With stocks plummeting across the world, the White House has decided its time to send George Bush out to give us a pep talk. I doubt he will tell us to stop whining, but the guy who was a cheerleader at Andover must be pretty pissed off that he has to end his Presidency in the same stupid business.

It doesn't really matter what he says, because the U.S. economic freefall is not something he can do anything about. Take the dollar. British governments bonds are yielding 5%  (Euro Bonds 4.5%) while U.S. Treasuries yield 2%. This simple fact is why the dollar is in freefall and oil costs us more everyday. In his congressional testimony this morning, Fed Chairman Bernanke talked about the banks need to rebuild capital, but as Bloomberg pointed out yesterday, even the biggest banks are in far more trouble than their balance sheets would indicate.

At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank's $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan.

Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that New York-based Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.

Way back in January we warned about the Shadow Banking System , the $500 Trillion of off balance sheet derivatives that would come to haunt America. When this slow-motion crash is all over and the genius quants and hedge fund wizards have taken early retirement in their Greenwich mansions some brave soul in Congress will call a 21st Century version of the Pecora Commission and these Masters of The Universe will have to tell under oath the rationale behind the debt addled insanity that brought us here. And though Republicans like Phil Gramm, Wendy Gramm, David Stockman and James Baker will be in that rogue's gallery, we must also include Democrats like Robert Rubin and Sandy Weill who pushed through banking deregulation. This house of cards was a bi-partisan project.

The worst top management of giant corporations in American history is also by far the most hugely paid. That contradiction applies as well to the Boards of Directors of these global companies.

Consider these illustrations:

The bosses of General Motors (GM) have presided over the worst decline of GM shares in the last fifty years, the lowering of GM bonds to junk status, the largest money losses and layoffs of tens of thousands of workers. Yet these top executives are still in place and still receiving much more pay than their successful counterparts at Toyota.

GM’s stock valuation is under $7 billion dollars, while Toyota is valued at over $160 billion. Toyota, having passed GM in worldwide sales, is about to catch up with and pass GM in sales inside the United States itself!

GM’s executives stayed with their gas guzzling SUVs way beyond the warning signs. Their vehicles were uninspiring and technologically stagnant in various ways. They were completely unprepared for Toyota’s hybrid cars and for the upward spiral in gasoline prices. They’re cashing their lucrative monthly checks with the regular votes of confidence by their hand-picked Board of Directors.

Chevrolet pickup trucks and SUVs are seen at a dealership in Silver Spring, Maryland, July 1, 2008. REUTERS/Yuri Gripas. Image may be subject to copyright. See RTSF Fair Use Notice!

About the same appraisal can be made of Ford Motor Co., which at least brought in new management to try to do something about that once famous company’s sinking status.

Then there are the financial companies. Top management on Wall Street has been beyond incompetent. Wild risk taking camouflaged for years by multi-tiered, complex, abstract financial instruments (generally called collateralized debt obligations) kept the joy ride going and going until the massive financial hot air balloon started plummeting. Finally told to leave their high posts, the CEOs of Merrill-Lynch and Citigroup took away tens of millions of severance pay while Wall Street turned into Layoff Street.

The banks, investment banks and brokerage firms have tanked to levels not seen since the 1929-30 collapse of the stock market. Citigroup, once valued at over $50 per share is now under $17 a share.

Washington Mutual – the nation’s largest savings bank chain was over $40 a share in 2007. Its reckless speculative binge has driven it down under $5 a share. Yet its CEO Kerry Killinger remains in charge, with the continuing support of his rubberstamp Board of Directors. A recent $8 billion infusion of private capital gave a sweetheart deal to these new investors at the excessive expense of the shareholders.

Countrywide, the infamous giant mortgage lender (subprime mortgages) is about to be taken over by Bank of America. Its CEO is taking away a reduced but still very generous compensation deal.

Meanwhile, all these banks and brokerage houses’ investment analysts are busy downgrading each others’ stock prospects.

Over at the multi-trillion dollar companies Fannie Mae and Freddie Mac, the shareholders have lost about 75 percent of their stock value in one year. Farcically regulated by the Department of Housing and Urban Affairs, Fannie and Freddie were run into the ground by taking on very shaky mortgages under the command of CEOs and their top executives who paid themselves enormous sums.

These two institutions were set up many years ago to provide liquidity in the housing and loan markets and thereby expand home ownership especially among lower income families. Instead, they turned themselves into casinos, taking advantage of an implied U.S. government guarantee.

The Fannie and Freddie bosses created another guarantee. They hired top appointees from both Republican and Democratic Administrations (such as Deputy Attorney General Jamie Gorelick) and lathered them with tens of millions of dollars in executive compensation. In this way, they kept federal supervision at a minimum and held off efforts in Congress to toughen regulation. These executives are all gone now, enjoying their maharajan riches with impunity while pensions and mutual funds lose and lose and lose with no end in sight, short of a government-taxpayer bailout.

Over a year ago, leading financial analyst Henry Kaufman and very few others warned about “undisciplined” (read unregulated) and “mis-pricing” of lower quality assets. Mr. Kaufman wrote in the Wall Street Journal of August 15, 2007 that “If some institutions are really ‘too big to fail,’ then other means of discipline will have to be found.”

