is that there has been an underlying necessity that has pushed them forward. There were other solutions, but once this one was chosen, there was no political will, nor any political capital for a different one. Here is what happened and why.

In the 1930's America abolished the gold standard for individual debts, and instead dollars were issued based on loans made on good assets in banks. A system of insuring and examining and regulating those banks was created, and investment banking and retail banking were separated, this was not done all at once, it was not done by design, it was however, within a paradigm or design pattern. Once the idea of stabilizing the anchors of the economy was come upon, and using promises of the people as the foundation for that stability, each additional step became easier and clearer. The feverish activity of the first week of what was to become the "Hundred Days," gave way to long and protracted political battles.

The new basis then, was the value of developed land. The incentive was for Americans to develop their cities and towns, and reap the rewards of increased home values and stability of their communities. This, in turn, created the ability of the government to print more dollars, relatively confident that if there was a dollar, then somewhere there was economic activity underneath it. There was, at least, someone with an address who could be taxed.

The model that we used for development was the automobile, and we saw the rise of the automobile city, which was far more sprawled out than the old industrial city. Old industrial cities have population densities of around 7000 to 10000 per square mile, where as automobile cities peak at around 3000 per square mile and often have as little as 750 per square mile. In short, the use a great deal more land, and a great deal more gasoline per capita to create and support. Suburban sprawl reaches a particular density, and then it sprawls outward farther.

As long as all the oil came from the US, it was not much of a problem. There were fights over who got to be part of the truly personal mechanized society, there were even more brutal fights over those on the margins of that society. Civil Rights were, at basis, the right to be part of the new age that was spreading across America.

However, in the late 1960's American oil production slowed. This was exacerbated by the Vietnam War, which created spending on activities that did not aid America, but the same wall was coming with or without the Gulf of Tonkin Resolution. At first there were attempts to stave this off, but, in the early 1970's the Arab oil producers enforced their role as the swing producer in the world, by using an embargo. Later there would be a war between Iran and Iraq. The intermediate steps, such as abandoning Bretton-Woods and creating a floating currency regime, deregulating the airlines, attempts to save gasoline, were all stopgaps until a new basis for the global economy came into being. That basis was the paper for oil economy. In this economy the United States generated paper based on development arbitrage and technology, which Arabs bought, and in return they sold us oil for that paper which we were to turn around and use to create more paper.

It served, in a way, both interests. First it gave the oil to the old sprawl system, and for the Arabs it provided an umbrella of protection and stability, as well as assets for the time when their oil no longer commanded the same premium that it did then. The internal response in the US was to create a Red Queen's Race, where it was made harder and harder to own the assets of America, at the same time, the Arab states grew socially conservative, and attempted to thwart the rise of a middle class that would demand imports and capitalization. It was an agreement by the conservative forces in both systems, and in turn both used it to drive their respective political systems to the right, even though underlying technological and social trends were for greater liberalization and freedom.

It is this dynamic, and not any of its subsidiary moves, that is important. The implementation of trade, banking deregulation, tax policy are all means by which the United States and the West tried to stay one step ahead of oil. The roots of this crisis are then the demand to keep the sprawlconomy going, the decision to engage in the paper for oil economy, and the de facto result of making it so that the wealthy, rather than the society as a whole, would hold the paper. In short, our rich, had to stay ahead of their rich. This created the most important race to the bottom: of top tax rates. It is impossible to tax our wealthy more than their wealthy taxed themselves.

The 1% Solution

The death of this system was that it worked too well, in that with the coming of the internet bubble it seemed as if the "New Economy" would replace "Bricks and Mortar." Oil prices plunged to their lowest real value since the coming of the petroleum age. Arab nations bled dollars, and were under pressure. The Clinton-Rubin dollar drought nearly capsized the conservative economies of Saudi Arabia and other oil states. Many responded, not by liberalizing, but by creating even more radical anti-Western ideologies, to hold of the wave of liberalization that would inevitably come should the become consumer states.

This dynamic threatened the very basis of the reactionary coalition in America. They had always assumed that they had stacked the deck for a permanent Republican majority and hold on power. Thwarted over and over again by Clinton in their attempts to secure power in the 1990's, it became evident that the left could play the paper for oil game better than the right could. This is because the left, not the right, had become the party of free markets, and since the left had much less concern over who got rich, it was able to open more opportunities. Free Trade, the dotconomy, a reduction in military spending and corresponding increase in civilian investment all altered the very composition of the small club of the Republican Party.

