When Lehman Bros flopped last year, markets went into freefall. A sharp correction turned into a full-blown panic. The bubble burst and trillions of dollars in credit vanished in a flash. Trading in exotic debt-instruments stopped overnight. A global sell-off ensued. Markets crashed. For a while, it looked like the whole system might collapse.

The Fed’s emergency intervention pulled the system back from the brink, but the economy is still wracked with deflation. Billions in toxic waste now clog the Fed’s balance sheet. The dollar has fallen like a stone.

When the financial system blows up and credit is sucked down a capital-hole, the economy goes into a downward spiral. Businesses slash inventory and lay off workers, workers have to cut back on spending and credit. That creates less demand for products, which leads to more lay offs. This is the vicious circle policymakers try to avoid. That’s why Fed chair Ben Bernanke wheeled out the heavy artillery and launched the most aggressive central bank intervention in history.

The Fed dropped rates to zero, but its Quantitative Easing (QE) program (which monetizes the debt) actually pushes rates even lower to roughly negative 2 percent.

Bernanke has underwritten every sector of the financial system with government guarantees. He has provided full-value loans for dodgy collateral which is worth only a fraction of its original value. The market can no longer operate without the Fed. The Fed IS the market, which is why it is foolish to talk about a “recovery”. The idea of recovery implies a free-standing system based on supply and demand. But, for now, the government provides the demand, which is why there is no market and no recovery. Analysts at Goldman Sachs sum it up like this:

How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far? Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter.

Positive growth is an illusion created by government spending. The economy is still flat on its back. Consumer spending and credit are in sharp decline. Unemployment is steadily rising (although at a slower pace) and wages are flatlining with a chance of falling for the first time in 30 years. Deflationary pressures are building. The talk of a “jobless recovery” is intentionally misleading. Jobs ARE recovery; therefore a jobless recovery merely points to asset-inflation brought on by erratic monetary policy. Surging stocks shouldn’t be confused with a genuine recovery.

The Fed faces stiff headwinds ahead. Low interest rates can have unintended consequences. The “cheapness” of the greenback has made the dollar the funding currency for the carry trade. Investors are borrowing low cost dollars and using them to purchase higher interest assets elsewhere. The process, which is rapidly escalating, is fraught with peril as economist Nouriel Roubini points out in an article in the Financial Times:

Since March there has been a massive rally in all sorts of risky assets… and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable…

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronized rally….Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fueling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates…

Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing…

…This policy feeds the global asset bubble it is also feeding a new US asset bubble…. The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy….This is keeping short-term rates lower than is desirable…. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate… the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.¹

Everyone who watches the market has noticed the inverse correlation of stocks to the dollar. When the dollar fades, stocks soar. And when the dollar strengthens, stocks plunge. Eventually, the dollar will reverse-course and stage a comeback, probably when Bernanke stops his printing operations. That will trigger the next severe correction which will burst bubbles across all asset classes.

Bernanke’s success in reflating sagging asset prices has depended entirely on interest rate manipulation and liquidity injections. There’s been no effort to patch household balance sheets, increase production, or strengthen overall demand. It’s a clever trick by a master illusionist, but it has its costs. When the dollar rallies, markets will crash. And Bernanke will mainly be responsible.

1. Nouriel Roubini, “The Mother of all Carry Trades Faces an Inevitable Bust,” Financial Times.

This is appeasement not peace. Yet, the Nobel Peace Prize was awarded to US President Barrack Obama for reasons which are baffling. Recipients of the same prize, namely the Dalai Lama and Barrack Hussein Obama, ironically cannot meet as it might discombobulate a delicate international order. Perhaps the Norwegian Nobel Prize committee was rewarding Obama for not launching a war under false pretexts the way his predecessor George W. Bush did just nine months into office. Otherwise, Obama has achieved nothing except for an exaggerated engagement with the Islamic world.

According to the Daily Telegraph, an “Obamameter” run by the political accountability organization PolitiFact lists “seven broken promises, a dozen stalled initiatives and 117 pet projects still ‘in the works.’”

The Nobel award is symptomatic of all that is wrong with our system.

Our standards are literally being shortened. There is a duality of metrics that separates the rulers from the ruled. When the ruler fails to deliver, a prestigious award provides the fix.

One class sports a long list of titles, awards, “achievements” and those meaningless two-, three-lettered acronyms on ponderous coattails while the other class desperately cling on to the hems for their daily crumbs.

We live in an SMS world defined by abbreviated value-added jargons (VAJ) like ROIs, ERPs, KPIs and thousands of other acronyms that favour paper credentials over knowledge, Ponzi schemes over gold and venality over industry.

One class throws out such jargons, titles and acronyms as yardsticks that others should live by. When ruination knocks at the door, it is the agenda setters and the main culprits who walk away with the fat bonus.

It is not easy to shake off the power of acronyms. If they were alive today, Sigmund Freud and his nephew Edward Bernays may have used them in case studies of population control.

There is power in stilted vocabularies. In a corporate meeting, jargons are routinely resorted by one clueless group to beat the senses of another. Statistics and glossy power points are shoved down your throat. Few seek clarity. No one wants to be seen as a hick. Resolutions are finally passed. Over time, it leads to pseudo-sciences within the once respectable socio-economic fields of study.

Abbreviated terms of reference (TOR) are great trinkets for a self-delusional professional rabble. They revel in the mass-manufactured credentials available at schools, universities and e-bay.

In the end, we have an acute global talent shortage in a world brimming with paper qualifications.

Ever heard of the search consultant who slogged more than a year to find a suitable vice president for an international bank? Standards were high; the two-, three-lettered credentials required would fill up a page, including the never advertised GF – Good Family. (If you applied these standards to the military, a field medic is not allowed to man the 20-mm gun at a crucial point in battle).

Six months later, the bank collapsed! Few four-flushers at this bank knew what was going on. Their tasks were neatly delineated. Yet, armed with their vaunted acronyms, they are free to peddle their rattlesnake oil elsewhere. They are in demand as, like Obama, they can promise the world and con the common man into parting with their future.

Welcome to the real world. Like the financial world, “notional” and “fiat” flips into “real.”

War becomes peace! Fiction becomes fact. The worrying signs are there. A startling number of Britons actually consider Winston Churchill and Mahatma Gandhi to be fictional characters while they vouch for the authenticity of Baker Street’s Sherlock Homes!

The Daily Mail hypothesizes that such ignorance “could well have something to do with the TV insurance adverts inviting viewers to ‘challenge Churchill’ and featuring a lugubrious talking dog.”

That’s the power to sell. The power of fictional imagery! According to a Wall Street Journal report, an astonishing 61% of sub-prime loans were palmed off to those who actually qualified for a conventional loan. The problem lies not with greed per se, but with Key Performance Indexes (KPIs) governing the Job Descriptions (JDs) of bank executives. To meet such metrics, they have to inveigle large quantities of loans in the shortest possible time to achieve maximum profit.

A computerized database of such performances sifts out the “high achievers” from the “underperformers,” the conmen from the common men and, in some instances, the barely literate from the educated. Your worth is spelt out in stats and acronyms. Every trick is employed under the veneer of letters to cheat the uninitiated.

These charlatans set the universal discourse for civilized behaviour, educational standards and career achievements.

The most pressing task for the CEO of America Inc is a financial one. How will he deal with a one quadrillion dollar plus (more than 1,000 trillion) derivatives market that is waiting to explode? It is largely an American creation. The Chinese are threatening to default on a fraction of them and a few trillion in defaults is enough to sink the Western Economy.

Nobel Economics laureates will tell you it is all business as usual, and the bulls are being warmed up for the mother of all matador markets (MOAMM). It is only matter of time…

Time, however, is revealing a disturbing reality.

The Obama Record

Has Obama brought peace to Afghanistan or is he building up troops there? Read the news. The Taliban writ runs throughout half of Afghanistan and slowly, across the western half of Pakistan. Has Muqtada Al-Sadr kissed the cheeks of his Sunni and Kurdish brethren in Iraq with a salam? Isn’t Pakistan’s Jihad Inc. run with US-supplied weaponry?

Why are the entities known as Osama bin Laden and Al Qaeda still free to thread the terror mill? Why hasn’t the United States sued for peace and diplomatic ties with neighbouring, little Cuba when it can tolerate every gross human rights violation in China?

If Obama is afraid of Turkish sensitivities over a century-old Armenian genocide, can he be expected to stand up for international justice today?

Has Obama brought universal healthcare to millions of Americans who can’t afford it? How are the deteriorating manufacturing and employment sectors measuring up to reality? Do the marginalized need another sound bite or another lying statistic to reassure them that things are shaping up?

Will the deteriorating value of the US dollar prompt Washington to embark on another Persian Gulf adventure? Every major war in history was fuelled by the re-liquidation needs of an empty treasury. Like the psychology of acronyms, the casus belli is buried under jargons, lies and patriotic grunts.

ROI, ERP, KPI, T-Bill …CIC, Rah, Rah Rah!¹ Sieg Heil, Sieg Heil, Sieg Heil!

The historical progression is time-tested. When financial systems collapse under the weight of fraudulent practice, it is time for a Fuhrer to step in with catchphrases. They will be earthy and populist and will be addressed to a horde of the disenchanted.

And the clueless!

Let’s face it. This is the first modern generation not to have produced a Nikola Tesla, an Albert Einstein, or a financial whiz who can match the genius of Nikolai Kondratieff. Or how about a Mahatma Gandhi who was rejected five times for the Nobel Peace Prize? Maybe things were not rigid then. Einstein could not fix his hair right, Gandhi wore a loincloth. People could think!

Obama sets Gandhi as his standard. It is a clichéd fashion statement. The contrast cannot be depicted with sufficient brevity. One was born to privilege but “came down” to his true roots. The other was fast-tracked out of a ghetto possibility to the presidency of the United States. It was something unreal and remains so, much like Obama’s tinsel-tinged predecessors.

Mahatma Gandhi eschewed violence. He brought down the greatest empire ever through non-cooperation, by boycotting the financial foundations of Imperial rule. His actions triggered self-rule and independence for many nations. He fought for the poor and wanted them to live in dignity.

Obama the Nobel Peace laureate may turn out to be the anti-Gandhi. Out of the crumbling foundations of our financial system, he and his cohorts must do something. The metrics of today leave him little choice. There is no thinking outside the box.

Instead of fortifying the nation-state, Obama may dissolve them for a borderless commune. Force will be met by force, violence will increase and the foundations of a New World Order will be built on the ashes of the faceless poor.

The Norwegians must have given that award to prevent this spectre.

1. It was this American cheerleading phrase which Adolph Hitler adopted into his Sieg Heil (Hail Victory) Nazi rallies.

The debate has revealed a deep division over the causes and remedies, with Anglo-Franco American (AFA) politicians, columnists and economists on one side and their Asian-German (AG) counterparts on the other. In general terms the AFA spokespeople put the blame for the crises on external factors, or more specifically they point their finger at the positive trade surpluses, dynamic export sectors and high investment rates in productive sectors and low levels of consumption in the AG countries as the cause of ”unbalances” or “disequilibrium” in the world economy.¹

In contrast, the AG countries reject this argument which speaks to prejudicial external practices. They emphasize the internal “imbalances” within the AFA countries, which has weakened their international, commercial and financial position.

In this paper, I am going to argue that both internal economic policies and external empire building strategies of the AFA countries have been the driving force for global imbalances. The structural differences between the two regions and the differences in class structure and economic configurations in each bloc precludes any easy or immediate solution. On the contrary, for the foreseeable future, the conflict between dynamic emerging export powers and the declining western bloc is likely to intensify, leading to greater trade conflicts and possible military confrontations.

The AFA charges against China’s commercial ‘imbalances’ conflates trade with the West with Beijing’s relations with the rest of the world. China has balanced trade or even trade deficits with Asian, African, Middle Eastern and Latin American countries. Moreover, the AFA countries have trade imbalances with other regions including the Middle East and Germany. Even if the AFA countries curtailed imports from China, it is most likely that other Asian countries would replace them, including Vietnam, South Korea, Taiwan, Bangladesh and India. The resulting trade deficits of the AFA would remain about the same.

The AFA countries blame China’s “undervalued” currency, and claim that Beijing authorities manipulate the exchange rate to under price exports and beat out competitors (namely producers within the AFA). Yet China’s currency has been revalued steadily upward over 20% the past five years, and yet the AFA still run a deficit, suggesting that their domestic producers have still not been able to compete with Chinese manufacturers.² More recently AFA writers have complained about low interest rates set by the Chinese government as a “subsidy” to its exporters. Yet AFA interest rates are at zero percent or even negative, to no avail. Moreover, the AFA have provided over 1.5 trillion in bailout funds and over 1.3 billion in stimulus spending – a subsidy five times greater than China’s stimulus package, without improving their trade balance. What is telling, given the sectoral allocations, of each regime’s bailout – subsidy – stimulus packages, China has fully recovered and is growing at 8% by mid 2009, while the AFA continue to wallow in negative territory and continue running up trade deficits. This points to the centrality of internal factors, namely, the economic sectors which receive the state subsidies and how they invest it and as a result how their decisions affect trade balances.

The AFA charge that China’s low cost labor, its exploitation of workers accounts for trade imbalances. Yet an increasing percentage of China’s exports are based on technological advances, not cheap labor. This is because low labor cost competitors are emerging in Asia.

The AFA complain that China over emphasizes its ‘export’ strategy at the expense of producing for the domestic market. Yet nearly half of China’s exports to the US are made by US owned multi-nationals who have invested, subcontracted and co-produced with Chinese counterparts. In other words, US internal policy, the deregulation of capital flows, has facilitated the movement of US manufactures abroad resulting in a decline of local production, an increase in imports and greater trade deficits.

Internal Causes of Trade Deficits (and Unbalanced World Economy)

The most obvious and striking correlation with the growth of AFA trade imbalances is the growth and dominance of the financial sector.³ The financialization of the AFA economies and Wall Street’s CEOs dominant role in the strategic economic positions of the state is transparent to the mass of the people and has even been acknowledged by most private economists and academics. Trade deficits increased in direct proportion to the growing political and economic power of the financial sector. In large part, this was due to the transfer of capital from manufacturing to financial services, leading to the decline of the manufacturing sector’s investments in innovations and competitive management strategies. The financial sector’s, high salaries, bonuses and quick returns attracted most of self-styled “best and the brightest”. MBA graduates multiplied while advanced engineering school graduates diminished. Advanced skilled worker training programs disappeared while low skill retail sales recruitment grew.

The problem was that financial services did not, could not replace the overseas earnings which formerly accrued to the country through manufacturing sales. Least of all in the highly regulated financial markets of China, Japan, India and the rest of Asia, where banking was subordinated to the expansion of manufacturing — namely financing industries targeted by state officials. The dominance of finance capital and the related sectors of real estate and insurance, led to a highly polarized class structure: in which billionaire and millionaire investment bankers presided at the top and an army of low paid service workers (retail employees, cleaners and sweepers, etc.) immigrant and non-union workers occupied the bottom. Presently income inequalities in the US exceed those of any other “advanced” capitalist country. The inequalities in Manhattan exceed those of Guatemala. The growing concentration of wealth is accompanied by decline of median wages over the past three decades. As a result the purchasing power of US workers is declining, thus reducing the demand for locally produced quality goods. The purchase of imported cheap textiles, shoes and other accessories results. The result was a decline in local saving and domestic investment in manufacturing leading to a decline in competitiveness. Moreover, the competition among financial lenders furthered consumer spending and greater individual indebtedness at a time when manufacturing exports were declining, starved of investments.

Most manufacturing firms transformed themselves into financial corporations, channeling investment funds in sectors not earning foreign exchange. Worst of all in pursuit of higher profits, manufacturers turned into commercial vendors, closing down plants and sub-contracting production to China and other Asian countries and importing final products into the US creating the trade imbalances. The large scale relocation of US multi-nationals abroad further exacerbated the trade imbalances.

The key role of the state in creating domestic imbalances leading to global disequilibrium is a result of the financial sector’s takeover of the state,and the deregulation of financial markets. The result was the long term promotion of an economic policy, in which the central bank (the Federal Reserve) and Treasury encouraged the growth of finance ,real estate and insurance sectors over manufacturing. The finance based strategy was justified by a large army of academics and publicists who spoke of a “post industrial”, or “service” or “information” economy as a “higher stage”, rather than a perversely unbalanced, unsustainable and unjust economy.

Financial supremacy coincided with the growing militarization of US foreign policy. Throughout the last thirty years, US overseas economic expansion was gradually eclipsed by the growing reliance on military intervention, and the build-up of military bases in hundreds of sites. As financialization weakened the productive capacity of US manufacturing exporters’ efforts to capture markets, US policymakers increased their reliance on the supremacy of military power. The channeling of billions into military spending drained resources from efforts to upgrade the competitiveness of US civilian industry and was a major factor-in its declining share of export markets. The end result of militarization was a loss of export earnings and the growth of trade deficits.

If we combine the three great internal imbalances in the AFA economics, but especially in the US, the financialization of the economy, the militarization of foreign policy and the concentration of wealth at the top, we can best understand why the US has such a huge and growing trade deficit.

China Export Driven Strategy

China’s emphasis on an export driven strategy and the resultant growing class inequalities is largely a result of the class composition of the state and its social structure. In other words internal factors are the driving force of its pursuit of trade surpluses. What is ironic is that some of the AFA critics, who rightly point to the internal ‘imbalances’ in China, overlook similar problems in the West. Namely, no mention is made of the absence of a national health plan in the US, the growth of inequalities and declining mass purchasing power – even as they point to these deficiencies in China. What Western advocates of greater social welfare in China do not discuss, is the capitalist class power, privilege and profits which hinder greater mass consumption. Least of all do they discuss the motor force for lifting working class and peasant living conditions, namely the class struggle. Instead they rely on technocratic appeals to Chinese elites for greater social spending.

The Chinese state has evolved into a powerful machine for manufacturing goods and billionaires. Today China has the highest growth, the highest rate of exploitation and the greatest class inequalities in Asia. Increasing wages to stimulate local consumption means reducing profits, anathema to all capitalists including Chinese. Increasing public spending on universal health coverage especially for the 700 million uninsured peasants and rural workers means higher taxes on the rich, including the families and colleagues of the governing elite. In contrast, producing for export markets does not require increasing domestic consumer power, on the contrary it requires lower wages.

A shift from an export-driven to a domestic market driven strategy, requires not only a ‘change in policy’ but a deep shift in class power, from the current capitalist class and its state backers to the workers and peasants. To realize large scale, long term commitments of public revenues to social services for the rural poor and higher wages for exploited workers requires sustained popular mobilizations, uprisings, strikes to secure the independent trade unions and peasant associations necessary to secure a shift in state allocations toward domestic consumption.

China’s “imbalances” are largely internal, social and political. An imbalance of social power between an all powerful capitalist state and a repressed powerless mass of workers and peasants; an imbalance in income between a super-rich banking, real estate, manufacturing export elite and a low paid working class and subsistence peasantry;an imbalance between a highly organized state linked by family, ideology and economic interests to the capitalist class and a dispersed, fragmented and isolated mass of working people.

China’s ruling class, its outward billion dollar investments in western capitalist enterprises via its sovereign wealth funds, its billion dollar investments in overseas extractive enterprises, is driven by the mass of capital accumulated that is extracted via intense levels of labor exploitation and the elimination of state funded pensions, health plans and education. China’s role as an emerging imperial power is rooted in the imbalance between global power and social welfare decay.

The fact that western capitalist writers, policymakers and their academic camp followers point to the same social imbalances in China as its domestic working class critics should not obscure a basic point. The Wall Street critics are defending the AFA financial elite against China’s export industrialists’ greater productivity; while the domestic working class critics are criticizing the capitalists and the state for their high rates of exploitation and concentration of wealth.

The key to reducing imbalances in world trade is reducing socio-economic inequalities within each region. The US requires a profound shift from a finance dominated economy to a manufacturing economy, where finance, high tech and higher education is directed to creating a competitive, productive economy based on skilled labor. The link at the top between Wall Street and the Pentagon must be replaced by a link from below between the industrial working class, low paid service workers and public sector employees and professionals.

The structural transformation of the US economy is necessary but not sufficient. If US efforts to pursue a military driven empire persist, this will divert resources away from domestic and overseas economic priorities. Military driven empires alienate trading partners, have high costs and low returns, isolate economic investors and traders from productive partnerships and are destructive of domestic and overseas civilian productive facilities.

The way out of the massive imbalances is for the US to engage in a large scale, long term domestic structural transformations – namely de-financialization and de-militarization. But the political and economic forces benefiting from the current configuration are deeply entrenched, in control of both major parties and dominate the mass media and its message. Yet, despite their profound institutional power they suffer several fatal flaws. In the first instance they have created unsustainable global imbalances, which will sooner or later lead to a collapse of the dollar and renewed and more virulent and costly financial bubbles. Secondly, the free market which is the main ideological prop of the deregulated financial power elite is totally discredited as evidenced by the single digit support and trust of Wall Street. Thirdly, military driven empire building has run its course: after nine years of war in Afghanistan the vast majority of the US public has sent a message to the political elite of both parties, the White House and Congress, that its time to shift from funding failed overseas adventures to solving the problem of 20% under and unemployed Americans (30 million), the 100 million or 33% of Americans with no or costly and inadequate health coverage. No amount of media and political pundit scapegoating of China for our own self-induced “imbalances” can divert American opinion from their direct experiences with our own internal inequalities and policy failures.

1. Martin Wolf, “Why China must do more to rebalance its economy” Financial Times, September 23, 2009, p 11. See also Financial Times, October 3, 4, 2009. p 3 and Financial Times, September 21, 2009 p 9.
2. Financial Times, October 9, 2009 p 1.
3. Gerald Davis, Managed by the Markets: How Finance Re-Shaped America (New York: Oxford University Press 2009).

Even if the stock market can be shored up by more government borrowing for “stimulus” spending, it’s a temporary reprieve, because nothing can bring back the consumer purchasing power that was lost when the banks stopped pumping money into the economy through out-of-control mortgage lending. We simply no longer have the job base for people to earn the income they need to live.

The underlying cause of the crisis is in fact the debt-based monetary system, whereby the U.S. ruling class long ago sold out our nation and its people to the international banking cartel of which the Rockefeller and Morgan interests have been the chief representatives for over a century. It was lending on a previously unheard of scale for overpriced assets to people and businesses unable to repay that created the bubbles that burst in 2008, not only in the housing market but also in such areas as commercial real estate, equities, commodities, and derivatives. It was an explosion that reverberated throughout the world.

The Obama administration’s response to the crisis has been to print Treasury bonds both for the financial system bailouts and the sputtering Keynesian stimulus that so far has gone substantially into military infrastructure. This bond bubble is what I have referred to as “Obama’s Last Picture Show.”

Government debt is fundamentally inflationary. For a generation, the U.S. dollar has been inflating at an increasing rate, with the economy being kept in a growth posture by selling our debt instruments abroad or allowing foreigners holding dollars to purchase property and other assets on our own soil. The website EconomyinCrisis.org reports that in 2007, the most recent year for which data are available, “foreign entities spent $267.8 billion to acquire or establish U.S. businesses.”

Foreigners are spending their dollars as fast as possible, because they are now plummeting in value. It’s increasingly clear that sooner rather than later, the dollar will be dumped by foreign purchasers of bonds, particularly China, and possibly even the oil-producing nations.

These nations know full well that bonds denominated in dollars can never be completely repaid, even if the bonds can be rolled over into fresh debt. It’s this dynamic that is dragging the U.S. economy to the cliff, because real economic growth stopped long ago when our manufacturing jobs were exported. This is because most of the growth since Ronald Reagan was elected president in 1980 has been only on paper through financial bubbles. This included the dot.com bubble of the Clinton years that blew up in 2000-2001.

Now, after the Treasury bond bubble of 2009, there is nothing left in America to inflate. With so many jobs gone, the American family home was the last thing of value we owned.

So the air is going out of the tires. Americans who are struggling to work for a living are passive spectators as their jobs, savings, health insurance, pensions, and homes continue to erode in value or even disappear. Last Sunday the Washington Post reported a massive crisis in state and local government pensions. Reporter David Cho wrote, “The financial crisis has blown a hole in the rosy forecasts of pension funds that cover teachers, police officers and other government employees, casting into doubt as never before whether these public systems will be able to keep their promises to future generations of retirees.”

So what, if anything, can be done about it?