There are ways to prevent such crashes. In the nineteen thirties, President Franklin Delano Roosevelt chose stronger regulation, creating the Securities and Exchange Commission (SEC) and several bank regulatory agencies. He saved the badly listing capitalist ship.

Today, there is no real momentum in a frozen Washington, D.C. to bring regulation up to date. To the contrary, in 1999, Congress led by Senator McCain’s Advisor, former Senator Phil Gramm and the Clinton Administration led by Robert Rubin, Secretary of the Treasury, and soon to join Citibank, de-regulated and ended the wall between investment banks and commercial banking known as the Glass-Steagall Act.

Clinton and Congress opened the floodgates to rampant speculation without even requiring necessary and timely disclosures for the benefit of institutional and individual investors.

Now the entire U.S. economy is at risk. The domino theory is getting less theoretical daily. Without investors obtaining more legal authority as owners over their out of control company officers and Boards of Directors, and without strong regulation, corporate capitalism cannot be saved from its toxic combination of endless greed and maximum power—without responsibility.

Uncle Sam, the deeply deficit ridden bailout man, may have another taxpayers-to-the-rescue operation for Wall Street. But don’t count on stretching the American dollar much more without devastating consequences to and from global financial markets in full panic.

Consider the U.S. dollar like an elastic band. You can keep stretching this rubber band but suddenly it BREAKS. Our country needs action NOW from Washington, D.C.

END

Here's a picture of Obama's economic policy director. What a freaking pot-smoking, long-haired, hemp-loving, sandal-wearing, peace sign-flashing, Deadhead, tie-dyed shirt wearing guy this is, huh? Damn, did he just come out of the Kremlin or what, friggin' liberal commie.

That other bastion of "liberals," the unions, don't like this guy too much.  Guess why?  He's too "conservative."  That's right.  Obama, that "most liberal senator in the Senate," has an economic policy director that's too conservative. Gosh, it sucks when these darn little facts just keep getting in the way of perception.

A recent article, states, "Labor union leaders criticized the move, and said that 'Rubinomics' [named after Robert Rubin, who is no "liberal"] focused too much on corporate America and not enough on workers."

The article touches on some of Obama's other liberal wacko ideas like balancing the budget (gasp) and free trade agreements.

In all sincerity, I'm not trying to convince anyone to vote for Obama.  I'm simply saying get your facts straight when you criticize him. Don't rely on labels. I'll do the same for McCain. It makes the discourse run a little smoother.

Obama speaks before NALEO on 6/28

• Newsweek: The McCains' Tax Default on Vacation Home: The McCains, owners of 7 homes and worth over $100M, have failed to pay taxes on a beachfront home in elite La Jolla, California for four consecutive years. When the campaign discovered Newsweek was sniffing around the story, it quickly paid most of the back taxes yesterday, but not fully.
• Out of Touch: McCain can't remember the last time he pumped his own gas or how much it cost.
• Andrew Sullivan's London Times column: Obama maps out a landslide.
• It's hearsay, but apparently Bill Clinton said Obama must kiss his butt to get his support.
• Politico: Western states in play, much to McCain's dismay (about which Obama will make hay).
• Poll analysis site 538 sees stability across polling data with Obama enjoying a substantial electoral college lead. Notes that Obama's jump in Gallup's daily tracking poll today by 4-points is really more of a return of that poll towards the mean after being an outlier.

• Wesley Clark slams McCain, arguing that crashing a plane over Vietnam is not a qualification to be president.
• Craig Crawford: McCain seems to be following Hillary's "inevitable" strategy by acting as if he's already president, traveling abroad and largely ignoring pocketbook issues. He says to call that strategy "unorthodox" is being charitable.
• LA Times: GOP insiders baffled by McCain's lack of vision and misplaced focus on foreign affairs/national security when voters are clearly focused on economic issues.
• WaPo examines how geographical strongholds are flipping from red to blue and vice versa, with formerly GOP-centric well educated and affluent suburbs of Philly, Denver, DC and NY have flipped to blue, while working class states like West Virginia that were deep blue for decades after the New Deal are now very red.
• Frank Rich puts all of the recent GOP sleaze tactics into a nice package with a bow.
• Politico asked leading party insiders and academics for creative longshot candidates for Veep. Bill Gates and Meg Whitman were among those listed for McCain, while Colin Powell and Robert Rubin were among those listed for Obama.
• WaPo ombudsman slams WaPo reporter for saying "The great irony is that [Obama] is much more white than black, beyond skin color." The WaPo reporter apologizes.
• NY Times uncovers an exciting new development - folks outside the MSM and not affiliated with campaigns participate in democracy via the Internets! (In other news, cell phones are now being used by people who aren't corporate executives!)
• In case you missed it, WaPo had a story Saturday about a professor's persistent and successful search to uncover the sources of the anti-Obama slanderous emails.

Hillary Clinton and Bob Rubin are a matched set. They were always at the table when the great decisions were made, but they are never accountable for the mistakes. Here's former Clinton Treasury Secretary and Citibank Exec Rubin on his role in Citibank's recent credit meltdown.

“People know I was concerned about the markets,” he says. “Clearly, there were things wrong. But I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.”

“I don’t feel responsible, in light of the facts as I knew them in my role,” he adds.

