Because he makes the rich look foolish, he is not in jail. Madoff is now grounded by the court, the con goes on. He can only go out of his $5 million dollar Manhattan home from 7am until 9pm and is restricted to Connecticut, southern New York State and the city. He did have to turn in his passport, and can no longer visit his two estates on Long Island, or the one in Palm Beach, or the one in France. That was because he couldn’t find four friends to co-sign for his bail.

Pictures of Bernie out for a stroll seem to make him seem like someone those of us on the bottom might even admire. You see Bernie, on his way up learned something a lot of people, rich or poor, don’t know. The rich aren’t any smarter than the rest of us. Of course they want to believe that and they just want you to believe that. Hence the title, Masters of the Universe.

His victims were long established wealthy families, hedge funds, big charities, big players on Wall Street, and as the New York madam said, the rest of the list will be revealed. Some of these brilliant people invested their whole family savings with Bernie. They represent la crème de la crème of the moneyed social circuit who created this financial nightmare.

Most of that wealth was acquired by inheritance or by actions like the stark avarice of the wizards on Wall Street. The result of such inheritance is the production of whole generations of George Bushs in the halls of financial power and government. Bernie screwed those guys, the ones who were screwing the rest of us.

It is difficult to have much sympathy for these folks; they participated in the mugging of the rest of the country. If you are making great returns, especially every quarter, the less you want to know. It’s easy, it’s not much different then not wanting to know that item you just bought was made by slave labor in some polluted third world country.

Bernie knew how to work snobbery built on greed and one-up-manship that has no relation to how the rest of the world lives, and could care less. He appealed to their eager desire to join even more and more exclusive groups. You know the ones, where people supposedly get to make better returns because of their special god given superiority.

In a Dec. 18th article in the New York Times, Christine Haughney writes, “Jeffrey R. Gural, chairman of Newmark Knight Frank, the brokerage firm, said Mr. Madoff had turned his family down as investors about eight years ago because they would not invest at least $20 million. For years, he said, colleagues introduced to Mr. Madoff through relatives or country club friends had sung his praises.

“People used to brag how they were getting these great returns when everybody else was struggling,” he said. “They thought Bernie Madoff was a genius, and anybody who didn’t give them their money was a fool.”’ Now commercial real estate, already looking at sliding over the cliff in 2009, gets a push from real estate outfits who had pledged investments with Madoff as collateral for 100s of millions of dollars.

Madoff also suckered (supposedly) other rich investors who managed funds to place them all with him. They sold access to their funds to invest in his fund of funds, their job complete due diligence. They collected millions in fees for carrying clients to Madoff, now they are crying victim too, poor rich bastards. Madoff’s sons and other family members all claim no knowledge; in fact Bernie says he fooled them all, taking full blame.

The Watchdogs

In 1999 Financial analyst Harry Markopolos asked the SEC to investigate Madoff, stating it was impossible to make his profits legally, he supposedly liquidated every asset every quarter to avoiding reporting investment information and only had one accountant, who didn’t do audits. The SEC investigated Madoff twice and found nothing wrong, so much for due diligence.

The New York Times reported that Michael Markov, a hedge fund consultant hired to evaluate one of Bernie’s rich shills’ investment companies, Fairfield Sentry, he said their returns were “statistically impossible to replicate.” The only other fund he could find that would produce the same returns was the Bayou Fund, prosecuted and shut down for fraud in 2006.

So the money is gone, Bernie is walking on the sidewalk, knowing at worst he’ll get time in a federal penitentiary. He’s 70, he knows he’s had a better life than most. He knows that all those rich schmucks are walking around dazed and confused. They thought they had the connection, the magic one that, they had made it to the promised land, the elite of the elite, who get to make more because they are special.

The market took a turn that Bernie couldn’t survive. As long as the folks that he was able to scam could keep scamming the folks below them, the game was on. No one ever asked what would happen when the folks at the bottom ran out. Except Bernie, he knew, that’s why he didn’t run.

Maybe for Bernie the best is yet to come. There is the trial, the book and of course the movie. Without their money who will the rest be, but Bernie, he will go down in history. Maybe he could have even kept it going, who knows? Maybe it just wasn’t fun anymore unless you could share it.

The need to act with dispatch to prevent the economic freefall that is coming if we don’t has never been greater. The deregulators, who were drunk on greed ignored the risks, Bush and the political bosses pumped money into the false economy to keep it going, the wealthiest with almost free borrowing and windfall tax breaks, unleashed a speculation monster of unprecedented proportions. Unfortunately those are the folks who are still running the show and creating more disaster.

It will get worse, much worse, why? The bailout solution is based on the same trickle down theory the economy was built on, give it to the rich who know how to use it and it will help the people at the bottom. The theory was if you spread the debt widely, it would have little impact if some of it failed. They used this theory to ignore normal debt to asset ratio, instead comparing it to a drop in the ocean, forgetting enough drops fill an ocean.

Only when some of the underlying debt masquerading as assets began to fail did anyone ask the question, how much of this debt have we put out there? Income to debt ratios suddenly became meaningless. No one knows how much debt is out their, what it is worth or who is holding it. The reality is that until stock values deflate to a reasonable asset to debt ratio and consumers have income to buy, the market will continue to fall.

Simply, it is likely that thousands of businesses will fail including some giant automakers. General Motors assets for example, are estimated to be worth $2.6 billion while its debt is $300 billion. This is a sobering thought, yet the Detroit executives are arguing to keep their bonuses if they get government help as this is being written.