Well, the first thing an intelligent physician does is diagnose the disease. Thomas Greco, in his new book The End of Money and the Future of Civilization (Chelsea Green: 2009) , outlines the increasingly familiar story of how things got so bad, and he tells it as well as anyone has ever done. His style is precise and sometimes academic. Behind it, though, is a passion for truth and the type of rock-solid integrity that refuses to sugar-coat a very bitter pill.

More than that, Greco writes about how to change what has gone wrong. His credentials as an engineer, college professor, author, and consultant are impeccable. His book is among the most important written in this decade. It is truly a book that can alter the world and, if taken seriously, give large numbers of people a practical way to survive the gathering catastrophe.

But unlike most commentators, what Greco offers is not another phony prescription for what the financiers and government should do for us, whether through “restarting” lending or another round of stimulus spending. Rather it’s what we should do for ourselves, and could do much better, if we understood what to do and if big banking and big government just got out of the way.

As I said, at the root is the monetary system, whose failure cannot be understood without a history lesson. So Greco writes about the struggle between banking and democracy that took place in the 1790s when the ink on our new national constitution was barely dry.

It was Alexander Hamilton, the first secretary of the treasury, who compromised the new nation, through what he admitted was “corruption,” by giving the wealthy speculators in Revolutionary War bonds the benefit of federally-sponsored redemption and then by establishing the First Bank of the United States. This early drift toward elitist rule was opposed by Thomas Jefferson, James Madison, and others who figured in the creation of what later became the Democratic Party.

Greco writes: “While Jefferson favored a stronger union than that which emerged under the Articles of Confederation, he was vehemently opposed to the reconstruction of monarchic government on the American continent.” Hamilton had said frankly that the British monarchy was the best system of government known to man. Part of the monarchic system was the Bank of England, which Hamilton copied when setting up the First Bank.

But Jefferson, who repudiated Hamilton’s elitist platform, was elected president in what was then called “The Revolution of 1800.” Congress refused to renew the Bank’s charter by a single vote when it was up for renewal in 1811.

But the Second Bank of the United States was chartered in 1816 due to the government debt left behind from the War of 1812 against Great Britain. Thus was set up what became known as the “Bank War.”

It was President Andrew Jackson who dethroned the bankers from power by pulling government funds out of the Second Bank in 1833. Greco writes that in Jackson’s view: “The ‘Bank War’ was a contest for rulership—would the United States be governed by the people through their elected president and representatives, or by an unelected financial elite through their central bank instrument?”

The modern takeover began in earnest during the Civil War when Congress passed the National Banking Acts in 1863-64 which mandated use of government bonds as bank lending reserves, thereby creating a direct linkage between bank profits and the debt the government was starting to load on the shoulders of taxpayers.

The nation’s fate was sealed with the passage of the Federal Reserve Act in 1913. The deal was that the bankers would control the currency, and thereby the nation’s economy, while the government would be provided with an unlimited amount of inflated dollars to fight its wars.

The bookkeeper’s trick of creating money out of thin air, charging interest for its use, then forcing it down the throats of weaker nations by threat of violence, is what has allowed the Anglo-American empire, since the founding of the Bank of England in 1696, gradually to conquer the world. Though President Woodrow Wilson signed the Federal Reserve Act into law, he saw what that action meant. Greco cites Wilson as writing: “There has come about an extraordinary and very sinister concentration in the control of business in the country…. The great monopoly in this country is the monopoly of big credits.”

Among other ill effects, the system has ruined the value of the currency. The inflation caused by large issues of bank-created loans is seized upon by the government which goes along because inflation reduces the cost of its deficits. Investors buy Treasury bonds denominated in Federal Reserve Notes then watch their value evaporate over time. In fact Federal Reserve Notes have lost over 95 percent of their value since they were first introduced.

Moreover, it’s additional inflation caused by bank-generated interest that drives up the costs of goods and services, forcing everyone in the economy to try to defend themselves by raising their prices to the max. Greco spells this out too, which almost every economist in the world, with the exception perhaps of Australia’s James Cumes, overlooks.

Bank interest has other tragic effects. It was high interest rates, for instance, that destroyed the Idaho potato industry. A farmer from that region told me at a conference a few years ago that when interest rates skyrocketed in the early 1980s, he asked the president of one of the Federal Reserve Banks why they did it. The answer was they were “ordered” to raise interest rates by the international banking system.

Make no mistake, it’s the banking system, facilitated by the Fed, not unwary borrowers, who brought on the collapse of 2008.

Now, in 2009, the bankers, mainly those in the U.S., have so shattered the world economy by debt mounted on debt that there may be no reprieve except the creation of a slave society based on rule by the rich over the masses of whatever peons should happen to survive the downturn and its tragic effects on employment, health, the food and water supply, and even our ability to cope with climate change.

The political establishment, expressing itself in pronouncements by organizations like the Council on Foreign Relations, see a future, not of economic democracy or increased financial pluralism, but consolidation of world currencies into a small number overseen at the top by the world’s financial oligarchy. Citing the writings of Benn Steil, the CFR’s Director of International Economics, Greco writes: “The ostensible plan is to reduce global exchange media to three—one each for Europe, the Americas, and Asia. One might reasonably suppose that at a later stage, those three would be combined into one currency also under the control of the global banking elite.”

Greco concludes: “The New World Order is upon us.”

With ample justification, he even goes apocalyptic, citing The Book of Revelation in demonstrating the import on a spiritual plane of the elitist takeover: “And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand or in their foreheads: And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.” (Revelation 13: 16-17)

But is it really the end, or is there a new world waiting to be born? Greco thinks so. He speaks of the end of an era when unlimited economic growth fed by massive influxes of debt-based money is no longer sustainable. He writes: “That our global civilization cannot continue on its current path seems evident….But I think our collective consciousness is beginning to change. We are becoming aware of limits and are reaching that part of our evolutionary program that says, ‘Stop!’”

Part of the awareness of how to stop must focus on the institutions responsible for the crisis. Greco praises Ron Paul for calling out the Federal Reserve in the 2008 presidential campaign. He cites a statement Paul made to Federal Reserve Chairman Alan Greenspan in a 2004 hearing where Paul told Greenspan that the power of the Fed “challenges the whole concept of freedom and liberty and sound money.” Thus Paul and other monetary reformers, though largely ignored by the mainstream media and political establishment, have made it clear that change must start with what really lies at the bottom of elite control: how money is made and who makes it.

Unfortunately, few progressive economists, including Paul Krugman, Joseph Stiglitz, and Robert Reich comprehend the monetary causes of today’s disasters. Instead of demanding reforms that would make money the proper servant of a sustainable economy, most call for more stimulus spending; i.e., more government debt, along with “reform” of a financial system that is corrupt down to its very DNA.

So do we really need the bankers’ fake currency, today backed by nothing but a federal deficit of $12 trillion and growing by the day?

Greco says we don’t, and this is what his book about. But it’s not about doing without the necessities of life, or heading for the hills with a gun and backpack. Nor is it about important efforts at macro-level monetary reform like those of the American Monetary Institute, Congressman Dennis Kucinich, or advocates for a basic income guarantee. Rather it’s about individuals, groups, and communities taking control of the monetary system at the grassroots level and creating an entirely new basis for trade than bank-owed debt.

Greco writes about “a new paradigm approach to the exchange function.” The solution, he says, “is to provide interest-free credit to producers within the process of mutual credit clearing. That is the process of offsetting purchases against sales within an association of merchants, manufacturers, and workers. It will eventually include everyone who buys and sells, or makes and receives disbursements of any kind.”

Greco is one of the world’s leading experts in describing alternative or complementary currencies. These are self-regulating systems that facilitate “reciprocal exchange,” not using government legal tender but which are still allowed under the currency laws so long as taxes are not evaded.

Greco discusses the large and growing worldwide “LETS” movement—Local Exchange Trading Systems, like the Ithaca HOURS system in Ithaca, New York. He describes the Swiss WIR Bank, the longest-running credit clearing system in the world, with over 70,000 members. He writes about the national and international barter exchanges that involve over 400,000 businesses trading at an annual level of $10 billion.

Greco also describes the world-famous Mondragon Cooperatives from the Basque region of Northern Spain. Started by a Roman Catholic priest in 1941, the Mondragon system, he says, is “the hub of what is probably the most successful and progressive social cooperative economy in modern history.”

He also tells the inspiring story of the Argentine trading clubs—the trueques—which, when used with “provincial bonds” issued by regional governments, rescued that country during the 2001 economic collapse brought on by the collusion between the Argentine government and the International Monetary Fund.

Credit clearing is not new. Greco traces it to the medieval European fairs. These exchanges are like banking clearing houses. The world’s largest is the automated clearing house—ACH—operated by the Federal Reserve.

But as Greco points out: “The clearing process need not be restricted to banks; it can be applied directly to transactions between buyers and sellers of goods and services. The LETS systems that have proliferated in communities around the world use the credit clearing process, as do commercial trade exchanges. Credit clearing systems are, in essence, clearing houses—but their members are businesses and individuals instead of banks.”

Alternative currency and trading systems, says Greco, are the wave of the future. Even though most only mount up to partial local successes, they show what can be done. Greco likens these efforts to the Wright Brothers’ first flight that covered 120 feet. They show, he says, that the potential exists for local, regional, then national and international money-free exchanges that eventually could be joined by a single web-based trading platform. This could eventually get rid of the corruption of debt-money altogether.

Chapter 16 of the book is about “A Regional Economic Development Plan Based on Credit Clearing” that shows the potential. Greco writes, “The credit clearing exchange is the key element that enables a community to develop a sustainable economy under local control and to maintain a high standard of living and quality of life.”

This would be a real revolution. What can governments do to help? Perhaps only by removing, as Greco recommends, the privileged position of bank debt-money as legal tender. Instead, let bank money compete with market-based alternative currencies and credit exchanges, if it can.

Greco’s book is a how-to-do-it manual that updates and expands on his previous books, Money and Debt: A Solution to the Global Crisis, New Money for Healthy Communities, and Money: Understanding and Creating Alternatives to Legal Tender. Greco also operates a website that offers advice and support to worthwhile community initiatives.

My own view is that no one should wait to see who takes the lead in creating the monetary and credit-clearing systems of the future. The time is now. There is no more reason to delay. If the people of the world do not join together in this kind of action, they can likely kiss their economic future and perhaps their livelihoods good-bye. The controllers of the world, those with the big money, the ones who run the banking systems, who own the global corporations, and who finance politicians like Obama, the Bushes, and the Clintons, are now poised in their blindness to extinguish the light of democracy on the planet for good.

Greco is implying that the power of the elite is not only dated but illusory. Thus the way to proceed is not just to oppose them. If they are opposed, they’ll do what they always do, which is to roll out the SWAT teams, the military in the streets, the tear gas, the sound cannon, the concentration camps, the Patriot Acts, the torture chambers, because that is all they know, and it’s what they do best.

The money monopoly translates into a monopoly on violence on an ascending scale. We know that the U.S. sells more weapons abroad than any other nation, and we know that it is war above all that makes the bankers rich.

So let them have their weapons and wars. With all due respect to those brave enough to protest, it’s time for people simply to walk away and set up their own economic and monetary systems as a prelude to a rebirth of humanity as ethical beings in sustainable communities of choice.

The keys, says Greco, are simple: “Promote the establishment of private complementary exchange systems—and use them. Buy from your friends and neighbors wherever possible. Contribute your time, energy, and money to whatever moves things in the right direction.”

Greco also recommends that the unit of exchange for alternative currencies be based on the value of commodities—not necessarily gold or silver, which bankers and governments manipulate, but those commodities readily available within a trading system. State and local governments should do everything possible to protect, encourage, nourish, and participate in these systems.

The irony is that what may appear on the surface to be technical changes in how the exchange of goods and services takes place can have such profound effects. The answer is that systems of exchange reflect entirely different perceptions of the world. Bank-money exchange reflects and creates a system of elite control and human slavery. Reciprocal credit exchange reflects and creates a democratic system on a level monetary playing field.

The difference points to the fact that such reform is, above all, a spiritual endeavor. Thomas Greco has devoted decades to this quest and is one of its foremost visionaries. In an Epilogue he writes: “We will either learn to put aside sectarian differences, to recognize all life as one life, to cooperate in sharing earth’s bounty, and yield control to a higher power—or we will find ourselves embroiled in ever-more destructive conflicts that will leave the planet in ruins and avail only the meanest form of existence for the few, if any, who survive.”

It’s a vision we can all strive to embrace.

But two key words seem to have survived the attrition and withstood the test of time: imperialism and financialism.¹

Talk of imperialism and financialism – and particularly of the nexus between them – remains as catchy as ever. Marxists of different colours – from classical, to neo to post – find the two terms expedient, if not indispensable. Radical anarchists, conservative Stalinists and distinguished academics of various denominations all continue to use and debate them.

The views of course differ greatly, but there is a common thread: for most Marxists, imperialism and financialism are prime causes of our worldly ills. Their nexus is said to explain capitalist development and underdevelopment; it underlies capitalist power and contradictions; and it drives capitalist globalization, its regional realignment and local dynamics. It is a fit-all logo for street demonstrators and a generic battle cry for armchair analysts.

The secret behind this staying power is flexibility. Over the years, the concepts of imperialism and financialism have changed more or less beyond recognition, as a result of which the link between them nowadays connotes something totally different from what it meant a century ago.

The purpose of this article is to outline this chameleon-like transformation, to assess what is left of the nexus and to ask whether this nexus is still worth keeping.

Empire and Finance

The twin notions of imperialism and financialism emerged at the turn of the twentieth century. The backdrop is familiar enough. During the latter part of the nineteenth century, the leading European powers were busy taking over large tracts of non-capitalist territory around the world. At the same time, their own political economies were being fundamentally transformed. Since the two developments unfolded hand in hand, it was only natural for theorists to ask whether they were related – and if so, how and why.

The most influential explanation came from a British left liberal, John Hobson, whose work on the subject was later extended and modified by Marxists such as Rosa Luxemburg, Rudolf Hilferding, Vladimir Lenin and Karl Kautsky, among others.²

Framed in a nutshell, the basic argument rested on the belief that capitalism had changed: originally ‘industrial’ and ‘competitive’, the system had become ‘financial’ and ‘monopolistic’.

This transformation, said the theorists, had two crucial effects. First, the process of monopolization and the centralization of capital in the hands of the large financiers made the distribution of income far more unequal, and that greater inequality restricted the purchasing power of workers relative to the productive potential of the system. As a result of this imbalance, there emerged the spectre of ‘surplus capital’, excess funds that could not be invested profitably in the home market. And since this ‘surplus capital’ could not be disposed of domestically, it forced capitalists to look for foreign outlets, particularly in pristine, pre-capitalist regions.

Second, the centralization of capital altered the political landscape. Instead of the night-watchman government of the laissez-faire epoch, there emerged a strong, active state. The laissez-faire capitalists of the earlier era saw little reason to share their profits with the state and therefore glorified the frugality of a small central administration and minimal taxation. But the new state was no longer run by hands-off liberals. Instead, it was dominated and manipulated by an aggressive oligarchy of ‘finance capital’ – a coalition of large bankers, leading industrialists, war mongers and speculators who needed a strong state that would crack down on domestic opposition and embark on foreign military adventures.

And so emerged the nexus between imperialism and financialism. The concentrated financialized economy, went the argument, requires pre-capitalist colonies where surplus capital can be invested profitably; and the cabal of finance capital, now in the political driver’s seat, is able to push the state into an international imperialist struggle to obtain those colonies.

At the time, this thesis was not only totally new and highly sophisticated; it also fit closely with the unfolding of events. It gave an elegant explanation for the imperial bellicosity of the late nineteenth century, and it neatly accounted for the circumstances leading to the great imperial conflict of the first ‘World War’. There were of course other explanations for that war – from realist/statist, to liberal, to geopolitical, to psychological.³ But for most intellectuals, these alternative explications seemed too partial or instrumental compared to the sweeping inevitability offered by the nexus of empire and finance.

History, though, kept changing, and soon enough both the theory and its basic concepts had to be altered.

Monopoly Capital

The end of the Second World War brought three major transformations. First, the nature of international conflict changed completely. Instead of a violent inter-capitalist struggle, there emerged a Cold War between the former imperial powers on the one hand and the (very imperial) Soviet bloc on the other (with plenty of hot proxy conflicts flaring up in the outlying areas). Second, the relationship between core and periphery was radically altered. Outright conquest and territorial imperialism gave way to decolonization, while tax-collecting navies were replaced by the more sophisticated tools of foreign aid and foreign direct investment (FDI). Third and finally, the political economies of the core countries themselves were reorganized. Instead of the volatile laissez-faire regime, there arose a large welfare-warfare state whose ‘interventionist’ ideologies and counter-cyclical policies managed to reduce instability and boost domestic growth.

On the face of it, this new constellation made talk of finance-driven imperialism seem outdated if not totally irrelevant. But the theorists didn’t give up the nexus. Instead, they gave it a new meaning.

The revised link was articulated most fully by the Monopoly Capital School associated with the New York journal Monthly Review.⁴ Capitalism, argued the writers of this school, remains haunted by a lack of profitable investment outlets. And that problem, along with its solution, can no longer be explained in classical Marxist terms.

The shift from competition to oligopoly that began in the late nineteenth century, these writers claimed, was now complete. And that shift meant that Marx’s ‘labour theory of value’ and his notion of ‘surplus value’ had become more or less irrelevant to capitalist pricing.

In the brave new world of oligopolies, the emphasis on non-price competition speeds up the pace of technical change and efficiency gains, making commodities cheaper and cheaper to produce. But unlike in a competitive system, these rapid cost reductions do not translate into falling prices. The prevalence of oligopolies creates a built-in inflationary bias which, despite falling costs, makes prices move up and sometimes sideways, but rarely if ever down.

This growing divergence between falling costs and rising prices increases the income share of capitalists, and that increase reverses the underlying course of capitalism. Marx believed that the combination of ever-growing mechanization and ruthless competition creates a ‘tendency of the rate of profit to fall’. But the substitution of monopoly capitalism for free competition inverts the trajectory. The new system is ruled by an opposite ‘tendency of the surplus to rise’.

The early theorists of imperialism, although using a different vocabulary, understood the gist of this transformation. And even though they did not provide a full theory to explain it, they realized that the consequence of that transformation was to shift the problem of capitalism from production to circulation (or in later Keynesian parlance, from ‘aggregate supply’ to ‘aggregate demand’). The new capitalism, they pointed out, suffered not from insufficient surplus, but from too much surplus, and its key challenge now was how to ‘offset’ and ‘absorb’ this ever-growing excess so that accumulation could keep going instead of coming to a halt.

That much was already understood at the turn of the twentieth century. But this is where the similarity between the early theorists of imperialism and the new analysts of Monopoly Capital ends.

Black Hole: The Role of Institutionalized Waste

Until the early twentieth century, it seemed that the only way to offset the growing excess was productive and external: the surplus of goods and capital had to be exported to and invested in pre-capitalist colonies. But as it turned out, there was another solution, one that the early theorists hadn’t foreseen and that the analysts of Monopoly Capital now emphasized. The surplus could also be disposed off unproductively and internally: it could be wasted at home.

For the theorists of Monopoly Capital, ‘waste’ denoted expenditures that are necessary neither for producing the surplus nor for reproducing the population, and that are, in that sense, totally unproductive and therefore wasteful. These expenditures absorb existing surplus without ever creating any new surplus, and this double feature enables them to mitigate without ever aggravating the ‘tendency of the surplus to rise’.

The absorptive role of wasteful spending wasn’t entirely new, having already been identified at the turn of the twentieth century by Thorstein Veblen.⁵ But it was only after the Second Word War, with the entrenchment of the Fordist model of mass production and consumption and the parallel rise of the welfare-warfare state, that the process was fully and conscientiously institutionalized as a salient feature of monopoly capitalism.

By the end of the war, the U.S. ruling class grew fearful that demobilization would trigger another severe depression; and having accepted and internalized the stimulating role of large-scale government spending, it supported the creation of a new ‘Keynesian Coalition’ that brought together the interests of big business, the large labour unions and various state agencies. The hallmark of this coalition was immortalized in a secret U.S. National Security Council document (NSC-62), whose writers explicitly called on the government to use high military spending as a way of securing the internal stability of U.S. capitalism.⁶

According to its theorists, monopoly capitalism gave rise to many forms of institutionalized waste – including a bloated sales effort, the creation of new ‘desires’ for useless goods and services and the acceleration of product obsolescence, among other strategies. But the two most significant types of waste were spending on the military and on the financial sector.

The importance of these latter expenditures, went the argument, lies in their seemingly limitless size. The magnitude of military expenditures has no obvious ceiling: it depends solely on the ability of the ruling class to justify the expenditures on grounds of national security. Similarly with the size of the financial sector: its magnitude expands with the potentially limitless inflation of credit. This convenient expandability turns military spending and financial intermediation into a giant ‘black hole’ (our term): they suck in large chunks of the excess surplus without ever generating any excess surplus of their own.⁷

Now, on the face of it, the efficacy of this domestic black hole should have made imperialism less necessary if not wholly redundant. According to the theorists of Monopoly Capital, though, this would be the wrong conclusion to draw. It is certainly true that, unlike the old imperial system, monopoly capitalism no longer needs colonies. But the absence of formal colonies is largely a matter of appearance. Remove this appearance and you’ll see the imperial impulse pretty much intact: the core continues to exploit, dominate and violate the periphery for its own capitalist ends.⁸

Spearheaded by U.S.-based multinationals and no longer hindered by inter-capitalist wars, argued the theorists, the new order of monopoly capitalism has become increasingly global and ever more integrated. And this global integration, they continued, has come to depend on an international division of labour, free access to strategic raw materials and political regimes that are ideologically open for business. However, these conditions do not develop automatically and peacefully. They have to be actively promoted and enforced – often against stiff domestic opposition – and they have to be safeguarded against external threats (the Soviet bloc before its collapse, Islamic fundamentalism and rogue states since then, etc.). And because such promotion and enforcement hinge on the threat and frequent use of violence, there is an obvious justification if not outright need for a large, well-equipped army sustained by large military budgets.

In this context, military spending comes to serve a dual role: together with the financial sector and other forms of waste, it propels the accumulation of capital by black-holing a large chunk of the economic surplus; and it helps secure a more sophisticated and effective neo-imperial order that no longer needs colonial territories but is every bit as expansionary, exploitative and violent as its crude imperial predecessor.

Dependency

The notion of neo-imperialism boosted and gave credence to a subsidiary theory of dependency.⁹ This support was somewhat paradoxical, since the lineage between the two theories was weak if not contradictory. Recall that, by emphasizing the role of domestic waste, the theory of Monopoly Capital served to deemphasize if not totally negate the absorptive importance of the periphery. But the analysts of dependency put their own emphasis elsewhere. The persistence of (neo) imperialism, they claimed, showed that, regardless of its own internal dynamics, the core still needs to keep the periphery chronically subjugated and underdeveloped.

This dependency, went the argument, is the outcome of five hundred years of colonial destruction. During that period, the imperial powers systematically undermined the socio-economic fabric of the periphery, making it totally dependent on the core. In this way, when decolonization finally started, the periphery found itself unable to take off while the capitalist core prospered. There was no longer any need for core states to openly colonize and export capital to the periphery. Using their disproportionate economic and state power, the former imperialist countries were now able to hold the postcolonial periphery in a state of debilitating economic monoculture, political submissiveness and cultural backwardness – and, wherever they could, to impose on it a system of unequal exchange.

Unequal exchange can take different forms. It may involve a wage gap between the ‘less exploited’ labour aristocracy of the core and the ‘more exploited’ simple labour of the periphery. Or the core can compel the periphery to buy its exports at ‘high’ prices (relative to their ‘true’ value), while importing the periphery’s products at ‘low’ prices (relative to their ‘true’ value). As a result of this latter difference, the terms of trade get ‘distorted’, surplus is constantly siphoned into the core (rather than exported from or domestically absorbed by the core), and the eviscerated periphery remains chronically underdeveloped.¹⁰

This logic of dependent underdevelopment was first articulated during the 1950s and 1960s as an antidote to the liberal modernization thesis and its Rostowian promise of an imminent takeoff.¹¹ And at the time, that antidote certainly seemed to be in line with the chronic stagnation of peripheral countries.

