What Makes the American Economy Great?

The American consumer, i.e. the American worker, is in seriously dire straits. For many a poor soul, a sense of security in life has completely evaporated along with home values, retirement savings, healthcare, jobs and future opportunities. In addition, a lot of people are responsible for providing their kids with extremely expensive education as well as extremely expensive healthcare and eldercare for aging parents. The American economy is built on the idea that you, for the most part, keep what you earn, and in turn are responsible for providing for your own and your family’s needs with your own money. It is a system heavily built on individual responsibility. But any rational observer would quickly conclude that for most Americans: it is an AWFUL lot of responsibility.

Over the last 30 years, working Americans’ incomes have stagnated. Paradoxically, Americans have kept spending more and more, so logically the money for this must have come from somewhere other than the income for which consumers work. Some have won the lottery, some have received inheritance, but the vast majority of consumers have simply financed this increase in spending by taking loans. In addition, during the same period of time, a lot more financial responsibility of the kind I mentioned in the beginning has been put on consumers as a result of the dismantling of the social safety net, initiated by Reagan. That makes the fact that consumption has increased so much even more puzzling. In other words, the borrowing has been enormous. Unless something incredibly unforeseen happens, that type of borrowing will no longer be available in the future. So what should the American worker do?

There are many theories as to how it became a national taboo for workers to claim a salary that they can live on. For a long time, collective bargaining, worker and consumer rights have somehow been despised by the very people they were once designed to help. The few unions that still exist today are run more like motorcycle gangs than real unions. In academic language, unions such as the autoworkers’ unions are known as “exclusive unions”, and are designed to keep people out and protect only the members. Most modern unions in other parts of the world, however, are so called “inclusive unions”, whose main goal is the wellbeing of all working people in general, which they achieve through national collective bargaining, making sure that salaries and rights reach an adequate level for all in the economic situation at hand.

The simplest way to understand how the American worker has not gotten a fair deal over the last 30 years is to look at wage growth related to corporate profits. In general, there has been stagnation in wage growth, but there has been a huge growth in corporate profits during the same time. In addition, worker productivity has gone up, so, to sum up: fewer workers are making more money per worker for the corporation while receiving no gains in return. Meanwhile, government spending for the benefit of the public has been cut, and money has been used to finance tax cuts for corporations and high-income individuals. Reagan SIMELTANEOUSLY cut taxes for the rich, while raising them for the poor. Talk about wealth redistribution… It is definitely time to reverse these developments.

It is often said in America that a successful economy must have low taxes for businesses to thrive. Obviously it is true that a corporation or an individual is better off with more money to put into a business, which could be accomplished partly by low taxes, but to what extent is that a deciding factor? Is entrepreneurship inextricably linked to low taxes? I would argue yes and no. Here’s how:

Yes, because the business environment and high-income individuals in the United States have enjoyed low taxes for a very long time. Such a business or individual has obviously adjusted their margins around the fiscal environment. They spend and invest according to the low taxes. Established businesses with low margins and a large amount of risk taking would likely be hurt by tax increases, but such businesses are always vulnerable to many different risks.

No, because innovation and ambition in themselves have nothing to do with taxes. Gifted and driven individuals will always make themselves useful, in whatever situation. That’s just human nature. The invention of the PC was not made possible by low taxes, nor would it have been impossible with high taxes.

Low taxes are not what make the American economy great. What makes the American economy great is its human and natural resources. Right now, the human “resources” are in a crisis, and for the American economy to continue to be successful, time and money must be invested in them. They must also stand up for themselves and

demand what is rightfully theirs.

Moreover, I advise that the current electoral system should be destroyed

Three Bailouts - One Big Mess

Over the last two months, government bailouts of the private sector have been on the agenda more than anyone previously could have imagined. It is now obvious, even to Alan Greenspan, the crusader of anarcho-capitalism, that deregulation and Wall Street-mania has brought a catastrophe to the American economy, and to the American people. To make up for decades of mistakes, a series of government bailouts have been proposed, initially designed to restore the system so that it could continue to operate as it had before. When it became evident that this could not be done, the plans had to adapt. The government has certainly been innovative in coming up with new ways of helping the financial industry, but being all over the place with a new plan every day is not always such a good thing for the economy. One economist recently described the efforts as a giant game of whack-a-mole. What is also lacking in the process of trying to save the economy is a clear vision and ideological coherence in how to actually go about the task. Bush, Bernanke and Paulson have, from the start, been working with an idea that they strongly disagree with: government intervention in the private sector. The result of this is a twisted, ineffective, wasteful and criminal situation.