As the amount of debt and the true value of the assets is revealed, the stock price falls, requiring the sell off of real assets to stay in business, workers are laid off to cut costs, reducing their buying power. The feedback loops now in play; deflation, unemployment, more deflation will drive the market artificially low as it wipes out any remaining consumer and lender confidence. The solution with the least pain is to boost both consumer income and let the air out of the asset bubble simultaneously, not try and save those who created the problem.

Wealth redistribution created the problem.

The Bush tax breaks gave more capital to the rich and almost free borrowing to play the market with. At first it was invested in qualified mortgages, credit cards, auto and student loans. These were packaged and sold as bonds which were used as collateral to borrow more, to invest in other speculation. Private equity companies and hedge funds offered inflated prices for companies. They sold junk bonds to finance the deal, loading that debt on the purchased companies’ books and then taking huge fees and bonuses off the top for the debt they had created. Excess cash and deregulation also fueled the buyout and merger markets, creating companies “too big to let fail.” In essence they expected to be bailed out if they got in trouble.

These bonds were then rated AAA by companies paid by the sellers and insured with credit default swaps, which again were traded and used as collateral. How big is the problem? Current estimates are the amount of Credit Default sold equals between $55-62 trillion.

Building an economy on debt worked fine as long as you had enough qualified debtors that would pay back the notes. The problem was they ran out of qualified buyers, so pushed to give credit to those who weren’t qualified. This coincided with removal of usury laws restricting consumer interest rates, the restrictive bankruptcy laws passed in 2005 forcing more repayment and doubling fees and a steady bombardment of advertising selling credit to those least able to afford it. Those with no credit were offered payday loans at 600-750% annual percentage rates. Using extraordinary penalty interest rates and fees on the certain to be late payments, was used to give cover higher interest rates to the bond buyers and to justify the high ratings given on this debt.

Trickle down, flood up.

During the same period those same big money forces forced wages down by an all out assault on organized labor beginning with Ronald Reagan, weakening of worker protection laws, outsourcing, throwing of retirement programs to wall street and discontinuation of healthcare benefits. Americans found out that jobs created in the new economy were low paying part time service jobs, with few if any benefits. Construction was the fastest growing sector compensating for lost manufacturing jobs, of course that’s based on house building. All of this was successful in insuring a disproportionate share of the profits of the “new economy” went to the rich, not the working people and small businesses.

Making it worse were changes made in how unemployment was calculated hiding, actual unemployment numbers by taking those who had given up off the roles, reducing what full time was defined as and exclusion of some classes of workers. Those who were displaced to lower paying part time jobs were employed, whether that employment paid the bills or not was inconsequential to the conservatives in power. Income adjusted for inflation has fallen 30% since the 1970s, extra household members working and borrowing was the only way to keep up.

Federal housing subsidies have declined by over 60 percent since the 1980s, due to lower funding and the increased inflation of housing, pushing more people to refinance and enter risky financial obligations like subprime loans. In many cases, people had no choice but to take this cheap credit when emergencies that in the past that would have come out of savings arose.

While banks and companies line up at the federal trough to be rescued, millions will be abandoned. We hear bankers and politicians about insuring the “irresponsible consumer” is not let off the hook.

The free market boys also campaigned and got the destruction of the safety net that would have assured a bottom to consumer spending. According to a November 16th, New York Times article the tightening of rules has led to only 37% of the unemployed being eligible for benefits, which average $293/week for up to 39 weeks as compared to 65 weeks in the 1970’s. Of those without unemployment only 40 percent of poor families who actually qualify for public assistance receive it. Much of public assistance has been replaced by the Earned Income Tax Credit. The only problem, if you lose your low paying job, you lose your tax credit. The safety net is gone.

No consumer, no profit.

It seems not many people thought about what would happen when the squeezed consumer ran out of money and credit as long as the economy was churning along on speculative investments because of the low interest rates and the inflated money supply. The New York Times reports that bankruptcy filings are up 35% over October of last year and that’s not counting the sizeable number of people that think they can’t file under the new law or just don’t have the money to.

With 70% of the American economy running on consumer spending and not even enough money to buy cheap foreign goods, you can see why big department sales are running Christmas sales at the beginning of November. In normal times, the fed would cut the interest rate and stimulate the economy, but we’ve already been doing that for years to artificially fuel the economy and it is down to .3 percent, there isn’t anything left to cut.

We are now in a downward spiral where stock prices are falling, profit and assets are vanishing from the books, layoffs are becoming the norm and that will undermine the debt given to consumers who were credit worthy at the time of their loans. This will result in further falling stock prices, failed financial instruments and companies and more layoffs. Where the bottom is no one knows. Until the ratio of debt to assets is actually reasonable and determined, this situation will only get worse.

Those who in normal times would look to deficit spending and more national debt as did Franklin Delano Roosevelt to fund our way out of this are going to be disappointed. With a federal deficit this year of $311 billion for a total that exceeds $10 trillion, unfunded Medicare and Social Security obligations at $47 trillion, and confidence in the American dollar will decline. This will make it less likely that countries with reserves will buy more treasury bills, more likely they will dump them.

Uncle China cuts off the credit.

Money flowed into this scheme because the low interest paid on the increased sale of treasury bonds to print money produced a much lower return. While China was content to take these low interest yields as a hedge against a future downturn, our investment houses invested in the bogus debt based bonds with higher and more immediate returns. As long as China was willing to buy our treasury bonds and allow us to increase our national debt the fed kept on selling them, pushing more dollars into the system. This huge transfer of wealth kept their export economy growing and pushed our stock prices to artificially inflate.

