Global Train-Wreck: The Great Credit Bust of 2008

From this place, and from this day forth begins a new era in the history of the world, and you can all say that you were present at its birth. -– Goethe

On Tuesday morning, January 22, the Dow Jones Industrial Average plunged 465 points in a matter of minutes after the opening bell. At the same time, the Chicago Board Options Exchange Volatility Index, “The Fear Index,” shot up to an alarming 37.57, breaching its previous high in August when the credit storm first hit the market full-force and sent equities reeling. The Asian markets were already in a shambles following a two-day bloodbath that wiped out trillions of dollars of capitalization and put global equities into a swoon. Now it was Wall Street’s turn, and the overnight futures market pointed to an impending massacre. Anticipating a crash, Federal Reserve chairman Ben Bernanke made a surprise announcement that he would cut the Fed Funds rate by 75 basis points, dropping it to 3.50 percent. Bernanke’s move stopped the hemorrhaging on Wall Street almost immediately and turned the market towards positive territory. By the end of the day, stocks had only lost a mere 126 points. It could have been a lot worse.

Bernanke deserves credit: he probably avoided a full-blown market meltdown a la 1929. But he also used another arrow from his nearly empty quiver. What will he do the next time that tremors start rumbling through the equities markets? Will he still have the tools he needs to stop the bleeding?

The new Fed chairman faces myriad problems beyond the volatile stock market. The real estate market is slumping, the dollar is falling, unemployment is rising, and consumer spending is in a funk. Worst of all, some of the nation’s most prestigious investment banks are “capital impaired” and faltering from their own abusive lending practices. The overload of bad news has generated a pervasive sense of gloom that has descended on Wall Street like a dark cloud. Increasingly, the talk is not about recession but depression and whether or not it can be averted. Former Secretary of Labor Robert Reich commented on this in a recent blog entry, aptly titled “The Politics of an Economic Nightmare.” Reich notes that “A managing partner of a large Wall Street financial house told me a few days ago the scenario could get much worse. He gave a 20 percent chance of a depression.”1

20 percent? Are we really headed for a Depression? Robert Kuttner, financial journalist and co-editor of the American Prospect, thinks that it’s possible. Kuttner has traced the current market’s troubles to deregulation, which has allowed the banks and brokerage houses to create a plethora of shady, “structured” investments and debt instruments. These over-levered and complex investments are sadly reminiscent of the scams that preceded the Great Depression and they appear to have put us on the same downward trajectory. Here’s an excerpt from a recent interview with Kuttner on Amy Goodman’s Democracy Now!:

Amy Goodman: You’ve talked about a crash, like 1929. Is that what you see?

Robert Kuttner: I think the Fed has some powers now that it didn’t have in 1929. The Fed is determined to try and get out ahead of this. Mercifully, all of the stabilizers of the New Deal were not repealed, even though a lot of Republicans wanted to. We still have unemployment comp, although it’s too weak. We still have Social Security; the Republicans didn’t manage to privatize that. We still have Federal Deposit Insurance, or we’d have runs on banks. So they didn’t repeal the entire New Deal, thank God. On the other hand, the similarities – the weakness in credit markets, the assault on financial institutions, the hit that purchasing power has taken, the speculation with other people’s money and these pyramiding schemes – are all too familiar. So I can say flatly, this is the most serious financial crisis since the Great Depression, and we’ve only begun to see how bad it is.2

Reich and Kuttner are not alone in their dire predictions. Economist Paul Krugman believes that the nationwide housing crunch will drop prices 25 to 30 percent. That means that approximately 20 million homeowners will owe more on their mortgages than the current value of their homes. This presents a systemic problem for which there is no solution. Statistics show that when homeowners have “negative equity” they stop making payments and default on their loans. If that’s the case, then the present surge in foreclosures is just a sign of things to come. As rates reset on subprimes and Adjustable Rate Mortgages (ARMs), the tidal wave of foreclosures will steadily increase through late 2009. By then, home prices are likely to reflect the 40 percent decline that we’ve already seen in sales from their peak in June 2005.

The Bush Administration is trying to negotiate a “rate freeze” so that struggling homeowners can stay in their homes without increasing their monthly payments. But the project, dubbed “New Hope,” will not have much of an effect. Most market-analysts predict that only 140,000 homeowners will benefit from the program, while current projections estimate that up to three million people may default on their mortgages in the next two years. There’s simply no way to keep people in homes that are beyond their means. Besides, the real beneficiaries of the rate freeze are the banks, which are not in a position to absorb the astronomical losses, nor to take possession of two million foreclosed homes.