The dot bust that followed the dot boom was, to some extent, timed. Greenspan's rate raising campaign of 1999 and 2000 was not outside of the bounds of discretion as Fed chairman, but it was more aggressive than he had been with a Republican President in trouble, and was much less accommodating than he would be with a later Republican. In other words, what he did wasn't obviously manipulation of the election, but it was out of character.

It was in this environment that the election of 2000 occurred, American was on the cusp of, but not yet in, recession. It had had a brief period of broad prosperity, but not yet completely taken hold. It was also facing a massive crash in speculative equities. Enter George W. Bush.

His overt promise was to bail the wealthy out of their dot crash with tax cuts. These tax cuts satisfy the need of the Red Queen's Race, in that they gave money back to Americans, and much less to others. Thus preventing a situation where assets would be bought up cheaply while illiquid. However, the response of the oilarchies, at the bottom of the crash, was to sell. This was the brutal climax of a three year long bear market, which occurred in the summer of 2002. The plan had been to lower interest rates through the floor, pressure the yield curve to favor mortgages over industrial output, and buffer industry with a war. When the bubble popped, the insolvent banking system would be bailed out by ordinary people, leading to a frozen in place economy. This process I labelled Japanification. It would lead to a long period of stagnation, where the majority people would not live that badly, but they would have little hope of improvement, and face increasing pressures personally and financially.

Thus, it was not enough to bail out our rich, it was necessary for Bush, if he and others wanted a permanent reactionary state, to control a flow of oil to pour into their version of the sprawlconomy. This was the Iraq War, and the ultra-low interest rates that Greenspan provided, by his own admission, had two purposes. One was to get as many people to own homes as possible, the other was to finance the war. Both policy results were failures. The costs of the failure in Iraq are not necessary to go over here. What is more important is the housing bubble caused by the failure of the Fed to accept in 2005 that the Bush economy had failed, and take the economy into recession then, ending the building boom, and force the fiscal reckoning in Congress. Instead we received horse hockey hokum from Greenspan, even as the numbers he presented showed that almost all of the increase in debt was going to fuel short term consumption.

The 1% solution to the Red Queen's race was to allow our top 1% to pile up asset inflation to match the petro-dollar acquisition of assets. The Iraq war was a recognition that, to keep the Republican base, oil was needed, and to keep control of the top, it had to be in American hands.

"Financial Genius is Leverage and a Rising Market."

John Kenneth Galbraith quipped that financial genius is leverage, and a rising market. It is for this reason. among others that he had a suspicion of the "dubious magic of monetary policy." Monetary policy means that those who have, get. Monetary policy means that those first in line at the bank window, get to sell at a profit to those farther down that line. It is not a neutral market stimulus, but, in fact, a very specific one.

In our case leverage was provided not only by low interest  rates, but by the SEC relaxing leverage ratios, the failure of various regulatory agencies to enforce laws already on the books, let alone new laws that might have been desirable being passed.

The reason that mortgages were the basis for this vast mountain of instruments is relatively simple. The United States partially liberalized it's economy. Some people competed very directly against the rest of the world, while others did not. People naturally fled from competitive exporting, to non-competitive non-tradeables. One can't go to Singapore for a Big Mac tonight. One can't buy a house in Ireland to commute to a job in Topeka. One can't go to a hospital in Mumbai. And we don't let people build our aircraft carriers, such as the Ronald Reagan, George Herbert Walker Bush, or Gerald Ford.

As with many things, what we got was socialism, protectionism, Keynesianism and liberalism - for the Republican Coalition. This was the practical political realization of the post-Reagan Republican Party. They couldn't afford to buy landslides any more, but they could afford to buy enough of the cheap states to control Congress and the Presidency. With the occasional assist from the Supreme Court.

But mortgages had another magical property, and that is that they were the heart of the sprawlconomy, and no political party could be allowed to have them fail. Thus the bet was that if everything went wrong, there would be a massive bailout. The British fretted over the lack of "moral hazard." In finance terms, almost any position is better if you don't have to protect against the downside. In the circles I travelled in, this was known as the "eating babies" case. "Well if that happens the world has gone to hell and we are  all eating babies, so it doesn't matter." For example the effects of global thermonuclear war can be discounted, because we will have other things on our mind than the value of our Intel shares.

