Paulson tries another gambit

Isn’t anybody ever going to admit that those in charge of confronting this now global economic crisis don’t have a clue. Henry Paulson now has again changed his mind on how to use his massive $700 billion slush fund (see http://www.nytimes.com/2008/11/13/business/economy/13bailout.html?hp.) It galled us all weeks ago to have watched how quickly the Congress, the talking heads on the tube, the Presidential candidates all capitulated and lined up behind such as a breathtakingly and appalling large figure. Think back in the past over all the ugly animal noises that emanated from both house of Congress over proposals to spend “paltry” little sums like $25B or so on spending packages that would given money to pre-schools programs or veterans or aspiring college students or whatever. And if and when any of these were finally grudgingly passed, they were immediately vetoed by his imminence ,“The Bush”, whining that we can’t afford it. Think how we once agonized over the costly Iraqi debacle running up some $ 2B a month and maybe hitting a trillion $ eventually. And now suddenly they turn around and almost instantly come up with 700 fucking billion dollars (and more) to bail out a bunch of greedy bankers (an maybe more for inept automakers)! And from where?

Somewhere in implementing the gargantuan exercise of shoveling money at the ailing financial sector by buying up the toxic debt someone realized that, ‘Hey this sucks!’ We are buying bad debt at some arbitrary price to try to stop a free fall in the value of the debt instruments when the source of the problem is somewhere else - the debt instruments are linked to mortgages on plummeting home prices.

As we now know the banks blew it big time and loaned into a classic bubble economy that fucking popped (which for years was predicted to happen.) Now the taxpayers have to bail them out. At this point the problem is the banks, big and small, don’t trust each other because they confidentially know how bad things are in their own bank. So we a get a monumental credit freeze which leads to equity sell offs in stock markets worldwide, which of course feeds on itself and thus this downward spiral. Ah yes, everything is interconnected. Once stock prices start to collapse traders get caught short and have to cash in their positions in other markets, like commodities and so commodities join equity stocks in the commode. At least oil prices also took a nosedive, so we won’t have that source of cost-push inflation - at least for a while.

Economists liked to talk about the “wealth effect”, the idea that with rising home values and juicy 401K people felt ‘fat and sassy’ and spent not unlike drunk sailors, foolishly draining equity out of the (inflated) home value and running up their credit cards (that carry usurious interest rates) to buy goods and services they could have maybe done without. But we now have the reverse of the “wealth effect”. People who have not even yet been directly impacted in terms of their day-to-day disposable income (they still have jobs) now suddenly feel a hell of a lot poorer – and they are! So they buy less stuff that they don’t really need, and aggregate demand falls, manufacturers cut back production due to rising inventories and lo and behold: layoffs. Now real cuts in disposable income start to occur with another round of reduced spending – and so it goes. So many feedback loops in a capitalist economy, loops within loops and they are all connected.

So after realizing maybe exchanging good money for garbage wasn't such a hot idea Paulson and the boyz upped and gave money to all the big banks whether they needed or not (they couldn’t give it only to the ones that really needed it and point out the real losers or they would have triggered a run on those outfits.) The idea was 're-capitalizing' the banks would free things up and lending would be forthwith. But greed has no limits. The banks just chuckled and used the money to do what they pleased. You see the real problem for the banks is their stock price are in the toilet. They want them back up there where they think they belongs. They (the bankers) personal fortunes depend on it. With this meltdown the really, really rich are now only really rich, and they don’t like it. In other words the bankers (and corporate ownership class in general) generally don’t give a rats ass about the about aggregate economy as a whole. It’s their particular firm (and personal fortune) that matters. Of course they must realize on another level that we all they we all sink or swim together. We are are naturally conditioned to look out for numro uno first, then secondly maybe the entire edifice.

Since the big bankers are such self-serving pricks (which Paulson should have known as he one of them), he is now redirecting his slush fund in other direction maybe even to the actual borrowers. Maybe they should have thought of that sooner. Whatever they are doing , it doesn’t seem to have lessened the pessimism as the Dow fell like a rock again today - over 400.