As I have said before, Rubin's fight to deregulate the banking industry while he was at Treasury has a direct link to the financial crisis we face today. in 1998, Brooksley Born, the chairwoman of the commodities commission, tried to push through a more stringent regulation of derivatives. Rubin went ballistic.

Mr. Rubin made no secret of his feelings about her proposal. “It was controlled anger. He was very tough,” Mr. Greenberger recalls. “I was at several meetings with him, and I’ve never seen him like that before or after.” Ms. Born didn’t return calls for comment. Mr. Rubin says he was against the proposal because he feared it could create chaos in the markets, rather than actually improve oversight of derivatives.

But during his time in Washington, he says, “the politics would have made this impossible. Even if I’d taken a placard and walked up and down Pennsylvania Avenue saying the financial system would come to an end without strict regulation of derivatives, I would have had no traction.”

But as Ben Stein writes, what we have is chaos in the markets. Stein points to a speech last week from David Einhorn of Greenlight Capital. The very lack of transparency in derivatives that Rubin fought so hard to preserve has become our undoing.

(Einhorn) says the S.E.C. allowed broker-dealers to set their own valuations on assets and liabilities that were hard to value. And broker-dealers could assign their own creditworthiness ratings to counterparties in complex derivatives transactions when those counterparties were otherwise unrated.

In a word, Mr. Einhorn says, the S.E.C. told Wall Street to police itself to save on regulatory costs, while not bothering to “discuss the cost to society of increasing the probability that a large broker-dealer could go bust.”

A result of all this, he says, was as follows:

“The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails you lose. It is a reverse-Robin Hood system.”

This is the ultimate legacy of neo-conservative deregulatory economics--privatised profits and socialized risk.

America came out of the Great Depression with a pretty effective financial safety net, based on a fundamental quid pro quo: the government stood ready to rescue banks if they got in trouble, but only on the condition that those banks accept regulation of the risks they were allowed to take.

Over time, however, many of the roles traditionally filled by regulated banks were taken over by unregulated institutions — the “shadow banking system,” which relied on complex financial arrangements to bypass those safety regulations.

Now, the shadow banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s. And the government is rushing in to help, with hundreds of billions from the Federal Reserve, and hundreds of billions more from government-sponsored institutions like Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Given the risks to the economy if the financial system melts down, this rescue mission is justified. But you don’t have to be an economic radical, or even a vocal reformer like Representative Barney Frank, the chairman of the House Financial Services Committee, to see that what’s happening now is the quid without the quo.

Last week Robert Rubin, the former Treasury secretary, declared that Mr. Frank is right about the need for expanded regulation. Mr. Rubin put it clearly: If Wall Street companies can count on being rescued like banks, then they need to be regulated like banks.

But will that logic prevail politically?

Not if Mr. McCain makes it to the White House. His chief economic adviser is former Senator Phil Gramm, a fervent advocate of financial deregulation. In fact, I’d argue that aside from Alan Greenspan, nobody did as much as Mr. Gramm to make this crisis possible.

Ok, who out there thinks that Richardson is doing this out of purely altruistic reasons and it has nothing at all to do with snagging that priceless VP slot he's been looking for? Anyone? Don't be shy, raise your hands.

Ok, here's a little challenge. Katharine Hepburn once said of Ginger Rogers and Fred Astaire: "She gives him sex and he gives her class." So, the challenge is, what does Richardson give Obama and vice versa, I mean, besides the hispanic vote in the fall and a VP slot? Actually, isn't it too late to capture the hispanic vote for the primaries except in Puerto Rico? Is Obama worried about Puerto Rico and what does that say about The Math? *OR* is Obama saying, "My plan is to completely diss FL and by extension, CA, NJ, NY, MA, AZ, MI, OH and TX, but don't worry, I'm going to give you a hispanic leader for VP and we'll all be friends again. Isn't that cool? Now, make me the nominee, damnit!" (Am I reading too much into this?)

In other news...

Paul Krugman channels Prince (the artist formerly known as a symbol) in Partying Like it's 1929. Ha-ha-ha-ha-ha! Er, Robert Rubin on NPR this morning said something along these same lines when he was talking about leverage and liquidity. I don't know nuthin' 'bout investment markets but I got the shivvers when he said something to the effect, "Nooo, we don't need no stupid regulation on what they're doooing. We need regulation on how much we're able to lose without suffering tremendous loses.", or something to that effect. In other words, playing the market and creating new "instruments" is all ticketyboo but that whole risk thing? Yeah, government has to be better about letting people get caught holding the bag. Hmmmm....

Lieberman Supports Waterboarding: 'It's Not Like Using Hot Coals'

Connecticut Sen. Joe Lieberman reluctantly acknowledged Thursday that he does not believe waterboarding is torture, but believes the interrogation technique should be available only under the most extreme circumstances.

Lieberman was one of 45 senators who voted Wednesday in opposition to a bill that would limit the CIA to the 19 interrogation techniques outlined in the Army field manual. That manual prohibits waterboarding, a method where detainees typically are strapped to a bench and have water poured into their mouth and nose making them feel as if they will drown.

The Senate passed the measure. [...]