As of now, there are mainly three different bailouts that have either been proposed, or are in different stages of implementation. One of them was suggested by Bernanke and Paulson, the second by John McCain, and the third was advocated by a large number of economists who drew inspiration from crisis management in Sweden and Great Britain.


What I refer to as the first bailout, is the original $700 billion plan presented by Paulson and Bernanke that would buy up bad assets from Wall Street firms, also called the TARP plan. The proposed second bailout is what John McCain has recently suggested, which is the one that would have the government buy individual mortgages. The third bailout is what the government later changed the first one into, so that the $700 billion would instead be used to buy shares of banks. This is what was done in Sweden in the 90s, and what was done in Great Britain a few weeks ago.


It can be hard to wrap ones mind around what these bailouts really mean, what they can accomplish, and what the final consequences are. Consider the following analogy:


During a period of five years, Ford has been producing millions of cars. After a couple of years, signs are starting to show that the quality of the cars is rather poor. Some more time goes by, and eventually it becomes clear that all of Ford’s cars that have been produced during this five-year period will inevitably break down beyond repair after just two years. Ford is now facing bankruptcy because of these problems of quality control in the manufacturing process. There is no way that the company is able to reimburse all the people who bought the faulty cars, and Ford asks the government to bail out the company. The politicians then consider three plans to bail out Ford with taxpayer money:


1. To buy all the faulty cars at full price from the consumers who bought them, so that they can go and buy new cars, and so that Ford does not have to reimburse the customers and just go on as if this never happened, or


2. To set up government-run and owned car repair garages that will repair and update all the millions of faulty cars produced by Ford, or


3. To help Ford overcome its problems with quality control in the manufacturing process by investing money in Ford factories as well as in research and development for the future


It may come as no surprise that plan 1 is an analogy of the first bailout (the TARP plan), and that plan 2 is the McCain plan. Most people now realize that the original bailout plan was not such a good idea. I believe that plan 1 in the Ford analogy is no more absurd than the TARP plan, in its practical implementation. McCain’s plan is also so complex, and has such a large element of a tax money give-away, that it is undoable, unfair and would not really solve any systemic problems. I believe that McCain only proposed it so that he could have something to say to individuals who are suffering at the hands of 35 years worth of laissez-faire capitalism.


Plan number 3 is meant to describe the Swedish/British bank bailout plan. A bank is a lot like a car factory, in that most financial instruments and most financial deals originate there. By fixing the banks, the fundamental workings of the financial economy could probably be restored. As it turns out, however, that plan may not have worked as well as most people had hoped. The fact that the banks are still not lending money to each other, or to individuals, is really at the heart of the financial problems, and it is also an economic indicator that is every bit strong as the stock market when trying to gauge where things are going. The banks are also at the heart of a healthy relationship between the real economy and the financial economy. Never mind the stock market, hedge funds and all the rest of it; the economy cannot recover with job growth and wage growth if the banks don’t function properly. At this point, it appears that the bank bailout plan did not work, but why?


Henry Paulson made an intentional “mistake” that doomed the bank bailout plan, and again, turned the $700 billion package into a huge waste of taxpayer money. He did not require the banks to lend out the money that they were receiving from the taxpayers. Injecting the money into banks was the right thing to do, but it was not right to do this without strings attached. What was needed were clear guidelines and rules for what could be done with the money, but none were provided. Paulson should have required the banks to make the money available for other banks and individuals to borrow, which is what politicians did in Great Britain.


The government should have taken some amount of active control of the banks as a result of the huge capital injection. Instead, the American banks took the money and put it in the safe, or went and bought up other banks. This is happening as we speak, and we are going to see a lot fewer banks in America within a few years. The banks can hence kill two birds with one stone: they can clean up their balance sheets, and eliminate the competition! Paulson probably did this because he categorically opposes government influence in the private sector, and by not doing his job in the interest of the tax payers (by not using the power that the government now rightly has over the banks), while hoping to appear to be doing his job admirably, he is once again trying to deceive the American people and steal $700 billion from them and giving the money to his friends.