A Grim Dystopian Science Fiction Novel

It's a dark times for capitalism indeed. It's like out of some grim dystopian science fiction novel. The Dow Jones fell over 1000 in one week. And then popped back 900 a few days later. And then fell 700 plus again. It again fell over 500 yesterday (10/22) now it's up a 172 today. As Steven Colbert said the other night it's like a roller coaster except you vomit money. All over Europe and Asia markets are churning viciously. Whole countries are stone broke. No one knows what to do. The US now has a slush fund of some 700 billion dollars originally to buy the so-called toxic debt that has triggered the crisis/panic. But continually beaten back by worldwide pessimism and a frozen credit market, they almost daily reconsider and float new grand schemes to see how the markets reacts. But no one is sure including the government officials who plead for the money or the Congress who grudgingly granted it are sure if they are not simply throwing good money after bad.

We thought that September 15^th was a bad day. In a previous post I called it a ' bad day at Black Rock' after the famous western. Little did we know that it was merely a precursor far way worse things to come – what could be a full scale global economic collapse. Maybe not. But they sure wouldn't tell us in advance. Back went it started last month it seem like a few investment banks were on the rocks. But so what. It was kind of entertaining in a vicarious way to watch the financial sector temporarily seize up. And later as the drama played out many we thought (naively) that if Uncle Sugar came to the rescue, somehow conjuring up hundreds of billions of dollars (from God know where) and bailed out a few of these bastards (which everyone hardily resented) that eventually this credit constipation would dissipate. It hasn't! Now trillions are being erased worldwide as markets plummet. Every single market is being hammered as panic sets in everywhere as everyone tries to cash out of their investments and traders try to cover their margins. Plus lots of opportunistic short selling no doubt.

What is so infuriating is that a shadowy elite of really big time wheelers and dealers - investment bankers, hedge fund managers and the really rich for whom they worked , have made obscene amounts of money while truly hosing up the entire global banking system in the process. They couldn't just make their zillions on ordinary financial legerdemain. No their greed got most of them at they included high risk action into the mix. All of this as we now know was being recycled and repackaged from the originating banks into some vague stratosphere of international capital as (risk minimized) financial instruments know as “derivatives”, ½ a trillion worth

Not satisfied to just merely peddle overvalued real estate , these greed heads started including mortgages specifically designed for those who could not afford them often simply for the commission. Already the preponderance of recent home buyers could only barely afford their mortgages since the spread between salaries in most jobs didn't anywhere near match the ¼ to ½ million dollar price tag for an ordinary tract home. But it was the nature of a deregulated market to expand indefinitely until some externalities eventually kick in. These new so-called “subprime mortgages” was their undoing. They become time bombs that were neatly hidden into the whole bloody package. A pack of surreptitious Bolsheviks could not have done a better job. Again the money was too good to turn down and there were no cops on the beat. Wall Street and those who took their lead from the USA, financial biggies world wide, all climbed aboard this financial Titanic. They were assured they had invented a perpetual motion machine. After all complex algorithms, complex legal language defining the priorities repayment upon default , special insurance, high bond ratings assured all parties involved that everything was cool at least for the time being.

It all begin to unravel when the rising tide of home values eventually peaked sometime last year and the began , alas, to retreat. Once these marginal “homeowners” who had zilch equity suddenly discovered they owned more on than their place than it was worth, they simply walked. And now it has all come tumbling down. Now day after day the stock markets as well commodity markets world wide as plunge ever further downward in repeated rounds of panic selling. And billions of Dollars, Pounds, Yen, Rubles, Francs vaporize.

How could the finest financial minds of our time working for the worlds preeminent financial institutions and the august and powerful government authorities charged with overseeing this complex process allow this to happen? The answer again lies in ideology. . We have had 30 years of political support for a bogus and highly opportunistic economic ideology known by the confusing term of Neoliberalism. Neoliberalism as an economic mindset and basis for policy across our (narrow) political spectrum which ironically came into its own as just as the term “liberalism” became a popular pejorative to throw at anyone politically left of Ghegis Khan. Once the Soviet Union imploded, “red baiting” went out of style. So derisively calling someone a liberal had to suffice. Neoliberalism provided credibility and ideologically support for right wind populist the anti tax rebellion and (an air-headed) libertarian small government movement. (It termed neo liberalism because liberalism in its formal definition is a term for those pro free market “progressives” of colonial times who were at the time at war with something called Merchantilism, a defunct import/export economic ideology. It started in late 1970s when Republicans, and so called conservatives and libertarians with only feeble resistance from the Democrats argued that the US standard of living was falling because we were overtaxed and our businesses were over-regulated. When in fact in the 1970s the entire capitalist edifice was suffering an aggregate fall in the rate of profit (a normal tendency of capitalism over time according Marxists) hence lower wages. Lower profits, lower wages equals social unrest.