However, the trick was to systematically create investments which would all go wrong at once, and then proclaim that they could not. The catalog of financial games, for example, packaging sub-prime loans valued at the face value of the loan, which was highly unlikely to be paid, while at the same time packaging good loans at the default value of the house, which was virtually impossible to occur, because if the owner defaulted it would be because of a massive economic downturn, were just two of the tricks used in creating Collateralized Debt Obligations and derivatives that had no relation to reality.
The truth about finance is that it is about giving people permission to do things they otherwise would not be allowed to do. It is, therefore, a social utility. The key to controlling finance is not regulation per se, but in having a social project to which it is directed. Regulation then, is the way we tell that institutions are following the socially and politically agreed upon course. If the course is wrong, no amount of regulation will work, because even if it is still on the books, it is dead letter.

Thus with Greenspan, Bernanke, and others who were part of - not merely the broadly agreed upon paper for oil project, which both Democrats and Republicans signed on to - the project for a permanent Republican and reactionary order, regulations and indeed economic sobriety were out the window.

The reason Greenspan got the nick name "bubbles" was for his practice of finding a way to inflate the top level money supply, called M3, without it becoming consumer demand. Inflation was defined as "inflation of consumer goods." This is the inflation that our foreign bond holders care about, because it is their buying power from us. Thus, a simple policy measure was in place: make the broades measure of money supply, called M3, go up, without inflation in what America sells, called "core inflation" rising beyond a comfort zone. All this sounds bloodless and analytical, until you realize that it is impossible to sustain. This is because core inflation can only be contained by monetary policy if the money ordinary people have access to is expensive and scarce. A good measure of this money is called "M1." But M3 is just M1 on quaaludes. All of the bets made that are in M3, have to be paid back by M1.

Now you can do this for a little while by two expedients. One is to make it so people who buy assets accept less return on their investment, as measured by say "Price to Earnings Ratio" or interest rates. The other is to drain the savings rate of ordinary people, so that money is flying around faster and faster. This is called "the velocity of money."

However, both of these have limits. At a certain point buyers are getting the lowest returns they can accept, and consumers are not saving. In fact, by the marginal theory of utility, it will go on a bit longer than it should go on, because it takes a while for people to realize that no only are they losing money, they aren't going to make money. In this decade, the total annualized real return on the S&P 500 has been - negative. That's right, money put into the S&P, including dividends, has been behind inflation. And that's just in dollars. In this decade the US savings rate has turned - negative. That's right, we are spending down. In this decade American wages have been, in real terms, negative. And that's before we count in the housing bubble.

This then was the state of affairs at the time when Daniel Altman labelled this a revolutionary gamble to create a neoconomy

The Adventures of Captain Carnage

Benjamin Bernanke is an academic expert. Specifically, he is an expert in how to manage a crash in assets, without creating a situation where the rich will require a bail out from the public, and the public, in turn, demands real control over the society. His thesis was that the Federal Reserve in the Great Depression could have printed money to prevent deflation, and then used extra-ordinary means to prevent inflation. His argument was that FDR, in though not in so many words, could be prevented if only the right macroëconomic policies had been taken, followed up by using gaps in the system if need be.

Bernanke was, thus, obviously, the choice for Fed Chief after Greenspan. He has the misfortune of having had his policies put into practice, to borrow a quip from John Kenneth Galbraith. His failure was the attempt to impose microëconomic manipulation and market failure on macroëconomics. His papers do not hold together even as they are written, and I am happy to say I was busy calling him a fraud before it was fashionable. It will be a lot more fashionable very soon.

But for practical purposes, it is enough to note that starting in 2007, when the various positions began what Krugman labelled "The Great Unravelling". In financial terms, a position unravels when it's parts no longer work together. A sophisticated investment is not merely picking stocks you like, but in putting together different possible futures, and having something that will do well in all of them. A position unravels when the future doesn't coöperate.

The assumption that mortgages would not be allowed to unravel  met head on with the assumption that unlimited amounts of money could be created, so long as that money did not become demand for real things. This is the contradiction mentioned above. It is impossible for financial instruments to expand for ever, and for wages to stay flat forever, without bringing new people in to the system. It is impossible to do this with a basically constant amount of oil.