Again, we are seeing a twisted version of capitalism with huge give-aways, corporate welfare, corporate favoritism, lies and deceit. What I described in plan 3 in the Ford example is what should have happened in a well-designed plan (and what did happen in Sweden). If I were to incorporate the result of the bank bailout plan, into the Ford example, it would instead look like this:


3. To give Ford $700 billion so that the company can buy Honda, Hyundai and Chrysler, close them down, and keep whatever is left over of the money while the government does nothing.


Moreover, I advise that the current electoral system should be destroyed.

Imperial Elections

At this point in American history, the odds are permanently stacked against a Democratic presidential candidate. There can be no dispute over that fact that a Democratic president is the exception, while a Republican one is the norm. The differences between two such candidates are usually many, and often include differences on issues such as tax policy, government programs, government spending and the role of government in general. I believe that these differences are usually secondary in a presidential election, and that foreign policy trumps them all.


There is an old theory about the life span of empires that seems to become truer and truer as time goes by. It dictates that the life span of an empire is usually three generations. The first generation is the one that conquers, dominates and actually creates the empire. The second generation is one that solidifies the empire, and comfortably settles in, in their position as rulers of the empire. They are not concerned with further expansion of the empire, but are still committed to glory, tradition and dominance, and are very concerned with not losing their position in the world. The third generation, however, has lost the desire for glory and dominance, and would rather enjoy the wealth that has been created during the course of the empire’s existence. The third generation wants to focus on softer values, on itself, rather than people and countries abroad.


The historical examples of empires that have more or less followed this trend are many. France immediately comes to mind. The country had a very powerful colonial empire not very long ago. However, by the 1950s, voices crying out for French glory and dominance were becoming rarer and rarer as France had reached its third generation in the colonial empire. The French people decided to spend their money on themselves by providing universal healthcare, by taking two months vacation per year and so on. The French started going to the beach instead of going to war in some godforsaken desert. At the same time, the connection to “traditional values” concerning religion and morality was loosened.


The United States emerged as an imperial power of sorts after World War I. The country became the protector of the West and a self-described incarnation of Western values (although I believe that America constitutes an exception within the Western civilization). Prior to becoming an empire, the United States had resisted just that, by focusing on itself, in the desired isolation of the agrarian society that preceded the imperial era. The focus shifted when the imperial period started, to an intentional outward projection of power and an intentional spreading of American values abroad. This included military power, economic, cultural and societal values. This created in the American people a sense of superiority within the trailblazers, the conquerors; the first generation.


The second generation, the boomer generation, created for themselves a proud and prosperous society. They carried on the traditions of their fathers and defended the American empire wherever threats to it or its dominance occurred. This generation truly believed in the idea of America as a force of good everywhere in the world, and that this force must continue to flow and spread for the good of everyone in the world. The word “un-American” is meant to be offensive, while the word “un-French” would at this point just sound strange. The boomer generation still controls this country, and we are still living in the second generation of the American empire. However, this presidential election appears to show a hint of a possible change of guards, from the second to the third generation.


I believe that John McCain represents the second imperial generation and is someone who wants to fiercely defend the American empire and all it stands for. A majority of voters in presidential elections agree with this standpoint, which is why Republicans have been vastly more successful than Democrats in presidential elections over the last six or seven decades. The odds are always stacked against a Democratic presidential candidate because he or she usually does not share all aspects of this philosophy.


However, I believe that Barack Obama and many of his voters represent the third generation of the American empire, which is the one that wants to bring back the focus on domestic issues and enjoy life at home rather than fighting wars in some godforsaken desert. Hence, we are now possibly living in a transformational era, an era in which the third generation takes over after the second. The future of America may be one of intense focus on the homeland and gradual, but major retreat from dominance in the world. It may depend on the election of Barack Obama.