So in rides the neo liberal right with an easy answer – blame Keynsian economics for the inherent defects of capitalism. Keynsian economic theory had dominated since the Great Depression. In fact it was essential in saving capitalism was it was implemented to the scale necessary in WW II. The brilliant idea of the political right, who always resented the Democrat FDR and his successes, was to remove the regulatory apparatus as much as was politically possible, that is any mechanical governor on the engine of capitalism and let it run unrestrained. Forget the bearings, forget oil changes, forget preventative maintenance - run it full blast without any controls. It's actual academic credentials came from the anti-Keynesian rebellion led by economist Milton Friedman, out of the University of Chicago. To Friedman government spending as a tool of economic counter cyclical policy should be phased out if not eliminated and manipulation of the money supply would suffice for controlling the business cycles. Fiscal policy (gov spending to manage business cycles) was out and monetary policy (fussing with the money supply through the Federal Reserve) was in. This as the military-industrial complex consumes 1/3 of our national budget and totally inter penetrates our economy. So it was always bullshit. No one really believed it. It was used by corporations and Republicans and bankers as they lobbied opportunistically for wholesale deregulation of the US economy including the key banking and financial sector .

Now all of that is history. Neoliberal ideology and the policy mix it wrought we would hope is now throughly discredited. Two centrist candidates, one center right (McCain) representing the military-industrial complex, failed Bushian neoliberalism and a tragically failed geopolitical agenda called neoconservative, and one out of the tradition of the pro-business, quasi-progressive, identity politics (gays, blacks, feminists) center-left (Obama) vie for the US presidency amidst the worst financial panic in 70 years. Neither have yet said how they will confront it.

Something is very out of whack

Everyone intuitively including the people pushing this bailout realize something is very, very out of whack here. It just doesn't compute that we as taxpayers have to pay for this massive cleanup. Whats more they, the 'designers' of it, are deeply embarrassed to have to do it. It totally contradicts and makes mockery out of the entire Reaganian ideology of deregulation and free-for-all market driven economics to which they ascribed to and from which Poulson personally benefited. And as Birk T. J. Birkenmeier shows (see below) even the a "piddly" $85B for the AIG bailout directed back at US citizens would have an incredible direct effect. But $700B? It boggles the mind. What the fuck is going on?

In a time when we've gotten used to pissing money away at astronomical rates (see the ‘burn-rate’ for the Iraq Occupation at http://www.nationalpriorities.org/costofwar_home) this figure, $700B, still blows everyone away. There is never money for anything: health care, bridges, schools, college tuition assistance, states budgets. When some modest spending bill passes Congress for 2 or 3 "measly" billion, Bush fucking vetoes it. "Can't afford it" he says. Then low and behold we now have to fork over nearly 3/4 of a trillion dollars or else everything goes down the tube. And what is galling beyond words is that the very people that got us in this mess (and got way richer in the process) are saying unless the US taxpayer (meaning the US middle class) bails us out, we will let everything collapse in a 1929 style gotterdammerung.

As far as I can tell these guys, Poulson and Beranake are winging it. One day they bailout a big investment bank, the next day they let one collapse, then they rescue a big insurance company. But nothing works. Now they are coming up with the "700 billion dollar gamble." They just try different shit to see how the stock market and credit markets worldwide react. The markets liked the big bailout idea. So now the big boys are now holding out for this massive mother of all one time expenditures. Today it looks likes going through so the Dow is up, surprise, surprise.




A modest proposal from:

Birk T. J. Birkenmeier, A Creative Guy & Citizen of the Republic


I'm against the $85,000,000,000.00 bailout of AIG. Instead, I'm in favor of giving $85,000,000,000 to America in a We Deserve It Dividend. To make the math simple, let's assume there are 200,000,000 bona fide U.S.

Citizens 18+. Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up.. So divide 200 million adults 18+ into $85 billon that equals $425,000.00. My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.

Of course, it would NOT be tax free.

So let's assume a tax rate of 30%. Every individual 18+ has to pay $127,500.00 in taxes.

That sends $25,500,000,000 right back to Uncle Sam. But it means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife team has $595,000.00. What would you do with $297,500.00 to $595,000.00 in your family?

Pay off your mortgage - housing crisis solved.

Repay college loans - what a great boost to new grads Put away money for college - it'll be there Save in a bank - create money to loan to entrepreneurs.