But what started as a partial theory soon expanded into a sweeping history of world capitalism. According to this broader narrative, capitalism was and remained imperial from the word go: it didn’t simply start with conquest; it started because of conquest. Its very inception was predicated on geographical exploitation and domination – a process in which the financial-commercial metropolis (say England) used the surplus extracted from a productive periphery (say India) to kick-start its own economic growth. And once started, the only way for this growth to be sustained is for the metropolis to continue to eviscerate the periphery around it. The development of the emperor depends on and necessitates the underdevelopment of its subjects.

The next theoretical step was to fit this template into an even broader concept of a World System – an all-encompassing global approach that seeks to map the hierarchical political relationships, division of labour and flow of commodities and surplus between the peripheral countries at the bottom, the semi-peripheral satellites in the middle and the financial core at the apex. From the viewpoint of this larger retrofit, capitalism is no longer the outcome of a specific class struggle, a conflict that developed in Western Europe during the twilight of feudalism and later spread to and reproduced itself in the rest of the world. Instead, capitalism – to the extent that this term can still be meaningfully used – is merely the outer appearance of Europe’s imperial expedition to rob and loot the rest of the world.

This view reflected a fundamental change in emphasis. Whereas earlier Marxist theorists of imperialism accentuated the centrality of exploitation in production, dependency and World System analysts shifted the focus to trade and unequal exchange. And while previous theories concentrated on the global class struggle, dependency and World System analyses spoke of a conflict between states and geographical regions. The new framework, although nominally ‘Marxist’ on the outside, has little Marxism left on the inside.¹²

And if we are to believe the postists who quickly jumped on the dependency bandwagon, there is nothing particularly surprising about this particular theoretical bent. After all, ‘history’ is no more than an ethno-cultural clash of civilizations, a never-ending cycle of imperial ‘hegemonies’ in which the winners (ego) impose their ‘culture’ on the losers (alter).¹³ To the naked eye, the totalizing capitalization of our contemporary world may seem like a unique historical process. But don’t be deceived. This apparent uniqueness is a flash in the pan. Deconstruct it and what you are left with is yet another imperial imposition – in this case, the imposition of a Euro-American ‘financialized discourse’ on the rest of the world.

Red Giant: An Empire Imploded

The dependency version of the nexus, though, didn’t hold for long, and in the 1970s the cards again got shuffled. The core stumbled into a multifaceted crisis: the United States suffered a humiliating defeat in Vietnam, stagflation decelerated and destabilized the major capitalist countries and political unrest seemed to undermine the legitimacy of the capitalist regime itself. In the meantime, the periphery confounded the theorists: on the one hand, import substitution, the prescribed antidote to dependency, pushed developing countries, primarily in Latin America, into a debt trap; on the other hand, the inverse policy of privatization and export promotion, implemented mostly in East Asia, triggered an apparent ‘economic miracle’. Taken together, these developments didn’t seem to sit well with the notion of Western financial imperialism. And so, once more the nexus had to be revised.

According to the new script, ‘financialization’ is no longer a panacea for the imperial power. In fact, it is prime evidence of imperial decline.

The reasoning here goes back to the basic Marxist distinction between ‘industrial’ activity on the one hand and ‘commercial’ and ‘financial’ activities on the other. The former activity is considered ‘productive’ in that it generates surplus value and leads to the accumulation of ‘actual’ capital. The latter activities, by contrast, are deemed ‘unproductive’; they don’t generate any new surplus value and therefore, in and of themselves, do not create any ‘actual’ capital.

This distinction – which most Marxists accept as sacrosanct – has important implications for the nexus of imperialism and financialism. It is true, say the advocates of the new script, that finance (along with other forms of waste) helps the imperial core absorb its rising surplus – and in so doing prevents stagnation and keeps accumulation going. But there is a price to pay. The addiction to financial waste ends up consuming the very fuel that sustains the core’s imperial position: it hollows out the core’s industrial sector, it undermines its productive vitality, and, eventually, it limits its military capabilities. The financial sector itself continues to expand absolutely and relatively, but this is the expansion of a ‘red giant’ (our term) – the final inflation of a star ready to implode.

The process leading to this implosion is emphasized by theories of hegemonic transition.¹⁴ The analyses here come in different versions, but they all seem to agree on the same basic template. According to this template, the maturation of a hegemonic power – be it Holland in the seventeenth century, Britain in the nineteenth century or the United States presently – coincides with the ‘over-accumulation’ of capital (i.e. the absence of sufficiently profitable investment outlets). This over-accumulation – along with growing international rivalries, challenges and conflicts – triggers a system-wide financial expansion, marked by soaring capital flows, a rise in market speculation and a general inflation of debt and equity values. The financial expansion itself is led by the hegemonic state in an attempt to arrest its own decline, but the reprieve it offers can only be temporary. Relying on finance drains the core of its energy, causes productive investment to flow elsewhere and eventually sets in motion the imminent process of hegemonic transition.

Although the narrative here is universal, its inspiration is clearly drawn from the apparent ‘financialized decline’ of U.S. hegemony. Since the 1970s, many argue, the country has been ‘depleted’: it has grown overburdened by military spending; it has gotten itself entangled in unwinnable armed conflicts, and it has witnessed its industrial-productive base sucked dry by a Wall Street-Washington Complex that prospers on the back of rising debt and bloated financial intermediation.¹⁵

In order to compensate for its growing weakness, these observers continue, the United States has imposed its own model of ‘financialization’ on the rest of the world, hoping to scoop the resulting expansion of liquidity. Some states have been compelled to replicate the model in their own countries, others states have been tempted to finance it by buying U.S. assets, and pretty much all states have been pulled into an unprecedented global whirlpool of capital flow.

The spread of ‘financialization’, though, has only been party successful. For a while, the United States benefited from being able to control, manipulate and leverage this expansion for its own ends. But in the opinion of many, the growing severity of recent financial, economic and military crises suggests that this ability has been greatly reduced and that U.S. hegemony is now coming to an end.

Capital Flow and Transnational Ownership

The highly publicized nature of these imperial misgivings makes this latest version of the nexus seems persuasive. But when we look more closely at the facts, the theoretical surface no longer seems smooth; and as we get even closer to the evidence, cracks begin to appear.

Start with the cross-border flow of capital, the international manifestation of ‘financialization’. This process is often misunderstood, even by high theorists, so a brief clarification is in order. Contrary to popular belief, the flow of capital is financial, and only financial. It consists of legal transactions, whereby investors in one country buy or sell assets in another – and that is it. There is no flow of material or immaterial resources, productive or otherwise. The only things that move are ownership titles.¹⁶

These changes in ownership, of course, are of great importance. If the flow of capital is large enough, the stock of foreign owned assets will grow relative to domestically owned assets. And as the ratio rises, the ownership of capital becomes increasingly transnational.

The history of this process, from 1870 to the present, is sketched in Figure 1, where we plot the total value of all foreign assets as a percent of global GDP (both denominated in dollars). The underling numbers, admittedly, are not very accurate. The raw data on foreign ownership are scarce; often they are of questionable quality; rarely if ever are they available on a consistent basis; and almost always they require painstaking research to collate and heroic assumptions to calibrate. There are also huge problems in estimating global GDP, particularly for earlier periods. But even if we take these severe limitations into consideration, the overall picture seems fairly unambiguous.¹⁷

The figure shows three clear periods: 1870-1900, 1900-1960 and 1960-2003. The late nineteenth century, marked by the imperial expansion of ‘finance capital’, saw the ratio of global foreign assets to global GDP more than double – from 7% in 1870 to 19% in 1900. This upswing was reversed during the first half of the twentieth century. The mayhem created by two world wars and the Great Depression on the one hand and the emergence of domestic ‘institutionalized waste’ on the other undermined the flow of capital and caused the share of foreign ownership to recede. By 1945, with the onset of decolonization under U.S. ‘hegemony’ and the beginning of the Cold War, the ratio of foreign assets to global GDP hit a record low of 5%. This was the nadir. The next half century brought a massive reversal. In the early 1980s, when Ronald Reagan and Margaret Thatcher announced the beginning of neoliberalism, the ratio of foreign assets to GDP was already higher than in 1900; and, by 2003, after a quarter century of exponential growth, it reached an all time high of 122%.

This final number represents a significant level of transnational ownership. According to recent research by the McKinsey Global Institute, between 1990 and 2006 the global proportion of foreign-owned assets has nearly tripled, from 9% to 26% of all world assets (both foreign and domestically-owned). The increase was broadly based: foreign ownership of corporate bonds rose from 7% to 21% of the world total, foreign ownership of government bonds rose from 11% to 31% and foreign ownership of corporate stocks rose from 9% to 27%.¹⁸

The next step is to break the aggregate front and examine the distribution of ownership. This is what we do in Figure 2, which compares the foreign asset shares of British and U.S. owners from 1825 to the present. The chart shows two important differences between the earlier era of ‘classical imperialism’ dominated by Britain and the more recent ‘neo-imperial’ period led by the United States.

First, there is the pattern of decline. British owners saw their share of global assets fall from the mid-nineteenth century onward, but until the end of the century their primacy remained intact. The real challenge came only in the twentieth century, when capital flow decelerated sharply and foreign asset positions were unwound; and it was only in the interwar period, when foreign investment gave way to capital flight, that the share of British owners fell below 50%.

The U.S. experience was very different. U.S. owners achieved their primacy right after the Second World War, when capital flow had already been reduced to a trickle – and that position was undermined the moment capital flow started to pick up. In 1980, when U.S. ‘financialization’ started in earnest, U.S. owners accounted for only 28% of global foreign assets. And by 2003, when record capital flow and the U.S. invasion of Afghanistan and Iraq prompted many Marxists to pronounce the dawn of an ‘American Empire’, the asset share of U.S. owners was reduced to a mere 18%.

Second, there is the identity of the leading owners. In the previous transition, power shifted from owners in one core country (Britain) to those in another (the United States). By contrast, in the current transition (assuming one indeed is underway) the contenders are often from the periphery. In recent years, owners from China, OPEC, Russia, Brazil, Korea and India, among others, have become major foreign investors with significant international positions – including large stakes in America’s ‘imperial’ debt.

Does this shift of foreign ownership represent the rising hegemony of countries such as China – or is what we are witnessing here yet another mutation of imperialism? Perhaps, as some observers seem to imply, we’ve entered a (neo) neo-imperial order in which the ‘Empire’ actually boosts its power by selling off its assets to the periphery?

The Global Distribution of Profit

Surprising as it may sound, such a sell-off is not inconsistent with the basic theory of hegemonic transition. To reiterate, according to this theory, hegemonic transitions are always marked by a financial explosion which is triggered, led and leveraged by the core in a vain attempt to arrest its imminent decline. Supposedly, this explosion enables the hegemonic power to amplify its financial supremacy in order to (temporarily) retain its core status and power. And if retaining that power requires the devolution of foreign assets and the sell-off of domestic ones, so be it.

The question is how to assess this power. How do we know whether the core’s attempt to leverage global ‘financialization’ is actually working? Is there a meaningful benchmark for power, and how should this benchmark be used and understood?

Unfortunately, most theorists of hegemonic transitions tend to avoid the nitty gritty data, so it’s often unclear how they themselves gauge the shifting trajectories of global power. But given the hyper-capitalist nature of our epoch, it seems pretty safe to begin with the bottom line: net profit.

Net profit is the pivotal magnitude in capitalism. It determines the health of corporations, it tells investors how to capitalize assets, it sets limits on what government officials feel they can and cannot do. It is the ultimate yardstick of capitalist power, the category that subjugates the social individual and makes the whole system tick. It is the one magnitude than no researcher of capitalism can afford to ignore.

With this obvious rationale in mind, consider Figure 3, which traces the distribution of global net profit earned by publicly-traded corporations. The chart, covering the period from 1974 to the present, shows three profit series, each denoting the profit share of a distinct corporate aggregate: (1) firms listed in the United States; (2) firms listed in developed markets excluding the United States; and (3) firms listed in the rest of the world – i.e., in ‘emerging markets’.

The data demonstrate a sharp reversal of fortune. Until the mid-1980s, U.S.-listed firms dominated: they scooped roughly 60% of all net profits, leaving firms listed in other developed markets 35% of the total and those listed in ‘emerging market’ less than 5%.

But then the tables turned. During the second half of the 1980s, the net profit share of U.S.-listed firms plummeted, falling to 36% in less than a decade. The 1990s seemed to have stabilized the decline, but in the early 2000s the downward drift resumed. By the end of the decade, U.S. firms saw their net profit fall to 29% of the world total.

The other two aggregates moved in the opposite direction. By 2009, the profits of firms listed in developed countries other than the U.S. reached 53% of the total, while the share of ‘emerging market’ firms quadrupled to 18%.

These numbers, of course, should be interpreted with care. First, note that our profit data here cover only publicly traded firms; they don’t include unlisted, private firms. This fact means that variations in profit shares reflect two very different processes: (1) changes in the amount of profit earned by listed firms, and (2) the pace of listing and delisting of firms. The latter factor became important during the late 1980s and 1990s, when Europe and the ‘emerging markets’ saw their stock market listings swell with many private corporations going public – this at a time when the number of listed firms in the United States remained flat.

Second, the location of a firm’s listing says nothing about its operations and owners. Many firms whose shares are traded in the financial centres of the United States and Europe in fact operate elsewhere. And then there is the issue of ultimate ownership. Recall that currently one third of all global assets are owned by foreigners. This proportion is already large enough to make it difficult to determine the ‘nationality of capital’, and if it were to rise further the whole endeavour would become an exercise in futility.

The theoretical implications of these caveats have received little or no attention from students of hegemonic transitions, and their quantitative implications remain unclear. But even if we take the ‘nationality of capital’ at face value and consider the numbers in Figure 3 as accurate, it remains obvious that ‘financialization’ has not worked for the hegemonic power: despite the alleged omnipotence of its Wall Street-Washington Complex, despite its control over key international organizations, despite having imposed neoliberalism on the rest of the world, and despite its seemingly limitless ability to borrow funds and suck in global liquidity – the bottom line is that the net profit share of U.S. listed corporations has kept falling and falling.

The Engine of ‘Financialization’

Now, in and of itself, the collapse of the U.S. profit share – much like the sell-off of U.S. assets – isn’t at odds with the theory of hegemonic transition. To repeat, this theory suggests that the hegemonic/imperial power, having been weakened by its prior financial excesses (among other ills), will kick-start, promote and sustain a system-wide process of ‘financialization’. According to the theory, the latent purpose is to leverage this process in order to slow down the hegemon’s own decline – but nowhere does the theory say that this ‘strategy’, whether conscious or not, has to succeed.

Presented in this way, the story sounds historically compelling, logically consistent and empirically convincing – but only if we can first establish one basic fact. We need to show that the global process of ‘financialization’ indeed has been led by the United States. This is the starting point. Only if U.S. ‘financialization’ preceded, was bigger than and propelled ‘financialization’ in the rest of the world can we speak of the U.S. leveraging this process for its own ends. And only then can we assess whether that leveraging succeeded or failed.

So let’s look at the evidence.

Concepts and Methods

The initial step in this sequence is to measure ‘financialization’. Conceptually, the task may seem simple. All we need to do is calculate the share of financial activity in overall economic activity and then trace the trajectory of the resulting ratio. When this ratio goes up, we can say that the economy is being ‘financialized’; when it comes down we would conclude that it is being ‘de-financialized’.

But that’s easier said than done.¹⁹

The basic difficulty is that capitalism is mediated through money, and that fact makes every mediated activity both ‘economic’ and ‘financial’ at the same time. As we have already seen, heterodox economists bypass the problem by defining ‘finance’ more narrowly to denote activities that merely shuffle money and credit without producing ‘real’ goods and services (and obviously without generating any surplus value and ‘actual capital’). Unfortunately, though, this yardstick isn’t very practical. In order to use it, the economist needs to know which activity is ‘productive’ and which is not; and yet, strange as it may sound, this is something that economists do not – and indeed cannot – know. Despite hundreds of years of theorizing and endless claims to the contrary, they remain unable to actually measure ‘productivity’. They cannot quantify the productivity of the CEO of a large bank – or of an auto mechanic for that matter. In fact, they don’t even have the units with which to measure such productivity.

The only thing they can do is to assume. Mainstream economists assume that productivity is ‘revealed’ by income, so if the CEO earns 1,000 times more than the mechanic, he must be 1,000 more productive. Marxists reject this arbitrary assumption; instead, they stipulate, also arbitrarily, that financiers are unproductive while mechanics are productive – although this claim still leaves them unsure of how to treat actual corporations, where ‘unproductive’ and ‘productive’ activities are always inextricably intertwined.

The net result is that we don’t have a clear theoretical definition for ‘finance’ and therefore no objective way to assess the extent of ‘financialization’.

But not all is lost.

We certainly can stick with conventions – and the convention, at least among capitalists and investors, is to treat ‘finance’ as synonymous with the FIRE sector; i.e., with firms whose primary activities involve financial intermediation (banking, trust funds, brokerages, etc.), insurance or real estate.

Based on this conventional (albeit theoretically loose) definition of finance, and given our specific concern here with capitalist power, it seems appropriate to proxy the extent and trajectory of ‘financialization’ by looking at the share of total net profit accounted for by FIRE corporations. The magnitude of this share would indicate the extent to which FIRE firms have been able to leverage ‘financialization’ for their own end, and the way this share changes over time would tell us whether their leverage has increased or decreased.

The Inconvenient Facts

This distributional measure of ‘financialization’ is depicted by the two series in Figure 4. The first series shows the net profit of FIRE corporations as a percent of the net profit of all U.S.-listed firms. The second series computes the same ratio for firms listed outside the United States.

And here we run into a little surprise.

According to the theory of hegemonic transition, the engine of ‘financialization’ is the United States. This is the black hole of the World System. It is the site where finance has been used most extensively to absorb the system’s surplus. It is the seat of the all-powerful Wall Street-Washington Complex. It is where neoliberal ideology first took command and from where it was later imposed with force and temptation on the rest of the world. It is the engine that led, pulled and pushed the entire process.

But the facts in Figure 4 seem to tell a different story. According to the chart, the United Sates has not been leading the process. If anything, it seems to have been ‘dragged’ into the process by the rest of the world. …

During the early 1970s, before the onset of systemic ‘financialization’, the U.S. FIRE sector accounted for 6% of the total net profit of U.S.-listed firms. At the time, the comparable figure for the rest of the world was 18% – three times as high! From then on, the United States was merely playing catch-up. Its pace of ‘financialization’ was faster than in the rest of the world; but with the sole exception of a brief period in the late 1990s, its level of ‘financialization’ was always lower. In other words, if we wish to stick with the theory of a finance-fuelled red giant that is slowly imploding as its peripheral liquidly runs out, we should apply that theory not to the United States, but to the rest of the world!

Indeed, even the most recent period of crisis seems at odds with the theory. According to the conventional creed, both left and right, the current crisis is payback for the sins of excessive ‘financialization’ and improper bubble blowing.²⁰ In this Galtonean theory, deviations and distortions always revert to mean, ensuring that the biggest sinners end up suffering the most. And since the U.S. FIRE sector was supposedly the main culprit, it was also the hardest hit.

The only problem is that, according to Figure 4, the U.S. wasn’t the main culprit. On the eve of the crisis, the extent of ‘financialization’ was greater in the rest of the world than in the U.S. And yet, although the world’s financiers committed the greater sin, it was their U.S. counterparts who paid the heftier price. The former saw their profit share decline mildly from 37% to 25% of the total, while the latter watched their own share crash from 32% to 10%.

The gods of finance must have their own sense of justice.

The End of a Nexus?

Of course, this isn’t the first time that a monkey wrench has been thrown into the wheels of the ever-changing nexus of imperialism and financialism. As we have seen, over the past century the nexus had to be repeatedly altered and transformed to match the changing reality. Its first incarnation explained the imperialist scramble for colonies to which finance capital could export its ‘excessive’ surplus. The next version talked of a neo-imperial world of monopoly capitalism where the core’s surplus is absorbed domestically, sucked into a ‘black hole’ of military spending and financial intermediation. The third script postulated a World System where surplus is imported from the dependent periphery into the financial core. And the most recent edition explains the hollowing out of the U.S. core, a ‘red giant’ that had already burned much of its own productive fuel and is now trying to ‘financialize’ the rest of the world in order to use the system’s external liquidity.

Yet, here, too, the facts refuse to cooperate: contrary to the theory, they suggest that U.S. ‘Empire’ has followed rather than led the global process of ‘financialization’ and that U.S. capitalists have been less dependent on finance than their peers elsewhere.

Of course, this inconvenient evidence could be dismissed as cursory – or, better still, neutralized by again adjusting the meaning of imperialism and financialism to fit the new reality. But maybe it’s time to stop the carousel and cease the repeated retrofits. Perhaps we need to admit that, after a century of transmutations, the nexus of imperialism and financialism has run its course, and that we need a new framework altogether.