This problem is known to engineers as the problem of "scaleability." Can a solution be expanded, and if so what happens. Unlimited amounts of money cannot rest on limited amounts of oil. Even the total amount of oil is not important so much as the peak bandwidth of cheap oil. Oil at 140 dollars a barrel is not cheap enough for people run the sprawlconomy on.

Bernanke's attempts at bail outs failed, because with each failure, the financial people next in line could either accept the loses, or fail in turn. This is why each bail out has lead to another, bigger, bail out. From loans, to debt swaps, to outright guarantees, to the Freddie and Fannie bail out, to the Paulson Proposal, each bail out has gotten bigger, and been attached to money that is less and less likely to ever be seen again by the tax payer. The cost of 100 billion in loans is really the cost of the returns could have been done with that money for a few months. This is a few billion at most. The cost of 100 billion dollars in buying toxic assets, is probably 100 billion dollars give or take a few cups of coffee.

In July the plug was pulled on Captain Carnage's printing press, because the cost of oil was threatening to rattle apart the entire Republican coalition. North Dakota and South Dakota were in play on the Presidential level, with Montana leaning Democratic. The Republicans wanted liberalism on the cheap, and expensive gasoline put it out of reach. Thus, the plug was pulled. M3 began contracting rapidly, and oil fell as rapidly. This was expected, the cost of oil was not a problem of oil undersupply in particular, that's the chronic problem, but a problem of acute dollar oversupply. As soon as the dollars went away, so too did the inflation. Since then you have not heard much from Ben Bernanke, because he tried and failed.

Instead Paulson has come to the front, and he has presented a more traditional, bare knuckles, solution to the panic, one that would not have been unfamiliar to bankers of old: get the government to buy up the worst assets, send a few people out to pasture, and have life go on. It is thus Pauslon who has gotten the ball here. You can also bet that there will be no money left in the till by the election, because otherwise what would have happened is that Bernanke would have resigned as Fed Chair, Paulson would have been appointed, and the Fed, not the Treasury, would be given the blank check. The Fed has taken on hundreds of billions of toxic debt already, it could be empowered to take on even more.

Thus the book on Bernanke is that he printed dollars, polluted the Fed balance sheet, and could neither stop the financial crisis, nor prevent inflation, nor stop the one thing which he said needed to be stopped: the contraction of the money supply in the face of an economic downturn. Remember this is what right wing academics say was the cause of the Great Depression: the fed allowing the "great contraction" of money supply going into a down turn. We are now in a position to judge this theory and say that it is not the case, the Fed's actions of 1930 may have precipitated the economic crisis, but had they done differently the result would have been to pull the Fed chairman and put in someone in charge who would do the same thing in attempting to bail out the wealthy and stick everyone else with the bill.

Small Steps are not enough

In March of this year, economist Paul Davidson proposed that two agencies be used to solve the growing fiscal crisis. His proposal was to use a Home Owner's Loan Corporation model, a depression era program where the government bought unstable loans at a discount, and then cut the interest rate and the face value, allowing the homeowner to stay in the house. This is a "foreclosure in place" plan along the lines proposed in general by Larry Summers in February. By March the idea received attention in the press. From a fellow at the American Enterprise Institute.

Now think on this. This late this winter and early spring and respected academics were already clear on the need for debt relief - academics from the left Post-Keynesian Economics school of thought to the ultra-rightist American Enterprise Institute. In fact proposals for the return of an HOLC have been offered for sometime from the margins.

This idea has flowered in recent days, from Nouriel Roubini, and other writers. Hillary Clinton has taken up the HOLC banner.

The HOLC proposal would do two things. First it would offer a floor to the market. Second it would prevent homes from being dumped on the market just as this would create a contagion even for good loans. But it is not enough. Even after there is debt relief, that still leaves a host of other people in a great deal of trouble, For example, the people who do not qualify for debt relief, but are going to be even more upside down in their homes than they were before. It also means that some loans are going to unravel, since it is absolutely certain that an HOLC price for loans will be lower than what is offered.
In short the HOLC is not nearly radical enough. Instead, with the US already committed to stabilizing half of all mortgages in the US, it is only one small piece of what must be a wider restructuring of the financial markets.

