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Updated 18 Sept 2012

A Great Recession began five years ago with the folding of New Century Financial Corporation. The signs are now clear that our future (for perhaps a decade as in the Great Depression) history may be repeating itself. It is easy to blame Obama, but it is equally evident that special interests reign in Washington that are stronger than any one man or woman. For example, the premier statesman of the 10th Century, Franklin Roosevelt, could not quickly right the economic ship of state. It took WWII to do that. Nevertheless, his reforms laid the groundwork that led to America becoming the greatest economic hegemon of all time.

First, some background from the outside looking in.

FDR had the political will to do the right things; reform the financial system, create public work projects to strengthen our infrastructure, and stand by Britain in its dark hours. Today, things are the same, but different. In 1932, like today, capitalism-unbridled created a huge mess. Unlike today, the 1932 capitalists lost control of the economy. So our situation may be even more foreboding.

It is ironic that America is becoming non competitive on the world stage in important ways.

  • We import a huge fraction of our energy needs.
  • Our auto companies are in or flirting with bankruptcy.
  • We lag Germany in solar power,
  • Much of the developed world leads us in rapid transit.
  • Chinese national growth rate in recession was still better than it gets in boom periods in America.
  • Other currencies are gaining strength.

Our creativity in electronics and aerospace has saved us so far, but here too others are coming on. The Internet is a huge equalizer in communications, good for the world--a world we all share. What all this means is that America is at least shrinking down in relative size, if not in an actual longer-term decline.

Unlike 1932, special capitalistic interests have captured Washington. Make that plutocratic. They are not only in control, they are alive and well with roots so deep that a mere recession will not make them wither politically.

Nevertheless, 2008 basically mirrors 1929. During the 1920s capitalism failed in its mission to create a stable, democratic, society. To understand how, let’s review econ 101. Capital comes in three forms: Human, objects of enduring value, and money--the exchange medium between the other two. In 1929, capitalists, with help from bankers, controlled the exchange reserve. Some of those in control anticipated the crash and liquefied their holdings. Others lost virtually all they had when the bubble of exuberance burst.

Things are little different now except this time, the stakes are higher and the financiers have much more coordinated muscle. Well, there is another important difference. This time, certain banking and industrial institutions had become “Too Big To Fail.” What that really means is that the American public insures the plutocrats against failure. We pay for their mistakes—they don’t. At the same time we hear deafening propaganda that if we don’t let them get away with it, we will be far worse off. Is that true? Who would argue? They know the system better than we, as individuals, do. But many top-flight economists disagree about where to go from here. This page is devoted to formulating a review. Before getting into the basics, we will start with the things most economists think have to happen if society is to lift itself out of stagnation. We are indebted to Fred Magdoff and Michael Yates The ABCs of the Economic Crisis: What Working People Need to Know. for the following list.

Immediate Band Aids to stop blood letting and further infection:

  • Aid state governments.
  • Aid the unemployed.
  • Provide mortgage relief for home owners.
  • Infrastructure spending.

The above are not enough. They merely sustain a failed system--if they work. But they are not working well. Some thirty million Americans are available for gainful employment. Working, they become consumers instead of drags. If people can’t buy, corporations cannot either. And if corporations cannot buy, nations can’t either. And so it was as America put the capitalist world in a hole, seeking the holy grail for what? Plutocratic hegemony.

If we do not take this opportunity to enable the future, it will be more of the same with no guarantee at all that new bubbles will arise with further erosion of our nation’s capital. That can only end with the demise of capitalism as the plutocrats (effectively an oligarchy) would have it. nothing short of a system overhaul is needed. But measures so far, have been palliative, not curative. Obama recognizes that as the next agenda item. But we have no faith at all that he can effect real change now that the bail-outs have eased and avoided a true depression. The political will to take on the plutocrats is not there. Their power is somewhat less, but its enabling base is alive and still virulent.

In retrospect, we along with many experts and pundits alike suggest what follows:

  • Nationalize the failed banks, for re capitalization, downsizing, and spin off.
  • Ban the shell-game players from financial positions for life,
  • Re-institute New-Deal banking controls,
  • Limit bonus remuneration to real capital formation.
  • Criminalize gambling with what in the end is public money.
  • Create a watch-dog function in the current system of government with teeth to monitor levels of bank risks and reserves.
  • Ban off-balance-sheet holdings.
  • Provide truth in both borrowing and selling financial instruments by banks.
  • Separate commercial banks from investment banks.