1. The precise terms are rather loose and their use varies across theorists and over time. Imperialism, empire and colonialism are used interchangeably, as are finance, fictitious capital finance capital, financialization and financialism. Here we use imperialism and financialism simply because they rhyme.
2. John. A. Hobson, Imperialism: A Study (Ann Arbor: University of Michigan Press, 1902 [1965]); Rosa Luxemburg, The Accumulation of Capital, with an introduction by Joan Robinson, translated by A. Schwarzschild (New Haven: Yale University Press, 1913 [1951]); Rudolf Hilferding, Finance Capital: A Study of the Latest Phase of Capitalist Development, edited with an introduction by Tom Bottomore, from a translation by Morris Watnick and Sam Gordon (London: Routledge & Kegan Paul, 1910 [1981]); Vladimir I. Lenin, ‘Imperialism, The Highest State of Capitalism’, in Essential Works of Lenin. ‘What Is to Be Done?’ and Other Writings (New York: Dover Publications, Inc., 1917 [1987]), p. 177-270; Karl Kautsky, ‘Ultra-Imperialism’, New Left Review, 1970, No. 59 (Jan/Feb), p. 41-46 (original German version published in 1914).
3. See, for example, Joseph A. Schumpeter, Imperialism and Social Classes, with an introduction by Bert Hoselitz, translated by Heinz Norden (New York: Meridian Books, 1919; 1927 [1955]); Barbara Wertheim Tuchman, The Guns of August (New York: Macmillan, 1962) and The Proud Tower: A Portrait of the World Before the War, 1890-1914 (New York: Macmillan, 1966); and Paul M. Kennedy, The Rise and Fall of the Great Powers (New York: Random House, 1987), Ch. 5.
4. Some of the important contributions to this literature include Josef Steindl, Maturity and Stagnation in American Capitalism (New York: Monthly Review Press, 1952 [1976]); Shigeto Tsuru, ‘Has Capitalism Changed?’ in Has Capitalism Changed? An International Symposium on the Nature of Contemporary Capitalism, edited by S. Tsuru (Tokyo: Iwanami Shoten, 1956), p. 1-66. Paul A. Baran and Paul M. Sweezy, Monopoly Capital: An Essay on the American Economic and Social Order (New York: Modern Reader Paperbacks, 1966); and Harry Magdoff, The Age of Imperialism: The Economics of U.S. Foreign Policy, 1st Modern Reader ed. (New York: Monthly Review Press, 1969).
5. Veblen’s early analysis is articulated in The Theory of Business Enterprise (Clifton, New Jersey: Augustus M. Kelley, Reprints of Economics Classics, 1904 [1975]).
6. See U.S. National Security Council, NSC 68: United States Objectives and Programs for National Security. A Report to the President Pursuant to the President’s Directive of January 31, 1950. Top Secret (Washington DC, 1950); David A. Gold, ‘The Rise and Fall of the Keynesian Coalition’, Kapitalistate, 1977, Vol. 6, No. 1, p. 129-161; and Jonathan Nitzan and Shimshon Bichler, ‘Cheap Wars’, Tikkun, August 9, 2006.
7. Classical Marxists interpret the role of waste rather differently. In their account, wasteful spending withdraws surplus from the accumulation process; this withdrawal reduces the pace at which constant capital accumulates; and that reduction lessens the tendency of the rate of profit to fall. See for example Michael Kidron, Capitalism and Theory (London: Pluto Press, 1974).
8. Perhaps the clearest advocate of this argument was the late Harry Magdoff, a writer whose empirical and theoretical studies stand as a beacon of scientific research; for a summary, see his Imperialism Without Colonies (New York: Monthly Review Press, 2003). Similar claims (minus the research) are offered by Ellen Meiksins Wood, Empire of Capital (London and New York: Verso, 2003).
9. Some of the important texts here include Raúl Prebisch, The Economic Development of Latin America and its Principal Problems (New York: United Nations, 1950); Paul A. Baran, The Political Economy of Growth (New York and London: Modern Reader Paperbacks, 1957); Andre Gunder Frank, Capitalism and Underdevelopment in Latin America: Historical studies of Chile and Brazil (New York: Monthly Review Press, 1967); Arghiri Emmanuel, Unequal Exchange. A Study of the Imperialism of Trade (New York: Monthly Review Press, 1972); Eduardo H. Galeano, Open Veins of Latin America: Five Centuries of the Pillage of a Continent (New York: Monthly Review Press, 1973). Samir Amin, Accumulation on a World Scale: A Critique of the Theory of Underdevelopment. 2 vols. (New York: Monthly Review Press. 1974); Immanuel Maurice Wallerstein, The Modern World-System. Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century (New York: Academic Press, 1974) and The Modern World-System II: Mercantilism and the Consolidation of the European World-Economy, 1600-1750 (New York: Academic Press, 1980); and Fernando Henrique Cardoso and Enzo Faletto, Dependency and Development in Latin America (Berkeley: University of California Press, 1979).
10. The inverted commas in this paragraph highlight concepts that the theory of unequal exchange can neither define nor measure. Since nobody knows the correct value of labour power, it is impossible to determine the extent of ‘exploitation’ in the two regions. Similarly, since no one knows the ‘true’ value of commodities, there is no way to assess the extent to which export and import prices are ‘high’ or ‘low’. This latter ignorance makes it impossible to gauge the degree to which the terms of trade are ‘distorted’ and, indeed, in whose favour; and given that we don’t know the magnitude or even the direction of the ‘distortion’, it is impossible to tell whether surplus flows from the periphery to the core or vice versa, and how large the flow might be.
11. W.W. Rostow, The Stages of Economic Growth: A Non-Communist Manifesto (Cambridge, England: Cambridge University Press, 1960).
12. The question of what constitutes a ‘proper’ Marxist framework is highlighted in the debates over the transition from feudalism to capitalism. Important contributions to these debates are Maurice Dobb, Studies in the Development of Capitalism. London: Routledge & Kegan Paul Ltd., 1946. [1963]); Paul M. Sweezy ‘A Critique’, in The Transition from Feudalism to Capitalism, Introduction by Rodney Hilton, edited by R. Hilton (London: Verso, 1950 [1978]); Robert Brenner, ‘The Origins of Capitalist Development: A Critique of Neo-Smithian Marxism’, New Left Review, 1977, No. 104 (July-August), p. 25-92; and Robert Brenner, ‘Dobb on the Transition from Feudalism to Capitalism’, Cambridge Journal of Economics, 1978, Vol. 2, No. 2 (June), p. 121-140. For edited volumes on this issue, see Rodney Hilton, ed., The Transition from Feudalism to Capitalism, Introduction by Rodney Hilton (London: Verso, 1978); and T. H. Aston and C. H. E. Philpin, eds., The Brenner Debate: Agrarian Class Structure and Economic Development in Pre-Industrial Europe (Cambridge and New York: Cambridge University Press, 1985).
13. For a typical narrative, see John M. Hobson, The Eastern Origins of Western Civilisation. (Cambridge, UK and New York: Cambridge University Press. 2004).
14. See for example, Fernand Braudel, Civilization & Capitalism, 15th-18th Century, translated from the French and revised by Sian Reynolds, 3 vols. (New York: Harper & Row, Publishers, 1985); Immanuel Maurice Wallerstein, The Politics of the World-Economy: The States, the Movements, and the Civilizations (Cambridge, New York and Paris: Cambridge University Press and Editions de la Maison des sciences de l’homme, 1984); and Giovanni Arrighi, The Long Twentieth Century: Money, Power, and the Origins of Our Times. London: Verso, 1994.
15. For the ‘depletion thesis’, see for example Seymour Melman, Pentagon Capitalism: The Political Economy of War, 1st ed. (New York: McGraw-Hill, 1970) and The Permanent War Economy: American Capitalism in Decline (New York: Simon and Schuster, 1974). A broader historical application is given in Paul M. Kennedy, The Rise and Fall of the Great Powers (New York, NY: Random House: 1987).
16. The generalization here applies to portfolio as well as direct foreign investment. Both are financial transactions, pure and simple. The only difference between them is their relative size: typically, investments that account for less than 10% of the acquired property are considered portfolio, whereas larger investments are classified as direct. The flow of capital, whether portfolio or direct, may or may not be followed by the creation of new productive capacity. But the creation of such capacity, if and when it happens, is conceptually distinct, temporally separate and causally independent from the mere act of foreign investment.
17. The early data on foreign assets are incomplete in that they do not cover all countries (especially smaller ones). As a result, the measured ratio of foreign assets to global GDP in the earlier years of the chart may be somewhat understated (see Maurice Obstfeld and Alan. M. Taylor, Global Capital Markets: Integration, Crisis and Growth [Cambridge: Cambridge University Press, 2004], p. 51-57).
18. See Diana Farrell, Susan Lund, Christian Fölster, Raphael Bick, Moira Pierce, and Charles Atkins, Mapping Global Capital Markets. Fourth Annual Report (San Francisco: McKinsey Global Institute, January 2008), p. 73, Exhibit 3.10.
19. For a detailed analysis of the associated difficulties and impossibilities that we discuss here only in passing, see Jonathan Nitzan and Shimshon Bichler, Capital as Power: A Study of Order and Creorder (New York and London: Routledge, 2009), Chs. 6-8 and 10; and Shimshon Bichler and Jonathan Nitzan, ‘Contours of Crisis II: Fiction and Reality’, Dollars & Sense, April 28, 2009.
20. See Shimshon Bichler and Jonathan Nitzan, ‘Contours of Crisis: Plus ça change, plus c’est pareil?’ Dollars & Sense, December 29, 2008; and ‘Contours of Crisis II: Fiction and Reality’, Dollars & Sense, April 28, 2009.

“I would much rather own equities at 9000 on the DOW than have a long investment in govt bonds or a continuously rolling investment in short term money. Now, again I don’t know where it’s going to go next week or next month,” said Buffett in a quote archived at Huffington Post.

“But you still think equities is the place to be?” asked Becky Quick.

“I own them myself,” chuckled Buffett, putting mouth where money is at.

For my part–ignoring for the moment how “media savvy” the Oracle from Omaha can be–I have been paying attention to Buffett because I think what he says can be helpful in trying to understand a way upward in the direction of job growth. Also, with my brief experience in market trading, I think he does have the more sustainable long-term view of market investment. If the market crashes next week, he will still have plenty to work with.

Although I have NO IDEA what people should do with their savings this month, I do think that whenever more people decide to truly invest in equities there will be a greater chance of a recovery based on jobs. The term “jobless recovery” to me has all the charm of fingernails scraping a blackboard. Anyone who speaks seriously about a jobless recovery is only declaring that he belongs to the class which has no Real Jobs to lose.

For the rest of us, the combination of depression and joblessness cannot suggest images of anything resembling recovery. Already the image of Skip Gates in handcuffs warns us how suddenly ugly things can get.

So I am looking for a way to think about the requirements of a recovery “with jobs” and I am following the guidance of San Francisco economist Henry George who argues that workers will create value on the spot so long as they are provided proper tools. From this cue I go looking through Google News for signs of capital expenditures and investments. What’s up with tool development these days?

Notice that I did not begin my search for recovery with “consumer spending,” because I think that the mainstream chatter about this is another way of capitulating to depression. In other words, please tell me why consumers are going to increase spending while they are losing jobs? A labor-centered discussion of recovery would change the language of “jobless recovery” into “capital stagnation” so that we may more forthrightly name the thing that needs to be directly confronted.

The run-up in technology-sector equities these past few months gives us something to work with. This is a prime tooling sector for advancing development along broad dimensions of opportunity. Jim Cramer makes a compelling case that the tech sector is also more free to refresh itself compared to other sectors plundered by pirates of finance. Yet the tech sector is beginning to quiver and quake upon rocking foundations.

The first item I find when looking for “capital investment” is a press release from the National Venture Capital Association announcing that the Biotech sector has attracted a 67 percent increase “in Seed and Early Stage fundings” during Q2. Clean Technology is the next fastest growing venture sector, followed by Software and Medical Devices. Although the raw numbers look hopeful because of very recent increases, the historical levels of capital at play take us back more than a decade, “close to what we saw in 1997 before the Internet bubble.”

Next item on the Capital expenditure front is a pep talk by Andy Rowsell-Jones at Gartner, Inc., who is telling IT directors not to capitulate to cuts in IT budgets.

“While IT expenditure may be a small proportion–ranging from 1.7 percent in the construction and engineering industry to 12.6 percent in the banking and finance sector–budgets have been cut in light of the economic situation. Rowsell-Jones said IT spending has risen every year from 2003, but is being cut for this year, according to a recent Gartner survey.” The banking sector is not even upgrading its own computers? Hold your expletives, and pass the subpoenas..

The third item is from Stockholm, reviewing the quarterly report from Ericsson Telephone: “Several telecom operators have announced plans to reduce investments in order to maintain cash-flow in the economic downturn, a trend that can hurt companies like Ericsson that supply network equipment.”

From this short sample of findings we may draw a preliminary hypothesis that capitalism is in no great position to deliver the tools that will be needed for a speedier economic recovery. And this is why so long as Capitalism Knows Best we are staring at a chasm that is called the jobless recovery.

What is called for is something we might call pinpoint socialism where public resources are put to use injecting support for tool-making in precise contexts. In the case of IT upgrades and telecom network equipment, the needs are “shovel ready.” They have been planned and budgeted. Suppliers are at hand. Only a vicious cycle of “free market cash implosion” has trickled down. If active and sensible agents of public trust were to get busy in these areas, putting our debt bubble to productive use–instead of taking August recesses–jobs could still be “saved or created” in the near term.

As a preliminary parameter for public injections of funds to make new tools, there could be a simple baseline requirement that qualifying companies must state the need in their SEC filings. If the companies are caught lying about their capital investment needs, theoretically there is an agency that could send in the Cambridge Police.

Along a second line of analysis offered by Henry George, successful experiments are taking place in Pennsylvania and Michigan regarding a different approach to land policy. Wikipedia has a good orientation to Land Value Tax (LVT) that gives brief credit to Henry George. The basic idea is to shift the burden of taxation away from capital (capital gains) and labor (income tax) — both of which we need more of — and place the taxation onto land (which is ever in fixed supply).

According to reports archived at earthrights.net the experiment with LVT has been underway in Pennsylvania since the 90s. The process begins with a “split tax” that separates property improvements from land itself, and then gradually shifts the tax burden away from improvements and onto land itself. What the land tax is supposed to do is discourage land accumulation beyond the capacity to put it directly to productive use. Land at the margins will therefore be ready for the next person who can actually make it pay.

In a paper titled, “Can the Land Tax Help Curb Urban Sprawl? Evidence from Growth Patterns in Pennsylvania,” H. Spencer Banzhaf from the Georgia State University Department of Economics and Nathan Lavery argue that, yes, the land tax can effectively counteract the nefarious magnates of sprawl, too.

In Genesee County Michigan, home of the legendary city of Flint, alternative land use practices have also been developed. If you live next to an abandoned property you adopt it from the County Land Bank (LBA) for $25. All you have to do is promise to take care of it. Now here’s what the executive director says to any of you non-Genesee residents:

“Any non-Genesee County residents may acquire LBA property only with an enforceable plan to place the property into immediate productive use (meaning the property is to be occupied immediately or with the immediate commencement of some form of development project that fits our stated mission). This applies to vacant lots as well as properties with structures, residential and commercial properties.”

The LBA principle of land liberation is right out of “Progress and Poverty” by Henry George, which argues at length that labor and capital will keep each other more productive if all unused land is set free. Need we remind ourselves there will never be a cheaper time in our lives to liberate the land monopolists?

Finally, while we’re at it, may I venture to suggest, that wherever today you find people complaining about “Mexican illegals,” tomorrow–with fresh tools and liberated land–everybody will marvel at the rise of cities of gold.

This week may give us a chance to put some big questions onto the table about the way things work and the Real Meaning of the stresses we’re about to undergo, together. Let’s talk about the Real Market, shall we? And the Real Deal that we’re all in the process of cutting.

For five months I’ve been cramming market analysis the way I used to cram geometry the week before college boards. And for strictly educational purposes I have taken some advice from John Dewey by making my study “hands on” by putting a few hundred bucks into an online trading account. Thirty nine trades later, my portfolio is outperforming the dollar, so I haven’t lost any Real Money yet, but I’ve learned a few things.

Dewey was correct. What you learn is different depending on whether you are watching or participating. Put just a little money in an active market account and suddenly things go pop and start dancing all around you. Right away you lose your sense of what’s really up or down.

An abstract lesson that the market teaches you is the distinction between judgment and theory. You take or sell a position at so-and-so a price. That’s judgment. You base the decision on what? After your first few killer trades you begin to feel a gut-level desire for some theory that will help you to keep your head from spinning and your palms dry. Yes, a few hundred dollars means that much to me. So you have to go looking for market theory.

One of my early favorites in market theory was Investor’s Business Daily, because it identified a fairly consistent set of criteria for buying and selling, and then was considerate enough to remind me to breathe. IBD offers advice you would expect to hear from Ben Franklin. One rule that stuck with me is to never take more loss than eight percent.

Gradually I have become less interested in individual stocks and more interested in Exchange Traded Funds (ETFs) which allow me to make a little money from China or India while losing money in Real Estate or the Middle East. Websites such as Google Finance, MarketWatch, and stockta.com allow you to track stocks through online portfolios. Another nice free service is investmenttools.com. For a quick glance at overall trends, I also like the market overview page at stockcharts.com or some of the “view all funds” lists available at ETF providers such as iShares or PowerShares. Of course, the Wall Street Journal offers an excellent market data page.

In the hard times that are coming, newspapers will likely continue their downsizing and dispersion. But I don’t think this will affect investors very much. Outfits like Standard and Poors, Thomson-Reuters, Bloomberg, and Murdoch seem like they will be able to continue delivering robust information to premium customers. When you go looking for information that has cash value, you discover that the information sector is booking plenty of first class seats.

Plato’s Republic teaches that justice is a matter of everyone minding their own business, because each occupation has its urgencies. So let’s clear up first things first. Real Investing is a full-time occupation. If the market calls, you’d better be there to answer. Meanwhile, you’d better keep watching out. Once you get a taste for the daily risk of the market life you can see why so many people with Real Money still prefer to take out U.S. Treasury notes. When someone says China is buying U.S. bonds for chiefly political reasons, please ask them where they’d find a less risky place for Real Big Money today.

Therefore, anyone who wants to make a national policy of retirement funding via personal market accounts is simply asking everyone to drop what they do best, because you cannot expect everyone to be an excellent investor on the side. Retirement funding is a craft unto itself. Besides, imagine your tax dollars going into someone else’s market bets.

There are three basic families of market theory. The first one is represented by Jim Cramer, the bouncing host of Mad Money. I like the guy, because there is something pleasing about anyone enjoying his work that much. Plus, if you actually have “skin in the game,” his daily presence on television is a kind of exorcism against the dread-mongering that fills so much market chatter. He didn’t succumb to the great “head and shoulders scare” of early July.

As for market scares in general, I started this story on a Friday evening when all was quiet. Now that I’m doing final revisions on Monday morning, I find myself thinking, who knows? A crash could come any day. Or a pop. Or a bomb somewhere. Or a bad number out of Korea. So as of this minute in time it appears that Cramer’s short-term bullishness has been vindicated. Right now, Cramer’s keel is still attached.

Cramer’s theoretical model is “fundamentals.” For the most part, he likes to buy stocks in individual companies. He likes to study the balance sheets, read the SEC docs, listen to the conference calls, and figure out if there is really a productive business priced at a bargain level. Sometimes he gets it wrong, but mostly he wraps his recommendations inside reasons that help you to think about the way the market is working. Like a good teacher, Cramer presents his own choices in ways that help you to think on your own. He offers a market theory.

Along with the other two families of market theory that I will discuss below, the “fundamentals” camp assumes the perspective of the investment class. Cramer can discourage wage raises for Wal-Mart workers because they would raise the price of goods for customers, which will drive down store sales, which will, you guessed it, hurt the stock price that investors need most. We’ll come back to this problem later.

Fundamental analysts such as Cramer, Peter Schiff, H.S. Dent, or Warren Buffett have market theories grounded in the study of earnings, demographics, economic, and yes, investment trends in the Real World.

The second family of theorists can be called “chart technicians.” What they study is the price and volume action as it can be pictured in hundreds of ways. The vintage form of technical analysis–the candlestick chart–is attributed to an 18th Century rice trader in Japan.

The classic school of modern-day chart technicians goes under the name of Dow Theory because it was founded by the first editor of the Wall Street Journal, Charles H. Dow, who became the Dow of Dow-Jones. In its classical form, Dow Theory compares the movements if two indexes, the Dow Industrials and the Dow Transportations, which according to Jack Schannep and the editors of thedowtheory.com, yields a buy or sell signal about once a year. To catch more short-term trends, all kinds of charting devices have been invented.

I think the most popular technical tool of the modern trader is the Moving Average Convergence/Divergence indicator or MACD (pronounced Mac-D). At the Wall Street Journal for example the MACD is a default feature of every dynamic chart, reflecting market movements into a graph that helps gauge probable short-term trends in price.

During the head-and-shoulders scare of early July, technical analysis dominated market chatter. Investors have plenty of fundamental reasons to worry about another downturn, so technical signals can really spook the herd. The head-and-shoulders pattern was a pure technical signal that things could get very bad quickly. It spooked me. As it turned out, either there was no head-and-shoulders or the pattern was more of a signal that something big was about to happen up OR down.

The head-and-shoulders pattern, if it was one, actually signaled a breakout or sudden uptrend–which is not the first opportunity I have missed (in the market as in life) because of caution poorly timed.

This week the technical question becomes whether the breakout has established a new floor for a short-term trading range. The fundamental school seems cautiously optimistic that data will continue to come in “less bad.” And many of the technical chart analysts–including the ones who spooked us before–seem to think we’re going to be trading a new level up, at least for the near term. Technical signals don’t take all the chaos out of the market, but they do help you to feel as if you are not gambling on absolute randomness.

The third great family of market theory, The Elliott Wave, could be placed under technical analysis as a subset of Dow Theory, but I’m going to place Elliott Wave Theory in its own camp, because it seems like another order of technical analysis altogether.

Once upon a time a fellow named Ralph Nelson Elliott became so ill that he did nothing but study stock charts. He came up with astonishing results. He found a wave with a complex construction in which advances were related systematically to declines. He theorized that each wave was a wave of waves in which the basic structure was repeated in fractal form. The closer you get to the shorter time frames the tinier the waves become.

The contemporary master of the Elliott Wave Theory is Robert Prechter, who does not offer much advice for free. If you want Prechter’s analysis in detail you will have to pay for it. I think of him as the modern-day Pythagoras. As a market trader, I’m paying for his opinion and glad about it.

Well let me qualify that. To know Prechter’s approach is to know a vision of the next decade that is not gladdening in outline. The long-term wave we seem to be on right now is the yin to that yang we were riding during the good times. If Elliott was correct about the underlying form of market waves, and if Prechter is correct in the application, then prices are really deep disclosures of a psychic life that buoys our collective consciousness. And no, dear reader, you are not reading a Pynchon novel just now.

The Elliott Wave school strikes me as Jungian in flavor, so it will be an acquired taste for most. Something about Jungian archetypes runs counter to mainstream thinking, so we shall soon see who teaches whom the greater lesson. For my part, the older I get the more sense Jung makes. And the Elliott Wave has a serious following among Real Investors.

Related to market theory is an emerging trend in “social investing.” A visit to the KLD website will give you the essential orientation to social consciousness as it has been monetized by the investment classes. Also, a brand new ETF trading under the ticker symbol JVS brings a new style of valuation to the American investor by way of principles mandated by Sharia Law. I have written a little more about these items under a project called abetterorder.com. I own some JVS.

Even with only a few hundred bucks in play these are the things you begin to learn as if your fortune depended upon it. The market is a game–and you want to win. Which brings us back to something that I promised to discuss–the perspective of the investing class. This is a class of folks that for the most part have saved money that they are trying to grow and protect. They appear to be very smart and decent people, even downright likeable. And they have some very practical experience in how the market game works and how to win it. But I used to have a neighbor named Paul who worked all his life for the city parks department.

“Never was a rich man who didn’t get his money off a poor man’s back,” is what Paul would say. Which is another way of claiming that all Real Value comes from labor. If we extend Paul’s intuition to the investment classes as such we might say that all great wealth is already a kind of redistribution.

On the one hand I wonder if Paul could have done better in the wealth department if he had applied his eighth-grade education and not assumed that investment potential belonged to other people. No doubt there are a billion people asking that question right about now. Better choices are always possible. Nobody can say they weren’t warned. So I can see how value belongs not only to those who produce it but also to those who treat it best.

Therefore, I can understand why so many smart investors take a hard line when it comes to the kind of respect we should pay for value. I can see why they have a passion for gold as a standard. A devotion to standards of valuation has allowed many of them to see clearly how our loose regards would steer us into the ditch we’re in. When you start watching your money closely in a trading market, these perspectives accrue practical value.

On the other hand, market trends are thoroughly social if not absolute manifestations of collective (un)consciousness. The problems of market cycles have dimensions that exceed the sum of individuals. As my neighbor Paul implied, strictly speaking there is no such thing as individual wealth. All wealth in some sense is held in trust. Likewise, individuals don’t create market cycles, it takes a market to go boom and bust.

I can understand why some of the great artists of the market are outraged by our social responses to market crisis. They call it socialism. Yet, no matter which family of theory you belong to–whether fundamental, technical, or E-wave–you are dealing directly with a social movement.

At some level each and every individual choice gets subsumed into a dynamic relation to other choices such that “the market” comes to exist with a life of its own. Every investor wants to know, what will the market do today? So there is something that troubles me about investor perspectives that seem to take for granted that “the market” is the only motive force worth respecting, as if the social reality of our lives could be so one-dimensional.

The investment-class perspective shows through when Cramer discourages higher wages at Wal-Mart. This is a perspective that overvalues existing savings to the detriment of new savings that could be made possible if “the market” were enabling more opportunity for all. If existing savings accounts were willing to take a little less return, perhaps new savings accounts could be more easily started downstream.

In the case of my old neighbor Paul, why shouldn’t a worker expect a social order in which every productive life is rewarded with decent wages, benefits, and pensions? But Frederick Douglass long ago advised Americans not to gnash our teeth at spectacles of unfairness. Struggle is the Real Cure.

As corporate capital rebuilds its structure from the current bust to the next boom, why shouldn’t some higher expectations of performance be costed in right now? I think I understand how these labor costs will make additional demands upon the structure of recovery, but if decent health benefits and pensions are made a universal condition of corporate earnings perhaps the regeneration of corporate health this time will help to raise up a new generation of investors who understand that money not budgeted toward labor’s livelihood is at risk of being gambled away.

Finally, I have an intuition that the bias of the investor class leads to a skewed desire for a gold standard, but I’m not altogether sure about this. It may be that my impression is colored by a context in which most of the talk about gold is by people who are thinking chiefly of wealth in individual terms. In five months of investing I too have gone from “gold, what’s it good for” to “give me thirty shares of silver trust please.” I’m up eleven dollars thanks to that call on SLV.

In thinking about gold, I have drawn the distinction made by San Francisco economist Henry George who talked about the difference between wealth for personal use and capital that is put back into new tools. The good people at Lew Rockwell point out that if I hold my personal wealth in a Real Bank it will be leveraged into Real Capital, therefore there is no Real Difference between wealth and capital. Yet even if this were also true for holdings in Real Gold, I think we can still distinguish between wealth and capital. But I’m willing to grant that Real Gold held by a Real Bank may be somewhat more productive than fear itself.

As for the assumption that Real Banks will take Real Savings and turn them into Real Capital, I think this is the problem. From what I understand, banks are not producing capital investments at any kind of usual rate. And they are not doing it because of the damage done by the great evil that Henry George warned against—land speculation. Therefore, the dramatic increase in American savings is not now being leveraged into new tools for American workers. The pressures of the current economy will keep labor compensation low on one side while disrupting on the other side the assumption that increased savings by labor should be leveraged into capital investment. Instead, Real Banks are gouging labor further on the debt front. Prechter has more to say about what has happened to Real Banks in his July newsletter.