Buy a new car - create jobs Invest in the market - capital drives growth Pay for your parent's medical insurance - health care improves Enable Deadbeat Dads to come clean - or else Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And, of course, for those serving in our Armed Forces. If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ('vote buy') economic incentive that is being proposed by one of our candidates for President. If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+! As for AIG - liquidate it. Sell off its parts. Let American General go back to being American General.

Sell off the real estate. Let the private sector bargain hunters cut it up and clean it up. Here's my rationale. We deserve it and AIG doesn't. Sure it's a crazy idea that can 'never work.' But can you imagine the Coast-To-Coast Block Party! How do you spell Economic Boom? I trust my fellow adult Americans to know how to use the $85 Billion We Deserve It Dividend more than do the geniuses at AIG or in Washington DC.

And remember, The Birk plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam. Ahhh...I feel so much better getting that off my chest.

Kindest personal regards,

Birk T. J. Birkenmeier, A Creative Guy & Citizen of the Republic

PS: Feel free to pass this along to your pals as it's either good for a laugh or a tear or a very sobering thought on how to best use $85 Billion!!

Bad Day at Black Rock

Monday September 15th was a ‘bad day at black rock’ for Wall Street - and probably all of us. When two major investment houses fall in one day, one to the ignominy of bankruptcy, Lehman Brothers, and the other being forced to allow itself to be eaten by a bigger fish as BankAmerica gobbles up Merrill Lynch, it is indeed worth noting. But other than damaged careers and besmirched reputations, most of the guys responsible for this mess will land on their feet financially. They might have to fall a couple levels down from super rich to merely being ‘very well off.’ But they all no doubt saw this coming years ago and protected much of their own personal wealth. At the operational level the 13,000 jobs Lehman Brothers are in question, whereas BofA will probably keep most of Merrill Lynch’s 18,000 financial advisors and become the preeminent source of “experts” on financial matters (even as these ‘experts‘ participated in one of the biggest financial disasters in American history.)

The problem is not that there was shakeup on Wall Street and some biggies bit the dirt. The problem is that all of these operations were incestuously interconnected in a giant financial clusterfuck. The housing bubble has been long since acknowledged but was conveniently ignored by the both the players and government regulators, the neoliberal free marketeer controlled government agencies and the (as usual) corrupt Congress. There was simply too much easy money being made by all. Granting mortgages once meant using the aggregate of depositors’ money, saving accounts and such, as a reserve against loaning larger amounts on a real estate, that is real property that had some kind of underlying quantifiable value. With people’s homes as collateral they only defaulted if they absolutely could not avoid it. And property values slowly appreciated hence equity increased both by paying down the principal and enjoying the normal appreciation in value. That had worked well for years and was well understood and regulated.

What started it all was a sustained and delightful steep appreciation in home values, probably kicked off by normal supply and demand factors, but inevitably amplified by old fashion speculation. The whole thing might have been contained had not mortgages become not simple financial instruments in and of themselves but elements in larger more complex financial instruments. They become embedded in packages that were not handled by regular banks but big time investments banks like Bear Stearns et. al. and sold widely. And this eventually included the newer, higher yield but also higher risk animal – the now notorious “subprime loan”. This is a mortgage that by all rights should never have been granted in the first place. The debtor can’t afford it and/or the terms are misunderstood or misrepresented. Also often little or no down payment was required – a perfect recipe for many to bail at the first opportunity. Furthermore, they were marketed in an unregulated and McDonalds hamburger type way along with massive numbers of home equity loans, once quaintly known as “second mortgages.’

By the early 2000s the economy essentially ran on credit much of it derived from people pulling equity out of their homes for consumer spending (along with ubiquitous and usurious “plastic” - credit cards) as well as, of course, buying homes they couldn’t afford. The risk of subprime mortgages was supposed to be engineered out by all kinds of complex arrangements and the risk spread evenly like insurance risk. However, when the crash came and they were defaulted on, the reverse happened they infected everything they had contact with. The result is a near worldwide financial meltdown. And here we stand. The investment banks are falling like dominoes going hat in hand to each other and the government for handouts. If the government acquiesces, it falls absolutely into a contradiction to its ideological principals of lassie faire capitalism. Plus it sends the wrong signal to a future generation of players. But in the worse problem is it is liable to further erode the dollar causing a possible run and trigger hyperinflation.