But this gets us back to a very simple question, in a crisis of liquidity, the question is how to put money into the system, and then pull it out once the crisis has passed. In a financial crisis such as this one was some time ago, the question is how to borrow money to clean up the mess, and then impose regulations to prevent the exploitation of both the bail out, and the flaws in the system. However, we are not faced with either of these two smaller problems.

The problem is what, exactly, are we going to pay these loans off 
in? Remember the reason this is a crisis, and we can't just walk away, is that our money is based to no small extent on mortgages. We buy oil and import goods with this money. If the total money supply cannot expand, then it must mean that American living standards must drop dramatically in order to pay back the mortgages. The American people, in 2000 and 2004 were sold "a pig in a poke." They were not told what the differences were, nor were they told what the consequences could be. While it will be impossible to avoid having the penalties fall on the American public for what they bought and voted for - "You don't know what it is, and you're voting for it." - the greater blame must fall on elites. However, as long as elites can stay in power promising that the land casino will re-open after some clean up from the last party, there will be no such change.

A Constitutional Crisis

As Paulson's little demand for dictatorial powers makes clear, this is not really a financial crisis. Instead, it is a political and constitutional crisis. Paulson told Barney Frank that putting in an amendment to cap executive pay would be a "poison pill." If this were really a catastrophe in the making, one where the American public's money was needed right now, or else, then Paulson would have accepted almost any conditions, even if he intended to renege on them in practice. After all, with 700 billion to spend, it would have been trivial to make sure that a few billion sloshed to the people whose golden parachutes he took away. The defense department loses track vast sums of money. It would not have been hard to do that here. Clearly we are not in the moment of true catastrophic financial failure. Hence there is no reason to not make this as hard a bargaining process as possible.

The key to the constitutionality of this is that in order to pay back the massive sums of debt taken on by the failed Bush executive, which will probably amount to some 8 trillion dollars when all of the dust is finally cleared out of the air and everything is accounted for - some new source of value must be created. There is no way, with current rates of oil production, the global expansion of the middle class, and current rates of oil consumption, for the US to ever produce enough houses, at high enough prices, to print enough money to grow our way out of this debt. It is physically impossible, just as there ever being enough physical gold to pay off the debts of the First World War and its aftermath, because interest multiplies like rabbits, and gold does not.

Thus it is necessary, not merely to shift money around, but to change the very definition of money. This is why the "cram down" model is also wrong. There is no reason for the Arabs to accept a cram down, they can just raise the price of oil to the point where all of the surplus value created in the global economy flows to them. This gets them effectively what they paid for, even if the numbers are not correct. It would also mean that the center of the financial world would be Dubai, not New York, London, or even Shanghai.

This means that while HOLC/RTC proposals are useful the most important step right now is to meet the demands of the Treasury Secretary for arbitrary powers head on, and select a different entity to manage any bail out, and to forbid bailing out of specific securities, but only of whole entities. In short, before the public will by any more toxic assets, the public will have the authority to remove the people who bought, created, and sold those assets.

There is already an entity whose purpose it is to evaluate failed institutions, collect insurance, and merge institutions into healthy ones. That entity as Robert Reich correctly observed in a recent radio interview, is the Federal Deposit Insurance Corporation. Since we have, effectively, taken responsibility for the global financial system, it is time to accept that the principle of insurance, direction, and regulation is required. This process has been going on for some time, since, in fact, the response to the crash of 1987, when circuit brakers were put in place to prevent wide swings of the stock market.

However, as of this year, with the US having taken on the losses for the markets world wide, effectively, the solution must be that the financial system must pay for access and insurance in good times, so as to have funds in moments like this. That this principle has escaped 20 years of executive and legislative leaders is a sign of how far down the wrong road we have come.

This means that the FDIC needs to be expanded to have a reach not just for banks, but for securities as well, and for all funds held as securities. Since people already pay fees to mutual funds, it will not be difficult to shift some of this revenue from money managers, where it is buying brass nameplates and vacations, to an insurance fund. That insurance fund can be used to retire foreign debt as its means of accumulating interest.