Which brings us to the last word in successful investing, Warren Buffett. No doubt his influence has sometimes weighed down upon wages from time to time as he seeks to maximize earnings from Dairy Queen or Geico. Last week he admitted that he had to cut the jobs of 500 people. Yet Buffett says that it may be time to think about a second stimulus which would be a Real Stimulus this time. What interests me about Buffett’s position–all puns intended–is that he speaks as an exceptionally engaged investor who follows carefully how his wealth, and therefore his capital, has effects on precise productive labors.

If Buffett can stomach the idea of a stimulus then we should raise the question of costing into the new generation of investment a better life for labor in long-term salaries, benefits, and pensions. We are the workers upon whose labor the power of U.S. Treasury notes depends–and we have been valued in this crisis as worthy enough to carry the world’s savings accounts on our backs. Therefore cost us in at the full value of a whole life.

Maybe there is nothing that can be done about a future that is already written by the finger of God. Just save yourself if you can. But when it comes to the problems faced by the investor classes and their personal wealth preservation in this sick economy, at least Buffett still talks as if the investor classes are in the same boat with the rest of us and how we need to pull together and share some of the risks. While we’re at it, we should not be afraid to discuss the opportunities that this crisis holds out for labor. Discussing it today will be cheaper than discussing it tomorrow.

Based on what I’ve learned after five months as an active trader, I don’t think it’s a question of whether hard times are coming. The question is how can we best work on this social trauma individually AND together to address risks and opportunities system-wide? The thing that strikes me about Buffett’s position on the second stimulus is this. If the ship’s going down, Captain Buffett talks as if he’s prepared to go down with it. Any Real Captain would surely toss Real Gold overboard now in order to bring more Real Lives safely to port later.

Ben Bernanke:

The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit…. My colleagues and I believe that accommodative policies will likely be warranted for an extended period.

No talk of recovery here; just a continuation of the same radical policies that were adopted after the collapse of Lehman Bros. The only sign of improvement has been in the stock market, where Bernanke’s liquidity injections have jolted equities back to life. The S&P 500 is up 40% since March. Conditions in the broader economy have continued to deteriorate as unemployment rises, the states find it harder to balance their budgets, and the real estate bubble (commercial and residential) continues to unwind. The Fed’s policies are Bernanke’s way of saying, “The states are not the country. The banks are the country.”

Bernanke’s op-ed is a public relations ploy intended to soften the effects of his visit to Capital Hill today. Congress wants to know the Fed chief’s “exit strategy” for soaking up all the money he’s created and avoiding inflation.

Bernanke again:

The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed.

This is the core issue. The Fed has built up bank reserves by accepting (mainly) mortgage-backed garbage (MBS) that is worth only pennies on the dollar. Bernanke assumes that investors will eventually recognize their mistake and begin to purchase these toxic assets at a price that won’t bankrupt the banking system. It’s a complete hoax and everyone knows it. In essence, Bernanke is saying that he is right and the market is wrong, which is why he continues to conceal the fact that he provided full-value loans for collateral which the banks will never be able to repay. The costs, of course, will eventually be shifted onto the taxpayer.

Bernanke knows that the country is in a Depression and that inflation won’t be a problem for years to come. It’s all politics. Bank lending is way off and the shadow banking system–which provided over 40% of consumer credit via securitization–is still on life-support. At the same time, the savings rate has spiked to 6.9%–a 15 year high–as consumers cut back on spending to service their debt-load, and try to make up for the $14 trillion in lost household wealth since the crisis began. If the banks aren’t lending and consumers aren’t spending, inflation is impossible.

Bernanke’s zero-percent interest rates and lending facilities have been a total bust. The velocity of money (how fast money changes hands) has stopped. Retail is down 9% year-over-year. Imports/exports down 20%. Rail freight and shipping at historic lows. Travel, manufacturing, hotels, restaurants are all in the tank. The economy is flat-lining. Only Goldman and JPM have done well in this environment, and that’s because the White House is a Goldman-annex.

The only Bernanke policy that’s worked so far has been flooding the market with money, which has has sent equities into orbit while the real economy continues to twist in the wind. Here’s how former hedge fund manager Andy Kessler summed it up last week in the Wall Street Journal:

By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn’t put money directly into the stock market but he didn’t have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn’t go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.¹

Bernanke’s quantitative easing (QE) has pumped up bank stocks enough so that Geithner won’t have to grovel to Congress for another TARP bailout. The banks now have access to the capital markets and can withstand the stormy downgrades ahead. Thus, the nagging problem of toxic assets has been solved (temporarily) just as Bernanke had planned.

Bernanke will continue to monetize the debt (by purchasing more US Treasuries and MBS) until securitization is restored and there are signs of life in the failed wholesale credit-system. That’s the real objective; to keep credit expansion in the hands of privately-owned financial institutions that are beyond the reach of government regulation. The Fed’s so-called mandate of “full employment and price stability” is pure malarkey. The Fed’s job is to provide an endless stream of cheap capital to Wall Street. By that standard, Bernanke has performed his task admirably.

1. Andy Kessler, “The Bernanke Market,” Wall Street Journal.

On the other hand, whether you are listening to pro-dollar or anti-dollar partisans today, there is an eerie agreement between Marxist and Friedmanite alike that return on capital is the main thing. What we need to hear more often from both sides of the global mouth is how capital will only grow through labor.

With the help of Google translate, the average monolingual yankee can cross the ocean and listen to the official pronouncements of ministers for the Communist Party of China (CPC) who have a thousand throats exhorting the masses to keep on the scientific path.

What the scientific path sounds like in China today is a lot like what you hear weekdays over the chatterbox at the Capitalism-Knows-Best Channel (CNBC). For instance, the Chinese “socialist market economy” is being redefined scientifically into a “modern market economy under rule of law,” which is exactly the way they like it at CNBC.

From both sides of the Pacific you get pretty much the same news: double-digit downturns in profits across the board, dozens of gigantic projects suddenly scrapped and unplugged, trade routes collapsing, pages snatched from memories of capitalism past, the better to remind us how to survive.

Even on the question of climate change there is a convergence of policy conviction that “the construction of ecological civilization” will help our damaged economies to “cope with the international financial crisis” through the material re-production of green technologies.

Tuning into the thoroughly capitalized culture at CNBC — coming at you “live from the financial capital of the world”–bust is generally accepted as the price of boom. Mad Money man Jim Cramer said recently that if the stock market were to take another 150-point dive on the S&P 500 Index, investors from the boo-yah land of Cramerica could consider it a gift — “A GIFT!!”

But over on the Chinese mainland, ministers seem to be talking to masses that haven’t quite learned how to appreciate the opportunities of economic collapse. This is the time, say the ministers, to vigorously seek innovations in technology, reconfigure business models, bury dead capacities, and evolve the community through decisive calculations of “M&A.”

In the chatter of Chinese ministers sounds a worry that the “socialist market economy” could come out of the economic crisis fatter than it needs to be and therefore vulnerable to all the lean dogs that global capital is breeding as we speak.

Of course every Wal-Mart shopper knows how much is owed to the enormous Chinese factories that punched out a dozen or so shopping seasons. But Chinese ministers know better how the tiny “Made in China” labels were not attached to Chinese-branded logos. And whereas the great logos of the global economy will likely recover on top of factories somewhere or anywhere (thank you Naomi Klein) there is no guarantee that the factories of China will be serving the logo powers next year.

There is enough worry to go around. In the USA we don’t know if the unemployment numbers will stop in time to provide the baby boom a respectful retirement. In China, the ministers don’t know if plants and projects will stop shutting down in time to prevent a more colossal sacrifice in capital spending.

Matching the positive image of the Chinese minister atop his nearly $2 trillion mountain of dollar reserves is the precise negative image of the average American consumer down in his valley of debt. And where the images should be joined at the middle term is across the rubbed glass surface of the Wal-Mart checkout counter, courtesy of MasterCard and Visa.

Of course, there was a time not too many months ago when the era of dollar-fed arrogance seemed to be stalking the world with unchecked power as “dollar hegemony” rolled around the globe with tsunami force. These days however the dollar gets pulled up off its knees by other currencies at the most curious times, exactly in moments when the whole flow of things seems to shudder with collapsing pipes.

What the dollar needs most right now is a national emergency declared in behalf of jobs. Enough diddling with yield curves and balance sheets already. Whatever it takes, we need folks back at work. Until we are busy creating value through labor, every dollar will stay busy shrinking.

Which brings us to the final correspondence between CNBC and the ministers of China. By and large all these voices fail to inflect the urgency of the single outcome that will count most toward economic health — getting everybody back to work. If you are holding a pile of dollars the immediate question should be how to transform that cash into tools of productivity for workers of the world. Wealth today is paralyzed from not knowing how to become productive. This is the real problem.

So whether you grew up on one side of the Pacific listening to warnings about the Midas touch or you grew up on another side of the Pacific sneaking lessons from Mencius you should know. When you mistake the real value of human economy for dollars, gold, or profit, you shall kill the order of things.

Something about the discourse of crisis is chilling to the ear. Neither side of the ocean is talking early or often enough about how to forge wealth into tools that can be put to work. There is still time perhaps to put jobs first.

Whether those meaningful reform proposals become law is no sure thing, and will depend on the administration’s willingness to stare down Wall Street — which still retains immense political power, despite its partial self-immolation — and on whether a mobilized public demands Congress act for consumers, not contributors.

The 85-page draft released today is qualitatively different than the bullet-point plans previously issued by the Treasury Department. It contains detailed proposals, spanning across the financial regulatory spectrum, not easily summarized. Here are only some key elements — first, the good, then the bad.

The Good

1. The administration supports creation of a strong Consumer Financial Regulatory Agency.

It proposes to give this new agency very strong powers, and jurisdiction over consumer protection rules — taking away authority from existing regulators (like the Federal Reserve) that have failed utterly to protect consumers. It favors simplicity and gives the new agency the authority to mandate financial firms offer “plain vanilla” loans along with the more complicated packages they prefer. It gives the agency authority to ban mandatory arbitration provisions that strip consumers’ right to go to court for redress of scams and rip-offs. And it establishes that the new agency’s rules will be a regulatory floor, with states permitted to adopt stronger protections.

2. The administration proposes to reduce speculative betting, through new standards on leverage.

One reason the financial crisis spun out of control was financial firms’ excessive use of “leverage” — borrowed money. Heavily leveraged, the top commercial banks and investment banks overreached with very risky loans and investments. The administration proposes that all systemically important financial firms be subjected to higher capital reserve standards (meaning they can rely less on borrowed money). The administration properly says these rules should apply to any systemically important firm, whether or not it is a bank. It defines systemically important as a firm “whose combination of size, leverage and interconnectedness could pose a threat to financial stability if it failed.” There are still important details to be worked out here, including how much capital such firms must maintain. And there is the very worrisome element that it is the Federal Reserve that is given primary responsibility for overseeing these systemically important firms.

3. Through “skin-in-the-game” rules, the administration aims to prevent predatory and reckless lending.

One reason lenders were willing to make so many predatory and bad-quality mortgages — including but not limited to the class of “subprime” loans — was that mortgage originators did not hold on to the loans. Mortgage brokers cut deals on behalf of banks and non-bank originators, which in turn sold the resulting mortgages to other banks. These banks, in turn, sliced and diced the mortgages, combined them into packages of pieces of thousands of other mortgages, and sold them to all kinds of investors. Because the initial lender did not maintain an ongoing interest in the mortgage, they did not have any incentive to ensure they were making a quality loan.

The administration proposes that loan originators be required to keep, at minimum, a 5 percent exposure in loans.

4. The administration seeks power to take over failing, systemically important financial firms.

The government already has such “resolution” power for commercial banks. The Federal Deposit Insurance Corporation regularly takes control over failing banks and “resolves” them outside of the bankruptcy process. This typically means selling off the failing bank to another bank, often after separating its good assets from bad. FDIC is expert at this process, moves very quickly, and averts the harmful consequences from extended bankruptcy processes.

The government does not have the legal authority to undertake comparable measures for important non-bank firms. This includes investment banks (think Lehman Brothers) and insurance companies (think AIG). Giving the government resolution power for non-banks should help control financial panic.

The Bad

1. The administration does not propose to do anything serious about executive pay and top-level compensation for financial firms.

The administration does support “say-on-pay” proposals, which give shareholders the right to a non-binding vote on executive compensation. But a non-binding vote isn’t worth too much; and, more importantly, shareholders are often willing to support excessive compensation while risky bets are paying off.

In terms of financial stability, the imperative is to do away with the Wall Street bonus culture, where executives and traders are given extraordinary bonuses — often four or more times base salary — based on annual performance. This bonus culture gives traders and executives alike an incentive to take big bets — because they get massive payoff if things go well, and don’t suffer if they go bad, or go bad sometime in the future.

This is a structural problem, not a symbolic one. Anyone who thinks pay isn’t of overriding importance in financial regulation should have been set straight by the desperation of the bailed out Wall Street firms to pay back their loans from the government. That desperation is overwhelmingly tied to a desire to escape the extremely modest pay standards issued by the Obama administration.

Besides financial stability, there are important questions of economic justice and taxpayer rights related to executive compensation. The Wall Street hotshots — including the major hedge fund players — have paid themselves unfathomable amounts of money over the last decade. They have set an aspirational standard for other executives and professionals, and helped drive wealth and income inequality to outrageous and unhealthy levels. Ultra compensation should be taxed at very high rates; and, at a bare minimum, the loopholes that let hedge fund managers pay taxes at about half the rate of regular folks must be closed. The case for aggressive tax reform on ultra rich financiers was overwhelming last year; now, with the financial system completely dependent on taxpayer largesse, there shouldn’t be anything left to debate. No one in finance can say they made their money just by working hard or being clever — their system was saved by the government.

2. The administration does not propose structural reform of the financial sector.

Although it proposes some meaningful regulatory reform, and modest alteration of the structure of regulatory agencies, the administration does not propose to alter the structure of the financial sector itself.

There is no discussion of returning to Glass-Steagall principles, to separate commercial banking from other financial activities including the speculative world of investment banking. Glass-Steagall was adopted during the Great Depression, as a response to financial abuses that closely parallel those of the previous decade. Repeal of Glass Steagall — following a decades-long erosion — came in 1999, and helped pave the way for the present crisis.

Nor is there any discussion of shrinking the size of goliath financial firms. Everyone now recognizes the problem of too-big-to-fail and too-interconnected-to-fail financial firms. The administration proposes to deal with the problem through regulation alone; a more fundamental approach would break up giant firms (or at least commit to prevent further consolidation going forward).

Addressing structure and size is important not only because of the economic power accreted by the goliaths, but because of their political strength — about which, see below.

3. The administration’s approach to regulating financial derivatives is too timid.

To its credit, the administration proposes to repeal recent deregulatory statutes and establish regulation of financial derivatives. But its plan does not go far enough. It creates a regulatory exemption for customized derivatives — a loophole that will create lots of business for corporate lawyers ready to change terms in derivative contracts so that they differ somewhat from standardized terms.

Nor does the administration propose to ban classes of dangerous financial instruments that cannot be justified. A clear example of a product that should be banned is a credit default swap — a kind of insurance against a certain outcome, like the inability of a bondholder to make required payments — in which neither party has a stake in the underlying transaction. Such credit default swaps have no insurance component, and are nothing more than bets — but they are bets that can vastly exceed the value of the transaction being bet on, and can spread financial contagion, as AIG demonstrated. George Soros argues that all credit default swaps basically share this feature, and should be banned altogether.

The administration proposal also fails to require that exotic financial instruments be subjected to pre-approval requirements. Under such an approach, financial firms would be required to show that new instruments offer some social benefit, and do not pose excessive risk.

4. The administration does not propose to empower consumers.

There is enormous merit to the proposal for a Consumer Financial Products Agency. But it is not a substitute for giving consumers the power to organize themselves to advance their own interests. Simply mandating that financial firms include in bills and statements (whether mailed or e-mailed) an invitation to join an independent consumer organization would facilitate tens of thousands of consumers — and likely many more — banding together to make sure the regulators do their job, and to prevent Wall Street from “innovating” the next trick to scam borrowers and investors.

The Ugly

Identifying the merits and gaps in the administration’s proposal is important. But the proposal does not exist in a vacuum, and it doesn’t become law just because the administration has proposed it.

The Wall Street types don’t know shame. Having benefited from literally trillions of dollars of taxpayer largesse, one might expect that they would be embarrassed to lobby on Capitol Hill. Or, that Members of Congress would be unsympathetic to their pleas.

But that’s not how Washington works. Having spent $5 billion on political investments over the last decade, Wall Street continues to pour cash into the political process — and those investments continue to pay handsomely.

To understand how things work, consider the fate of the proposal to give bankruptcy judges the power to adjust mortgages, so that they could reduce the principal owed on loans on homes now worth less than value of the loan. Then-candidate Barack Obama campaigned in favor of such “cram-down” provisions. In a rational world, banks would agree to these adjustments to principal on their own, because they do better if people stay in their homes and continue paying on the loan, rather than by forcing foreclosure. Not long ago, it was widely expected that cram-down would quickly become law. But the banks deployed their lobbyists, and this vital though totally inadequate measure was defeated in May. The Obama administration sat quietly by.

Now, Wall Street is already trashing the good parts of the administration’s proposals.

“Congress is not going to impose a ’skin-in-the-game’ requirement on all loans,” Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital, flatly tells American Banker.

The Chamber of Commerce and other industry groupings are attacking the idea of a Consumer Financial Product Agency, including with the extraordinary claim that it will improperly relieve consumers of their duty to do “due diligence” on financial products.

Hedge funds are hiring ever more lobbyists and floating the claim that the administration’s requirements for some modest disclosure requirements for secretive hedge funds could do more damage than good. One purported reason: the disclosures may be too complicated for regular people to understand.

There’s no question that Wall Street is going to mobilize — is already mobilized — to defeat the administration’s positive proposals.

What remains very much in question is the administration’s willingness to engage in bare-knuckled political fighting to defend these proposals, as well as whether the public will be mobilized to support these and other moves to control Wall Street.

A new public interest coalition — Americans for Financial Reform — aims to do just that, but they are fighting on occupied territory. As Senator Majority Whip Richard Durbin says, “the banks are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

[Disclosure: My organization, Essential Action, is a member of Americans for Financial Reform.]

You would think that. But you’d be wrong.

For Wall Street’s lobbyists in Washington, it’s business as usual. Since Barack Obama took office, the bankers have succeeded in pushing through bogus “stress tests” of financial institutions’ solvency, escaping tougher government oversight, and steamrolling attempts to give working-class borrowers a break.

Even the much-hyped limits on CEO pay are being rolled back. In mid-June, Barack Obama lifted a five-month-old limit on executive compensation at financial firms that took federal bailout money. Apparently, only $500,000 a year in salaries and other perks was just too much of a sacrifice for the financial system to bear. Instead, Obama has established a “special master of compensation,” who will decide on pay to top executives at banks still reliant on government money.

While having a “special master” oversee pay might sound like a big deal, the banks aren’t sweating it. “Our people kind of thought it was a non-event,” one unnamed executive of a large bank told the Washington Post. “I don’t think there are worries about it on Wall Street.” And, the executive added, “It’s not like the horrible and unethical action from Congress, where they were putting artificial caps on pay or trying to steal back bonuses.”

The sense of entitlement on display in comments like these is staggering — as if the “wizards” of Wall Street deserve the billions in compensation showered upon them in the past decade for producing what has proved to be fictitious wealth, while destabilizing the economy and destroying the lives of people across the U.S.

As for legislation aimed at stemming the kinds of predatory lending practices that helped exacerbate the housing bubble and ultimately triggered the financial crisis, Senate Banking Committee Chair Christopher Dodd recently said, “We’ve got a lot on our plate. We’ve got other things to do.”

Apparently, however, one of those “other things to do” was not passing “cramdown” legislation — a measure that would have enabled bankruptcy court judges to lower the principal on existing mortgages for homeowners facing foreclosure, thereby helping people to keep their homes. In that bill, defeated in early May, the Senate sided with banks over homeowners by a 51-45 margin.

Housing rights activists estimate the legislation could have staved off 1.7 million foreclosures and preserved $300 billion in home equity. Nevertheless, a dozen Democrats in Senate voted against it.

“Instead of defending ordinary Americans, the majority of the senators went with the banks,” said the Center for Responsible Lending in a statement. “Yes, the same banks who have benefited so richly in the [$700 billion Troubled Asset Relief Program, or TARP] bailout.”

Meanwhile, the Treasury Department was celebrating the fact that 10 banks would be paying back TARP funds — insinuating that the financial system is on stable enough ground that the government could begin backing off.

But the same day that Treasury Secretary Tim Geithner talked up the TARP repayments, TARP Oversight Panel Chair Elizabeth Warren said the so-called stress tests, conducted to determine whether the big banks were on safe financial footing, should be redone.

“The employment numbers for 2009 have already exceeded the harshest scenario considered so far, suggesting that the stress tests should be repeated,” Warren’s report stated.

There was just one piece of legislation that didn’t go entirely the banks’ way: a bill, signed into law by Obama in May, that put some restraints on the out-of-control credit card industry,

The new law bans increases in annual percentage rate interest charges during the first 12 months after opening up an account. Consumers must get 45 days’ notice of changes in rates or contracts, and 30 days’ notice for account closures. The law also eliminates the notorious practice of “double billing,” in which credit card issuers impose finance charges based on balances already paid.

Yet even here, industry lobbyists were able to block changes sought by industry critics. Crucially, there’s still no cap on the interest rates that credit card companies can charge.

That’s why John Taylor, chief executive of the National Community Reinvestment Coalition, said in a recent interview: “It’s the bottom of the ninth, and it’s bankers 10, consumers zero. It’s like being in a street fight, and you and a few friends just went up against 100 other people, and you’re just picking yourself up off the ground. And you’re just bloodied.”

One reason bank lobbyists have been so successful is that they have convinced Congress to take on financial issues piecemeal, rather than in a single piece of legislation. That way, the lobbyists could focus on one battle at a time.

And on each bill, they made the case that new rules would restrict credit and jack up interest rates, thereby hurting consumers. Overall, the financial industry spent $42 million in lobbying efforts in the first quarter of 2009 — even as many banks were still being bailed out with taxpayer money.

By and large, this tactic has been successful. Scott Talbott, a lobbyist at the Financial Services Roundtable, admitted, “We knew we were going to be up against it. Yeah, we know it was going to be a tough year. And so far, it has not been a tough as expected.”

So despite Wall Street’s greatest crisis since the 1930s, the banking system is still calling the shots in Washington. Indeed, in a rare moment of candor, Sen. Dick Durbin (D-Ill.) said: “And the banks–hard to believe in a time when we’re facing a banking crisis that many of the banks created–are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

What’s more, the same people move seamlessly back and forth between the corridors of power in finance and politics. Consider the case of Michael Paese, an ex-JP Morgan employee who became the top staffer to Rep. Barney Frank, chair of the House Financial Services Committee — which oversees Wall Street. Last September, Paese bolted to become Goldman Sachs’ top lobbyist. There he replaced Mark Patterson, who, in turn, left Goldman Sachs to become chief of staff at the Treasury Department.

Goldman Sachs, remember, is the firm that was run by former Treasury Secretary Henry Paulson before he went to Washington to work in the Bush administration. And don’t forget that Treasury Secretary Timothy Geithner himself is a disciple of Ronald Rubin, another former Goldman Sachs executive turned treasury secretary during the Clinton administration.

Given this Wall Street-Washington circuit, it’s little surprise that Barney Frank has written a piece of legislation on lending “reform” that seems tailored to Wall Street.

His proposed measure has nine consumer, housing and civil rights groups up in arms. The National Consumer Law Center, for example, says the proposed legislation would “do more harm than good,” and added in a statement, “The bill is complex, convoluted and simply will not accomplish its main goal–to fundamentally change the way mortgages are made in this country.”

Just in case the Wall Street/Washington revolving door isn’t sufficient to get their way, the finance capitalists spread enormous amounts of money around Congress.

In the 2008 election cycle, securities and investment firms donated a whopping $154.9 million to political campaigns — $57 million more than the 2004 elections, according to OpenSecrets.org. Of that, 57 percent went to Democrats and 43 percent to Republicans. Real estate, which became deeply enmeshed with Wall Street during the housing bubble, donated another $136.7 million. The split was 49 percent Democrats and 51 percent Republicans.