Although foreclosures are a serious problem that will destabilize the markets for the next two years, it is the loss of mortgage equity withdrawals (MEWs) that will hurt the economy in the short term. Now that prices are going down, homeowners can no longer use their equity to cover their expenses. According to Merrill Lynch, the real estate slump will curtail consumer spending by $360 billion in 2008 and 2009. This is more than twice the size of the Bush’s “stimulus package,” and a substantial chunk out of the GDP. Without home equity withdrawals to count on, maxed-out consumers will be forced to cut discretionary spending and accept a lower standard of living. All this suggests that we are headed for a sobering bout of deflation.

And the economic woes go well beyond the housing bust. In “The Worst Market Crisis In 60 Years,” George Soros says there is a profound difference between our present troubles and financial crises of the past:

The current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency.… Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced.… What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.3

Soros does a good job of showing how the subprime mess was just the first of many dominoes that have now been set into motion. The contagion has spread throughout the global system, savaging balance sheets and creating huge losses for banks, brokerages, insurance companies and hedge funds. The entire financial world is in a tailspin. More importantly, the Fed is limited in what it can do because of the anemic state of the dollar. If rates are cut too severely, the dollar will plummet and foreign investment will dry up. Regrettably, the only tools the Fed has (whether it cuts rates, opens the Discount Window, creates a Temporary Auction facility (TAF), or provides tax rebates) are damaging to the currency. That’s why many critics believe that Bernanke will eventually crush the dollar while trying to save the economy.

Soros believes that a recession in the US will spread across the continents and trigger a meltdown in the multi-trillion dollar derivatives trade. The net outcome will be “a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.” Thus Soros predicts not only a depression but also the end of US hegemony.

A growing number of pundits are drawing the same conclusion. For example, investment strategist John Riley sums up the derivatives dilemma as follows:

The Fed has to make a decision: lower rates and save the banks, but ignite inflation and kill the Dollar; or let the banks cave in under the weight of some bad derivatives but stave off inflation for a bit and protect the Dollar. I think the Fed has determined that a bank failure would cause more damage to the economy than the collapse of the Dollar and higher inflation. I think they look at the decline of the Dollar so far and tell themselves, it hasn’t killed us yet. When thinking about the next Fed move, consider the implications of a 180 trillion dollar mistake (the estimated amount of derivatives on banks’ balance sheets, with only 6 percent capital-backing). And even if you eliminate the derivatives that are netted out, that still leaves a pool more than double the size of the US economy. Who is the Fed working for? Who is the Fed most concerned about? Who is the Fed likely to consider before making any moves? Given the choice between a Dollar crash or a major bank failure and closure, which do you think the Fed fears most? If you think the Fed doesn’t take the banks’ derivatives holdings into consideration, you have not been paying attention. It seems everything the Fed has been proposing since the summer is designed to throw the Dollar under the bus and let inflation run. All to protect the banks.4

Riley is right: the Fed will try to toss a lifeline to the banks even though the extra liquidity will do nothing to bring them back from insolvency. Many of the banks are already among the “walking dead” and can’t be saved. They are being dragged under by the $600 billion in bad bets they have on their balance sheets, which are being downgraded almost daily. It is death by a thousand cuts. Still, the banks are the Fed’s main conduit for distributing credit to consumers and businesses, so they’ll have to do everything in their power to keep them from failing.

Bernanke’s rate-slashing has drawn a fair amount of criticism from the punditocracy. The Washington Post’s business editor, Steven Pearlstein, wonders why the Fed would cut interest rates 75 basis points when it was cheap credit that created the speculative frenzy in housing to begin with. He asks: “Now the bubble has burst and the prices of those assets are beginning to fall back to more reasonable levels. Why would anyone want to interrupt that process by bringing back the cheap credit? The short and oversimplified answer can be summed up in three words; the Great Depression.” He adds ominously that, “The Fed’s big fear isn’t a mild U.S. recession. It is a market meltdown in which the failure of one bank or hedge fund or insurance company triggers another and another as panicked investors and lenders all head for the exits at the same time.”5

Pearlstein’s scenario seems more plausible now following five months of wild gyrations and stock sell-offs. Imagine what the reaction will be if a major bank or hedge fund keels over unexpectedly. Investors will stampede for the exits and send the market reeling.