The stock market is well aware of all of this and responded by going into full in panic mode, falling a disastrous 504 points. The amount of wealth that vanished in the clicking of mice is probably more than GDP of good number of whole countries. When everybody sells at the same time nobody gains except the first few rats off the ship – or of course all the guys ‘selling short” which I’m sure was a large chuck of the action. But what about the 401 K plans based stock ownership? Retirement for the baby boomers (a term I detest but use anyway due to laziness) looks bad. There are going to be a lot of old geezers in the workforce holding on to their jobs until they retire feet first.

Blame it on the ‘Green Meanies’ - demagoguery works

Webster defines a demagogue as a leader who makes use of popular prejudices and false claims and promises in order to gain power.

OK I ask you, if the Republicans have the answers then why do they need to continually resort to abject blackguard demagoguery in every stinking election? If they have facts and rationality on their side, why is it necessary to appeal to the lower instincts of the populace to get votes? We know in recent presidential election it is the so-called swing voters that provide their small margin of victory in the so-called swing states (assuming, of course, that there was no election malfeasance there, a valiant assumption.) Anyway, at this stage of things the base of each party has nowhere else to go and it’s all up to the undecided, the uncommitted. In other words ‘it’s the swing voters, stupid!’ Or it is the stupid swing voters? Are these characters all that bright? They can’t decide whether they are Democrats or Republicans, Left or Right wingers, conservatives or liberals, progressives or reactionaries. And some are so gullible and/or craven that they fall for the transparently obvious ploys by cynical Rovian-style campaign consultants every fucking time? They seem to be just waiting to be “swift boated” into voting, yet again, against their own best interests? These are the people who rely on TV advertising and slick partisan campaign literature to decide who and what to vote for - and the Repubs know it!

The latest one of these such Republican ploys is this absurd but apparently appealing idea that opening the continental shelf fully to oil exploration will somehow immediately lower gas prices at the pump. It’s always easiest to blame the ‘green meanies’ for everything. The environmentalists are preventing us from achieving “energy independence. Yet why did everyone run off and buy 16 MPG gas hogs in the last ten years? Did they think oil would stay at 40 dollars a barrel forever? Why have the oil companies and their boys in Congress not been beating the drum and pushing for offshore access especially back when the Repubs controlled Congress? Until now, it was only drilling in ANWR in Alaska that was their golden fleece? Did they think that an endless war(s) in the Middle East would not adversely affect oil prices. Why have coastal state Republican governors like Arnold Swartzenagger and Jeb Bush both been steadfast opponents of “coastal drilling?” Why was Sen. John McCain previously opposed to offshore drilling and now as a Prez candidate he is steadfastly in favor of it? The answer is simple: demagoguery works. A quick fix is to gratuitously appeal to the masses of pissed off drivers, like the stupid idea of ‘gas tax holiday.’ Scapegoating is a favorite of demagogues - blame the environmentalists, blame Nancy Pelosi and the Democrats for keeping all that good US oil out of our pipelines. Give the oil companies what they want: more leases in sensitive marine areas and wildlife preserves. Forget about the larger issue of global warming and the fact that any oil found would not be available for a least 10 long years “Energy independence” is the new holy grail of the Right, a new apple pie nationalistic buzzword.

During my college boy years I lived in the Seal Beach/Huntington (named after the oil baron Samuel Huntington) Beach area. I lived where the ocean horizon was punctuated by huge multistory oil rigs. They were a normal part of an urban coastal oceanscape and we grew accustomed to them. Sure there were occasional leaks and spills. I remember seeing pictures in the newspaper of surfers covered with oil sometime in the early 60’s. Sometimes we would have use kerosene to clean oil blobs off our boards. But it was not until the huge spill off of Santa Barbara in 1969 when a Union Oil platform blew and eventually leading to a rupture in five places along an underwater fault that the potential for catastrophe of this industrial coastal arrangement hit home with a vengeance. It took a full week and half to staunch the leaking. There was a huge loss of marine life. After that the platforms would never be looked upon as benignly, and coastal states especially Florida and California from then on resisted expansion of oil leases – until now.

The SF Chronicle reported yesterday that by a small margin even Californians favor offshore drilling as a placebo to $4.00 a gallon gas. Again, demagoguery works!

A run on the banks?

A run on the banks? Where is this all headed? Are we on the brink of another big one? The Great Depression of the 1930s was first kicked off by a particularly bad day on the stock market. There have had some other days even worse than Black Thursday October 24^th 1929 with stock values falling 17% in one day. But in the plunge continued and stocks continued downward well into the next week with a Black Monday and a Black Tuesday. Stock values never fully recovering until the mid 1950's. As we know it was so bad that stockbrokers jumped out of windows. But the real problem manifested itself a little later when there was a run on the banks. Sound familiar? Back in 1929 as the pessimism spread people lost confidence in those granite pillars of respectability, the banks, and wanted their money out immediately if not sooner.