Commercial banks, meanwhile, contributed $37.1 million to politicians–the most ever from that sector–with 48 percent going to Democrats and 52 percent to Republicans. Lastly, hedge funds tossed in another $16.7 million — four times as much as the sector had donated in any other election cycle. Hedge funds favored Democrats by a 65-35 percent margin. Altogether, that comes to $345.4 million.

While the numbers may have been larger than ever, Wall Street has long bought members of Congress in both parties to advance its legislative agenda. And it was a Democrat, President Bill Clinton, who signed into law two key pieces of legislation that set the stage for the current financial crisis.

The Gramm-Leach-Bliley Act, passed by a Republican Congress in 1999, repealed the Depression-era Glass-Steagall laws, which had separated risky investment banking from traditional, deposit-taking commercial banks. A year later, Congress passed the Commodity Futures Modernization Act, which kept large parts of commodities trading beyond the reach of regulators — including complex financial instruments that triggered the financial meltdown.

Today, Democrats have total control of the legislative process. But Wall Street is still getting its way, despite the bankers’ shattered credibility for their role in crashing the economy. Real financial reform that provides relief to working people will come only when social movements can put enough pressure on politicians to force them act.

It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger….

Is there a risk that we’ll have inflation after the economy recovers? That’s the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt — that is, drive up prices so that the real value of the debt is reduced…. Such things have happened in the past…

Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens (but)… there’s no sign it’s getting traction with U.S. policy makers now.”¹

Krugman believes that conservatives have conjured up the inflation hobgoblin for political purposes to knock Obama’s recovery plan off-course. But even he’s mistaken, there’s little chance that inflation will flare up anytime soon because the economy is still contracting, albeit at a slower pace than before. A good chunk of the Fed’s liquidity is sitting idle in bank vaults instead of churning through the system as Bernanke it could do some good. According to Econbrowser, excess bank reserves have bolted from $96.5 billion in August 2008 to $949.6 billion by April 2009. Bernanke hoped the extra reserves would help jump-start the economy, but he was wrong. The people who need credit, can’t get it; while the people who qualify, don’t want it. It’s just more proof that the slowdown is spreading.

That doesn’t mean that the dollar won’t tumble in the next year or so when the trillion dollar deficits begin to pile up. It probably will. Foreign investors have already scaled back on their dollar-based investments, and central banks are limiting themselves to short-term notes, mostly 3 month Treasuries. If Bernanke steps up his quantitative easing (QE) and continues to monetize the debt, there’s a good chance that central bankers will jettison their T-Bills and head for the exits. That means that if keeps printing money like he has been, there’s going to be a run on the dollar.

Now that the stock market is showing signs of life again, investors are moving out of risk-free Treasuries and into equities. That’s pushing up yields on long-term notes which could potentially short-circuit Bernanke’s plans for reviving the economy. Mortgage rates are set off the 10-year Treasury, which shot up to 3.90% by markets’ close on Friday. The bottom line is that if rates keep rising, housing prices will plummet and the economy will tank. This week’s auctions will be a good test of how much interest there really is in US debt.

At some point in the next year, the dollar will lose ground and commodities will surge, causing uneven inflation. But for how long? That depends on the state of the economy. Dollar weakness and speculation can drive up the price of oil, (oil is up 100% in the last two and a half months, from $34. to $68.) but falling demand will eventually bring prices back to earth. Presently, there’s a bigger glut of oil sitting in tankers offshore than anytime in the last 15 years. Which brings us back to the original question; how bad is the economy?

The answer is, really bad! Here’s a short blurb from economist Dean Baker in an article in the UK Guardian:

The decline in house prices since the peak in 2006 has cost homeowners close to $6 trillion in lost housing equity. In 2009 alone, falling house prices have destroyed almost $2 trillion in equity. People were spending at an incredible rate in 2004-2007 based on the wealth they had in their homes. This wealth has now vanished.

Housing is weak and falling, consumption is weak and falling, new orders for capital goods in April, the main measure for investment demand, is down 35.6 percent from its year ago level. And, state and local governments across the country, led by California, are laying off workers and cutting back services.

If there is evidence of a recovery in this story it is very hard to find. The more obvious story is one of a downward spiral as more layoffs and further cuts in hours continue to reduce workers’ purchasing power. Furthermore, the weakness in the labor market is putting downward pressure on wages, reducing workers’ purchasing power through a second channel.²

Don’t be fooled by the cheery news in the media. The economy is hanging by a thread and recovery is still a long way off. The only way to dig out of this mess is to address the underlying problems head-on. That means removing the toxic assets from the banks, revamping the credit system, and rebuilding battered household balance sheets. If these issues aren’t resolved, the problems will drag on for years to come. And even if they are fixed, the economy is still facing a long period of deleveraging and retrenching followed by an anemic recovery. Obama’s fiscal stimulus might give GDP a jolt in the third quarter, but without help from the government checkbook, economic activity will stay in the doldrums.

Last month, personal savings increased to nearly 6 percent while consumer credit fell by $15.7 billion, the second largest decline in debt on record. According to Brad Setser of the Council on Foreign Relations, “Total borrowing by households and firms fell from over 15% of GDP in late 2007 to a negative 1% of GDP in q4 2008.” How can these losses to GDP be made up when private borrowing has vanished without a trace? Consumers have shut their wallets, locked their purses and are refusing to take on any more debt. Despite government efforts to restart the credit markets by backing up loans for 0% financing on auto sales and $8,000 tax credit on the purchase of a new home, (which is tantamount to subprime lending) consumers are digging in their heels. All the hype about inflation hasn’t sent them racing back to the shopping malls or the auto showrooms. Consumers have reached their saturation point and they are not budging. It’s the end of an era.

The unemployment picture is getting bleaker and bleaker. Last week’s report from the Bureau of Labor Statistics concealed the real magnitude of the job losses by using the discredited “Birth-Death” model which exaggerates the number of people reentering the workforce. Here’s what former Merrill Lynch chief economist David Rosenberg had to say about Friday’s BLS report:

The headline nonfarm payroll figure came in above expectations at — 345,000 in May — the consensus was looking for something closer to -525,000. The markets are treating this as yet another in the line-up of ‘green shoots’ because the decline was less severe than it was in April (-504,000), March (-652,000), February (-681,000) and January (-741,000). However, let’s not forget that the fairy tale Birth-Death model from the Bureau of Labour Statistics (BLS) added 220,000 to the headline — so adjusting for that, we would have actually seen a 565,000 headline job decline.

The BLS figures have been denounced by every econo-blogger on the Internet. The figures are another example of the government’s determination to airbrush any unpleasant news about the recession. Here’s a better summary of the unemployment numbers from Edward Harrison at Credit Writedowns:

The Business Birth-Death Model added 220,000 jobs to the headline seasonally-adjusted number. Without this number, we are looking at a loss of 565,000 jobs….The number of jobs lost in the last 12 months increased from 5.34 million in April to 5.51 million in May….Other indicators suggest that the shadow supply of discouraged workers not counted in the numbers will now return to the labor force, pushing up the unemployment number. For example, the U-6 unemployment number was a gargantuan 16.4 %, the highest ever.³

Unemployment now stands at 9.4% (16.4%?) and will continue to rise whether there’s an uptick in economic activity or not. Businesses are shedding jobs at record pace, and slashing hours at the same time. The average workweek slipped to 33.1 hours (down 2 hours from April) a new low. It goes without saying, that unemployment is highly deflationary because jobless people have to cut out all unnecessary spending. Beyond the 500,000 layoffs per month; wages and benefits are also under pressure, making a rebound in consumer spending even less probable. This is from Brian Pretti’s article “Place Your Wagers”:

The year over year change in the Employment Cost Index (ECI) is the lowest number in the history of the data… in the absence of household credit acceleration… aggregate demand (will fall)

The year over year change in wages has never been this low in the records of the data. .. Wages and salaries… are all in negative rate of change territory. They are ALL contracting year over year.

Absent household balance sheet reacceleration in leverage it sure seems a good bet forward corporate earnings are now as dependent on household wages, salaries and broader personal income as at any time in recent memory. And corporations to protect margins and nominal profits are pressuring wages and salaries downward.⁴

From a workers point of view, things have never been worse. Demand is falling, employers are slashing inventory and handing out pink slips, and entire industries are being boarded up and shut down or shipped overseas. Economists Barry Eichengreen and Kevin O’Rourke make the case that, in many respects, conditions are deteriorating faster now than they did in the 1930s. Here’s what they found:

1–World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.

2–World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.

3–The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.⁵ Their conclusion: “Today’s crisis is at least as bad as the Great Depression.”

Yeah, times are tough, but what happens when housing prices stabilize and the jobs market begins to pick up; won’t that put the Fed’s trillions of dollars into circulation and create Wiemar-type hyperinflation?

Many people think so, but Edward Harrison anticipates a completely different scenario. The author takes into account the psychological effects of a deep recession and shows how trauma can have a lasting effect on consumer habits, thus, minimizing the chance of inflation. It’s a persuasive thesis. Here’s what he says:

Richard Koo goes further in his book The Holy Grail of Macro Economics. Here, he argues that the unwind of great bubbles suffers from what he labels a ‘balance sheet recession.’ In essence, companies go from maximizing profits, as they had done in normal times, to a post-bubble concern of reducing debt. Regardless of how much priming of the pump monetary authorities do, the psychology of debt reduction will limit the effectiveness of monetary policy as a policy tool.

In my view, the catalyst for this change of psychology is the ‘debt revulsion’ that ushers in the panic phase of an asset bubble collapse. (Charles Kindleberger highlights the various stages of a bubble and its implosion in his seminal book Manias, Panics and Crashes. In this particular bubble, debt revulsion began post-Lehman Brothers. What we have seen, therefore, is a reduction in leverage and debt as the most leveraged players have gone to the wall. But, more than that, the household sector has gotten religion about debt reduction as the savings rate has increased dramatically since Lehman. In fact, I would argue that companies learned their lesson about debt from the aftermath of the tech bubble. It is the household sector in the U.S. (and the U.K.) which is heavily indebted. Therefore, if the psychology of a balance sheet recession does take form, it will be the household sector leading the charge.

In sum, the psychology after a major bubble is very different than the psychology before its collapse. The post-bubble emphasis becomes debt reduction and savings, making monetary policy ineffective, not because financial institutions are unwilling lenders but because companies and individuals are unwilling borrowers. These are forces to be reckoned with for some to come.⁶

Seductive interest rates, lax lending standards and nonstop public relations campaigns, persuaded millions of people that they could live beyond their means by simply filling out a credit app. or fudging a few numbers on a mortgage loan. These are the real victims of Wall Street’s speculative bubble-scam. For many of them, the agony of losing their home, or their job, or filing for personal bankruptcy will be felt for years to come. At the same time, the experience will keep many of them from getting in over their heads again. The same phenomenon occurred during the Great Depression. The pain of losing everything shapes behavior for a lifetime, which is why the savings rate has spiked so dramatically in the last few months. There’s been a tectonic shift in attitudes towards consumption and there’s no going back to the pre-bubble era.

If Harrison is right, our decades-long spending-spree is over and people will be looking for ways to live more modestly, pay-as-they-go and avoid red ink. This is good news for the economy’s long-term strength, but bad for short-term recovery. Deflation will persist even while savings grow and consumption comes more into line with personal income. The dollar will fall hard if Bernanke continues to load up on Treasuries, but with a few slight adjustments, he should be able to avoid a full-blown currency crisis. Thus, Zimbabwe-type hyperinflation is unlikely; the ongoing slowdown should keep inflation in check.

1. ”The Big Inflation Scare,” Paul Krugman, New York Times.
2. Dean Baker “Cheerleading the Economy,” UK Guardian.
3. Edward Harrison credit writedowns.
4. ”Place Your Wagers,” Brian Pretti, Financial Sense Observations.
5. ”A Tale of Two Depressions,” Barry Eichengreen and Kevin O’Rourke, VOX.
6. Edward Harrison, “Central banks will face a Scylla and Charybdis flation challenge for years” Credit Writedowns.

It’s not only possible, it’s been done. And now the scoundrels who cashed in on the swindle have lined up outside the Federal Reserve building to trade their garbage paper for billions of dollars of taxpayer-funded loans. Where’s the justice? Meanwhile, the credit bust has left the financial system in shambles and driven the economy into the ground like a tent stake. Maxed-out consumers are cutting back on everything from nights-out-on-the-town to trips to the grocery store while the unemployment lines are growing longer in every city across the country. And it’s all due to a Ponzi-finance scam that was concocted on Wall Street and spread through the global system like an aggressive strain of Bird Flu. It’s called securitization, and it is at the very heart of the financial meltdown.

Securitization — which is the conversion of pools of loans into securities that are sold in the secondary market — provides a means for massive debt leveraging. The banks use off-balance sheet operations to create securities so they can avoid normal reserve requirements and bothersome regulatory oversight. Oddly enough, the quality of the loan makes no difference at all, since the banks make their money on loan originations and other related fees. What matters is quantity, quantity, quantity; an industrial-scale assembly line of fetid loans dumped on unsuspecting investors to fatten the bottom line. And, boy, can Wall Street grind out the rotten paper when there’s no cop on the beat and the Fed is cheering from the bleachers.

In an analysis for the Federal Reserve Bank of Atlanta’s 2009 Financial Markets Conference, titled “Slapped in the Face by the Invisible Hand; Banking and the Panic of 2007,” economist Gary Gorton shows that mortgage-related securities ballooned from $492.6 billion in 1996 to $3,071.1 in 2003, while asset backed securities (ABS) jumped from $168.4 billion in 1996 to $1,253.1 in 2006. All told, more than $20 trillion in securitized debt was sold between 1997 to 2007. How much of that debt will turn out to be worthless as foreclosures skyrocket and the banks balance sheets come under greater and greater pressure?

Deregulation opened Pandora’s box, unleashing a weird mix of shady off-book operations (SPVs, SIVs) and dodgy, odd-sounding derivatives that were used to amplify leverage and stack debt on tinier and tinier scraps of capital. It’s easy to make money, when one has no skin in the game. That’s how hedge fund managers and private equity sharpies get rich. Securitization gave the banks the opportunity to take substandard loans from applicants who had no way of paying them back, and magically transform them into Triple A securities. Abracadabra. The Wall Street public relations throng boasted that securitization “democratized” credit because more people could borrow at better rates since funding came from investors rather than banks. But it was all a hoax. The real objective was to turbo-charge profits by skimming hefty salaries and bonuses on the front end, before people found out they’d been hosed. The former head of the FDIC, William Seidman, figured it all out back in 1993 when he was cleaning up after the S&L fiasco. Here’s what he said in his memoirs:

“Instruct regulators to look for the newest fad in the industry and examine it with great care. The next mistake will be a new way to make a loan that will not be repaid.” (Bloomberg)

That’s it in a nutshell. The banks never expected the loans would be paid back, which is why they issued them to ninjas: applicants with no income, no collateral, no job, and a bad credit history. It made no sense at all, especially to anyone who’s ever sat through a nerve-wracking credit check with a sneering banker. Trust me, bankers know how to get their money back, if that’s their real intention. In this case, it didn’t matter. They just wanted to keep their counterfeiting racket zooming ahead at full-throttle for as long as possible. Meanwhile, Maestro Greenspan waved pom-poms from the sidelines, extolling the virtues of the “new economy” and the permanent high plateau of prosperity that had been achieved through laissez faire capitalism.

Now that the securitization bubble has burst, 40% of the credit that had been coursing into the economy has been cut off triggering a 1930’s-type meltdown. Fed chief Bernanke has stepped into the breach and provided a $13 trillion dollar backstop to keep the financial system from collapsing, but the broader economy has continued its historic nosedive. Bernanke is trying to fill the chasm that opened up when securitization ground to a halt and gas started exiting the credit bubble in one mighty whooosh. The deleveraging is ongoing, despite the Fed’s many programs to rev up securitization and restore speculative bubblenomics. Bernanke’s latest brainstorm, the Term Asset-backed securities Lending Facility (TALF), provides 94 percent public funding for investors willing to buy loans backed by credit card debt, student loans, auto loans or commercial real estate loans. It’s a “no lose” situation for big investors who think that securitized debt will stage a comeback. But that’s the problem; no one does. Attractive, non-recourse (nearly) risk free loans have failed to entice the big brokerage houses and hedge fund managers. Bernanke has peddled less than $30 billion in a program that’s designed to lend up to $1 trillion. It’s been a complete bust.

To understand securitization, one must think like a banker. Bankers believe that profits are constrained by reserve requirements. So, what they really want is to expand credit with no reserves; the equivalent of spinning flax into gold. Securitization and derivatives contracts achieve that objective. They create a confusing netherworld of odd-sounding instruments and bizarre processes which obscure the simple fact that they are creating money out of thin air. That’s what securitization really is: undercapitalized junk masquerading as precious jewels. Here’s how economist Henry CK Liu sums it up in his article “Mark-to-Market vs. Mark-to-Model“:

The shadow banking system has deviously evaded the reserve requirements of the traditional regulated banking regime and institutions and has promoted a chain-letter-like inverted pyramid scheme of escalating leverage, based in many cases on nonexistent reserve cushion. This was revealed by the AIG collapse in 2008 caused by its insurance on financial derivatives known as credit default swaps (CDS) . . . .

The Office of the Comptroller of the Currency and the Federal Reserve jointly allowed banks with credit default swaps (CDS) insurance to keep super-senior risk assets on their books without adding capital because the risk was insured. Normally, if the banks held the super-senior risk on their books, they would need to post capital at 8% of the liability. But capital could be reduced to one-fifth the normal amount (20% of 8%, meaning $160 for every $10,000 of risk on the books) if banks could prove to the regulators that the risk of default on the super-senior portion of the deals was truly negligible, and if the securities being issued via a collateral debt obligation (CDO) structure carried a Triple-A credit rating from a “nationally recognized credit rating agency”, such as Standard and Poor’s rating on AIG.

With CDS insurance, banks then could cut the normal $800 million capital for every $10 billion of corporate loans on their books to just $160 million, meaning banks with CDS insurance can loan up to five times more on the same capital. The CDS-insured CDO deals could then bypass international banking rules on capital.

The same rule applies to derivatives (CDS) as securitized instruments; neither is sufficiently capitalized because setting aside reserves impairs one’s ability to maximize profits. It’s all about the bottom line. The reason credit default swaps are so cheap, compared to conventional insurance, is that there’s no way of knowing whether the dealer has the ability to pay claims. It’s fraud, on a gigantic scale, which is why the financial system went into full-blown paralysis when Lehman Bros defaulted. No one knew whether trillions of dollars in counter-party contracts would be paid out or not. There are simply more claims on wealth than there is money in the system. Bogus mortgages and phony counter-party promises mean nothing. “Show me the money.” The system is underwater, and it cannot be fixed by more of the Fed’s presto liquidity. Here’s what Gary Gorton says later in the same article:

A banking panic means that the banking system is insolvent. The banking system cannot honor contractual demands; there are no private agents who can buy the amount of assets necessary to recapitalize the banking system, even if they knew the value of the assets, because of the sheer size of the banking system. When the banking system is insolvent, many markets stop functioning and this leads to very significant effects on the real economy . . . .

Indeed. The shadow banking system has collapsed, not because the market is “frozen” or because investors are in a state of panic after Lehman, but because derivatives and securitization have been exposed as a fraud propped up on insufficient capital. It’s snake oil sold by charlatans. That’s why European policymakers are resisting the Fed’s requests to create a facility similar to the TALF to start up securitization again. Here’s a revealing clip from the Wall Street Journal, which explains what’s going on behind the scenes:

Bankers are pushing European policy makers to consider a U.S.-style program to aid the region’s economy by reviving the moribund market for bundled consumer loans. Officials at the European Securitisation Forum, a trade group representing banks and other market participants, said Tuesday that central bankers should consider stepping in with a program similar to the U.S. Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF, which provides loans to private investors who buy new securities tied to consumer loans . . .

After suffering heavy losses on securities stuffed with poorly made loans, investors are reluctant to wade back in, and Europe lacks big players like the Pacific Investment Management Co. in the U.S., whose buying can mobilize other investors….The market also faces uncertainty over how European regulators will change the rules of the game, in part by imposing tougher capital requirements on banks, the main buyers of securitized assets in Europe.

One European Commission proposal would dramatically hike the capital required of banks holding a securitized asset if the originator allowed its share of that asset to fall below a 5% threshold . . .

Paul Sharma of Britain’s Financial Services Authority said regulatory action is likely to shrink the investor base for ABS, in part by increasing the capital cushions banks will have to hold against ABS holdings in their trading books. He also argued that ABS were inappropriate for banks to hold as liquid assets, because they have proven difficult to sell in a market crisis.

“There is very much a query in the minds of regulators as to whether there is a significant future for securitization,” said Mr. Sharma, though he added his own view was that the market did have a future role. (”In Europe, a U.S. Way To Fix ABS Market?,” Neil Shah and Stephen Fidler, Wall Street Journal)

See? In Europe regulators still do their jobs and make sure that financial institutions have money before they create trillions of dollars in credit. They don’t stick with their heads in the sand while crooked bankers fleece the public. Bernanke’s job is to step in and put an end to the hanky-panky, not add to the problems by restoring a credit-generating regime that transferred hundreds of billions of dollars from ordinary hard-working people to fat cat banksters and Wall Street flimflammers.

The centerpiece is the list of America’s 500 biggest corporations by revenues, but the big story this year was the steep dive in profit by the companies — under $99 billion in 2008 vs. $785 billion in 2006. That’s a crash of 85%, an incredible swing in fortunes for American capital. The magazine admits that there had been a “bubble” in earnings, mainly in finance, although it fails to identify the broad deregulation of that sector as the reason.

The analysts find one reason that profit had been so enormous during the bubble period was that “labor costs, which account for two-thirds of all corporate expenses, barely budged during the glory days.” This was in part due to “a pro-business administration” that kept down labor, and as the magazine puts it, “Wages rose modestly.” Very modestly — the Economic Policy Institute reports that real wages grew by 0.0% over 2000-2006.²

And since the dollar was falling in the world markets, imports were more pricey, giving U.S. firms “plenty of space to raise their prices,” and with labor costs flat and productivity high, the profit margin on each unit sold shot up. Add in growing sales in the bubble environment, and total profit reaches its massive $785 billion peak. The oft-quoted economist Mark Zandi notes that “All of the increases in productivity went right to the bottom line. We’ll never see another profit period like it.” God willing!

We learn that the recent crash in profit had a few causes — the first being the collapse of U.S. banks and finance firms that overinvested in risky subprime assets. Their monumental losses make up about 70% of the decline in profit. But the second major sector of the economy to lose money was “consumer cyclicals” — representing any consumer goods that can be put off purchasing till later. The reason that this sector would face massive losses is that it “mirrors the fading fortunes of the U.S. consumer” who is “heavily, often ruinously in debt.” Of course, Fortune doesn’t connect this in-hock America to our stagnating real wages, which have failed to grow in purchasing power in thirty years.³ But this debt has left Americans “sharply reducing their spending to cover monthly interest and pay down their debt.” Obviously, this is no fault of the corporations, which have illegally fired thousands of union organizers and gone to great lengths to bust the unions that might have raised pay and prevented our needing to rely on plastic for groceries.⁴

Looking forward, the magazine’s editors expect that profit will “recover as labor costs fall” and “the consumer is coaxed back to anything like normal spending.” Sounds like they learned their lesson!

The magazine contains a few other notable points, including a section on “market myths,” such as “the myth that stocks as a group are a fundamentally reliable investment over the long term . . . The topper came four years ago: President George W. Bush could even propose privatizing Social Security by letting beneficiaries invest in stocks and have the idea taken seriously.” Even business looks down on Fox News.

President Obama gives an exclusive interview to the magazine, and insists that while his Administration has a “responsibility to take aggressive action to avoid an even deeper recession” the real role of government is “not to stifle the market” and to “get out of the way.” Government only has a legitimate role cleaning up the market’s mess, apparently.

But best of all is the article predicting that business will now be more accountable, because of “broad populist anger.” Now “government is getting involved, with an eye toward restraining the worst corporate behavior. But even without federal involvement, businesses will have to answer to a higher authority,” apparently meaning the public. A consultant is quoted saying executives “are very sensitive to the societal pressure.”