Don’t expect China to help now; their internal stability is much more important to their leader’s survival then that of the world economy. China has watched their own stock market drop 60% and over 65,000 factories stop production throwing millions out of work. The instability that brings gives Chinese leaders nightmares.

Their solution, invest $586 billion dollars in the next two years to overhaul their infrastructure, put people to work and keep their national economy from disintegrating. The most likely way to fund this is from selling some of the $541 billion in U.S. Treasury bonds they are holding. Any hope that China will fund this from its annual $300 billion dollar trade surplus is not likely given that recession has already caused rapid descent of its exports to the world markets, a condition that is sure to worsen.

No one knows how little the dollar will be worth if they start dumping treasury notes on the market. The Mid-East, forget it, falling oil prices will force them to defer from buying dollars and improve the lot of their vast poor to prevent being overthrown. The potential for severe deflation followed by hyper-inflation is very real.

Investing in the past won’t work.

Paulson’s recent change from buying toxic debt to direct investment may well indicate there is just too much of it for the government to handle. Direct investment into the financial sector, auto sector and other major players gives the confidence of federal backing without exposing how much debt is really out there. Unfortunately it’s like investing in a buggy factory the day before Henry Ford publically introduced the Model A. The invisible hand the conservatives like so well will find the real value eventually.

There is a way to avoid complete catastrophe, but it is doubtful politicians will make it happen. The real answers are so radical as to disorient the average American and provoke the fiercest resistance against government by big business that can be imagined. Overhaul America.

The global climate catastrophe we are facing is the moral equivalent of World War II.

Conversion from a fossil fueled economy to a sustainable one will require massive green infrastructure rebuilding, tremendous retraining of manpower and all of the research and development that we can muster. It means including all costs in a product not public costs and private profits. It means doing away with inefficiencies in our current economic system that create profits rather than wealth. What are some of those?

1) End the empire of foreign military adventures — The best chance the world has is the redirection of our half trillion dollar military budget (some say the real cost with black box programs is actually a trillion) to develop sustainable energy infrastructure. Putting much more in direct development aid and an expanded peace corps would have a wider and more sustainable impact on world stability.

We have successfully turned from a wealth building civilian economy to a wealth destroying military economy for too long (since WWII). A machine created to create products or other machines creates much more wealth than the creation of machine to make something blow up. Just as after WWII millions of veterans returned to build the national infrastructure, current military and returning veterans have the organizational and other technical skills to rebuild our nation as civilians.

2) Healthcare – With government employees, military and veteran, Medicare, Medicaid, state, county and municipal workers already receiving government paid healthcare (well over 40% of the U.S. population) it is time to go to a single payer system. The difference in administrative costs and overlapping programs would allow us to give everyone in the country health insurance for no more than we are paying as a nation now. It would eliminate the bizarre labyrinth of access and result in lower costs from earlier treatment and preventive care. I’d rather have a government bureaucrat deciding my healthcare then an insurance flunky whose bonus depends on denying care.

3) Education produces wealth — our antiquated, overburdened education system should be completely retooled, free from preschool through trade school or college. Can anyone tell me why we still have summers off except for pressure from the tourist industry looking for cheap labor?

4) Create wealth through small business — provide startup capital in the form of micro loans, technical assistance and training to small scale entrepreneurs’. Restructuring disability and retirement through increased social security taxes would result in an explosion of creative entrepreneurship. Private retirement fund assets and liabilities would be moved into this system with restructured benefits allowing a living wage. While some would lose retirement income the majority would not. It’s better than losing it all, ask a GM or Ford retiree. Take the income cap off from social security; you pay on all of your earnings including capital gains.

5) Pass the Employee Free Choice Bill — Allowing workers to sign up to join a union on a card rather than a company wide vote announced months in advance would allow workers to restore the balance between them and management that has bled consumers of the buying power to keep the economy going. The secret elections argument is totally bogus. Why do you think companies are pouring millions of dollars into a campaign to insure secret worker elections? It allows them months to bully, intimidate, threaten and coerce workers into voting against their own interests. While union membership has dropped to 12.1 percent, 55 percent of Americans say they would join one if given a chance.

6) Raise taxes on corporate profits, capital gains, wealth and high income. Yes that’s right raise taxes, redistribute wealth, take it from the rich and invest it in the people who create most of the wealth in this economy. The rich are hoarding their remaining wealth to take advantage of further concentrating their power with fire sale buyouts or surviving the downturn in style.

People at the bottom of the income pile spend that money and they pay a greater portion of their income in taxes reinvigorating the economy and tax revenues. Raising taxes would encourage longer term investment into products and efficiencies necessary for building a sustainable society and economy instead of speculation in arcane financial instruments that only produce paper profits to justify ridiculous bonuses and salaries.

Chances are most of these solutions will not be adopted, or at least until conditions may well be beyond salvaging, they will seem much too radical to most. I guess allowing banks and other companies to use taxpayer bailout money to continue bonuses to failed and corrupt executives, acquire healthy competitors, and salvage buggy companies seems to make more sense to most people. We are a prisoner of our labels and limited imagination. As Pogo said, “We have met the enemy and he is us.”

While the Democrats tend to believe in more government regulation of essential industries services people basic needs and more freedom regarding personal behavior, Republicans tend to focus on controlling people’s personal behavior and giving individuals and corporations untrammeled ability to impose their economic and political will on others in the name of personal freedom. Any attempt to limit this ability to exploit, repress or subjugate and balance it with the collective good, is quickly declared an imposition on personal freedom and property rights, and of course soviet style socialism.