Moreover, I advise that the current electoral system should be destroyed

Liberty and Collectivism - The Obama Equation

If Obama is elected president, judging by what he has revealed of his true beliefs, it appears that America will start going in a new direction in terms of collective solutions. Obama believes that healthcare is a right, he believes in an altered income distribution and he believes in public infrastructure. Philosophically speaking, America has gone down the anarcho-capitalist path since the election of Ronald Reagan, but it appears that this social experiment is now over.

Anarcho-capitalism is a philosophy that is advocated by radical philosophers such as Rothbard and Rand, which dictates complete freedom for the capitalist forces and the complete absence of government intervention in all aspects of life. In practical terms, when policies are actually implemented, that means: extremely low taxes that are not progressive, dismantling of social programs, privatization of public infrastructure and a complete de-regulation of financial markets. In addition, it involves a heavy reliance on charity as a way of dealing with poverty. Alan Greenspan is a follower of this philosophy. There are very few examples of anarcho-capitalist experiments in the history of the world, and I would argue that America represents the only true one. The anarcho-capitalist experiment has led to the creation of a vast proletarian underclass, and a concentration of wealth that is almost unparalleled in history. In other words, America is presently very similar to a western society typical of the eighteen hundreds.

The Wall Street crisis has exposed the workings of American society, and that has turned public opinion against anarcho-capitalism. Talk of freedom of entrepreneurial opportunity, trickle-down wealth and less government spending is clearly not resonating with the American public at the moment. That is why they have turned to Obama. I believe that Obama’s true beliefs are more similar to those of European social liberal movements, such as the Labour party in Great Britain (in its present incarnation), or various liberal parties in continental Europe. These movements believe that every citizen has a right to a certain standard of living across the board, which is a thought that is barely represented in Washington today. However, I also believe that moving in this direction may present a big problem in American political life, mainly due to the very different historical contexts in which our different political cultures were established.

At the time of the establishment of free elections in Europe, the population of most countries on that continent had been living for centuries under the control of what we today would refer to as hereditary dictatorships, also known as royal families. These dictatorships were no better than such dictatorships of today, as they involved vast amounts of oppression, inhumane treatment and just about every imaginable abuse of power. The populations of Europe were suffering, and they had no influence on the making of decisions that affected them. When the peoples of Europe finally broke free of dictatorship, they were able to provide for themselves both liberty and an improved social situation at the same time. They were able to spend the country’s money on themselves, rather than on what pleased the dictator. From the perspective of the common people, these new solutions were obviously a lot more popular than the types of projects that the old regimes had prioritized. For example, the provision of public healthcare was usually more popular than the construction of a monument to the king. This process legitimized collective solutions, and made those the preferred way of solving problems, and in particular social problems, throughout Europe. The peoples of Europe felt that they had been provided with liberty AND prosperity by turning the page on the old regime.

On the other hand, the creation of American society was, although similar in some ways, very different. It was similar in that it was born out of the rebellion against a king, but that rebellion was started against a king who was perceived to be “foreign”. It was different in the sense that it was not started in order to switch the government from one thing to another, but to create an entirely new government in a new location. Liberty and self-governance were the driving forces behind the American revolution, and social rights played only a small role in the process. In essence, the American revolution, and the consequent creation of the constitution, was about the freedom to be left alone, as opposed to the perceived right to a better life that was the driving force behind revolutions in Europe. Through the American revolution, the American population were given liberty, but not necessarily prosperity. The constitution then cemented into place a system that was, and still is, inherently very conservative and difficult to change. At the time of the European societal changes (early nineteen hundreds) that created liberty and social rights, such as labor rights, pensions and so on, America already had liberty in society.

To a much greater degree than in Europe, many elements of society would have to give up resources and influence, in order for social rights to provided across the board in America. That ultimately made it impossible for this to happen, and unlike every other western society, there has never been a successful labor movement in America. In other words, America was way ahead of the curve in the provision of liberty, and as a result, the provision of social rights was made impossible by resistance of the elite.