The current troubles began with Greenspan’s trillion-dollar injection of low interest credit after the bust in 2001. The Fed chief left rates below the rate of inflation for 31 months straight, creating an ocean of cheap credit which flooded the real estate market and generated a speculative frenzy that send housing prices into the stratosphere.

The banks added to the problem by packaging pools of subprime mortgages into securities (“securitization”), which they sold to investors around the world. By tapping into investors to finance the mortgages, the banks were able to loan as much money as they wanted without risk and without depleting their capital – or so they thought. They never imagined they would get stuck holding onto hundreds of billions of dollars of mortgage-backed junk when the market tanked. The market for corporate bonds, asset-backed commercial paper (ASCP) and private equity deals has vanished overnight. The banks’ main revenue-streams have dried up. Now they are just trying to hang on long enough to restructure their businesses so they can sell off large chunks of their franchises to sovereign wealth funds (SWF). But time is running out. Every day more and more mortgage-backed securities (MBSs) are downgraded, putting greater strain on the banks’ diminishing capital. “Citigroup, for example, ended the fourth quarter still exposed to $37 billion of subprime mortgages, and $43 billion of corporate-loan commitments for leveraged buyouts remain on its balance sheets.”6 Regardless of Citi’s enormous fourth-quarter write-offs, their remaining assets will continue to get whipsawed by rating downgrades leaving them less capable of generating new revenue via traditional consumer and business lending. Many of the other banks face a similar situation, although to a lesser extent.

The problems in the banking sector are insurmountable. Many of them will fail within the year. Nevertheless, Bernanke has opened a Temporary Auction Facility (TAF), which provides temporary injections of liquidity and helps out in the short term. But the Fed cannot provide capital, and that’s what the banks really need to make up for their losses and meet their reserve requirements.

Bernanke is also trying to keep the public in the dark about what is really going on to avoid a panic. He even got some friendly advice in January from the editors of the Wall Street Journal, who ran an article titled “Managing a Panic”: “Mr. Bernanke needs to clear with everyone that easier money is not some elixir for the underlying problem of bank insolvency,” they argue. “The credit and real estate losses are real and have to be dealt with. This requires slow and steady workouts, raising new capital, and in some cases regulatory action to arrange mergers and rescue institutions whose failure could lead to problems in the larger banking system.”7

Bank insolvency? That’s hardly what one expects to read in the conservative WSJ. But the point is well taken: we are in danger of a major institution going under and starting a system-wide implosion. The other possibility is that the Fed’s persistent rate cuts will undermine investor confidence in US management of the financial system and send the dollar into free-fall. Either way, America’s economic future is far from certain. The dollar could either lose its status as the world’s reserve currency or the country could head into a protracted deflationary spiral.

So how did we get into this mess?

For more than 25 years, the banking giants lobbied Congress for repeal of the Glass-Steagall Act, the Depression-era legislation that prevented the merging of investment and commercial banks. Eventually the perseverance of the financial industry paid off. Most of the law’s regulatory restrictions were rescinded in 1987, the same year that Alan Greenspan – formerly a director at J.P. Morgan and a major proponent of banking deregulation – became chairman of the Federal Reserve. According to the PBS Frontline Documentary “The Long Demise of Glass-Steagall”:

In 1990, J.P. Morgan became the first bank to receive permission from the Federal Reserve to underwrite securities, so long as its underwriting business does not exceed the 10 percent limit. In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board issued a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent). This expansion of the loophole created by the Fed’s 1987 reinterpretation of Section 20 of Glass-Steagall effectively rendered Glass-Steagall obsolete.”8

In 1999, President Bill Clinton repealed the few remaining restrictions of Glass-Steagall, thus permitting the banks to recreate the same risky paradigm that was in place just before the stock market crash of 1929.

Another factor that has contributed to the current banking-muddle is the Basel rules. According to the BIS (Bank of International Settlements):

The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters.… The Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision.… The Basel Committee on Banking [Basel 2] requires banks to boost the capital they hold in reserve against the loans on their books.9

Although “boosting the level of capital in reserve” sounds like a good thing, the banks found a way to circumvent the rules by “securitizing” pools of mortgages (MBSs) in “off balance sheets” operations rather than holding individual mortgages. This provided huge origination and distribution fees for the banks and shifted much of the risk of default to Wall Street investors. The banks never expected that “the music would stop” and they’d be left without a chair. Now they’re stuck with massive debts that they can’t repay.