This argument is not new, the founders were certainly aware of it, and while denying rights to women, slaves and the landless, certainly recognized the necessity of both individual freedom and collective responsibility. Currently, we hear constant cries from right wing radio hosts and pundits about how the election of Barack Obama will lead to a socialist state with central planning. I have searched and searched, with no luck, for any indication of an attempt or proposal by Obama and other Democrats for this plan or goal to transfer all private property to the state. I would join them if I did. What he is proposing is bringing back into balance is economic freedom with collective responsibility.

The fact is that most of us already accept some “socialist” concepts in government when it comes to the “common welfare.” From garbage pickup, education, police and fire protection to Medicare and Social Security we accept the need for collective concepts as a part of our form of government.

What ought to be disturbing is that every industrial country that is performing better than us in healthcare, per capita income, freedom and economic growth is a socialist democracy with a stronger collective framework than us. The politically charged terms socialist and communist are quickly attached to any common purpose in an attempt to discredit it, which would limit the control of the wealthy over government.

Our History of Collectivism

The fact is that our form of government and history all indicate the founders’ intent of a collective responsibility. “Governments are instituted among Men, deriving their just powers from the consent of the governed,” (Declaration of Independence) in other words, a collective purpose for the common good, the very definition of “socialism”. The founders obvious commitment to this is simply the act of forming a representative democracy, squarely the first attempt to put a government in the “collective” control.

They emphasized the purposes of collective action in the declaration and the constitution, the equality of men in the eyes of government being the first recognition of the governed having the right to prevent despotism from injuring the common good for individual gain by forcing consensus decisions. From the declaration “the separate and equal station to which the Laws of Nature and of Nature’s God entitle them.” Then they went on to describe the common purpose of government to guarantee, “certain unalienable rights, that among these are Life, Liberty and the pursuit of Happiness.” They said the purpose of government was to “organiz(e)ing its powers in such form, as to them shall seem most likely to affect their Safety and Happiness.”, in other words, to balance their collective safety and individual interests.

There is not enough room in this article to review the parallels between George Bush and the colonists’ proofs of “Tyranny” they “submitted to a candid world” against King George in order to justify their rebellion. This quote that they used in summary of their requests for relief from the burdensome mandates disregarding their persons and property and unheeded pleas for redress might say it however, “A Prince, whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.”

They ended the Declaration with this, “And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.” In other words, a recognition of a collective interest greater than themselves or their personal property.

Again in the Constitution, the collective purpose is defined for our government in the preamble. “We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common Defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.” The Constitutional separation of powers was set up specifically to prevent government from being tipped towards the concentration of power in special interests and insuring that government acted for the collective purpose.

This discussion throughout our history spawned the bill of rights, the repeal of slavery, the equal protection clause and the vote for women. The founders originally were primarily concerned about protection from government tyranny; after all it was a time when kings dominated.

They saw the national economy as one in which they were jointly invested in and their principal fears of possible economic dominance being that of external empires, hence the war of 1812. They felt so strongly about this that while there was funding for a navy to protect trade and defense there was no plan for a standing army, (which Washington warned against in his farewell address) one they feared would be used by the government against its own people or for wars of aggression.

While there were regional rebellions, rent strikes, arguments over banking and other protests against the tyranny of wealth in the young country, wealth disparity was relatively small and not of concern to the government. Concentrated wealth was unable to shift the purpose of government to special economic interests until the Civil War grew many corporations to a size where they were influential shapers of policy.

The Consequences of Unbridled Individualism

Abuses of economic power in the form of government subsidies, suppression of worker rights, and the destruction of small farms and businesses rode the excess of post-war railroad expansion and the rise of the great monopolies. The unbridled growth resulted in repeated severe economic swings, rife with wild speculation, often using “watered (overvalued) stock.”

This dominance of the expression of unfettered economic freedom resulted in wild fluctuations in the economy. From the 82 years from 1857-1939 had 17 recessions and three depressions, (1873-79, 1893-94, 1929-39) while the 70 years after progressive regulation came into play had 11 recessions and no depressions.

Wealth disparity and economic exploitation grew during the earlier cycle until it exploded in a backlash. In 1877 the great railroad strike marked the beginning of a populist uprising referred to as the progressive era that lasted through almost 1920 before being destroyed. Mostly by using the acquired legal power of government the wealthiest had secured as a weapon against the common man.

The collective actions, including strikes, organizing and political action citizens tried to use to rebalance the collective interests with those of individual or corporate wealth was destroyed by government assistance of almost every president of the era, with Wilson doing the most damage and Coolidge using the red scare to finish the job. They were continually labeled, reds, socialists, communists and anarchists.

What they really were citizens with a collective desire for democratic input into the economy decisions making. Even reformers like Theodore Roosevelt used the power of the government in the interest corporations, hammering “radicals” for political purposes. The failure of government co-opted by wealth to adequately regulate the growing power of selfish economic interests only ended in the self-destructive excess that led to the great depression.

A similar growth of economic self-interest over government policy has repeated itself on a much greater scale since the election of Ronald Reagan in 1980 and the systematic idolatry of the deregulation of corporate behavior and worship of greed. Once again we are facing the collective consequences of extreme self-interest dominating government.

As in the great depression it will take a government that provides for the common good over the individual interest to restore the balance intended by the founders. It will only happen if we have the ability to believe in something bigger then ourselves.