Banks always have more outstanding claims on their assets than they have as real cash in their vaults. That is there function; banks not only hold money they create money. Amazingly enough they are allowed to generate money out of thin air by simply making loans. It’s all a confidence game in a way. So when the depositors all want their money on the same day or week, there is, hey, not enough there to go around. This because banks are legally allowed to create money by loaning amounts based on a percentage of their deposits. It’s called their Reserve Requirement. This is set by the Federal Reserve Board. This along with several other mechanisms for controlling the money supply, the most important being the Prime Rate are the way the money supply is managed, and in turn the entire economy -theoretically anyway. But unlike the 1930s today we have have a safety net, something called the Federal Deposit Insurance Corporation (FDIC) which exists as a direct result of the problems causing by previous bank runs. This government funded corporate entity allows depositors to rest assured that their saving and checking accounts are safe, at least the first $100,000.

However, banks again are starting to experience ‘the runs’ even with the FDIC in place. As we have seen last week IndyMac Bankcorp had to be rescued by the FDIC. This rescue took a big bite out of the FDIC’s total reserves, as much as 10% of their $53 billion cache. And that's just one bank. IndyMac is the fifth US bank to fail this year - and its only July. It's classified as a ‘retail bank’. There probably won’t be a run on retail banks. IndyMac bank was big into subprime mortgages and has been under scrutiny for some time. But the real problem is with the next level up, the so-called investment banks. These banks create “money” for the big boys – corporations, hedge funds, pension funds. They do this by creating financial instruments like equities and securities that can be traded internationally. These include the recently nearly bankrupted Bear Stearns investment bank. Since they are investment banks, not regular commercial or retail banks, there is no FDIC and very little regulation – ah yes, the benefits of deregulation. Besides FDIC's 100K safeguard is chump change in this crowd. In fact to them millions are small potatoes. They wheel and deal in billions. And what has everyone concerned is that other investment banks are also on the ropes. Bear Sterns, which was recently taken over, that is eaten by a bigger fish, JP Morgan Chase, with government support. This happened with the unprecedented event of the Federal Reserve, that is the US government, "guaranteeing" the massive $32B buyout of Bear Stearns by JP Morgan. It was entirely necessary as Bear Sterns could have easily been the first domino in a long ugly chain of collapses. No one gains from a worldwide financial meltdown.

Why are Bear Sterns and other investment banks failing? Is it because they became too greedy and irresponsible during the gravy years of “free market” deregulatory madness? Were they like all compulsive gamblers unable to know when to 'cash in their chips'? Did they think they could permanently engineer all risk out of loaning to poor people at high interest rates (like the credit card companies have done?) They sliced and diced risky low grade ‘subprime mortgages’ and embedded them into financial instruments known as CDOs (Collateralized Debt Obligations.) The subprime loans were supposed to remain safely buried deep inside a mix of solid and not so solid mortgages, using high interest subprimes to pump up the returns but offset by the safer mortgages. These things were then sold to big players like hedge funds, insurance companies, pension funds, etc. Cool idea for making quadzillions. One hedge fund manager made over three billion dollars last year (and paid income tax on it at a rate far lower than your mailman pays.) Until the housing market went south these buried subprime mortgages pumped up the CDOs taking advantage of the high interest rates the poor saps eventually would get stuck with once their Adjustable Rate Mortgages (ARM) reset. But, alas, as the everything imploded and home values slid below mortgage value, these new homeowners began 'to walk'. So the subprime mortgages instead of bolstering eventually contaminated the CDOs in which they were embedded.

When an investment becomes questionable it gets dumped first by the sharpies, the Warren Buffets of the world, then as word gets around, survival instinct takes over and there is a mad rush to the exits. So now the mighty investment banks are in the toilet, a credit crisis threatens and the US economy slides inexorably into recession - and it might be a really bad one. This is because the standard counter cyclical tools, monetary and fiscal policy, in a downturn require expanding the already looming federal deficit. This will in turn weakens the dollar, which (alas) pushes up the price of oil thus more inflation and less money for consumer durables and so it goes. Inventories accrue leading to layoffs (maybe in China, too) resulting in even less disposable income available for consumption, and so on. Feedbacks loop r us. Stagflation, anyone? Runaway inflation, anyone?