The American political system is a two-party, center-right, presidential system. In Europe, the Democratic Party would be described as a conservative party. The Republican Party would be described as an anarcho-capitalist party. The president in America has, in theory and sometimes in practice, far more power than heads of states in Europe. Because of this, and because there are only ever in reality just two parties to choose from when voting, the American political system is best described as a semi-democratic, authoritarian system. This fact has vast implications on the political process, and makes wholesale collective solutions almost impossible. What necessarily takes the place of wholesale collective solutions when such solutions are needed, in the provision of infrastructure and healthcare for instance, is a series of band-aid solutions. This is evident in Obama’s healthcare proposals, tax proposals and views on the financing of public infrastructure. Even if Obama believes that wholesale collective solutions are necessary, it would be political suicide for him to suggest them openly.

I believe that Obama believes in the social rights that have reached their fulfillments in laws across Europe, but that he cannot politically realize these beliefs. America will completely depart from anarcho-capitalism under an Obama administration, but the country will do so by way of a series of semi-effective band-aid solutions that will in the best-case scenario lead to a watered-down version of a society with a social safety net.

Send in the FBI!

On Monday the markets all over the world rallied on an almost unprecedented scale as a result of a new cash injection plan, based on a Swedish crisis management model, dusted off by Gordon Brown in England. What will almost inevitably happen, is that we can forget all about the bailout plan that was approved a couple of weeks ago, where U.S. taxpayers would buy “bad assets” from Wall Street firms. Instead, U.S. taxpayers will soon own large parts of a few U.S. banks; the few that will be left standing after a coming wave of bank mergers. I think it’s a great plan, and have said from the beginning that this is the only thing that has any potential of working. It remains to be seen whether the U.S. government will try to guarantee all transactions between banks, like the EU has said it will, but I doubt that this could be done in reality. The risk of default is too big.

The fact that the stock market has plummeted lately is not the biggest of our concerns right now. The biggest risk to the financial system is the fact that banks are not lending to each other. Banks are not lending to each other because they don’t know how many bad assets the other banks have. They don’t know this because all the banks are trying to hide their assets, and are able to do so because of a lack of regulation. It is for certain that there are many Wall Street firms and banks that will not make it through this crisis, but we don’t yet know which ones they are. It makes perfect sense for banks to be suspicious and pull the plug on lending when the potential borrower might be in such bad shape that it will go under only the next day. There are still around 100 trillion dollars worth of bad assets out there, and nobody knows where they are.
I propose radical steps in order to deal with this problem, steps that involve forensic accountants from the FBI.

The very basis of a capitalist system is information that guides buying, selling, lending, and other decisions. If we are to ever get out of this crisis, we must find all the information that is hidden from the view of investors, the government and the public. The bad assets in the banks and other financial institutions that are hidden from view can only be found by means of coercion, because it would not be in the banks’ interest to have them exposed. I believe that the best way to expose the bad assets would be to make a law that would enable the FBI to raid Wall Street banks and financial institutions and comb through their books meticulously in search of bad assets. The findings would then be published continuously for everyone to see. This would eventually smoke out all the bad assets and cleanse the economy to some extent. Obviously, having such bad assets exposed would not be good news for the banks’ stock prices or near-term future prospects. However, the alternative is to have them hidden for longer, which will drag the economy down for years to come. That is exactly what happened to Japan during the 90s, a decade that has come to be called “Japan’s lost decade”.

I believe we need to take such drastic steps because we need to make up for decades of de-regulation. The financial regulation has failed, and is wholly inadequate at this point, so something drastic must be done before we can start over and re-make our regulatory system. A lot of people are feeling vengeful towards Wall Street these days, but that is not why I am proposing FBI raids. I am proposing this because I believe this is the only way to truly deal with the problem. It is somewhat bizarre to hear about “greed on Wall Street” as a reason behind the crisis. A Wall Street worker or executive would not be doing his job if he were not greedy…

A Loser Guy on Steroids

You often hear explanations about the state of our economy involving analogies about anabolic steroids (artificial growth hormone). I think it is a good analogy, but I will attempt to take it one step further, and relate the taking of steroids, and the specific medical implications of that, to the specific economic implications of the political and financial system that America has had over the last 30 years. With this strange exercise, I will ultimately try to portray the United States as a regular guy, but one who is deeply in debt, and addicted to steroids.