Fed chairman Alan Greenspan played a central role in what appears to be the biggest credit bust in history. Not only did Greenspan keep interest rates below the rate of inflation for nearly three years; he also endorsed many of the reckless lending practices which inflated the housing and equities bubbles. Ironically, no one makes the case against Greenspan better than Greenspan himself. Here are some of his comments at the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Washington, D.C., on April 8, 2005. They show how Greenspan rubber-stamped all of the policies that eventually led to the downturn in housing and the crunch in the credit markets.

Greenspan on subprime mortgages:

Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advance in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers.

Greenspan on CDOs:

The development of a broad-based secondary market for mortgage loans also greatly expanded consumer access to credit. By reducing the risk of making long-term, fixed-rate loans and ensuring liquidity for mortgage lenders, the secondary market helped stimulate widespread competition in the mortgage business. The mortgage-backed security helped create a national and even an international market for mortgages, and market support for a wider variety of home mortgage loan products became commonplace. This led to securitization of a variety of other consumer loan products, such as auto and credit card loans.

Greenspan on loans to people with bad credit:

Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to the rapid growth in subprime mortgage lending…fostering constructive innovation that is both responsive to market demand and beneficial to consumers. Improved access to credit for consumers, and especially these more-recent developments, has had significant benefits. Unquestionably, innovation and deregulation have vastly expanded credit availability to virtually all income classes. Access to credit has enabled families to purchase homes, deal with emergencies, and obtain goods and services. Home ownership is at a record high, and the number of home mortgage loans to low- and moderate-income and minority families has risen rapidly over the past five years. Credit cards and installment loans are also available to the vast majority of households.

Greenspan on “structural changes” that increase consumer debt:

As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. Without these forces, it would have been impossible for lower-income consumers to have the degree of access to credit markets that they now have. This fact underscores the importance of our roles as policymakers, researchers, bankers, and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers.10

Greenspan was at the center of each and every dodgy Ponzi scheme perpetrated on the American home-buyer. His own words are the most powerful indictment against him. They prove that he was the number one cheerleader for the policies that created the present crisis and put us on a fast-track to recession. Lately, there’s been a concerted effort by the media to confuse the public about Greenspan’s role in the subprime fiasco and to shift the blame onto the rating agencies, the predatory lenders or the gullible mortgage applicants. But don’t be fooled. The problems originated at the Federal Reserve and that’s where the responsibility lies.

Securitization: “Money for nothing”

Equity bubbles are the result of massive injections of liquidity that exceed the rate of growth in the overall economy. The “securitization” of mortgage pools allowed the investment banks to generate credit without the help of the Fed. David Roche explains how it works in a recent article in the Wall Street Journal, “The Global Money Machine”:

The reason for the exponential growth in credit, but not in broad money, was simply that banks didn’t keep their loans on their books any more – and only loans on bank balance sheets get counted as money. Now, as soon as banks made a loan, they “securitized” it and moved it off their balance sheet. There were two ways of doing this. One was to sell the securitized loan as a bond. The other was “synthetic” securitization: for example, using derivatives to get rid of the default risk (with credit default swaps) and lock in the interest rate due on the loan (with interest-rate swaps). Both forms of securitization meant that the lending bank was free to make new loans without using up any of its lending capacity once its existing loans had been “securitized.” This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt.11

So how does this work in practice? If the bank makes a loan for $400,000, then it has to keep $40,000 (or 10 percent) in capital reserves to guarantee the loan. However, if the bank moves the loan off its balance sheets (to a SIV or some other subsidiary) and transforms the loan into a security (securitization), then it can avoid maintaining the required capital reserves. In the coming months, we will see that the biggest names in investment banking have been playing this game and fudging the true value of their assets to conceal the fact that they are seriously under-capitalized. In truth, many of them are broke.

The securitization process is a way to maximize profits without sufficient capital. Off-balance-sheets operations allow the banks to create trillions of dollars of credit “out of thin air.” As Roche says, “The Fed is no longer able to limit the amount of money through interest rates and monetary policy. The capacity for lending is infinite.” That is, until the market begins to nosedive or the underlying assets (subprime mortgages) begin to default. That’s when trillions of dollars of mortgage-backed junk and structured investments begin to unwind and over-extended lenders start to go under.