Of course the overheated US housing sector had been in a near bubble bursting state for some time now. So its actual puncture was no surprise to anyone. But the problem is that it has been propping up the whole US economy for years. What now? Even Fannie Mae and Freddie Mac, the privately owned but government backed holder of mortgages, are now both in trouble and need rescue. They were indirectly burned by the subprime crisis. They hold trillions, yes trillions, in regular mortgages, much of it in Southern California where home values are sinking like rocks. Consequently Fannie Mae and Freddie Mac, normally solid as rock (again that tired simile,) have seen their stock hit the skids as their profitability goes into the red. They will need an injection of liquidly from Uncle Sam or all hell will break loose.

The system as usual was gamed. Irresponsible abuse of credit ran rampant. Everybody played, big boys and little fellas. Wall Street's investment bankers went wild as we have seen. But the middle class also participated in this hog wallow. Those who owned houses with plenty of equity used them to leverage themselves into ever bigger, newer, fancier ones. Or they simply felt wealthier (known as the "wealth effect") and spent profusely. Other more entrepreneurial types made big bucks 'flipping house' - buying and selling them in short succession as they rapidly appreciated, and then buying others. Those lower the down food chain or merely less enterprising simply refinanced often drawing out equity each time for SUVs, plasma HD TVs or vacations in Mexico, or else they irresponsibly took out ‘equity loans’ (once known derisively as 'second mortgages') foolishly consuming their hyper inflated home equity (for many their main asset) and adding it to ever heftier mortgages. This process was fine for a while especially when it involved solid mortgages on ever appreciating real estate. It was a avarice-driven phenomena typical of finance capitalism and it worked to pull us out of the downturn following the last bubble popping, the Dot Com bust.

All this was cooking along with no end in sight. But what about all the lower income working class types who also wanted to participate in the American Dream, home ownership and the realization something for nothing - real estate created wealth? With real income flat for blue collar and service sector jobs and the once unionized manufacturing jobs having been globalized to 'low wage platform' countries, many full time families with both parties working simply could not afford a home. They could neither come up with the traditional 20% down nor the stiff monthly payments on a multi hundred thousand mortgage. The inflated value of the housing, old and new, sent the value of even older tract homes into the stratosphere at least those near jobs. But not to worry, the banks had an answer - “creative financing” . All sorts of new loan packages were conjured up - adjustable rate, no interest, negative amortization and all without that annoying, intrusive documentation.

These new fangled mortgages were marketed like hamburgers or Fords. Amazingly enough hundreds of thousand dollar loans were floated without even verifying the info on the loan apps like actual employment. It all worked because the value of owner occupied homes kept zooming up. The sky was the limit. If people were worried about ballooning payments when the ARM reset or their ever-growing mortgage on interest only deals, they were told “when that happens, just refinance dude.” Of course, all of this irresponsibility pumped up the bubble ever more - and kept the US economy cooking right along. But it had to pop. And it now has. But so much else was going on – an unpopular inept President involving us not one but two wars, global warming actually happening, torture as official US policy, Constitutional shredding by a power mad administration and so on. How to could we be concerned about merely a possible real estate meltdown?

How close are we to a “big crash”? No one who really knows. And if so, they wouldn't be telling us. The role of the people who let this happen, who a run the Dept of Treasury and the Federal Reserve is not to acknowledge the seriousness of things but to placate and bamboozle us into acquiesce and passivity. That is simply because so much of this is psychological rather simply than logical. Panic selling (busts) and buying frenzies (booms) are two sides of the same coin. They are based on herd mentality. But if you are caught in herd running off a cliff, it’s pretty difficult not to get pushed over the cliff yourself by the mass of other crazed beasts. No use encouraging a stampede.

In any case, economists right, left and center agree we are in big trouble. We have definitely stepped into some serious shit. Generally in these situations by the time there is enough political support to do something drastic and steadfastly move away from what is obviously not working, more damage is done than was necessary. The dithering is dangerous. Yet moving resolutely in the wrong direction using superannuated ideologies as did the Hoover administration did in the early years of the Depression can be even worse. They did dumb stuff like plowing under crops to drive up ag prices up while people went hungry. An recent example of this was the pathetic attempt to goose the economy back ion track by luring consumers into going 'back to the mall' by giving everybody a measly $600 “tax rebate”. Like that is going to turn around a trillion dollar economy.