On this Independence Day it might be important to remember what Benjamin Franklin is reported to have said at the signing of the Declaration of Independence to John Hancock after Hancock talked of the need to maintain unity in support of the declaration with a dubious future, “Yes, we must, indeed, all hang together, or most assuredly we shall all hang separately,”

In the late afternoon the temperature drops refreezing the ruts of the last vehicles of yesterday in the new day’s mud. Driving then isn’t that bad as long as you stay in one of the rows of ruts. Turning is a rough adventure, as you have to fight the steering wheel to get your car out of one rut to another. It stays that way for a few weeks to a month, and then the snow is gone. The ground thoroughly thaws allowing the surface water to drain away, the grader comes through and the roads return to their normal washboard surface.

America is stuck in a rut, an invisible rut of our own making. We know we are in a rut, one that is carrying us off the road, but have little clue as what to do about it. We know our level of consumption is killing us, gasoline and food prices being the wakeup call, yet we have no clue as to how we are going to get out of this mess. Politicians at all levels in both parties are so dependent on maintaining our path in the rut they manufacture their own facts to confirm it. The most obvious evidence is to exclude food and energy prices as a measure of inflation. Hence the fed can declare inflation still manageable at 1.9% when it is really 11.7%.

The causes of our energy-money trap are many but the biggest one is policy. Despite identifying the problem of foreign dependence on oil 30 years ago, corporate control of government has kept us on this plan for self destruction actually increasing our per capita use of oil significantly during the same time. We have had government officials at the federal, state and local level who have opposed higher mileage standards, supported oil company subsidies while reducing them for green alternatives (Reagan wiped out most of Carter’s energy alternative subsidies in the first 60 days of his administration), encouraged consumerism around the world to increase profits driving up demand, loosened investment and banking regulations promoting speculation, and most importantly reduced our dollar to worthless paper.

To hide our national slide and maintain profits, there has been a consistent piling up of government debt, a constant attack on wages and benefits for workers, outsourcing of production capacity, a constant attack on freedom in the name of security and a steady criminalization of the poor to justify exclusion from the promise of progress in America. “Economic Growth” has been completely decoupled from the cost of living and quality of life.

Bush kicked it up a notch, coming off the dot com crash, then the economic impact of 9-11 he was looking at sliding into a recession while moving to control mid-east oil reserves, necessary to maintain an oil based economy. The solution, run the presses, print money, lower interest rate, moving from an economy that was based in production to one based in speculation.

To continue to put actual capital into the economy required getting citizens to give up the equity capital they held. That was done by promising every day Americans to leverage all of that equity in the great speculative game of Wall Street speculation including buying their own debt. That debt was encouraged by pushing bigger houses, SUVs and unneeded crap on credit cards they couldn’t pay for through a whole new spectrum of “financial products”. The result was the biggest transfer of wealth in the history of the country. As our personal and national debt increases exponentially, the presses run faster and faster to keep the bubble growing to prevent the inevitable collapse, insuring it will be bigger when it does happen. When it does the big guys take what is left, your house, your savings, and your car.

Oil is the new gold, ever rising prices are primarily a response to the falling dollar. As dollars become worth less, buy oil, because even at the current price it looks like a good deal in the long run when compared to a dollar increasingly backed by debt. Oil speculation is basically trading a commodity falling in value, U.S. Treasury notes and dollars, for a rising one, oil. Oil companies and speculators are doing just exactly what they are supposed to do; the criminal part is how they and the politicians they own have influenced public policy to create this situation in the first place. We are trapped by our debt, our transportation system, our sprawl, and our high energy dependent lifestyle but most of all by our denial.

Maintaining the National Delusion

How do you keep people in the dark while you are robbing them blind? Pump up the patriotism and reinforce national delusion. The basis of our common delusion is the myth of American Exceptionalism and it is deeply embedded in every American from the time of their birth. American Exceptionalism is the belief that we are the freest, most moral, best educated, best paid citizens on earth and that of course, is because we are favored by God. Consequently we are not only the bastion of the best, we have a duty to impose this system we have created on every corner of the earth.

This American Exceptionalism is a result of the domination of the Anglo-Saxon conqueror tribal tradition, the Protestant work ethic that tells us that wealth is a sign of the favor of God, our geographical and intellectual isolation from the rest of the world and a national ethic that raises unbridled greed to a moral imperative. The problem is this rut is headed off the road into that pile of vehicles that followed it before, the historical trash bin of dead empires.

History shows that all empires fall and almost always for the same reasons. They overextend their reach, they depend too much on exploiting vassal states for their production, class differences become extreme, and they tend to destroy their own environment. Their leaders become increasingly corrupt infecting all levels of governance under the illusion their personal wealth can somehow exclude them from the certain coming consequences they try and hide from the general populace. We are in the rut of empires, the consequences are certain unless we get out of that rut.

Symptoms of a Dying Empire

According to the World Health Organization we rank last among industrialized countries (and behind many non-industrialized countries) in all measures of healthcare including; infant mortality, life expectancy, accessibility, satisfaction and pay twice as much for the privilege. We rank 8th in per capita income and that doesn’t deduct what we pay for healthcare and other services provided nationally in other countries. We are 18th in educational attainment and 13th in higher education affordability. But we have more liberty and freedom than anyone, right? In freedom of the press we rank 17th, freedom from corruption for business and government 20th, overall freedom and civil liberty 15th.

We are still number one in a number of things that mark a failing empire; number one among democratic nations in surveillance of its citizens, the largest military in the world (almost bigger then the rest of the world combined), child poverty among industrialized nations and the largest number of incarcerated citizens (25% of the world’s total). Of course we are also the leader in global greenhouse gas production.