"You want to be able to use emergency tech to try to get the information out of that person," Lieberman said. Of course, Lieberman believes such authority has limits. He does not believe the president could authorize having hot coals pressed on someone's flesh to obtain that information.

The difference, he said, is that waterboarding is mostly psychological and there is no permanent physical damage. "It is not like putting burning coals on people's bodies. The person is in no real danger. The impact is psychological," Lieberman said. Lieberman said that his position on waterboarding differs from that of Sen. John McCain, R-Ariz., who he has endorsed as a presidential candidate. As a prisoner-of-war in Vietnam, McCain was tortured. McCain, he said, believes waterboarding is torture.

I first saw him perform at Bluesfest in Byron Bay in April of 2006. That show blew my mind. Then I missed him when he came through on August 4th, 2006 as Two Gallants were performing at The Greek Theater in Berkeley that night.

This time I didn't miss it. WOW! So glad I went.

The Pandit decision ends a painful month-long search that saw Citi getting snubbed by high-profile outside candidates including Treasury Secretary Hank Paulson and former Wells Fargo chief Dick Kovacevich. The move also comes just a few months after Bloomberg reported that Pandit, a Morgan Stanley (MS) veteran who came aboard this past spring when Citi bought his Old Lane hedge fund, had forked over $18 million to buy the late actor Tony Randall's apartment. Now the looming question is whether Bischoff and Pandit can clean up the mess that Prince and Citi's bond desk made -- or whether they'll just end up being another odd couple.

We have been warned. Here are a selection of warnings from 2003 and 2004, given by a wide range of experts and institutions. This list could easily be extended both backwards and forwards in time; a few such are included to illustrate this.

As noted in Chapter I, warnings given with sufficient lead time to avoid disaster -- allowing battleship America to avoid the ice ahead -- were derided as obviously false. Only sightings of peril directly ahead -- too late for corrective action -- can gain the attention of America's elites and citizenry.

Now the time for warnings has passed, as we no longer can avoid what lies ahead. The following materials tell what we need to know: our situation, the danger, and how we got to this point. The geopolitical implications will be the subject for a later chapter.

To see Chapter I of this series: The post-WWII geopolitical regime is dying.

The Impact of the Euro on the International Monetary System, Robert A. Mundell (Nobel Prize for Economics), The International Speculator (April-June 1998) Excerpt:

"The time will arrive when the pile-up of {America's} international indebtedness -- in itself a consequence of faith in the dollar -- will make increased reliance on the dollar as the world's only main international currency untenable. ... the boom will not go on forever and when it ends, there could be a spectacular run on the dollar. The huge stock of international reserves held in dollars makes that currency a sitting duck in a currency crisis. It was no accident that the dollar fell to 79 yen in 1995 at the peak of the fallout from the Mexican crisis, wrecking havoc with Japan's already distressed economy. The position of the United States as a the great debtor will eventually undermine the stability of the dollar as an international reserve currency."

The U.S. Economy: A Changing Strategic Predicament, Wynne Godley, Levy Institute (March 2003)

The Downward Spiral, Jim Rogers (4 March 2003)

Fiscal and Generational Imbalances: New Budget Measures for New Budget Priorities, Jagadeesh Gokhale and Kent Smetters (July 2003) -- Properly computed the total of Federal Government liabilities (estimate of future liabilities minus future revenue) is $44 Trillion. A radical conclusion at the time, since confirmed by other major institutions.

"Truth and Transparency: the Federal Government's Financial Condition and Fiscal Outlook" by the Honorable David M. Walker, Comptroller General of the United States, at the National Press Club, Washington, D.C. (17 September 2003) The first of his astoundingly honest and bold speeches warning America about the dangerous financial condition of the Federal government. He is a Paul Revere for our time.

Kenneth Rogoff, Economic Counselor of the IMF, speaking at the World Economic Outlook (18 September 2003) Excerpt:

"Right now the U.S. is just charging ahead. The United States has the best recovery that money can buy. It has a very high fiscal stimulus, a huge current account deficit. It's borrowing a great deal in order to sustain this very high recovery. That really is part of the difference between the growth we see in the United States and the euro area. But this comes at a cost of mortgaging growth further down the road."

Deficits, Debts, and Growth: A Reprieve but Not a Pardon, Levy Institute (October 2003)

America's Growing Trade Deficit is Selling the Nation Out from Under Us, Warren Buffett, Fortune (26 October 2003)

Implications of Rising Fiscal Deficits for the US Government's Credit Ratings, Reuter's story about a report by Moody's Investors Service (November 2003)

The Future of the Dollar: Has the Unthinkable Become Thinkable?, Korkut A. Ertürk, Levy Institute (December 2003)

Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray, by Allen Sinai, Peter R. Orszag, and Robert E. Rubin (former Treasury Secretary) (5 January 2004)

U.S. Fiscal Policies and Priorities for Long-Run Sustainability, International Monetary Fund (7 January 2004). Excerpt:

"These considerations have led to a renewed emphasis on estimates of the fiscal gap, which take into account longer horizons and the intergenerational transfers that are involved. Section IV presents estimates of the U.S. fiscal imbalance using an intergenerational accounting framework that encompasses the entire federal fiscal system over an infinite horizon. The results suggest that the fiscal imbalance is as high as $47 trillion, nearly 500 percent of current GDP, and that closing this fiscal gap would require an immediate and permanent 60 percent hike in the federal income tax yield, or a 50 percent cut in Social Security and Medicare benefits. The analysis also illustrates that this gap is associated with a severe intergenerational imbalance, with the burden on future generations increasing further if corrective measures are delayed."