After the FDIC has finished taking over entities, then individual mortgages can be assigned for debt relief to an HOLC, and individual assets which are saleable, but entangled in financial instruments, can be offloaded to an RTC to be run for some period of time and then sold when market conditions improve.
However the lynchpin is the acceptance that the US Dollar is now based on all equities, securities, and assets which are in the wider financial system denominated in dollars, and the expansion of the total capital system, and not just the suburban sprawl system, will be what the dollar is backed by. Since it has been true in effect, there will be no macroëconomic consequence to making it true in practice. The difference will be that it will be the public, and Wall Street and Riyadh, which will direct the use of the financial system.

In the very short term, then, what is necessary is to prevent American assets from being bought up cheaply by foreigners, and to radically reduce the value of current dollars without capsizing the economy. Fortunately there are several ways this can be done.

Part of the problem is that we have an executive which is illegally in place. This cannot be gotten around in coming up with proposals. If we had a legal President acting in good faith, as opposed to one who just sent a note to the Congress demanding a 700 billion dollar bribe or the economy will get it, then this would be a rather easy situation to deal with. The President could use the powers under the trading with the enemy act and the declaration of a national emergency to prevent US assets from being bought up by foreign entities. The strategic reserve would be tapped, rationing imposed on oil imports, and the market allowed to fall to a discovery point where only US national liquidity could be used to purchase assets. This would be done in the context of a promise to repeal the Bush revenue reductions retroactively by the new Congress, and the additional revenue devoted to back the bonds.

In short, if we had a President, as opposed to an illegal executive, there would be mechanisms in place by which a Congress could delegate sufficient authority to both bail out the financial system and prevent a short term fall in equities from becoming a permanent entrenchment. The public will, in a matter of weeks, be able to correct this problem, and in a matter of months an new government could be inaugurated. Thus all the Congress needs to do for now, is get to Zero Hour of the inauguration of a new President, and it will have the chance of doing so with the new Congres in January to authorize other short term measures as is necessary. While it is better to deal with the problem early, the problem is George W. Bush, and he is not going away until next year.

Thus the centerpieces of a counter congressional bill are:
  1. Expansion of the FDIC to include money market funds, brokerages, and other financial funds. Institutions which are out of this expansion, if any, will be allowed to fail as a class. Assign the CBO as the Congressional means of oversight and give the CBO authorization to extend credit to the FDIC, which can be waived if, after Congressional review, the money is justified. Basically, anything that Bush does on the way out the door must be subject to review by the incoming Congress and Administration.
  1. Authorization of an HOLC type cram down of mortgages with government liens, the profits of which are split between home owners and the mortgage system, now in taxpayer hands anyway. Place this process in the hands of the FHA, and have the CBO assigned to continuous oversight. Authorize some 20 billion dollars in stock to be purchased by the government.
  1. Declaration of a national emergency, without expansion of the debt ceiling, and also with explicit judicial review. In the national emergency specific authorization can be given to review any transfer of effective control of banks or other financial entites. In this declaration can be rationing of gasoline, imposition of conservation and other austerity measures.
  1. Dramatically expand safety net programs for the inevitable economic shock: food stamps, unemployment insurance, suspension of interest on student loans, loans to the government by members of the National Guard, active Military, or Reserve and so on.
That's all that is needed for today. For later? Yes, progressive taxation, green relief, federal debt restructuring and so on. But for today, that is all that is needed to stem the tide. When a new executive is in place, then Bernanke can be removed, the Fed restructured to be part of a joint Executive-Congressional control of monetary policy, green relief put in place, and a massive conservation drive funded.

But that is for tomorrow. Today what we need to do is to authorize the government to be the insurer of last resort and not theidiot of last resort. The short term problem is that interbank lending came to a near halt because banks didn't know which other banks were infected to what degree, and the fear that the money market funds would come unravelled. These can be provided for by the means above. If the Federal Government begins stepping and a dealing with problem banks, and buffers the inflationary hit, then we can go forward and deal with the larger crisis.


These events are not a short term bump on the road, but the culmination of the decision a generation ago to use paper to buy oil, to inflate that paper by allowing those at the very highest reaches of a social elite to engage in a "race to the top" with the suppliers of oil. This system was accepted by both parties, and it created a neo-liberal era where any restriction to creating paper wealth had to be removed. This was not a matter of left or right, everyone was a neo-conservative, and every one was a neo-liberal.

