Every trick in the book

Published on Online Journal, by Mike Whitney, Dec. 2, 2008.

Without any public debate or authorization from Congress, the Federal Reserve has embarked on the most expensive and radical financial intervention in history.

Fed chairman Ben Bernanke is trying to avert another Great Depression by flooding the financial system with liquidity in an attempt to mitigate the effects of tightening credit and a sharp decline in consumer spending. So far, the Fed has committed over $7 trillion, which is being used to backstop every part of the financial system, including money markets, bank deposits, commercial paper (CP) investment banks, insurance companies, and hundreds of billions of structured debt-instruments (MBS, CDOs). America’s free market system is now entirely dependent on state resources …

… Does that mean we should revive the failed system?


No, just the opposite. The markets need to be reregulated now to restore credibility. But the Fed should be looking for ways to create an emergency national bank, which operates like a public utility, so that credit can be made available to businesses and consumers who need it now. The Treasury should also be working with Congress on a plan for public education to forestall a panic, as well as recommendations for stimulus to soften the economic hard landing just ahead.

The financial system is broken and institutions will not be able to re-leverage fast enough to normalize the credit markets or stop the impending collapse in consumer demand. What’s needed is a constructive plan to rebuild the system while minimizing the suffering of normal people. There’s no sense in trying to put the genie back in the bottle or re-energize a failed system. What’s past is prologue. There needs to be a serious analysis of the factors which led to the present crackup and a plan for course correction. It’s not enough to throw stones at the Fed and its misguided serial bubble-making escapades.

Reagan’s legacy:

Our present dilemma can be traced back to the 1980s–the Reagan era and the rise of an organized, industry-funded movement, which advanced their business-friendly “trickle down” ideology, which, when put into practice, has led to greater and greater income disparity, unprecedented expansion of credit and, ultimately, economic disaster.

The problem is the way that the system has been reworked to serve the interests of the investor class at the expense of working people. As Wall Street has tightened its grip on the political parties, more of the nation’s wealth has gone to a smaller percentage of the population while the chasm between rich and poor has grown wider and wider. The United States now has the worst income and wealth disparity since 1929 and a whopping 75 percent of the labor force has seen a drop in their living standard since 1973. The average American has no savings and a pile of bills he is less and less able to pay. Apart from the ethical questions this raises, there is the purely practical matter of how a consumer-driven economy (GDP is 70 percent of consumer spending in US) can maintain long-term growth when wages do not keep pace with productivity. It’s simply impossible. The only way the economy can grow is if wages are augmented with personal debt; and that is exactly what has happened. The fake prosperity of the Bush and Clinton years can all be attributed to the unprecedented and destabilizing expansion of personal debt. Wages have been stagnate throughout.

The architects of the present system knew what they were doing when they cooked up their supply side theory. They were creating the rationale for shifting wealth from one class to another. But the theory is deeply flawed as the current crisis proves. Economic conditions do not improve when the rich get richer. All boats do not rise. Class divisions intensify and imbalances grow. Equity bubbles may be an effective means of social engineering, but they always lead to disaster. In fact, the crash of the Fed’s massive debt bubble could bring down the whole system in a heap. There are better ways to allocate resources so that everyone benefits equally.

It all gets down to wages, wages, wages. If wages don’t grow, neither will the economy. (full long text).

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