The Western World Past Its Prime: Sovereign Rating Perspectives in the Context of Aging Populations, Standard and Poor's (31 March 2004). Some nations have prepared for their aging populations -- Australia, Ireland, Sweden, and the UK. Not everyone ignores the obvious and inevitable.

Asset Poverty in the United States, Asena Caner and Edward N. Wolff, Levy Institute (April 2004). Roughly 40% of US households are 3 months or less from bankruptcy. That is, their high debts and low savings mean they cannot withstand even brief periods of unemployment.

Riding for a Fall, Peter G. Peterson, Foreign Affairs (September/October 2004). Peterson is Chairman of the Council on Foreign Relations, the Institute for International Economics, and The Blackstone Group. He served as Secretary of Commerce in the Nixon administration. Excerpt:

"Three long-term trends are threatening to bankrupt America: the burgeoning costs of waging the war on terrorism, the U.S. economy's increasing reliance on foreign capital, and rapid aging throughout the developed world. Washington must understand that committing the United States to a broader global role while ignoring the financial costs of doing so is deeply irresponsible."

The U.S. Current Account Deficit and the Global Economy, Lawrence. H. Summers, former Secretary of the Treasury (3 October 2004)

Aging, the World Economy and the Coming Generational Storm, Laurence Kotlikoff, Hans Fehr, and Sabine Jokisch (4 February 2005)

An Economy on Thin Ice, Paul Volcker (former Chairman of the Federal Reserve), Washington Post (10 April 2005): Excerpt:

"The US expansion appears on track. ... Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it."

The Long-Term Budget Outlook, by the Congressional Budget Office. They publish the same warnings again and again, ignored by Americans. December 2003. December 2005. Conclusions from the Executive Summary of the December 2005 report:

• Driven by rising health care costs and an aging population, federal spending for Medicare, Medicaid, and Social Security will claim a sharply increasing share of the nation's economic output over the coming decades.
• Even if taxation reached levels that were unprecedented in the United States, current spending policies could become financially unsustainable. An ever growing burden of federal debt held by the public would have a corrosive and potentially contractionary effect on the economy.
• As the U.S. tax system is now configured, federal revenues will grow faster than the overall economy. Under current law, taxpayers will face higher rates, with detrimental consequences for work, saving, and economic growth.
• Fiscal policy could be financially sustainable if the growth of health care costs slowed significantly from historical rates. But even in that case, tax revenues would probably need to be higher than they have been in the past, unless the growth of other spending was curbed.
• If taxation is restricted to the levels that prevailed in the past, the growth of spending on programs for the elderly will have to be reduced substantially. Limiting the growth of outlays for defense, education, transportation, and other discretionary programs would not be enough to ensure fiscal sustainability.
• Likewise, economic growth alone is unlikely to bring the nation's long-term fiscal position into balance. Moreover, issuing ever-larger amounts of debt or dramatically raising tax rates rates could significantly reduce economic growth.

Is the U.S. Current Account Deficit Sustainable?, Congressional Research Service (13 December 2005)

Some Unpleasant American Arithmetic, Wynne Godley, Levy Institute (June 2005). "Is it sufficiently realized how intractable those U.S. imbalances -- and how dangerous their potential consequences at home and abroad -- have now become?"

Debt and Lending: A Cri de Coeur, Wynne Godley and Gennaro Zezza, Levy Institute (April 2006)

Twin Deficits and Sustainability, L. Randall Wray (April 2006)

Is the United States Bankrupt? Laurence J. Kotlikoff, Federal Reserve Bank of St. Louis Review (July/August 2006)

U.S. Household Deficit Spending: A Rendezvous with Reality, Robert W. Parenteau, Levy Institute (November 2006)

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about this subject

1. A brief note on the US Dollar. Is this like August 1914?  (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
2. The post-WWII geopolitical regime is dying. Chapter One   (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II  (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
4. Death of the post-WWII geopolitical regime, III - death by debt  (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
5. Geopolitical implications of the current economic downturn  (24 January 2008) – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
6. A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
7. What will America look like after this recession?  (18 March 208)  — More forecasts.  The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
8. The most important story in this week’s newspapers   (22 May 2008) — How solvent is the US government? They report the facts to us every year.

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

Our friend, Smokey the Bear

In the late 19th Century the goal of preventing forest fires gained wide support in the US. The Forest Service was established in 1905, becoming the lead agency in this program. After a century of successful fire prevention much of the western US consists of dense forest with layers of dead wood. Tinderboxes across the West, ready for the next drought to spark uncontrollable fires.

What can be done? Not much. Nature delayed must take its course. Logging permits are difficult to get and logging itself often uneconomic. Thinning and removal of ground cover is prohibitively expense over large areas. Controlled burns often work well. Unfortunately they occasionally become uncontrolled burns. Instead landowners clear the land around their buildings and wait for the inevitable.  Eventually, over years, this process will work itself to a new equilibrium.