First, let me briefly explain a few things about steroids. Bodybuilders and athletes take them in order to increase their muscle mass. It is incredibly effective, because it turns your body, bio-chemically speaking, back into a teenager who can grow half an inch per day. When you take steroids, your body is flooded with male growth hormone, and if you lift weights, your muscles grow rapidly. As we all know, male hormones have a few other effects on the body, such as aggressiveness, which is eventually increased in the steroid-popping male. After having taken steroids for a while, our guy has large muscles, and an erratic temperament. This is pretty much as good as it gets for the guy, because after having achieved the superficial success of big muscles, things only go down the hill.

The whole problem with taking steroids is that you’re flooding the body with male growth hormones. This is telling the body that it does not have to produce any of growth hormone itself, and for that reason it stops doing that. Our guy starts losing his hair, and eventually his reproductive health starts to deteriorate. He is losing his potency as a male altogether, but still looks on the outside as if he is very strong. If he does not stop taking steroids at this point, the whole process can hit reverse, and he can turn into a freak. The reason for this is that the body stops producing male hormone, while it still produces female hormone (which males also have), so the guy’s body slowly turns female (if you have seen the movie “Fight Club”, there is a guy like that in it). Steroids can turn a man into a muscular freak with a high-pitched voice and female breasts.

In terms of economics, what you need to understand before we move on is something simple that people used to understand very well:

The real economy IS the economy!

Products and services of the real economy are things like cars, chairs (products), haircuts and cab rides (services). Products and services of the “financial economy” are things like derivatives, 401(k)s (products), “wealth” planning and investment advice (services). The financial economy is, largely speaking, a fictitious economy that only exists because the real economy exists. In a way, you could describe it as a parasite of the real economy. The most harmful products of the financial economy are the derivatives, because they are so far removed from reality that their true essence can rarely be grasped. In this complex form, they have been combined, amalgamated, merged and distorted, into ever more complex things. I will try to describe how simple derivatives work with an example:

Imagine that you want to sell your car for $10,000, so you put an ad in the paper. The next day, a guy calls and says the following:

- I’ll buy your car, but I’d like to pay you with a derivative. It’s worth $10,000 now, but it’ll probably be worth much more in the near future. The deal is that a bunch of my friends and I think that the price of cars, like the one you have, will go up, so we’re buying up a huge amount of cars, and we’re going to let the sellers of the cars get a share in the profit once the prices of these cars go up! As soon as the price goes up, you can sell your derivative to someone else and make a bunch of money. That sounds great doesn’t it?

It sounds pretty fishy, right? I think most people would hesitate in selling their car under those circumstances. It sounds like a pyramid scheme simply because it is a pyramid scheme. I’ll tell you for whom it was good enough: the U.S. Congress. For years, Greenspan was telling politicians (who didn’t understand what the hell he was saying, but wouldn’t admit to it) how great these derivatives were. Nowadays, almost all Americans own them in one way or another in this giant pyramid scheme. For years, derivatives artificially made it look as if the economy at large was doing great because the financial economy was made to look incredibly good with the help of derivatives. We can now begin to see the similarities between derivatives and steroids.

When all the derivatives started flooding the market like hormones in the body during the 90s, the stock market started to shine. What actually happened was that a lot of cash was made available, because it had grown artificially, just like muscles on a pill-popping bodybuilder. A bank didn’t actually have to give up money from its reserve (deposits from ordinary people) in order to give a person a loan, and that is the essence of what is called securitization. It just means that someone else is taking over your risk.

During this time of the shining stock market, there were a few downturns in the economy, like the tech crash, but that was a specific bubble related to new inventions, so it was not directly related to the kinds of problems we see today. In general, the financial economy appeared to be doing great until late last year.

Then the signs started showing, and our guy (meaning the American economy) started getting temperamental. The stock market started swinging wildly, and initiated its great downturn that we still see today. It seemed that things were no longer they way they had appeared. Financial products, such as people’s 401(k)s, suddenly started losing value. Value fell out of the portfolio like strands of hair from the bodybuilder’s head. Unbeknownst to the bodybuilder, he has already caused irreparable harm to his body, and his perceived beauty and masculinity is in a downward spiral.