We also export these things, many of the nations (at least those with oil) we support have terrible human rights records (Uzbekistan, they boil dissenters there), dictatorships (Nigeria), overthrowing democracies (Haiti) and leave them in horrible poverty except for the elite governing class if they do not ascribe to American policy. Then there is always the main beneficiary of our largess in both civil and military aid, Israel, the pseudo democracy that maintains the largest concentration camps in the world called the West Bank and Gaza.

The result of this dominance and corruption of power has resulted in our 6% of the population being able to devour 26% of the world’s resources every year. The state of the world is a collective problem, if we aren’t willing to give up some of our individual greed and sense of entitlement this empire will go the way of all the others. Persia, Egypt, Rome, the Netherlands, Great Britain, Germany are just a few of the empires who thought they were exceptional and superior as well. The history is clear, those who accepted their change in status and became partners in world survived, those that didn’t were destroyed. We definitely need to get out of this rut.

This incredible action of the Federal Reserve in funding the purchase of the reckless Bear Stearns investment bank by JP Morgan, with the promise of more, shows that the Bush administration will do anything to rescue its rich friends responsible for the unfolding financial debacle in this country. While watching the American working people and small businesss face foreclosure, bankruptcy and unmanageable inflation with little more then a sop of a tax refund, Bush and company promise to take care of their friends no matter what the cost to the rest of us. Every time the feds print more paper and push it into the economy it increases the national debt, deflates the dollar against other currencies and fuels inflation. If you haven’t gotten your tax rebate yet, by the time you do it might not buy more then a couple of tanks of gas.

While Wall Street laments and fears the kinds of loss in stock value that James E. Cayne, Chairman of Bear Stearns took (from $1.2 billion to $13 million) on his stock, the view of the average American is that, hey, I’d take a little humiliation for $13 mill. The fed says it needs to prevent a financial collapse; unfortunately pumping more paper money into the system and lowering the interest rate will not fix the problem and probably make it worse. Oil jumped to a new record (a new one being set every day now) of $112 a barrel. This is an automatic consequence of a dollar that is worth less. All commodities and overseas manufactured items jump in price, which of course is most stuff since we don’t make anything here anymore.

The fed cut of interest rates has made little change in mortgage or credit rates to consumers. The spread between borrowing from the fed and lending to consumers has widened, putting additional money in the pockets of investment banks to help them cover their reckless behavior. In the meantime, regular Americans are trying to decide whether to let their SUV be repossessed because of high gas prices and ride the bus or keep it, let the house go and live in their SUV. Credit cards? . . . just forget paying them.

These things are not accidents, they are the result of policies since the Reagan administration (Clinton included) that promoted trade deficits through outsourcing, encouraged cheap credit, removed financial regulations, and ignored national deficits.

Bailing out Bear Stearns won’t fix the problem. Not just Bear Stearns, but all kinds of investment banks, private equity firms and hedge funds are holding trillions in paper holdings that are backed by real assets worth pennies on the dollar, their value inflated by speculation and fed policy. The contribution of the war at $12 billion a month in deficit spending cannot be discounted either. Assets were leveraged at a rate of 30-1 in many cases, all based on the idea that houses, strip malls, and companies that would continue to be worth more no matter what reality dictated.

But Bush and friends continue to decide that saving Wall Street from its own follies is more worthy than making sure that the American worker and small businesses that actually produce the wealth in this country have a secure future. Worse, their continued pursuit of the same policies will insure a total meltdown of the American economy and leave America just another third world country.

Yet here were both looking for sympathy and help from their self-induced calamity. Murray was telling everyone who would listen how he was taking care of the miner’s families, doing all he could to extricate them and oh by the way it was an earthquake that caused the disaster. In fact he had submitted a plan last year for retreat mining at the site. Retreat mining is used when coal companies greedily want to get every last piece of coal out of a mine by removing the coal pillars holding up the roof and allowing it to collapse. The last pillar is called the “suicide pillar.” While many mine collapses have caused seismic events in Utah, none have ever been caused by a seismic event (earthquake). Yet Murray insists he will prove it was an earthquake. Chalk up another avoidance of responsibility to corporate America.

When Jim Cramer on MSNBC went into a rant last week talking about “Armageddon” and how we were all supposed to be upset that people employed in fleecing poor people into subprime mortgages with adjustable rates were losing their jobs it was more of the same. Why is it that these folks who all cry for less regulation, free markets and minding our own business are the first ones to plead innocence and ask for a government bailout when their actions cause catastrophe?

All over the airwaves in and in the newspapers, business pundits are telling investors don’t panic, leave your money in the market, in the meantime the financial pillars have been removed from a ceiling of debt held up by cheap money loaned for speculation with real little hope of repayment in the event of the inevitable economic downturn. The other message I love is the one that says, it’s just the mortgage market, everything else is ok. That message ignores the billions, maybe trillions of dollars in junk bonds used to finance questionable speculation in buyouts floating around the financial markets; it ignores the increasing weakness of the dollar caused by budget deficits, trade deficits and increasing consumer debt.

When Wal-Mart has to cut prices, the great American consumer spending machine is tapped out and no matter what anyone says the party is over. The speculators at Goldman Sachs, Bear Stearns, Morgan Stanley and 9,000 hedge funds are all leveraged to the max and the only way out is deflation or more free money, hence, the cry for more cash infusion by the feds and lowering of interest rates. The reality is they don’t have the funds to cover their declining positions and need the cash to stem the bloodletting.