Most economic experts believe the public would then have a chance to recover their bail out money. As it is, we are getting some back, but we are being short-changed on the recovery front. Banks (along with major corporations) are still hoarding cash and show little interest in actions that will turn around the economy. Hoarding in dire times is human nature, or rather the nature of nature. In their habitat, ears build and hoard fat all summer and fall so they can sleep all winter. In the wild, hoarding leads to survival of the hoard; it is always a good hedge for the future. But hoarding is harmful to financial systems, as it dampens the entrepreneurial spirit that fuels recoveries and economic growth. We need to brighten moods, not dampen them down.

Many of the bank plutocrats saved or invested their gains outside the US. So much for their real confidence in America's economic future.

Now for some inside looking out. For this section, our primary reference is Joshua Green, in the April 2010 Atlantic magazine. Inside Man:

What the above misses is the emotional components—of society in particular. Every option in life has its emotional aspects. Vindictive people want to see heads roll. Conservative people want their fortunes left intact with continued opportunities to enlarge them further. Humanists want to return to a fairer economic system. Neocons want to continue their policy of war. And so on ad infinitum.

A side note is that Obama made this choice substantially on the strength of a 65 minute interview. In that short interview, Obama realized Geithner deeply understood how the crisis came about and how to deal with it effectively. Obama seems to have an ability to put his own emotions aside and proceed down a wise path. The down side is that in spite of his oratory prowess, he is something of a loner in politics. The style of Reagan and Bush are not natural to him. But making sense of a problem does.

It may be ironic that by dispelling uncertainty, Geithner made the actual turn around look so easy and natural that it will work against his boss in the polls. Both men put substance ahead of form. But the typical American can only see form, and the media panders to that in its reporting. About all one can say about that is the louder the screams from the Neocons and conservative wings, the better the Geithner/Obama program is working. A short year ago, no one was predicting a turnaround might be in the offing by spring of 2010. 2011 or later seemed much more likely. Neither did many predict that some banks would repay loans this soon. Only one top banking head rolled, at Banks of America where stockholders took action.

Geithner, with Obama’s blessing proceeded, to leave the system intact while tightening the screw just enough to put the bankers on notice that gamboling is a no no. Geithner orchestrated the recovery in a very novel way. TARP (Troubled assets program) got all the attention in the bail out it was public money, seven billion dollars worth. What was not at all so well known is that private investors put up another 140 billion. Yet critics of the administration continue to yell bloody murder that this socialist government aims to take over at the expense of all private interests.

While we agree capitalism unbridled is indeed a shaky economic system, how to proceed from here is not so evident.

What we have today is a financial system that is essentially divorced from real capital creation. It is a huge crap shoot:

  • for the investment gamblers among us,
  • for those who don’t want to be bothered, and
  • for filthy-rich plutocrats who effectively own the casino.

In the absence of restraint, we have a financial system bloated beyond belief, beyond any conceivable benefit, except for the already rich. These are the problems recognized among those of us who would roll heads, nationalize and break up the largest offenders for re-privatizing, and limit executive pay. That option would have worked, but almost certainly would have put the entire world into a deep depression and in the end cost a lot more.

Geithner did all the right things to prevent a panic, a common event prior to WWI. No problem as grave as this one can be solved by a few tweaks here and there. Obama and Congress are now at work on a number of tweaks that will indeed ease the current crisis further. They face two huge problems: 1) when the Senate finishes with the House version, it will be watered down, possibly to the point of uselessness, and 2) even the house version fails its test of strength. It contains loop holes that will permit future bubbles. See: Larry summers and Current Opinion for his views on size of government from Opinion Page of the Washington Post last month:

  • First, an aging population will swell the number of Social Security and Medicare beneficiaries, raising federal spending by 5.6 percent of gross domestic product, he says.
  • Next, higher interest payments on the burgeoning federal debt will boost spending by 1.5 percent of GDP.
  • Finally, the “complexity” of many services that government buys (health care, research and development) means that their costs rise faster than inflation. That’s another 3 percent of GDP.

Posted by RoadToPeace on Sunday, April 25, 2010.

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