Vanity started the entire process, and the guy attempts to deal with his new problem by taking more steroids and buying beauty treatments like plugs for his hair. This can be compared to the Federal Reserve lowering interest rates and coming up with different plans (such as the bailout) to try to help the stock market. It is all meant to preserve the status quo, even though that cannot be done. The bodybuilder has forever lost his potency because he has overdosed on male growth hormone. He has become infertile and impotent. From an evolutionary perspective, he is useless.

The Federal Reserve, has, just like the bodybuilder, also lost its potency. The reason for that is that the American economy has overdosed on the financial equivalent of steroids: derivatives and loans from abroad. The result of this is an infertile real economy and an impotent Federal Reserve.

Our freak of a guy is walking around confused, talking to himself in his high-pitched voice about glorious days gone by.

The Twisted Mixed Economy

After World War II, most of the western world realized that what would work best for a complex industrial society that subscribed to a few basic principles was the creation of a mixed economy. The principle for a mixed economy is simple: let the free market do what it does best, and let the government do what it does best.

 

The free market is great at coming up with new ways of using wireless communication technology, but it is not very good at figuring out a way of treating a patient with leukemia while a company is turning a profit. Sick patients are simply not profitable which is why healthcare, along with other sectors of the economy, can never be suited for the free market. In a mixed economy, sectors such as healthcare are hence “broken out” of the free market, and the costs are shared by everyone, to the benefit of everyone.

 

For many years, America has rejected the idea of a mixed economy, because it would require using public money for public goods. Americans seem to have preferred to use private money for private goods, while rejecting the very idea that things such as public goods exist. However, there seems to be a new line of thinking in America that has gained significant ground lately: using public money for private goods. Philosophically speaking, this is a truly remarkable policy, and one that on the surface would seem impossible to implement without a popular revolution. Indeed, the revolutions in both France and Russia had strong links to the private consumption by the royalty paid for by the public, which angered the masses to the point of revolution.

 

Why would the public give up its resources and get nothing in return, as it did with the Wall Street bailout? Such arrangements have rarely been seen since the abolishment of serfdom in Europe a few hundred years ago. In that case the factor was the threat or use of force. That is not the case in America today, but it seems that the real factor behind the new arrangement is deception.

 

The real economy and the financial industry were once quite separated. The financial industry was only a facilitating sector that helped the real economy to function more smoothly. However, bit-by-bit, the financial industry was able to weld itself together with the real economy, so that the desired co-dependence occurred. Some ways in which the industry did this was by taking control of America’s retirement system through the offering of 401(k)’s. The demutualization and privatization processes of recent decades have proved to be enormously helpful vehicles for the financial industry to further increase the dependence of ordinary people on Wall Street. At the present time, the American people in general, firmly believe that success in their lives is strongly linked to Wall Street, and many of them are probably right.

 

It is this link that led the American people to believe that the recent bailout was a good idea, because without it, we would see the crumbling of a system on which they depend. They depend on this system to provide them with the things that citizens in a true mixed economy are provided with by means of public money (and hence with no risk of losing the provision of services). If the system disappears, what is there to take its place?

 

And that’s the most important question of all. It will soon become very apparent to all Americans that this country cannot depend on Wall Street for its overall social safety. Wall Street is simply not interested in whether or not you can get an education, if you can afford to feed your kids, or whether you live or die. This sounds harsh and incendiary, but it is the simple truth.

 

The system of pure capitalism must be replaced immediately with a truly mixed economy that provides American citizens with the social safety that is afforded every other citizen of the Western world without the risk of having it all taken away by market swings. The twisted mixed economy of late, in which the poor support the rich, will hopefully be a short-lived philosophy. 

The Black Hole

If anyone still thought that the Wall Street bailout was a good idea, I would hereby like to put that sentiment into some perspective. When the bailout was approved in the house of representatives, Wall Street yawned, already knowing that in the near future it would be able to carry out the strategy that it had had from the very beginning when it started to promote the bailout: to take the money and run. The stock market did not rally after the vote, as anyone who knows anything about Wall Street knew that it would not, and on Monday of this week, it seemed that the stock market was heading for a crash before it recovered. The politicians must be so confused by now, because they were told that this bailout was going to solve everything. What they did not know was that they were being lied to repeatedly. If the Bush years have taught us anything, it is that, sometimes, ridiculous conspiracy theories are true.