The real deal is the pundits don’t want to be the last ones out and take the loss. “Please oh please, pump up the market so we can sell before everyone else catches on.” If these folks were really worried about the consumer they would be pleading for congress to pass legislation to allow people who are in danger of foreclosure to rent their own homes at the market rate until things stabilize and they can negotiate a reasonable repayment plan. The reason the whole subprime market was so attractive was because of the unregulated ability to suck people into thinking they could afford something they couldn’t and by the time they realized it, it would be someone else’s problem.

The increase in money in the system is unlikely to increase liquidity enough to stem the tide. Most banks are hoarding cash because they are unsure of how exposed to the subprime market they are. Corporations who are cash heavy have no incentive to buy when an economic downturn and falling profits are on the immediate horizon. Little of the increase if any will flow into the system. At the same time consumers trapped between loss of real income, inflation in energy, food and medical costs are drowning in debt. Think it will get better, not likely, $2.7 trillion dollars of adjustable rate mortgages will reset to higher interest rates between now and 2009. What the big boys are hoping is that they can get the feds to stall the crash for them to get out. The problem with that plan, is there will be too many of them sneaking towards the exits to go unnoticed.

Like an alcoholic who says, “I’ll quit tomorrow,” the financial industry is crying for the government to give them just one more drink, just one more fix, just a few dollars more. Like all addicts, this behavior will inevitably come to a catastrophic end. The problem is that the average consumer won’t be able to escape the consequences (they failed to hire a lobbyist thinking their representative was protecting their interests) of lost jobs, lost housing, destroyed credit and the new indentured servitude enforced by the bankruptcy laws. Quite the contrary energy, food and healthcare costs will in all probability continue to rise because of their own dynamics in the world market including inflation in China.

The question is not if we are facing a recession, the question is, are we facing a depression, with massive devaluation of the dollar, financial collapse and massive unemployment. If it happens believe me the financial pundits will all be running around like Bob Murray, declaring their horror at what an awful act that God has wrought. What many of them won’t be showing is their pronouncements from their palatial homes financed by the offshore accounts in the Caymans they have been accumulating. If you have any doubts about whether they foresaw this massive swindling of the American worker out of their assets, ask them what their position on the bankruptcy bill was.

Virtually unreported over at the Washington Post, Michael J. de la Merced was citing a significant crack in the debt dike preventing a flood of defaults on leveraged buyout deals. Most of the run-up on Wall Street has been based on the idea that there is an unlimited amount of debt that can be piled up to buy and flip companies, kind of like the housing market speculators. In fact some of them are the same people. To them the important thing is that they collect fees at every transaction along the way.

What the general public doesn’t understand is that the wealthy have been taking their extra money from tax breaks and investing it in speculation. The theory of trickle down economics is that the rich will invest it in increased production capacity, hire more people and generally lift everyone (“a rising tide lifts all boats”). But, true to human behavior, that’s not what happens. Instead, when people have extra money over their needs they tend to invest it in more speculative investments because the potential loss won’t affect their lifestyle while the potential gains are higher than from a more stable but slow-growing investment. In other words, a cabbie might make a bunch of $5 bets on long shots at the track and even may splurge on the Trifecta but a CEO can afford to make $10,000 bets. Both are gambling an amount that, if he loses, doesn’t impact his lifestyle, but if he wins, he wins big.

Private Equity and Hedge Funds have been the chief investment vehicles used by the wealthy to speculate on these long shots. Wealthy investors, institutional funds (pension) and other money pools have been joyously jumping on the bandwagon. As more and more people and funds (up to 9,000 hedge funds now) scout for undervalued companies to buy, the competition has grown fierce, driving up prices. In fact, many of the companies bought don’t justify the price, but what the heck? Neither did that $100,000 house you bought for $150,000 because it was going to be worth $175,000 next week. Right?

Much of their supposed profit does not expand production/create wealth but only increases profits based on tax advantages of their structure and the speculative behavior that inflates the value. The key to all of this is that these buyouts are not occurring with much real money involved. The initial investor in a Private Equity or Hedge Fund usually borrows up to 80% of the money they invest in the fund. The funds pool this capital from multiple investors and then use it to borrow up to 95% of the money they use to purchase the company. Then once the company is purchased and their fees paid, the newly owned company sells bonds, which the company hopefully will pay back.

But not to worry, the Private Equity and Hedge Fund boys make their money off of the amount of money they manage (2% fee) and a percentage of the profit (20%). The investment bankers made a bunch of money from arranging the financing and a bunch of others made money from issuing the bonds. Just like the mortgage brokers and investment houses that bundled the mortgages and resold them as bonds, their profits came from the transaction fees. These bonds have been typically easy to sell because of the high interest return as their risk increases (like subprime loans) and the cheap cost of financing.

Several indicators say that the end of this bubble is near. One of the first is when Hedge and Private Equity Funds go public as several have attempted to do recently. What this means is they believe the best times are over and they are selling their track record to get one last big bite of the apple before the downtrend comes. Everyone wants a crack at the action, not realizing that most of the action is over. Read the fine print on any stock purchase, past performance is no guarantee of future earnings. Having made millions and billions already at the peak of the frenzy, they now sell off a portion of their ownership for a big ka-ching. Even if the stock value of their remaining holdings in the company goes down they are still way ahead. Indeed billionaires became multibillionaires by selling off some of their ownership in these firms, only to see their stock price go below the Initial Public Offering (IPO) price within weeks. Losses in housing notes caused Bear Stearns to have to bail out two failed hedge funds in one week. It’s just reality that when there are more and more dollars chasing fewer and fewer deals that someone is going to lose and previous gains will not be as big as those in the past, even for the winners.