How Capital is destroyed

When U.S. homeowners default on their mortgages en mass, they destroy money faster than the Fed can replace it through normal channels. The result is a liquidity crisis which deflates asset prices and reduces monetized wealth. -– Economist Henry Liu

The securitization process is in a state of collapse. The market for structured investments – MBSs, CDOs, and Asset-backed Commercial Paper – has evaporated, leaving the banks drowning in an ocean of red ink. They are incapable of rolling over their short-term debt or finding new revenue streams to buoy them through the hard times ahead. As the foreclosure avalanche gathers in size and intensity, bank collateral will continue to be downgraded, triggering an unprecedented wave of bank failures. Henry Liu sums it up like this:

“Proposed government plans to bail out distressed home owners can slow down the destruction of money, but it would shift the destruction of money as expressed by falling home prices to the destruction of wealth through inflation masking falling home value.”12 It is a vicious cycle. The Fed is caught between the dual millstones of hyperinflation and mass defaults. And there’s no way out.

The pace at which money is currently being destroyed will greatly accelerate as the “virtual capital” represented in derivatives is consumed in the flames of a falling market. As GDP shrinks from diminishing liquidity, the Fed will have to create more credit and the government will have to provide more “stimulus.” But in a deflationary environment; public attitudes towards spending change and the pool of worthy loan applicants dries up. Even at 0 percent interest rates, Bernanke will be stymied by the unwillingness of under-capitalized banks to lend or over-extended consumers to borrow. He will be frustrated in his effort to restart the moribund consumer economy. The slowdown has already begun and the trend is irreversible. Bernanke’s hands are tied.

Fake Prosperity: stagnant wages, easy credit, and growing GDP

The Great Credit Bust of 2008 began with a plan by corporate elites to rework the economic landscape in a way that shifted larger and larger portions of the nation’s wealth to members of their own class. They achieved this by keeping workers’ wages stagnant but making credit more seductive and easily available. In the last few years, all of the normal criteria for issuing loans have been abandoned. Anyone who could fog a mirror could borrow hundreds of thousands of dollars. Thus, trillions of dollars in sketchy loans were given to people with poor credit, no documentation of their earnings, no collateral, and no assets. The banks engaged in this ruse knowing that the ratings agencies would provide their Triple A stamp of approval to garbage-loans that were then securitized and sold into the secondary market. The banks knew what they were doing: they were peddling the liabilities of subprime borrowers, who had no realistic prospect of servicing their debts, to credulous investors around the world. It was a shameless multi-trillion dollar swindle, but everyone thought it was a swell idea because it wasn’t their money that was backing the dubious loans. That was being provided by Wall Street. Not surprisingly, the Federal Reserve, the SEC and all the other so-called regulatory agencies looked on approvingly while this scam continued, four straight years.

The banks are now trapped in a disaster of their own making. When two Bear Stearns hedge funds blew up in July, the market for mortgage-backed securities immediately froze leaving the banks with billions of dollars of loans they could no longer pass along the investor food-chain. Now anything related to subprime loans or structured investments is radioactive and sends people running in the opposite direction. There’s no chance that the market will revive anytime in the near future or that the Fed’s rate cuts will reflate the housing or bond bubbles. Losses will continue to grow, defaults will mushroom, and the financial system will be pushed the brink of catastrophe. The credibility of US markets has already been shattered. Everyone will pay for the voraciousness of the few.

Financial Freefall and the Slide into Fascism

There will always be some debate about whether the present crisis was brought on by human greed or if it was part of a larger plan to bankrupt the middle class and pave the way for a New World Order. There’s no doubt that Greenspan and his buddies at the Federal Reserve understood how low interest rates work and the lethal effect they can have on the economy. After all, the Fed produces all the relevant charts and data that show what parts of the economy are expanding and contracting. They could see that the retail value of real estate had increased by a whopping $10 trillion in less than a decade, which was a sure sign of rampant speculation. They also knew the perils of untested financial innovation, but remained silent while the banks created trillions of dollars of shaky derivatives via Enron-type “off balance sheets” hanky panky.

They knew it all, and yet they continued to feed the speculation with regular rounds of praise for “the new market paradigm” and the “Goldilocks’s economy.” But could they also see how the Bush administration was savaging the Bill of Rights and creating a de facto US police state while they were busy feeding the housing bubble with cheap low interest credit?