We have managed our economy like our forests. The US Federal Reserve has successfully prevented a severe recession for a quarter-century. The early 1990's saw a slight downturn in GDP; the early 2000's an even slighter one. The government responded to each slowdown with aggressive monetary policy (easy credit, low rates), aggressive fiscal policy (government spending), and often exchange rate action (devaluing the US dollar to stimulate exports). The Fed has declared war on the business cycle. As Mao said, protracted struggle.

Consequences

Sooner or later, everyone sits down to a banquet of consequences.
     Robert Louis Stevenson, perhaps apocryphal

As a result of the Fed's success the US economy has evolved in an unbalanced manner since 1982. Large, growing trade deficits. Accelerating growth in household debt. Decreased savings. National consumption in excess of national income, financed by foreign borrowing (current account deficits) -- resulting in large foreign debts.

We have been warned. Comptroller General Walker. The IMF. High government officials, like former Treasury Secretary Robert Rubin. The major credit ratings agencies. Wall Street. Academia. It is not all boring jargon; here is a paper with an usually catchy title for a Fed publication: Is the United States Bankrupt?

A long list of alarms, ringing for many years. We ignored them as obviously false, since they warned of threats not yet here.

On September 28 the {Norman invasion} fleet came safely to anchor in Pevensey Bay. There was no opposition to the landing. The local "fyrd" has been called out this year four times already to watch the coast. Having , in true English style, come to the conclusion that the danger was past because it had not year arrived, they had gone back to their homes.
Churchill, The History of the English Speaking Peoples

Now we have (perhaps) passed the point at which corrective action is possible, such as the 1980-82 recession Fed Chairman Volker induced to break the inflationary fever that gripped the US. Today the danger of a recession burning out of control is too great.

Exhausted defenses of the US economy

Much research, like that of the Levy Institute, suggests that with the current record-high levels of household debt a recession like 1980-82 would create foreclosures and bankruptcies at levels not seen since the 1930's. The lower middle class (aka "blue collar" households) are especially vulnerable. Worse, our counter-cyclical economic stabilizers are largely burnt out from overuse.

• Even at the peak of the expansion in 2006 the Federal government still ran a deficit of aprox $250 billion ($4.6 trillion using real accounting, as corporations must do -- including the growth in liabilities). The deficit always increases during recessions, as expenses rise and income fades. This might make massive spending difficult during the next one -- without collapsing the US dollar or risking hyperinflation.
• Monetary policy has become less effective with each cycle, as US debt (government, business, households) approaches our maximum carrying capacity. As debt grows, each dollar of new debt provides less stimulus. That is, the elasticity of GDP with respect to debt approaches zero. Eventually we hit the limit on our national VISA card, and new debt does nothing. That marks the end of the Debt Supercycle, and the start of a new era.
• Devaluing the US dollar to stimulate exports has become extremely hazardous, risking currency flight and hyperinflation.

The exhaustion of our stabilizers -- which provide negative feedback -- means that positive feedback might dominate the downcycle. For example, home prices decline => mortgage default increase => consumer spending declines (wealth effect) and housing-related jobs disappear => more home price declines. And so it goes.

Conclusions

How will this play out? The end of the post-WWII geopolitical regime is like a singularity in astrophysics. We cannot see beyond it, because we do not understand the choices that will determine our fate -- or how we will choose. It also resembles a singularity in that what lies on the other side is unimportant until one survives the passage through it.

Economic regimes come, and they leave. As do Empires. The post-WWII regime has brought incredible prosperity to most of the world, but that does not make it eternal. As Queen Gertrude says to Hamlet (Act I, scene 2):

Good Hamlet, cast thy nighted colour off,
And let thine eye look like a friend on Denmark.
Do not for ever with thy vailed lids
Seek for thy noble father in the dust:
Thou know'st 'tis common;
all that lives must die,
Passing through nature to eternity.

** The movie "The Matrix" prominently featured a version of this, "All that lives must die."

A closing note

The next recession will stress our economic and social fabric like nothing we have seen since WWII. Will we rise to these challenges as have our forefathers before us?

I believe that we need not fear the future. America's strength lies not in our wealth or power. We are strong because of our ability to act together, to produce and follow good leaders. We are strong due to our openness to other cultures and ability to assimilate their best aspects. We are strong due to our ability to adapt to new circumstances, to roll with defeat and carry on.

We will be whatever we want to be. The choices we make in the next few years may reveal what that is.

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about this subject

1. A brief note on the US Dollar. Is this like August 1914?  (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
2. We have been warned. Death of the post-WWII geopolitical regime, Chapter II  (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
3. Diagnosing the eagle, chapter I — the housing bust  (6 December 2007)
4. Death of the post-WWII geopolitical regime, III - death by debt  (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
5. Geopolitical implications of the current economic downturn  (24 January 2008) – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
6. A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
7. What will America look like after this recession?  (18 March 208)  — More forecasts.  The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
8. The most important story in this week’s newspapers   (22 May 2008) — How solvent is the US government? They report the facts to us every year.
9. Another warning from our leaders, which we will ignore  (4 June 2008) — An extraordinarily clear warning from a senior officer of the Federal Reserve.
10. The geopolitics of inflation, an introduction  (17 June 2008)
11. Consequences of a long, deep recession - part I     (18 June 2008)
12. Consequences of a serious US recession - part II    (19 June 2008)
13. Consequences of a long, deep recession - part III   (20 June 2008)

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

The much-anticipated news of the departure of Chuck Prince at Citigroup broke on the eve of Guy Fawkes Day [November the 5th]. In England, it’s the day when Guy Fawkes is burned in effigy on bonfires around the land. It seems to be a time around the world when leaders are sacrificed as punishment for their misdeeds. Is this any more than a modern version of the old symbolic way of placing all guilt on a scapegoat?