Another is that debt buyers are getting a belly full and beginning to question the value of the debt whether in the form of loans or bonds. Merced reports that 20 recent debt offerings, including debt to finance the Chrysler Group buyout, have joined $235 billion dollars in loans sales that have been have been postponed. Bond sales are also suffering with billions in offerings being put off by First Data, Alliance Boots, U.S. Foodservice, Service Master International and Dollar General.

Investment bankers jumped on the deals to get the high interest rates and fees, even putting up part of the money themselves to get the loan and bond action. Now they are stuck, unable to resell their equity. JP Morgan, Bank of America and Citigroup provided $1.5 billion in equity bridges that they now can’t sell without sweetening the pot or waiting for things to get better.

The housing market has only revealed the tip of the iceberg in defaults. Last week, Country Wide Mortgage, one of the biggest in the business, revealed that creditworthy mortgagees are falling behind in their payments and the decline in the housing market would continue until 2009. That may be optimistic as almost $1 Trillion of adjustable rate mortgages (ARMs) will reset this year.

Almost unnoticed is the commercial real estate market that is badly overbuilt and is starting to show its weakness. Local banks, shut out of the mortgage market and not wanting to be left out, have lent heavily in the commercial real estate market, sometimes at a rate of four to five times their reserve requirements. And we thought the S&L scandal was bad.

Inflation is low according to the government but that is “core inflation” and excludes food and energy costs, by far the biggest costs to the middle class other than housing. According to Mark Felsenthal in a Reuters article on July 12th, food prices have risen faster than core inflation every month since February and energy prices every year for the last four years. And it shows. The banks report that credit card sales and missed payments are both reaching all-time highs, indicating a worsening financial situation for the middle class. Retail sales are down across the board except at WalMart who had to make big price cuts in over 60,000 products to shed inventory. Those weren’t new sales. They were taken from other retailers.

Sadly, with crude oil reaching $75 a barrel and, as John Kilduff of Man Financial said, “We are one headline away from $100 a barrel.” The credit card is the last fading hope of the middle class. This drives up the cost of other necessities, like food. Of course the Fed doesn’t include the cost of gas or food in the “Core Inflation Rate” because it doesn’t affect the investor class much; you can only eat so much caviar.

Cheap financing advanced to consumers in the middle and working classes, who have had declining real income since the ’70s, has been purposeful public policy that forces consumers to borrow more and more to maintain their lifestyle. Incomes have not kept up with inflation, off shored manufacturing jobs have been replaced with service jobs that pay an average of 20% less, federal and state governments have shifted more cost to local entities, increasing property taxes, and the costs to participate in the legal economy for everything from daycare, to college, to medical insurance have been shifted to the worker. The result is a massive transfer of wealth over time from the general population to a very small percentage of super wealthy.

This process began during the Reagan administration and has continued, except during the Clinton years, until the present. It is nearing its inevitable end. As we learned in 1929, great disparity of wealth (which this process has increased tremendously) leads to a disproportionate investment in speculation, driving up prices to unsustainable amounts that then crash back to their real worth. Eventually the transfer of wealth from the working and middle class through increased debt deprives them of both purchasing power and the ability to borrow more, triggering deflation. Of course the devastation occurs mostly to the middle and working class who were already deprived of sharing the wealth of the speculative bubble, but now pay the consequences with layoffs and pension losses.

Our whole economy is built on consumer spending and as we produce less, ship good paying jobs overseas, increase our national and trade deficits, we have become a nation mired in debt. It’s no accident; we long ago passed the point were we “needed” more stuff, so we used advertising and planned obsolescence to create need and cheap financing to acquire it. Debt itself became the primary product. Whether it is the working poor at the window of the payday loan outlet, the Hedge fund manager at the conference table of Goldman Sachs or George W. Bush racking up $10 million an hour in Iraq, debt is the major creative enterprise in America today. In fact it is that government production of money to pay the cost of the war and recycled by the rich after low tax rates into speculative “high yield debt” that propels over inflated prices and over valued assets.

Most money being made today is from the financial transactions—the interests, the fees, and the creation of new kinds of exotic financial products that parse debt and resell it. Dealing in debt is quite lucrative. None of this actually produces wealth; it merely redistributes it more and more to the people at the top who have the money to lend.

The seventies stagflation were produced when the government stopped printing money to pay for the Viet Nam War and will happen again when this war ends. But it may happen sooner because as the economy becomes less secure and deflation becomes an eminent threat, China, Japan and Middle Eastern oil countries that are buying that debt may decide the Euro may be a better bet. When that happens as the old saying goes, “It will be Katie bar the door” to stop the rush to the exits.

At some point this must come unraveled in a rather nasty way. Whether it happens tomorrow or not is not the question, the answer is, it will happen and when it does it will be catastrophic for individuals, businesses, and government entities at all levels. What will happen to the big boys who created all of this? Well, most of them learned from the experience of Michael Milken the “Junk Bond King” who developed junk bonds, or “high yield debt”, to (guess what) finance leveraged buyouts. Indicted on 98 counts of racketeering and securities fraud, he pled guilty to six securities charges. He served twenty-two months. According to Forbes, he paid a total of $900 million in settlements and fines and still had a net worth of over $1 billion upon his release. His current net worth is estimated at $2.1 billion.

The private equity and hedge funds are not regulated by the SEC and most are registered offshore for tax and liability purposes. When it all falls apart most will be able to retire to their homes in the Mediterranean and live off their money in the Caymans, while the rest of us pick up the pieces.