Of course, they could. In fact the bursting of the housing bubble was perfectly timed to correspond with the finishing touches on Bush’s nascent police state, which was exactly how it was planned.

For example, we know now that the Bush administration began its illegal surveillance of the American people long before the attacks of 9/11. That proves that terrorism was not the driving force behind Bush’s decision to violate the Fourth Amendment. In fact, many of the most dramatic changes to the law have of course nothing to do with preventing terrorism. Rather they are an obvious attempt to transfer more power to the executive while brushing aside Congress and long-standing federal statutes. The Bush administration now claims the right to declare martial law and arrest or detain American citizens on the president’s authority alone. It has also begun secretively building detention camps within the United States without explaining how they will be used. Also, the National Defense Authorization Act of 2007 allows Bush to deploy the US Military within the United States to deal with public emergencies like natural disasters, epidemics or terrorist attacks. The president is now free to use the military against the American people in violation of the Posse Comitatus Act. Further even, National Security Presidential Directive 51 allows the president to cancel elections and do whatever he thinks is necessary to preserve the “continuity of government” (COG) – a particularly vague term that gives Bush dictatorial power to suspend the Constitution and ignore congressional mandates. Also, the Violent Radicalization and Homegrown Terrorism Act – which passed the Congress in early 2008 virtually unopposed – sets up an unelected commission to investigate and report on citizens who profess “extremist beliefs,” a clear challenge to first amendment rights of free speech. These changes represent a fundamental shift away from legal precedents that date back 800 years in English law. Habeas corpus and the presumption of innocence have been repealed while the president has been elevated to the status of supreme ruler. America is now a democracy in name only. The executive controls all the levers of political power and all the means of organized violence.

So, are these new powers the natural response to the threat of terrorism or are they part of a broader plan for maintaining order when the economic crash, engineered at the Federal Reserve, actually takes place? The latter seems much more likely, especially since the policies of the Fed and the Bush administration have been coordinated so that they work together seamlessly.

When the full-system collapse takes place, Homeland Security and the US Military will swing into high gear, just as they did following Hurricane Katrina, and declare martial law. The public’s reaction to this bold assertion of power is hard to predict. It may turn out that the Bush regime’s last leap to fascism has more pitfalls than its operators anticipated.

Einstein’s Warning

Baby boomers grew up in a period of hybrid-capitalism: a time of heavy regulation, government intervention in the markets, and progressive programs that were left over from the New Deal. This generation of Americans is not familiar with the real face of capitalism. Unchecked capitalism typically spawns the type of mayhem and suffering which is already visible in the housing bust. The doctrine of unlimited personal accumulation is unchanging – it is invariably predatory and self-destructive.

Albert Einstein recognized this 60 years ago and summed it up in an article titled “Why Socialism?” He stated: “Nowhere have we really overcome the predatory phase of human development.… The economic anarchy of capitalist society… is the real source of the evil. Private capital tends to become concentrated in few hands, [creating] an oligarchy with enormous power [that] cannot be effectively checked even by a democratically organized political society.”13

America’s current economic crisis is just the latest example of a hopelessly flawed system.


1. Robert Reich, “The Politics of an Economic Nightmare,” Jan. 22, 2008

2. Economics Journalist Robert Kuttner on the “Most Serious Financial Crisis Since the Great Depression,” January 23, 2008 (

3. George Soros, “The Worst Market Crisis in 60 Years,” Huffington Post, Jan. 25, 2008.

4. John Riley, “The Trillion Dollar Secret,” Jan. 18, 2008

5. Steven Pearlstein, “Only When the Bubble Bursts,” Washington Post, Jan. 23, 2008

6. Nick Timiraos, “Why Banks’ Pain Could Continue,” Wall Street Journal, 1/18/08, p. A11.

7. “Managing a Panic” (editorial), Wall Street Journal, Jan. 23, 2008, p. A24. 8

8. “The Long Demise of Glass-Steagall”


10. Greenspan’s remarks can be read on the Fed’s official website

11. David Roche, “The Global Money Machine,” Wall Street Journal, Dec. 17, 2007.

12. Henry Liu, “The Road to Hyperinflation,” Asia Times, Jan. 26, 2008

13. Albert Einstein, “Why Socialism?” Monthly Review, May 1949.

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