In the space of a few weeks we have had the cases of Sam O’ Neal of Merill Lynch, and then Charles Prince of Citigroup.

The board of Citigroup paid tribute to Mr Prince, with Alain Belda saying: "We thank Chuck for his unwavering commitment to Citi, its employees and its shareholders."

In days of yore, the priestly caste prepared the leader for the ceremony of ultimate sacrifice. The leader was treated with the greatest of respect, dressed in sumptuous garments, and then dispatched with honor, thus appeasing the Gods, and saving the rest of the tribe from divine wrath.

It’s all different today, isn’t it? Or is it?

According to The Washington Post the departing leader made the following statement:

"It is my judgment that given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as Chief Executive Officer is to step down,"

He had to go, didn’t he?

The much-anticipated news of the departure of Chuck Prince broke on the eve of Guy Fawkes Day. The question was raised by the interviewer in first discussion I heard on the topic. He had to go, didn’t he? Of course, re-assured the financial expert. Citygroup has such massive losses. It has seriously under-performed. He had to go.

Citigroup has installed former Treasury secretary Robert Rubin as chairman after the widely anticipated resignation of Charles Prince, the embattled chairman and chief executive who faced mounting criticism in the wake of a $6.5 billion write-down for the third quarter. After an emergency board meeting Sunday, Citigroup, citing significant declines in the value of subprime-related securities in the past month, estimated that it would take additional write-downs of $8 billion to $11 billion. Yes, he had to go.

There are echoes in the Western understanding of the Japanese phenomenon of hara-kiri now identified in business life.

To survive the competitive business world, many Japanese companies have now embarked upon restructuring. It is those middle-age men, who contributed to the economic success of Japan since the Second World War, who are now, ironically, the target for restructuring. They have devoted almost all of their lives and often sacrificed their own family life for their companies. People have had the aisha-seisin (a deep spiritual attachment to their own company) exactly akin to that held by the samurai for the oie. The man who commited hara-kiri had trusted the company and believed that the company would not abandon the business warriors. He killed himself when he felt betrayed by the company.

But was this the same kind of ritualistic act that characterized the behavior of a discredited Japanese leader who accepted suicide, as atonement of his disgrace? Or was it more the consequence of the economic realities of modern organizations?

In our recent Western examples, the leaders are hardly treated with dishonor if we judge only the scale of remuneration involved, if the leader had failed in a contractual way. However, even within a strictly rational economic explanation, it is not difficult to see how contractually, a leader of a large organization would have negotiated a lucrative n exit, even if his performance had failed to meet targetrs and expectations.

We should look a little more deeply. It seems that Citigroup wants to reassure markets that it has no intention of changing its business model. That suggests we are operating more on the ancient symbolic model. An honorable resignation, with those sumptuous trappings to the departing leader, protects the others from disaster, and ‘rescues’ the rest of the tribe.

The real test will be whether the departure of the leader produces necessary structural changes, or seeks to avoid them.

Zoelick approved by World Bank

Houston Indymedia

by ARC Friday, Jun. 01, 2007 at 10:16 AM

Henry Paulson, Josh Bolten, Robert Zoellick, Jon Corzine, and Robert Rubin consider the US government the operating branch of Goldman Sachs 5 of the Goldman Sachs White House

Goldman Sachs operative to head World Bank

TUTORS OF TRAITORS AND
INSIDER TRADER TATTLERS

The Wall St. firm which triggered
the crash of 1929* continues
leaving a trail of blood.

5 Goldman Sachs men in government

Henry Paulson, Josh Bolten, Robert Zoellick, Jon Corzine, and Robert Rubin consider the US government the operating branch of Goldman Sachs 5 of the Goldman Sachs White House

A Goldman Sachs operative, Robert Zoellick, who has worked for G H W
Bush and James Baker, partners in
the war profiteering Carlyle Group, will
head the World Bank. Recently he
had left the position of number 2 man
at the Condoleezza Rice headed
State Dept. to join Goldman Sachs.

Other Goldman Sachs operatives
are Henry Paulson, Secretary of
the Treasury, Joshua Bolten, White
House Chief of Staff, Gov Corzine
of NJ. Paulson and Corzine
are former CEO's.

Paulson further destroyed Nature
Conservancy tracts by introducing
cattle to them, multiplying animal agony and
furthering the deforestation which is the prime cause of global warming.
Texas Pacific and Goldman Sachs
have interlocking connections to
Burger King. Are the Nature Conservancy cows ending up
on BK plates?

Goldman Sachs is invested in
many war profiteer, anti environment
and animal slaughter concerns.