The problem we have now is that the tools that worked to get us out of the 1930s Depression (eventually), deficit spending on a grand scale (WW II) have been abused, misused and dulled for over 60 years. We have used it rain or shine, on the upside and or downside of the business cycle. We have used it like heroin and our tolerance as ever increased. The irony is that the Republicans who resisted such methods during the Depression and restrained Roosevelt from full application of counter-cyclical deficit spend in the 1930s, went hog wild with them in 1980s under Ronald Reagan and in the 2000’s and under George W. Bush went absolutely insane – pushing the deficit into the trillion dollar stratosphere. Since the positive effects of Keynesian deficit spending only came about only as a result of massive armament spending during WW II, it became acceptable by the Republicans and the libertarian right - but never acknowledged. They made it article of faith that social spending was "liberal tax and spend" apostasy and bad for everyone. Yet in the economic theory of John Maynard Keynes, that underpinned liberalism got us of out the Great Depression. The theory is that the business cycle endemic to capitalism, can be countered by deficit spending in downturns and recessions and recouped during upturns and booms (as Bill Clinton managed to do.) However the deficit, pump priming, spending that Keynes envisioned was to be for domestic needs ) – infrastructure, health care, welfare for the poor, education, etc. Yet WW II was no sooner over than we engaged in an arms race, the Cold War, with the Soviet Union and to a lesser extent the Peoples Republic of China. "Warfare Keynesianism" become the underlying mechanism that drove the fiscal policy but was never acknowledged. In fact as the Republican right took over from Reagan onwards, it continued to function but for guns not butter, even as 'liberalism" went out fashion and right wing, neoliberal, 'free market', deregulatory mania reigned supreme.

What next? It will probably take a major crash in one or more of the following -the US economy and/or the world economy, the biosphere, the USA as a superpower, confidence in monopoly capitalism, a belief in reactionary fundamentalist religion ideologies (we wish) and other hoary institutions of modern life to turn this mess around.

Hanging on by her fingernails

How little surface does Hillary need for her fingernails to remain engaged to the ledge? Apparently not much - only a measly 2% margin of victory in Indiana. This is in a red state much like the ones she usually takes in a brisk walk. It’s in the same rust belt neighborhood as Ohio and Pennsylvania. The Clinton camp has to be disappointed. With Obama’s campaign being pummeled every direction by his showboating ex-minister and the Clinton campaign’s no-holds- barred, down and dirty Republican style tactics, as well as the talking heads puditacracy hammering Obama nightly, they only managed a crummy 51/49 victory in Indiana and got trounced in North Carolina by a double digit spread.

Obama is now in an ascendant mode again. With the wind at his back he should soon pick up more of the wavering, wind direction sensitive super delegates and hammer a few more nails in the coffin of the Clintonian hope of dynastic glory. The numbers have been against her for a long time but there was always the perennial hope of a monumental Obamaian fuck up or freshly dug up smelly new canard disinterred and then amplified by the talking head jackals-with-bullhorns on the tube.

How far the Clintons will try to push things is now the question. Will they try to change the rules to seat delegates from the two disqualified states (Florida and Michigan?) Do they have some October surprise to detonate underneath Obama’s bus? Can they convince the uncommitted super delegate to line up behind Hillary because some recent polls now show (which didn’t in the pre-Wrightgate days) that she stands a better chance against McCann than Obama? Not likely. From now it is shear inertia (and draw down of their life savings) for Hill ’n Bill.

The numbers are simply not working for them. They are not losing by a lot but by enough. But that should do it. Everyone is sick of this thing. We have had too many debates and too much sterile analysis and windbag pontification. We’re bored. They are not different enough in their policy nostrums for it to be a real argument and thus interesting. Let’s move on. Sure Hillary can play alpha male and almost schizophrenically shape shift to alternately ingratiate, charm, intimidate and finally stoop to conquer by pandering. But who cares. If she wasn’t a Clinton it might have worked. She would have been a new phenomenon on the political scene – like Barack Obama. But she is a Clinton. Her name recognition via marriage to ex-President Slick Willie is both her best political asset and her Achilles heel. We already had our Clintonism - 8 years of it. His triangulation and pro business neo liberalism in a lot of ways paved the ideologically for our descent into Republican de-regulatory and privatization madness (of course Bill Clinton seems like Abe Lincoln compared to the clown in there now.)

The thoughtful sectors of the Democratic Party - the (non-Republican) educated upper middle classes, the left intelligentsia, the college kids and the African-Americans all agree – at this juncture Barack Obama for better or worse is our best bet. Let’s get on with it.