Great Statesmen Required

I have been following the financial mess fairly closely since August 2007 when the subprime market began to collapse. I remember reading in January how the financial markets will lock up in August/September. About that same time I read how banks were running low on reserves and near insolvency. All the while the stock market would wild swings of hundreds of points loses and gains. For the past year the entire US economy has felt like a game of Jenga. We kept removing blocks and every time the whole thing didn’t fall a brief sense of euphoria would grip the market. I know my friends have gotten tired of my recurring warnings of a falling sky, but there aren’t any more warnings from me now. (Damn, just enjoy whatever good times we have) We are all on the train and there is no getting off now. The bad thing is, the trip has only just begun.

I saw Kevin Phillips on Bill Moyers show Friday night. Kevin Phillips has been one of the most influential people on my political thinking. To say he is pessimistic would be an understatement. On the show he described seven sharks swimming the economic waters.

1) The financialization of the American economy- The financial sector makes up 21% of GDP. Manufacturing is about 12%

2) Build up of Debt- Incomes have been stagnant for 20+ years yet we are consuming more and more and saving less and less. Actually, we have a negative savings rate.

3) Home Prices Collapsing- The US housing market has only had a 15% decline in values. Conservative estimates are for a peak to trough drop of 30%. I was watching one very good analyst a couple weeks ago suggesting a 40 to 45% decline. I think Wachovia was calculating a 21% decline and it is already about to go out of business. In the past year Americans have lost $5 trillion in equity.

4) Commodity Inflation- How much has every thing from concrete to steel to oil gone up in the last few years? (If economic activity drops in a recession, how quick will commodity inflation turn to deflation?)

5) Flawed/Deceptive Government Statistics- Check out shadowstats.com.

6) Peak Oil- If you’ve read this blog for any length of time, you know I’m a Peak Oiler. There is only a certain amount of oil in the ground and so much you can get out of the ground at any given moment. Once you cross that mid point, it gets more and more expensive to get that remain oil out of the ground. Peak Oil and Global Warming are about tied for the most important crises facing humanity in the 21^st century.

7) The Collapsing Dollar- Are we deliberately devaluing our dollar to make all this debt more manageable?

These seven sharks are happening all about the same time, a very fragile time in our republic. We have just gone through the greatest expansion of executive power since FDR. Needless to say I believe in the causes championed by FDR a whole lot more than Bush. It is also suspicious that we learned today that the Treasury Department has been working on this bailout plan for months. It feels very Shock Doctrine-ish. I’m no economist, but when both libertarians and liberals say Paulson’s bail out plan is horrific I tend to listen. Not only does it give way too much power to the Treasury Secretary, it doesn’t solve the fundamental problem. There is just too much debt.

The very people that generated and profited from this debt growth are the ones benefiting from the bailout. How powerful are these captains of finance that they can force our government to socialize their loses but keep the profits privatized. (Yet the debt is still going to be here after the bailout.) These few captains of capitalism concentrate their hold on economic power even more through the Paulson Plan. Goldman Sachs and Morgan Stanley yesterday switched from investment to commercial banks. Via the bailout, both of these new banks will get a sizable amounts of capital that will be used to buy up weakened regional banks. The only real money left is the deposits in these banks. The plan lets Goldman Sachs and Morgan Stanley consolidate economic power to match their political power.

This situation is fraught with long term danger for democrats. The economic advisors Obama has surround himself are troubling, especially Bob Rubin. Obama already said yesterday that his social programs will be scaled back because of the bailout. If Obama wins, will there be civil war in the Democratic Party? It will be the labor (David Sirota and Unions) vs the Finance (DLC, Blue Dogs, Rubin) Wings. During this there will be occurring a serious economic recession and international conflicts. Kevin Phillips is probably on the right track in saying the Democrats may get ripped apart and swallowed by huge problems. Fascism may rear its head from the right in response to crisis and hard times. A truly scary era may lie ahead.

Calmness and skepticism should be the principles guiding the Democrats in Congress now. I would have no problem if Congress constructed a serious economic plan after the November election. A lot is riding on this and the electorate is watching. If a country loses control of its economy, what legitimacy does its government possess? A situation like this could easily devolve into “hot” class warfare that would shatter the coalitions that form the Democratic and Republican Parties and who knows what would follow. There will be pressure on Congress to do something quickly. Everyday, like today, that there is a 150 points drop in the stock market, it cranks up that pressure even more. Don’t fold.

For Congressman Cohen, I am a strong supporter and worked for your re-election, but be warned if you fold and accept anything less than Senator Dodd’s plan (I trust Paul Krugman on this.) I will actively work against your re-election in 2010. This situation is about as serious as it gets and lays the groundwork for how we deal with the crises on the horizon. If you choose poorly here, all of your previous work will lose meaning because your judgment failed at one of the most important moments. Your district and your country needs you to be a great statesman.