A former US Secretary of the Treasury,
Robert Rubin, was part of a campaign
with Jeffrey Sachs and others to
destabilize the Russian economy
and plunge millions into poverty.
He had worked 26 years at Goldman
Sachs and was appointed by Clinton.

A Goldman Sachs operative, Robert Zoellick, who has worked for G H W
Bush and James Baker, partners in
the war profiteering Carlyle Group, will
head the World Bank. Recently he
had left the position of number 2 man
at the Condoleezza Rice headed
State Dept. to join Goldman Sachs.

Other Goldman Sachs operatives
are Henry Paulson, Secretary of
the Treasury, Joshua Bolten, White
House Chief of Staff, Gov Corzine
of NJ. Paulson and Corzine
are former CEO's.

Paulson further destroyed Nature
Conservancy tracts by introducing
cattle to them, multiplying animal agony and
furthering the deforestation which is the prime cause of global warming.
Texas Pacific and Goldman Sachs
have interlocking connections to
Burger King. Are the Nature Conservancy cows ending up
on BK plates?

Goldman Sachs is invested in
many war profiteer, anti environment
and animal slaughter concerns.

A former US Secretary of the Treasury,
Robert Rubin, was part of a campaign
with Jeffrey Sachs and others to
destabilize the Russian economy
and plunge millions into poverty.
He had worked 26 years at Goldman
Sachs and was appointed by Clinton.

Forecast #4: bankruptcy

Perhaps only a crisis will catalyze America’s transition to a new form of government. There is no lack of candidates.

The last stone in the foundation of America’s greatness was laid by Alexander Hamilton, who as Secretary of the Treasury published the Report on the Public Credit in January 1790. He argued that America should – unlike most nations – pay its war debts. With the support of Washington, opposed by Jefferson and Madison, it was enacted through one of the great compromises that distinguish early American history.

Now we owe trillions to foreigners and plan to borrow trillions more – scurrilously – as we have neither the ability nor intention of paying back these loans. Worse, childishly, we hope our creditors will never demand repayment.

Look at our domestic balance sheet. Most American households have few savings – many lack even a 60-day emergency fund – and massive debts. The aggregate totals (so loved by economists) conceal this by including both Bill Gates and thousands of unemployed auto workers. It’s not an irrational way to see things, if Gates will donate money to pay off their debts and fund their retraining for well-paying jobs at Microsoft.

Our international balance sheet is equally frightening. Our massive foreign debts, accumulating at over $2 billion per day, spell the likely end of the US Dollar as the world’s reserve currency – and the end of the post-WWII economic regime and America’s role as the world’s hegemon. Without the unlimited ability to borrow in our own currency, America’s current economic condition becomes impossible to sustain.

This is, of course, old news. We’ve heard these warnings for many years.

On September 23 his fleet hove in sight, and all came safely to anchor in Pevensey Bay. There was no opposition to the landing. The local fyrd had been called out this year four times already to watch the coast, and having, in true English style, come to the conclusion that the danger was past because it had not yet arrived had gone back to their homes.

Description of William the Conqueror’s arrival, from History of the English Speaking People by Winston S. Churchill.

The list of agencies, experts and high officials who have warned us could fill many pages. I need not do so, as I believe we all at some level know we are on a course of near-certain self-destruction. A few references will suffice.

Since September 2003 David M. Walker, Comptroller General of the United States, has acted as a modern Paul Revere. He’s crossed the nation giving extraordinarily blunt speeches warning of the fiscal catastrophe looming ahead. Didn’t you see the front-page stories about this?

Here are two of his recent presentations:

1. The Nation's Growing Fiscal Imbalance
2. Saving Our Future Requires Tough Choices Today.

Here is another wake-up call – you must have seen the special TV new bulletins when this was published!

Is the United States Bankrupt?. Laurence J. Kotlikoff (Professor of Economics at Boston University), Published by the Federal Reserve Bank of St. Louis Review  (July/August 2006)

Perhaps the Fed’s reputation for obfuscation is not deserved. Note the opening of the article’s abstract:

Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation's economic future. …

Have you ever wondered at the total debt of US Government? Treasury Secretary O'Neil did, and asked some experts to compute the answer. Surprisingly, Bush fired him shortly afterwards. Our total liability was $44 trillion. Then. It’s much larger now, of course.

Fiscal and Generational Imbalances, By Jagadeesh Gokhale and Kent Smetters

Not to bore my readers with so many dire warnings, but here are more from former Treasury Secretary Robert Rubin  and the International Monetary Fund.

We cannot say that we were not warned.

This precarious load of debt can totter and fall at even a small disturbance.

• Inflation: rising interest rates are lethal to millions of households with adjustable mortgages and floating-rate consumer loans.
• Deflation: a recession that generates unemployment, cutting US consumer spending (an incredible 20% of global GDP) and creating layoffs, which can easily spiral out of control.

The already high deficits of the federal government, during the peak of the up phase – the large number of two-worker, high debt, no savings households – and many other factors make our economy far more vulnerable than at any time since WWII. Anything that destabilizes our economy could spark foreclosures and bankruptcies at levels not seen since the 1930s.

For what will have traded our greatness, our very solvency?  We’ll have spent billions on weapons, welfare, and granite countertops. Only the debts will remain.

For more on this see End of the post-WWII geopolitical regime.