 

The biggest problem with the bailout is that it is wholly inadequate and directed incorrectly. As we all know, these toxic securities are worthless because there is no market for them. Apparently, a lot of people who previously bought them, and even the people who sold them, knew that too back in the day. This is evident because investors bought insurance against losses on them, called credit default swaps. The reason that these products are not called insurance is that that would require…. you guessed it: regulation. It turns out that the companies who sold the toxic securities, like Lehman Brothers and Bear Sterns, also sold insurance against losses on them. In such a case, you can think of it as the extended warranty that you can buy for a new computer.

 

Now, most of what we have heard as of yet in this financial crisis is how these securities are worthless, and how much of a problem that is for those who own them. What Wall Street is not talking about, and may not be fully aware of, is the fact that, in many cases, that’s someone else’s problem.

 

Imagine if Dell had sold 100 million computers in the United States in one year. Every one of the customers also bought an extended warranty with their new computer. Then imagine that there is a completely fatal error on the motherboard of every one of the 100 million computers, which makes the whole machine completely unusable after one year. Dell would then have to pay about $100 billion to replace all the computers, which is something that it could obviously never do.

 

This is a SMALL-SCALE example of what type of problem awaits us with the credit default swaps. The companies who sold both securities and credit default swaps had to buy the swaps from a different company (as if Dell had insured its own computers with Hewlett Packard insurance and vice versa). Nobody knows how much of this insurance money will have to be paid, because the companies who sold the “swaps” do not have to disclose any details about them. However, according to voluntary surveys (which only some companies responded to) there is over 50 TRILLION dollars worth of them. Then count the companies that did not respond, and the companies that were less than truthful about the size, and it is not improbable that the number in reality is close to $100 trillion. Now consider the wisdom in throwing away $700 billion of taxpayer money into this black hole. It turns out that the black hole was insured! I have said it before, and I’ll say it again: banks and Wall Street firms are hiding how many bad assets they actually have. Why would they insure the assets for $100 trillion if there are only $700 billion dollars worth of them in existence???

 

Very few people know exactly how these insurance policies work. It is plausible, however, that we will see much bigger effects of them when the bailout program actually starts buying the toxic securities. As companies start realizing their losses by selling securities to the government, money will start pouring in from all directions:

 

1.Taxpayers will have to grossly overpay for the securities (which I will return to another day)

 

2. Companies can use the loss of the sale to decrease their taxable income

 

3. The credit default swap mechanism should pay money to the company selling the securities to taxpayers

 

The third step will be the hardest, because the companies who sold the credit default swaps definitely do not have the money to cover all the losses. They wouldn’t even have been able to cover smaller losses, because they did not keep capital reserves to be able to do so (because they were not regulated). In other words, the companies who sold both securities and credit default swaps will first be flush with taxpayer cash because of the bailout, then go bankrupt because of the swaps. After that, panic will ensue when people realize the magnitude of the problem.

 

All we can do now is to let it all happen, and pick up the pieces when it's done.

Monkey Business

I stole the following story from Jane Wells at CNBC, but I did it because I thought it was a very good explanation of the current economic problems. This story was apparently sent to Jane Wells by an author from Bangalore who seems to grasp the ins and outs of Wall Street's packaged financial products, and their implications, better that most:

"Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10 and, as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy monkeys at $20 each. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so scarce it was an effort to even find a monkey, let alone catch it! The man now announced that he would buy monkeys at $50 each! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. "Look at all these monkeys in the big cage that the man has already collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each." The villagers rounded up with all their savings and bought all the monkeys.

Then they never saw the man nor his assistant again, only lots and lots of monkeys! Now you have a better understanding of how the stock market works."

p.s. it might seem kind of cute to have lots of monkeys in your village, but since this is written from an Indian perspective, you have to know that monkeys in India can take over villages and be violent as a result of being seen as holy. The implication of having all these monkeys is hence meant to be very negative. Last year, an Indian politician who had opposed monkey control was pushed to his death off his balcony by a monkey.

p.p.s. a CNBC reader suggested the following conclusion to the story, which is actually an outstanding explanation of the bailout package:

"The mayor of the village then mandated that they would use the villagers' tax money to keep the monkey business going, even though there was no one there who was interested in buying the monkeys"