With the Fortune 500 laying off America and hoarding capital, here’s hoping our sensitive execs get thrown out of business in a takeover by “a higher authority.”

* Rob Larson lost all his money betting on the dogs. He’s Assistant Professor of Economics at Ivy Tech Community College in Bloomington, Indiana.

1. Fortune, Pop! Went the Profit Bubble, May 4, 2009.
2. State of Working America 2008/2009, Ch. 3, Economic Policy Institute, 2008.
3. Ibid.
4. BusinessWeek, “Can This Man Save Labor?,” September 13, 2004.

Export-led nations are looking for an edge to revive flagging sales by keeping their currencies undervalued. But the strong dollar is making it harder for Bernanke to engineer a recovery. He’d like nothing more than to see the dollar tumble and reset at a lower rate. That would reduce the debt-load for homeowners and businesses and send consumers racing back to the shopping malls and auto showrooms. Perception management is a big part of stimulating the economy. That’s why the financial media has been air-brushing articles that focus on deflation and shifting the attention to inflation. It’s an effort to kick start consumer spending by convincing people that their money will be worth less in the future. But deflation is still enemy number one. Rising unemployment, crashing home prices, vanishing equity and tighter credit; these are all signs of entrenched deflation.

Bernanke faces three main challenges to put the economy back on track. He must remove the hundreds of billions in toxic assets from the banks balance sheets, reignite consumer spending to offset the sharp decline in aggregate demand, and fix the wholesale credit-mechanism that provides 40 percent of the credit to the broader economy. Treasury Secretary Timothy Geithner has taken over the distribution of the remaining TARP funds, and created a new program, the Public-Private Investment Partnership (PPIP), for purchasing toxic mortgage-backed assets. The PPIP will provide up to 94 percent “non-recourse” government loans for up to $1 trillion of assets which are worth less than half of their original value at today’s prices. The Treasury’s plan is an attempt to keep asset prices artificially high so that the losses will not be realized until they’ve been shifted onto the taxpayer. Here’s how John Hussman of Hussman Funds summed up Geithner’s PPIP:

From early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount – the remainder being “non-recourse” financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficiently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.

Make no mistake — we are selling off our future and the future of our children to prevent the bondholders of U.S. financial corporations from taking losses. We are using public funds to protect the bondholders of some of the most mismanaged companies in the history of capitalism, instead of allowing them to take losses that should have been their own. All our policy makers have done to date has been to squander public funds to protect the full interests of corporate bondholders. Even Bear Stearns bondholders can expect to get 100% of their money back, thanks to the generosity of Bernanke, Geithner and other bureaucrats eager to hand out the money of ordinary Americans. (John Hussman, “The Fed and Treasury — Putting off Hard Choices with Easy Money, and Probable Chaos”)

The second part of the Fed’s plan is to fix the wholesale credit-mechanism, which means restoring the securitization markets where pools of loans are transformed into securities and sold to investors. Until Bernanke is able to lure investors back into purchasing high-risk debt-instruments comprised of student loans, mortgage securities, auto loans and credit card debt, the credit markets will continue sputter and growth will be flat. Structured-debt creates the asset base which is leveraged though traditional loans or complex derivatives. Credit expansion maximizes profit, inflates asset prices and establishes the structural framework for shifting wealth to financial institutions via speculative asset bubbles. This is the basic financial model that US banks and financial institutions hope to export to the rest of the industrial world to ensure a greater portion of global wealth for themselves and a stronger grip on the political process.

Bernanke’s Term Asset-backed Securities Loan Facility (TALF) provides up to $1 trillion in non recourse loans to financial institutions willing to buy AAA-rated debt-instruments backed by consumer and small business loans. So far, the response has been tepid at best. For all practical purposes, the market is still frozen. Bernanke knows that there will be no recovery unless the credit markets are functioning properly. He also knows that the TALF won’t succeed unless he provides guarantees for the underlying collateral, which is loans that were made to applicants who have no means for paying them back. Bernanke’s guarantees will cost the taxpayer billions of dollars without any assurance that his plan will even work. It’s a complete fiasco.

From the Federal Reserve Bank of San Francisco Economic Letter, “US Household Deleveraging and Future consumption Growth” by Reuven Glick and Kevin J. Lansing:

More than 20 years ago, economist Hyman Minsky (1986) proposed a “financial instability hypothesis.” He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions.

Until recently, U.S. households were accumulating debt at a rapid pace, allowing consumption to grow faster than income. An environment of easy credit facilitated this process, fueled further by rising prices of stocks and housing, which provided collateral for even more borrowing. The value of that collateral has since dropped dramatically, leaving many households in a precarious financial position, particularly in light of economic uncertainty that threatens their jobs.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless. (The Federal Reserve Bank of San Francisco Economic Letter, “US Household Deleveraging and Future consumption Growth” by Reuven Glick and Kevin J. Lansing)

The economy is in the grip of deflation. Commercial banks are stockpiling excess reserves (more than $850 billion in less than a year) to prepare for future downgrades, write-offs, defaults and foreclosures. That’s deflation. Consumers are cutting back on discretionary spending; driving, eating out, shopping, vacations, hotels, air travel. More deflation. Businesses are laying off employees, slashing inventory, abandoning plans for expansion or reinvestment. More deflation. Banks are trimming credit lines, calling in loans and raising standards for mortgages, credit cards and commercial real estate. Still more deflation. Bernanke has opened the liquidity valves to full-blast, but consumers are backing off; they’re too mired in debt to borrow, so the money sits idle in bank vaults while the economy continues to slump.

In an environment where businesses and consumers are rebuilding their balance sheets and paying off debt, there’s only one option; inflation. Bernanke will keep interest rates will stay low while increasing monetary and fiscal stimulus. The ocean of red ink will continue to rise. Still, the system-wide contraction will persist despite the Fed’s multi-trillion dollar lending programs, quantitative easing (QE) and Treasury buybacks. The “Great Unwind” is irreversible; the era of limitless credit expansion is over.

David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, believes that the equities markets have undergone a “gargantuan short-cover rally” and that stocks will retest the March 9th low, which was a 12 year low for the S&P 500 Index. Rosenberg said he doesn’t expect the economy to recover in the second half of the year.

“I’m seeing no revival of consumer spending in the second quarter,” Rosenberg said. (Bloomberg)

The conditions that supported the explosive growth of the last decade no longer exist. The credit markets are in a shambles, the banking system is hanging by a thread, and the consumer is out of gas. Traders are clinging to the slim hope that the worst is over, but they could be mistaken. There’s probably another leg down and it will be more vicious than the last.

Wexler’s statement continued by stating that, “The committee will investigate many of the outrageous policies of the Bush Administration to unearth and expose what happened during the past eight years…. We must take a hard look at what went wrong in the last eight years. We must continue to peel back the veil of secrecy that the previous Administration used as cover to undermine our system of checks and balances, and establish a clear line between what is necessary for our security and what is unlawful government intrusion and a violation of our civil liberties.”

Wexler is not the only member of Congress to announce his attention to call out the Bush administration on its abuses. Senator Patrick Leahy wants to set up a “Truth Commission,” whose mission, as described in Time, would be “to investigate the politicization of prosecution in the Justice Department under former Attorney General Alberto Gonzales; the wiretapping of U.S. Citizens; the flawed intelligence used to justify the invasion of Iraq; and the use of torture at Guantanamo and so-called black sites abroad. Leahy’s commission is to be modeled after one that investigated the apartheid regime in South Africa.”

The trouble is that congressional investigating committees rarely amount to anything. An example was the 1976 House Select Committee on Assassinations, set up to investigate the killings of President John F. Kennedy and Dr. Martin Luther King, Jr. The committee met largely in secret, withheld much of its evidence from the public, and, while it said both assassinations likely involved conspiracies, stated no government agencies were parties to them. The latter point has been disputed by independent researchers both before and since.

Another example was the National Commission on Terrorist Attacks on the United States, a.k.a, the 9/11 Commission. While the commission concluded that failures of the CIA and FBI allowed the attacks to occur, it failed to look at any possibility of complicity by those agencies or the Bush administration. Members of the commission later said government officials lied to them and impeded the investigation.

It’s possible, of course, that any committees set up to investigate Bush, Cheney, at.al., will have better luck, but will they examine the questions that really matter? Neither Wexler nor Leahy mention reopening the 9/11 case. And neither mentions the event that may be just as momentous—this is the “financial 9/11”; i.e., the 2008 collapse of the U.S. financial system.

I’d like to find out, for instance, how the 9/11 terrorist attacks were connected with the extraordinary movement of massive amounts of funds within and outside the Federal Reserve and U.S. banking system that led to a huge growth in the M3 monetary supply before the Federal Reserve stopped reporting M3 data in 2006. Such a link has been suggested in some internet reports.

I’d also like to know how and why Federal Reserve Chairman Alan Greenspan colluded with the Bush White House to suddenly start pumping massive amounts of credit into the housing bubble from 2001-2005 and what instructions went out to Comptroller of the Currency, the Securities and Exchange Commission, and other federal regulators to prevent the abuses in the subprime mortgage market from being investigated.

Then I’d like to know why the Bush Administration, including Secretary of the Treasury Henry Paulson, claimed no one foresaw the crash of the financial system in October 2008, why the demand was suddenly made to Congress for over $700 billion in bank bailouts, and what the role of Paulson and the host of other former Goldman-Sachs executives working for the Bush administration had in setting the stage for the crash and profiting from it. And why is current Secretary of the Treasury Timothy Geithner doing virtually the same as Paulson did in throwing money at the banks while the economy sinks deeper in recession?

Of course neither Wexler nor Leahy intends to examine any of these issues. Which is why their calls for investigations make good political theater, may put a few minor players on the hot seat, but, in the big picture, will be a complete waste of time. A better course would be a Special Prosecutor. But the Obama administration has given no indication of doing this either.

The housing market is crashing. There are no “green shoots” or “glimmers of hope”; the market is worn to a stump, it’s kaput. Still, whenever new housing figures are released, they’re crunched and tweaked and spin-dried until they tell a totally different story: a hopeful story about an elusive “light in the tunnel.” But there is no light in the tunnel; it’s a myth. The truth is, there’s no sign of a turnaround or a “bottom” in housing at all. Not yet, at least. The real estate market is freefalling and it looks like it’s got a long way to go. So why is the media still peddling the same “rose-colored” claptrap that put the country in this pickle to begin with? Here’s an example of media spin, which appeared in Bloomberg News on Wednesday:

“US home prices rose 0.7 percent in February from the month before, the Federal Housing Finance Agency said in Washington today, a sign that low interest rates may be moderating declines in real estate values. . . . Housing market data indicates prices are starting to “stabilize,” and households’ available cash should improve through each quarter of 2009 and into 2010.” (Bloomberg)

This report is complete gibberish. The only way to get a fix on what’s really happening with housing is to compare prices year over year (yoy) not month to month. Clearly, the journalist decided to spin the story from this angle because it offered the one flimsy sign of hope in a sector that’s been reduced to rubble. But, don’t be fooled, housing isn’t staging a comeback. Not by a long shot.

This is from Marketwatch:

“The Case-Shiller index of 20 major cities fell 2.8% in January, the fastest decline on record. The Case-Shiller index rose more than the Federal Housing Finance Agency (FHFA) index did during the bubble, and it’s fallen faster since the bubble burst . . . The index was down 19% year-over-year in January.”

So, the only reason that housing prices rebounded (slightly) in February was because, one month earlier, they were “declining at the fastest pace on record.” That’s not a sign of “green shoots” like the Pollyannas say. It’s a sign of a ferocious ongoing contraction. The only thing that’s keeping housing from collapsing completely is the Fed’s purchases of Fannie and Freddie mortgage-backed securities (MBS). Bernanke’s action has pushed interest rates to record lows giving homeowners a chance to refinance rather than default on their loans. Struggling homeowners have been granted a one-time reprieve courtesy of the US taxpayer. That’s great, but the fact that the Fed is subsidizing the industry to the tune of $1.25 trillion is hardly cause for celebration. What Bernanke should have done is prevented the credit bubble from inflating in the first place.

Check out this chart on The Big Picture to see a chilling illustration of a market in
capitulation-phase.

As the caption states:

“We are now in uncharted territory — new home starts have never fallen to these levels for as long as the Commerce Department has been tracking this data (since 1959). Note also the magnitude of the drop — it is unprecedented, having easily surpassed the 1982 collapse, the present circumstances have now become slightly worse than the 1973-75 fall.”

Housing will continue to deteriorate no matter what the Fed does; the downward momentum is too great to resist. And although the refi-business is booming, new home sales are still flat. Buyers are just too scared or too broke to take advantage of the ultra-low interest rates. (4.80%, 30-year fixed) And now that Obama’s foreclosure moratorium is over, delinquencies are stacking up faster than ever before auguring another wave of foreclosures. This is from DataQuick: “Golden State Mortgage Defaults Jump to Record High”:

Lenders filed a record number of mortgage default notices against California homeowners during the first three months of this year, the result of the recession and of lenders playing catch-up after a temporary lull in foreclosure activity . . .

A total of 135,431 default notices were sent out during the January- to-March period. That was up 80.0 percent from 75,230 for the prior quarter and up 19.0 percent from 113,809 in first quarter 2008, according to MDA DataQuick.

And from Bloomberg:

Fannie Mae and Freddie Mac mortgage delinquencies among the most creditworthy homeowners rose 50 percent in a month as borrowers said drops in income or too much debt caused them to fall behind, according to data from federal regulators.

The number of so-called prime borrowers at least 60 days behind on mortgages owned or guaranteed by the companies rose to 743,686 in January, from 497,131 in December, and is almost double the total for October, the Federal Housing Finance Agency said in a report to Congress today.

So, even top-of-the-line prime borrowers are having trouble making their payments. The debt virus has now spread to all loan categories. But what about Obama’s mortgage relief program? Won’t that help keep people in their homes?

In the last two months, roughly 9,000 mortgage modifications have been worked out under Obama’s Streamlined Modification Program. At the same time delinquencies have increased by roughly 195,000 per month. That means there are 186,000 more delinquencies than modifications per month. Obama’s program is like a re-staging of grunting Sisyphus pushing his boulder up the hill — utter futility.

Many economists believe that “cramdowns” are the only way to slow the rate of foreclosures and stop the precipitous decline in housing prices. Cramdowns allow a judge to modify mortgages by marking down the face value (the principle) of the loan. When mortgages accurately reflect current market prices, people tend to stay in their homes. But when prices fall sharply and homeowners owe more on their mortgage than their home is worth, (negative equity) they simply stop making their payments and leave.

So far, cramdown legislation has passed the House, but has stalled in the Senate where it looks like it will be defeated. Powerful groups of bondholders have taken their case to Capital Hill where they’re waging a pitch battle against the Obama plan. At this point, it doesn’t look good for supporters of debt relief even though cramdowns are desperately needed to stop the hemorrhaging of foreclosures.

As we noted in an earlier article, the backlog of homes on the market is still in the vicinity of 10 months. But that excludes the vast “shadow inventory” the banks are keeping off the market. According to SF Gate:

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

“We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,” said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. “California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage. (”Banks aren’t Selling Many Foreclosed Homes,” SF Gate)

Inventory has dropped from its peak in 2008, but if the estimates of the shadow inventory are accurate, then the backlog of vacant homes is still about the same. Any recovery in housing will show up first as falling inventory, since the heart of the problem is oversupply.

On Wednesday, the New York Times reported that fewer people are moving because of the troubles in housing. In fact, “Fewer Americans moved in 2008 than in any year since 1962, according to census data released Wednesday, and immigration from overseas was the lowest in more than a decade. . . . It shows that the U.S. population, often thought of as the most mobile in the developed world, seems to have been stopped dead in its tracks due to a confluence of constraints posed by a tough economic spell.” (Sam Roberts, “As housing Market Dips, more in US are Staying Put,” New York Times)

Diminished mobility is just another of the unpleasant side effects of the housing bust.

The problem with housing goes far beyond the supply/demand imbalance. True, buyers are staying away because they know that prices could fall another 15 to 20 percent, but there’s more to it than just that. The housing crisis has been a shock to the psyche. The dream of home ownership — which is so closely linked to the so-called American dream — has turned into a nightmare. The trauma of watching one’s life savings and retirement vanish in a matter of months is devastating. It’s not an experience that’s easily forgotten. Naturally, people will be more skeptical in the future about seductive interest rates and other faux inducements. Keep in mind, that after investors were burned for $7 trillion in the dot.com swindle, tech stocks swooned and the NASDAQ plunged 80 percent over the next year and a half. Housing is headed down that same bumpy path. There probably won’t be an uptick in housing until the market is flat on its back and given up for dead.

New Home Sales Update: On Friday, stocks skyrocketed on news that “new home sales did not fall as far as expected.” Once again, the story was presented in a way that suggested the housing market is “stabilizing”. But a closer examination of Friday’s data reveals how the media has manipulated the facts to create the impression that things are getting better. But they are not getting better; they’re getting worse. Here is a summary of Friday’s “good news”:

1) The median price of a new home fell $201,400 year over year (YOY)

2) Sales of new homes were down 31 percent from March 2008. They reached a record 1.389 million in July 2005.

3) Distressed properties accounted for about 50 percent of all sales.

4) Inventory (new homes) is still bulging at 10.7 months

5) Foreclosures are at record highs

Bernanke has provided generous “100 cents on the dollar” loans for Triple A mortgage-backed collateral that is now worth 30 cents on the dollar. The Fed stands to lose trillions of dollars on these loans because the assets will never regain their original value. Eventually the taxpayer will have to pony up the difference in higher taxes, fewer public services and a weaker dollar.

Bernanke’s liquidity injections may have sparked a flurry of speculation, but they won’t end the recession or slow the downward spiral. The relentless system-wide contraction continues apace and all of the leading economic indicators point to a deepening slump that will last for two years or more. Here’s a clip from a recent statement from the IMF:

Recessions associated with financial crises have typically been severe and protracted. Financial crises typically follow periods of rapid expansion in lending and strong increases in asset prices. Recoveries from these recessions are often held back by weak private demand and credit reflecting, in part, households’ attempts to increase saving rates to restore balance sheets. They are typically led by improvements in net trade, following exchange rate depreciations and falls in unit costs.

Globally synchronized recessions are longer and deeper than others. Excluding the present, there have been three episodes since 1960 during which 10 or more of the 21 advanced economies in the sample were in recession at the same time: 1975, 1980 and 1992 . . . Recoveries are usually sluggish, owing to weak external demand.

The recession will be a long uphill slog regardless of developments in the stock market. Bernanke admitted as much last Thursday when he said that the collapse of U.S. lending will cause “long-lasting” damage to home prices, household wealth and borrowers’ credit scores:

“One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be. . . . The damage from this turn in the credit cycle — in terms of lost wealth, lost homes, and blemished credit histories — is likely to be long-lasting.”

Unlike Treasury Secretary Geithner, Bernanke has been surprisingly candid in his analysis of the crisis. That doesn’t mean that his policies have been worker-friendly. Far from it. But he has been a lot more honest about the shortcomings of deregulation and financial innovation. So far, the meltdown has wiped out more than $11 trillion of household wealth, sent unemployment skyrocketing, and pushed millions of people from their homes. As Bernanke admits, the country will not quickly bounce back.

Economists Kenneth Rogoff and Carmen Reinhart have conducted a study on the last 18 international financial crises and compiled their findings in a document called “Is the 2007 U.S. Subprime Financial Crisis So Different?” What they discovered was that “rising public debt is a near universal precursor of other post-war crises” and that countries that experienced large capital inflows were particularly vulnerable to crises. By 2006, two-thirds of the world’s surplus capital was flowing into the United States via its current account deficit. This flood of foreign capital kept interest rates low, housing and equity prices high, and Wall Street flush with money. Now foreign investment is drying up, housing prices are falling, the secondary market is frozen, and deflation is setting in across all sectors of the economy.

Rogoff and Reinhart believe that “recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage. If the United States follows the norm of recent crises, as it has until now, output may take four years to return to its pre-crisis level. Unemployment will continue to rise for three more years, reaching 11–12 percent in 2011.” (Kenneth Rogoff and Carmen Reinhart, “Don’t Buy the Chirpy Forecasts,” Newsweek)

The proliferation of opaque, unregulated debt-instruments (MBSs, CDOs, CDSs) also played a big role in the present crash by reducing transparency and increasing systemic instability. Here’s Rogoff and Reinhart:

Assuming the U.S. continues going down the tracks of past financial crises, perhaps the scariest prospect is the likely evolution of public debt, which tends to soar in the aftermath of a crisis. A base-line forecast, using the benchmark of recent past crises, suggests that U.S. national debt will rise by $8.5 trillion over the next three years. Debt rises for a variety of reasons, including bailout costs and fiscal stimulus. But the No. 1 factor is the collapse in tax revenues that inevitably accompanies a deep recession.

Tax revenues are already falling sharply across the country as the recession deepens. In fact, Bloomberg News reports that, “State and local sales-tax revenue fell more sharply in the fourth quarter of 2008 than at any time in the past half century . . . ” (Corporate and personal income taxes are also declining at a record pace.) That makes it impossible to predict the ultimate cost of the crisis. But what makes it even harder is that Treasury Secretary Timothy Geithner refuses to remove toxic assets from the banks balance sheets using the usual “tried and true” methods. A recent report from a congressional oversight committee (The Warren Report) revealed that there are three ways to fix the banking system: liquidation, reorganization and subsidization. Geithner has rejected all three of these preferring to implement his own makeshift Public Private Investment Program (PPIP), which is thoroughly untested, has no base of public or political support, and is clearly designed to shift the toxic debts of the banks onto the taxpayer through publicly-funded non recourse loans. (Geithner’s plan will allow the banks to establish off-balance sheet operations so they can buy their own bad assets from themselves using 94 per cent public money) The whole thing is an obvious swindle papered over with gibberish.

So far, less than $10 billion has been transacted through Geithner’s PPIP, a mere drop in the bucket. The IMF estimates that the banks and other financial institutions may be holding up to $4 trillion in toxic assets. At the current rate, Geithner’s strategy will take a century to succeed. The Treasury Secretary knows his plan won’t fix the banking system; he’s just hoping that the economy rebounds before the government is forced to nationalize the big banks. It’s just a stalling ploy, but even so, there are risks. As the economy worsens, the likelihood of another financial meltdown or a run on the dollar increases. Foreign central banks and investors are getting restless and want to see the Treasury take positive steps to fix the system. In recent months, China has slowed its purchases of US Treasuries, traded tens of billions of USD in currency swaps, and has gone on a spending spree for raw materials — all to protect itself from weakness in the dollar. According to Bloomberg:

“People’s Bank of China Zhou Xiaochuan called for the establishment of a “super-sovereign reserve currency” last month after Chinese Premier Wen Jiabao said he’s worried a weaker US dollar may hurt China’s investments. Inflation and a depreciating dollar would erode the value of US holdings owned by international investors.”

Again, Bloomberg:

“China, Japan and Korea should establish a routine mechanism to diversify the region’s reserve currencies away from the dollar, the China Securities Journal reported, citing central bank adviser Fan Gang. The Asian countries need to consider setting up a transitional arrangement to help reduce reliance on the dollar before the problems in the international financial system are resolved.”

Geithner’s foot dragging could be extremely costly for America’s long-term economic prospects. The Treasury Secretary should be tackling the toxic assets problem head-on and stop the dilly-dallying; there’s no time to lose.

According to the Organization for Economic Co-operation and Development (OECD), “The world economy is in the midst of its deepest and most synchronized recession in our lifetimes, caused by a global financial crisis and deepened by a collapse in world trade.”

The vicious contraction has spread to every sector without exception — industrial output, credit, private consumption, exports, retail, residential investment, housing, equities prices and manufacturing — all have seen sharp cutbacks or plunging revenues. The spurious notion that “green shoots” are beginning to sprout up, is just more happy talk to divert attention from the severity of the impending storm.

The Fed is in way over its head and Bernanke knows it. Nothing is working — not the zero-percent interest rates, nor the multi-trillion dollar lending facilities, nor monetizing the debt by purchasing long-term Treasuries. It’s all been a flop. Financial institutions are deleveraging, businesses are slashing inventory, and corporations are laying off workers in droves. More than 40 percent of the credit that was sloshing around the economy via low interest loans has dried up. The banks aren’t lending and Wall Street’s credit-generating contraption — securitization — has broken down bursting the humongous equity bubble and precipitating a sudden decline in economic activity. There are no quick fixes. It will take years to reassemble the broken pieces or design a new financial architecture. It’s the end of an era.