The failure of this system has been widely predicted, but there was neither a holistic replacement, nor the political will to replace it. Criticism of it was outside of the mainstream, or channelled into the form of arguing over the margins of the benefits of it. It accumulated massive debt, and that debt is the heart of the financial pressure.

In 2000 Bush entered office with the plan of bailing out those in the US who had bet badly on the stock market, and invading Iraq to break the impasse over control of oil. Both of these policies failed. The back stop for failure was the Greenspan/Bernanke plan of creating a housing bubble, and then when the burst came, to inflict the costs on the American public. This is "Japanification."

We are now at the point where Japanification is the question, and Paulson is trying to enforce it at gun point: do this or I will do nothing and let everything fall apart. Since the result of this will be a political catastrophe for the Republicans, the Democrats should propose an alternate bill, make no compromises, and let the Republicans Hooverize the name of George W. Bush.

The correct response is to expand the FDIC, begin taking over institutions as a whole, providing immediate debt relief through an HOLC, and declare a national emergency to enforce austerity and prevent any short term attempts to profit from the financial chaos. A windfall profits tax on oil companies isn't a bad idea either, since it would bring in tens of billions of dollars right when they are needed the most.

This solution, or some version of it, is in line with proposals from economists and political figures such as Robert Reich, Paul Davidson, Nouriel Roubini and others. It also leads to the correct solution to the larger fiscal crisis, which is removing the oil bottleneck to the growth of wealth, and therefore the growth of wages to pay financial instruments, and the cramming down of instruments which claimed the profits of a new economy, while at the same time tried to prevent it.

In that future come a great drive to reduce consumption, increase savings, increase exports, globalize opportunity for all and not just for some, and create a very different system of work. But that is another day. Today's purpose is to say no to dictatorship, and to craft a counter which is yes to insurance and accountability.

Updated: Obama announces opposition to the principles of the Paulson Plan

"Even if the Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering.  And in return for their support, the American people must be assured that the deal reflects some basic principles.
  1. No blank check. If we grant the Treasury broad authority to address the immediate crisis, we must insist on independent accountability and oversight. Given the breach of trust we have seen and the magnitude of the taxpayer money involved, there can be no blank check.
  1. Rescue requires mutual responsibility. As taxpayers are asked to take extraordinary steps to protect our financial system, it is only appropriate to expect those institutions that benefit to help protect American homeowners and the American economy. We cannot underwrite continued irresponsibility, where CEOs cash in and our regulators look the other way.  We cannot abet and reward the unconscionable practices that triggered this crisis. We have to end them.
  1. Taxpayers should be protected. This should not be a handout to Wall Street. It should be structured in a way that maximizes the ability of taxpayers to recoup their investment.  Going forward, we need to make sure that the institutions that benefit from financial insurance also bear the cost of that insurance.
  1. Help homeowners stay in their homes. This crisis started with homeowners and they bear the brunt of the nearly unprecedented collapse in housing prices. We cannot have a plan for Wall Street banks that does not help homeowners stay in their homes and help distressed communities.
  1. A global response. As I said on Friday, this is a global financial crisis and it requires a global solution. The United States must lead, but we must also insist that other nations, who have a huge stake in the outcome, join us in helping to secure the financial markets.
  1. Main Street, not just Wall Street. The American people need to know that we feel as great a sense of urgency about the emergency on Main Street as we do the emergency on Wall Street. That is why I call on Senator McCain, President Bush, Republicans and Democrats to join me in supporting an emergency economic plan for working families – a plan that would help folks cope with rising gas and food prices, save one million jobs through rebuilding our schools and roads, help states and cities avoid painful budget cuts and tax increases, help homeowners stay in their homes, and provide retooling assistance to help ensure that the fuel-efficient cars of the future are built in America.
  1. Build a regulatory structure for the 21st Century. While there is not time in a week to remake our regulatory structure to prevent abuses in the future, we should commit ourselves to the kind of reforms I have been advocating for several years. We need new rules of the road for the 21st Century economy, together with the means and willingness to enforce them.
These points are utterly incompatible with any version of the Paulson plan. We should tell our Democratic representatives to back the next President of the United States, and only pass enough authority to get past the election and to the new Congress.

The people have spoken, Barack Obama has listened, and it is time that the Congress hears what is a nearly unanimous cry across the political spectrum for a comprehensive, fair, and effective restructuring of the financial system.