As for housing; the situation is devolving beyond anyone’s wildest expectations. It’s not a Depression, it’s bigger and more savage — an Uber-Depression! Take a look at this chart from Barry Ritholtz’s The Big Picture.

We are in uncharted water in a leaky boat.

Housing is a millstone that’s dragging down the whole economy. The Wall Street bulls can enjoy their “sucker’s rally” for now, but it’s going to be short-lived. The fundamentals have never been this bad. It’s like a chapter from Revelation. The banks are padding their earnings reports with accounting trickery to hide their losses. The consumer is underwater and worried about losing his job or getting evicted from his home. And the government is trying to conceal the damage to the financial system through trillion dollar stealth bailouts that never get congressional approval. It’s a real mess, and the problem is that there’s just too much debt. Martin Wolf of the Financial Times summed it up like this last Monday:

Consider the salient example of the US, on whose final demand so much has for so long depended. Total private sector debt rose from 112 per cent of GDP in 1976 to 295 per cent at the end of 2008. Financial sector debt alone jumped from 16 per cent to 121 per cent of GDP over this period. How much of a reduction in these measures of leverage occurred in the crisis year of 2008? None. On the contrary, leverage rose still further.

The danger is that a turnround, however shallow, will convince the world things are soon going to be the way they were before. They will not be. It will merely show that collapse does not last forever once substantial stimulus is applied. The brutal truth is that the financial system is still far from healthy, the deleveraging of the private sectors of highly indebted countries has not begun, the needed rebalancing of global demand has barely even started and, for all these reasons, a return to sustained, private-sector-led growth probably remains a long way in the future. (Martin Wolf, “Why the ‘green shoots’ of recovery could yet wither, Financial Times)

Debt is at the very center of the current financial crisis. The massive debt-overhang can only be resolved by writing down losses, restructuring capital, and initiating debt-relief programs. The Fed and Treasury’s task is to soften the effects of a hard landing not to stop the process altogether. That would be pointless. Recessions are a necessary purgative that cleanse the system of waste and excess. Wall Street’s unprecedented credit expansion — which ballooned to gigantic proportions from fetid assets, off-balance sheet operations and mega-leveraging — ensures that this recession will be more agonizing than any before. But that just makes it all the more important. The system has to exhale before the patient can be revived.

We who are watching President Obama carefully observe that he has betrayed us. For unknown, hopefully innocent and unknowing reasons, he has chosen an economic policy based on a massive falsehood, and advisors who have enabled Wall Street Banks to earn rich profits in the short run based on that falsehood. Obama has committed $12.8 Trillion to bailing out crooked Wall Street Banks, fraudulent by the public admissions of their own CEOs, and attempting to make them whole, a ratio of 14 for Wall Street Bank crooks to 1 for our Main Street economy. Obama continues the idiotic policy through massive bailouts of Wall Street crooks by trying to restart the unregulated real estate bubble, specifically including unregulated derivatives, credit default swaps, and hedge funds.

Instead of hope and change from the policies of the Bush Administration that some of us expected, every single policy regarding the maintenance of an aggressive economic empire abroad has been retained or expanded. We are all concerned about the depression that now confronts us, our loss of jobs and our loss of our homes in foreclosure, and the loss of our old age security. We had somehow assumed that Obama would deal with that directly and effectively by taking steps to restore purchasing power. An obvious first thing we expected was that he would enlarge and lengthen unemployment benefits. This has not happened. President Obama has not clearly explained how his present bail out priorities will help us. He has announced no alternate strategy if the present strategy does not work. Our disillusion was capped off by an article in the Wall Street Journal on April 18, 2009 reporting that Obama was considering secret retention of the right of the CIA to torture. We get no explanation of this from the mainstream media, nothing from the Democratic Party and nothing from the Republican Party. Even Marxists seem unconcerned about Wall Street Banks. It is left to us citizens and voters to try to find answers to these perplexing questions from non-mainstream sources and from economists and analysts who are not beholden to Wall Street’s status quo. We thus have a massive job of self-education and education of friends and neighbors. As Professor Michael Hudson suggests, we might copy a small European nation where labor unions called a one day general strike for the purposes of educating citizens. In the United States, we may need a one week general strike, probably more than one.

Since so large a proportion of public money is devoted to crooked Wall Street Banks, and to the maintenance of the aggressive spread of American investment opportunities in foreign lands, it seems appropriate to examine the dynamics of the Wall Street Banking system.

Three Preliminary Definitions

By “Wall Street Banks,” we mean about 10 dominant leading international banks of the United States, Europe and Japan, the main ones being based in the United States, and the major firms that they lend money to in defense industries, manufacturing and industrial businesses, agri-business and transportation. The term includes the Federal Reserve System, the WTO and the IMF. We do not mean the local independent banks that serve us in our local communities.

By “capitalism” we mean the political-economic system in which the Wall Street Banks and the firms they finance including their control over the governments where they operate. Capitalists are thus those within the operating complex of Wall Street Banks who have access to the means of producing goods and services, and access to the Wall Street Bank loans to do so. We citizens and voters whether employed or self-employed are not “capitalists.” because we have control of and access to nothing but our own labor or brain power which we sell or rent to employers or clients, patients and customers. The car dealers, professionals and independent businesses in our local communities are not capitalists in the sense here used. We non-Wall Street citizens and voters have very different moral values, ethics and interests than Wall Street Banks.

By “the massive falsehood,” we mean the culture wide dominating falsehood promoted by Wall Street Banks and its politicians and advisors and, so far, accepted by President Obama. It is this lie:

“The economy can flourish indefinitely by increasing the supply of goods and services and loaning people money with which to buy them. It is never necessary to increase the wages and purchasing power of employees. Wages and salaries can be cut, jobs eliminated, and production transferred to low wage countries without harming our stable economy.”

Current events now graphically demonstrate the falseness of this proposition as does simple logic. Imagine an economic system where all of the work is done by unpaid slaves. The slaves could buy nothing, having no earned income. So who is left to buy? Banks might loan slaves money with which to buy, but how would slaves repay the loans? That is now our plight. Wall Street Banks hate unions and hate high wages and salaries for employees. Wall Street Banks hate giving citizens more money and security. Our jobs were transferred overseas where workers earn too few pennies to buy much of anything. Too many of us are unemployed or employed only part time at a wage where we can not even buy enough food, much less support our huge, but very fragile economy.

The Private Fortune Building Machine: How the Fed and Private Banks Create Money Out of Thin Air and Then Profit by Lending it To Us

The Wall Street Banking System is private. It exists to make a profit for its investors and owners. Congress in the 1913 Federal Reserve Act granted a franchise to private banks to create money and to regulate interest rates. This franchise today is exclusive for all practical purposes since most money is “check book” money and not coins and dollar bills.

The Federal Reserve Board is not a public institution. Although the President selects the 12 board members for staggered terms, by law, they must be selected from a pool of private bankers. The Federal Reserve Bank and its 12 member branches are also private banks, owned by the member private banks. We have no accurate way of knowing the profits of this system because, by law, it may not be subjected to public audit.

The Federal Reserve Board creates money out of thin air, simply by writing a check, with no back up reserves or deposits and then allows a member bank to “create” 10 times more of that initial check book money. Our government backs this magic money as “legal tender” for the payment of all debts and taxes. For example, if a member bank has applications for loans, say $1000, the Fed simply writes a check for this money out of nothing and lends it to the member bank. Then a second bit of magic money making occurs: Each such loan by a member bank becomes an “asset” or a reserve so that the member bank can loan 90% of the first “asset” to a second borrower, and 90% of the second borrower to a third borrower and so on, to a maximum of $10,000 based on the initial $1000. This is called fractional reserve banking.” It is a fabulous way to create a permanent and growing “critical mass” fortune due to the compounding of money loaned at interest over time. It is the hidden secret of private banking that has existed at least since Rothschild in the early 1800s. The banks charge us interest on money they create out of thin air. The private fortunes that this system generates over the decades are beyond belief. These private banking fortunes must have multiplied many times.

The total private banking fortunes of Bank investors and heirs of investors must now be as large as the entire planet’s GNP. We have no way of knowing how much. This then is the operational underpinning of the private banking system. If we had known in time, we all should have started banks. Foreign banks and individuals, probably including Rothschild heirs, own stock in our private Wall Street Banks, but again we have no way of knowing how much. Because it generates so much money, it generates dominant power over our government. In fact it was this already existing private bank lobby money and power that “persuaded” congress to delegate its power to coin money and regulate the value thereof to private banks in 1913. Keep this secret, magic, profit generating system in mind as we examine how the private banks have used this power since 1913. Think also of the statement attributed to the legendary European banker Amschel Mayer Rothschild who allegedly said in 1838: “Permit me to issue and control the money of a nation, and I care not who makes its laws.”

How the Wall Street Banks Have Compounded Their Political Power and Profits, From 1913 to Date

Wall Street Banks have persistently striven to place themselves at the center of every human transaction so as to make money, and to expand their profit making opportunities and their power.

In 1944 the Wall Street Banks met at a ski resort in Bretton Woods, New Hampshire.Voters and citizens in the US were fighting WWII in the armed services, riveting airplanes, welding tanks and ships, and buying Victory Stamps arranged as corsages for their dates. Millions of ordinary citizens were putting out this massive effort to secure the Four Freedoms, Freedom from Fear, Freedom from Want, Freedom of Speech, and Freedom of Religion. The Wall Street Banks had a very different objective. They were meeting in Bretton Woods to plan how to maximize their profit and power following WWII. England, France, Germany and Japan were physically and financially devastated by WWII. The United States escaped WWII relatively unharmed. Wall Street Banks seized the opportunity to dominate. Wall Street Bankers hatched a plan to make the dollar backed by gold the dominant currency for the planet and to breach national barriers so as to foster dominant lending and investment opportunities throughout the world for Wall Street Banks. The dollar dominance created by Bretton Woods was backed by the US guarantee that it was “legal tender,” and the promise to pay in gold if demanded, the “gold standard.”

By 1971, The US debt and inflation due to the Viet Nam War caused Europeans to demand payment of debts in gold. This was exhausting our gold supply so President Nixon unilaterally abandoned the gold standard and adopted a “floating dollar standard” relative to other currencies. The US dollar dominance was strong enough by that time that the dollar remained the dominant currency of the planet, aided by a Treaty with Saudi Arabia that all oil it sold would be paid for with dollars.

After a time a domestic crisis occurred in the operation of this Wall Street Bank capitalism. There would be overproduction: more goods produced than earned wages could purchase, and still yield a profit. Wages stagnated. Wall Street Banks found insufficient profitable places to loan money. The Wall Street Banks quickly adapted using the IMF and the WTO which the private banks controlled. They exported their Wall Street Bank crisis to poor countries. They made large loans to foreign governments often to their Dictators, to “help them develop.” Wall Street Banks were not being charitable or benevolent. They imposed harsh conditions on these loans:

1. The borrowing country had to open its borders so that Wall Street Banks could invest in that country.

2. The country had to privatize many of its public works such as water works, abandon “socialism,” and adopt a market economy so that Wall Street Banks could purchase or invest in that country without restriction.

3. The country had to cut its social welfare programs (which had the intended effect of compelling workers to accept lower wages, or starve.)

4. Taxes had to be raised on the workers so that the IMF loans could be repaid.
This was the Wall Street Bank salvation formula that was imposed on the Soviet Union, Mexico, Brazil, Argentina, Chile, and Indonesia, among others.

By 1980, poor nations became unable to pay and Wall Street Banks were desperate to find still other ways to make profit. Wall Street Banks adopted the policy of “Financialization.” This meant that instead of trying to loan money for the production of goods and services that human beings needed, and could pay for, Wall Street Banks would buy and sell each other’s companies, invest in hedge funds or bets that a company or commodity would go up or down. The profits for Wall Street Banks were immense, much more than Wall Street Banks had ever made before. Wall Street Banks used its new money to persuade Congress to abolish the Glass-Steagall Act and to pass a law prohibiting regulation of these “securities.”

This new absence of regulation enabled Wall Street Banks to become crooks, to engage in fraud. Wall Street Banks made “liar loans,” risky loans that Wall Street Banks knew from decades of banking experience, the borrowers were unlikely to repay. Wall Street Banks begged local mortgage brokers to sell such liar loans to unqualified buyers of houses, urging them to falsify their income. These liar loans were made sometimes to unlearned first time home buyers and sometimes to speculative individuals who thought they saw a way to make money without working from the appreciation in house values.

Wall Street Banks then bundled these loans, and issued layer upon layer of bonds “secured” by these “liar loans.” Wall Street Banks then pressured the rating agencies like Moody’s to give these very risky bonds an AAA rating. Wall Street Banks then sold these bonds to state pension funds, wealthy foreign individuals, to foreign governments, and even to a tiny town in Northern Norway, all of whom justifiably relied on the AAA rating. The profits for Wall Street Banks created many new billionaires and millionaires. These Financial Assets grew to about 425% of U.S. Gross National Product. The total fortunes now accumulated by the families invested in Wall Street Banks are probably enough to control the entire developed world.

It is these crooked fraudulent Wall Street Banks, stock holders and CEOs that Obama is now bailing out with a commitment of $12.8 Trillion of public money. Further than that, President Obama has retained as his main advisors the same persons and the same crooked fraudulent practices that created our current depression and difficulties.

The Wars Against Terror, Aided Where Necessary by Torture and Assassination, are Critically Necessary to the Maintenance of the Power of the Wall Street Banks

Any person or group within a foreign country who actively opposes imperialistic Wall Street Bank looting or dollar domination is labeled a radical, a communist, a socialist, or more recently a terrorist. Terrorists are often loyal to their cause and to each other and will not talk when captured, so Wall Street Banks find it necessary to torture them so as to identify and capture other terrorists. This will not seem so strange or unusual to those who know that US employers, to protect their profits, have historically resorted to hired thugs, beatings, and murder of those employees who engaged in a work stoppage and union organizing. Employers did not see this as immoral or uncivilized. Such striking employees were “terrorists,” outlaws, hooligans, and radicals, so far as employers were concerned. Wall Street Banks apparently see those who oppose their policies abroad in the same way. According to Professor Michael Hudson, Wall Street Banks say in effect: If you oppose our dollar domination, we will kill you.” William Blum in his 1995 book, Killing Hope, gave us the details of 55 foreign countries in which our military or CIA had been involved in killing operations after WWII up to 1995! (The “hope” that Wall Street Banks killed was the hope of the citizens of these countries for a better life.) Since 1995, we have the additional examples of Yugoslavia-Bosnia, Afghanistan, Iraq, and now Pakistan.

Criminals Have Captured Our Government

We can make sense out of what is happening only by seeing Wall Street Banks for what they are: Criminals with far more power and capacity for evil than the mob or the mafia. These criminal Wall Street Banks, unlike the mafia, have control of our national government, with its larger military capacity than all of the other nations put together. These criminals have at their disposal, 800 military bases in 70 countries, the Army, Navy, Air Force and Marines, the CIA, most academic persons, the main stream press, and the support of the major religious faiths.
They have the tools of modern advertising and PR to create diversionary fears, to create “false flag disasters,” and to manipulate our thoughts and our votes.

Wall Street Banks are now exercising their power over our government to restart the crooked bubble without regulation. Michael Hirsch in an April 10, 2009 Newsweek article entitled “Wall Street Digs In” writes:

At issue is whether trading in credit default swaps and other derivatives – and the giant, too-big-to-fail firms that traded them — will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington — all of it courtesy of their supporters in the Obama administration. With its Public-Private Investment Program set to bid up and buy toxic assets, the administration is handing these companies another giant federal subsidy. But this time the money will come through the back door, bypassing Congress, mainly via FDIC loans. No one is quite sure how the program will work yet, but it’s very likely going to make a lot of the same Wall Street houses much richer at taxpayer expense. Meanwhile, the big banks that still need help will almost certainly get another large infusion once the stress tests are completed by the end of the month.

The financial industry isn’t leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of “over-the-counter” derivatives, in other words customized contracts that are traded off an exchange. Companies like these kinds of contracts, which are agreed to privately between firms, because they allow them to tailor a hedge perfectly against a firm-specific risk for a certain time period. But in order to preserve its right to negotiate these cheaper private contracts, Wall Street is apparently willing to argue for the same lack of public transparency and to permit the systemic risk that led to the crash.

Even Though the Congressional Oversight Committee Cannot Find Out What is Going On, What Can We Citizens Deduce Concerning Our Own Well-Being?

Elizabeth Warren, the head of the Congressional Oversight Committee, tells us that she cannot get answers from Wall Street Banks about their strategy or what they have done with the bail out money they have already received. However it is clear from the evidence that Wall Street Banks are attempting to subject us ordinary citizens to the policies that they imposed on the poor nations of the world. We ordinary US citizens are destined to become like the citizens of “underdeveloped” nations. Wall Street Banks are trying to “kill our hope.”

* We have to accept “free trade” meaning the exporting of our jobs to foreign nations where labor is cheaper, unregulated capitalism, and police wiretap power over our thoughts and records.

* We have to endure privatization of our public works such as water works, freeways and prisons, abandon “socialism,” and avoid joining unions

* We have to accept cuts in our social welfare programs (which have the intended effect of compelling us to accept lower wages, or starve.)

* We have to pay higher taxes to repay the bail out debts, while the wealthy get tax cuts.

Wall Street Banks well know of the culture wide lie that they have propagated. They know that the jig is up, that our wages and salaries have been so depleted, and our borrowing so maxed out, that the system is about to fall. Lending us more money, will no longer work.

Professor Michael Hudson says that the crooked Wall Street Banks know that the debts now being incurred by us taxpaying citizens can never be repaid. They know that this will cause China and Saudi Arabia to stop buying our Bonds, Bonds that finance our wars and bases that encircle and threaten those countries like China, Japan, and Saudi Arabia who now buy our bonds. Wall Street Banks know that their own acts and policies will inevitably bring our political economy crashing down. As bankers, they well know that creating a lot of “check book” money (fiat currency) will cause massive inflation so that each of our dollars will buy less and less.

So the only conclusion that can be drawn is that the human owners of the Wall Street Banks are grabbing all of the Trillions of dollars that they possibly can, while they can. They will quickly convert their dollars to a stable foreign currency if there is one, to land, oil, gold, diamonds, plutonium, and commodities, and live in residential castles behind guarded gates.

They will buy or obtain by foreclosure all available food producing land. Those of us that survive will be reduced to feudal serfs allowed to work a parcel of land for the economic nobles who own it, and to retain a small share of food, wool and cotton for ourselves. We will become share-croppers at best, and dead at worst.

So How Does Obama Fit Into All of This?

Is Obama the hypnotized, drugged, programmed puppet of Wall Street Banks?

Is Obama afflicted with the psychological disorder of two or more personalities, one magnificently promising us hope and change, and the other delivering starvation, serfdom, and death?

Is he simply innocently ignorant of the real dynamics of our political economy and respectful of his Harvard academic advisor like Lawrence Summers, University of California advisor Christina Romer and Wall Street Banker, Secretary Geithner who themselves have built their careers on the lie?

Does he have the ambition of the top law school graduates of rising to the top of the “legal pecking order” by serving the legal “needs” of the very largest private institutions?

Is he a very bright man who does know of the lie, but also knows the political limits, within which he can operate, and, somewhat like Lincoln, is waiting for Wall Street Banks to fall even further, become even more weak and bankrupt, before he can act on our behalf? If so there are neither plans on the shelf, nor knowledgeable persons to implement it.

We have no way of knowing what motivates Obama. How do you see him? What is your strategy given the circumstances? I am “beating pots and pans” as loudly as I can, and writing articles like this in my effort to arouse others to participate in massive protest marches whose objective is to make the politicians meet our needs. I invite you to do the same. As a fall back position, I am buying a small parcel of land with my remaining retirement dollars where I can grow food and keep a goat.

Forget it. They’re baaack! Their greed and power are revving up big time to bring Washington and you the taxpayer, you the parent, you the consumer, you the worker, to your knees. Here is a sample of the appalling dynamics of corporate greed and continuing over-reach each day in your nation’s capital.

1. Just when people thought the taxpayer-subsidized corporate student loan racket was ended by the Democrats, Sallie Mae, its cohorts and lobbyists, like Jamie S. Gorelick of FannieMae notoriety, are descending on Congress. The non-partisan Congressional Budget Office concluded that replacing these subsidized loans with direct Department of Education lending will save $94 billion over the next ten years.

It is long overdue to end this gouging, college payola giving, obscenely overcompensated industry, and give students an efficient and reasonable lending system. Still, Sallie Mae, Citigroup, Bank of America and others are swarming over Congress to retain a big piece of the action. “Why do we even need private lenders?” correctly asks Congressman Timothy H. Bishop, a former provost of Southampton College.

2. ABC News reports that banks are hiking already high credit card rates and other bank-related fees: “The Banks have been given billions of dollars of tax money and only lend it out if customers are willing to pay extortion rights,” said Tony Cesnik, a Concord, California, resident. Cesnik adds: “The banks need a legal spanking. They are acting like spoiled brats!” Elizabeth Warren, Harvard law professor and chair of the Congressional Oversight Panel agrees: “We’re asking taxpayers to pay twice.”

3. The big oil and gas companies are saturating the airwaves with ads warning about the Obama Administration’s alleged desire to tax them $400 billion. This will cost jobs and reduce the discovery of more oil and gas, they say. Where is this $400 billion figure from? Obama’s ambition is not much beyond repealing the tax breaks George W. Bush gave his oily friends for drilling in the Gulf of Mexico when oil was selling at less than $40 per barrel. Some of the oil industry’s own spokespersons admitted last year that their argument doesn’t hold water any more with such high oil prices and profits since then.

So what are the big oil corporations like Exxon doing with their excess profits that totaled a record $45 billion just for Exxon last year? They’re not even drilling on two-thirds of the acreage they have rights to explore. Instead Exxon is spending $35 billion to buy back its stock and hold in cash. When the next oil shock comes, Exxon will demand more tax breaks and other dispensations to fund its drilling. We’ve seen that game played out before at the gas pump.

4. Now comes Newsweek’s Michael Hirsh to report a private meeting recently between six senators and Obama in the White House where the president heard complaints that his proposed regulatory reforms were too weak and were being devised by his appointed officials who were part of the problem in Wall Street. Well, are you surprised that a new powerful lobby created by the likes of Citigroup, JPMorgan, and Goldman Sachs is gearing up to stop adequate regulation of “over the counter” derivatives, to keep these transactions secret, and to continue to permit what Hirsh called the “systemic risk that led to the crash.” This brazen move by the incorrigible banks is underway after they received huge bailout money from Washington. Beware they may yet demand and receive another big bundle.

5. With workers losing millions of jobs, the U.S. Chamber of Commerce, the National Association of Manufacturers, and virtually the entire business juggernaut are amassing tens of millions of dollars to stop the union-facilitating “card-check” legislation and any effort to bring the federal minimum wage up to what is was back in 1968, no less, adjusted for inflation. It is now about three dollars short of that modest goal for hard-pressed laborers, many without health insurance.

6. And oh, how these company bosses are fighting to keep their big bonuses going as a reward for tanking many of their own companies. Call it hubris, arrogance, disdain for common decencies of the American people, it all reflects too much corporate power over our lives-a judgment over 75 percent of Americans share.

All this lobbying of Congress and the White House year after year pays off. A study by three Kansas University professors found that a single tax break in 2004 earned drug, manufacturing, and other companies $220 for every dollar they spent in their cash register politicking. Presently, Lockheed Martin is spending millions of our taxpayer dollars to oppose Obama, Defense Secretary Robert Gates, and many other defense experts who want to finally shut down the price-skyrocketing F-22 fighter extravaganza designed for combat in the Soviet Union-era.

So, are you more upset than when you started reading this column? Feel frustrated and powerless? With your friends, ask your Senators and Congressperson during their frequent recesses for a three-hour public accountability session. If you can assemble 300 or more residents, after you rev up your community, you’re likely to have your elected representatives come to an auditorium where you live and work. If they think 500 people will show up, it is even more likely. Especially if you are organized and tell them this is just the beginning. Just the beginning!

Without the rumble from the people back home, a majority of the 535 members of Congress will continue to kowtow to about 1500 corporations and you’ll pay the price again and again. So, rumble, rumble, rumble!