There’s been a terrible falsehood perpetrated on the American people, and now we’re all collectively paying for it. That is, that somehow we can all invest our way to untold wealth and designer lifestyles of the rich and famous while working for $8.50an hour at Wal-Mart, if only we can scrimp and sock away enough in our 401K’s and pension funds. After all, CEO’s and financial insiders get rich on their stock options and insider deals at Wall Street’s back door, why not us, at least a little bit too at Wall Street’s front door? I think most of us, by now, know the answer to this, that much of the wealth that financial markets appear to have been creating wasn’t real wealth at all, or even the tumultuous winners and losers kind of returns that Wall Street mostly ignores in their advertising, was, in reality, largely smoke and mirrors wealth. That is, wealth on paper only.

The proof of this is in the fact that it was initially estimated that there is between $1.5 trillion and $2 trillion worth of bad mortgage based securities polluting the balance sheets of banks large and small. But by now, US taxpayers have anted up, not just the $350 billion in the original TARP funds bailout, but also nearly $2 trillion in loans from the Federal Reserve, plus now hundreds of billions for consolidations such as the purchase of investment house Merrill Lynch, by Bank of America, and more troubling, the nearly continuous upping of the rescue of insurance giant AIG, into which we’ve dumped $180 billion and counting.

AIG should be the poster child for all that is wrong in our financial system. Apart from their legitimate insurance businesses, insuring everything from you and me up to municipal bonds and cities governments (on which they’ve made nice profits over the years). With the help of Wall Street, AIG started issuing a different kind of insurance, the Credit Default Swap kind (CDS’s), on securities like Collateralized Debt Obligations (CDO’s), which are essentially the end product investments created from the issuing of shaky sub-prime mortgages, which were created by now defunct banks like Bear-Stearns. From an insurance point of view, this was an unregulated activity, because it wasn’t called insurance, but a “swap”. That meant that there was no requirement for companies engaged in this activity to keep anything but a minimum cash on hand in order to pay out on bad CDO’s.

The assumption was that only a small percentage of the CDO’s would go bad because mortgage brokers would always be able to roll over outrageous loans into newer refinancing to smooth over the ridiculous terms that were built into the original loans, terms that included, sky-rocketing payments and interest rates along with impossible balloon notes. The reason that loans like that were written in the first place is that they could be sold as AAA rated securities to unknowing investors because companies like AIG guaranteed to pay for them if they failed.

We all know what happened next. The housing bubble (driven not just by the inflated demand that came about because of easy credit, but also significant over investment by real estate speculators) burst, and with it, the fortunes of all of the investment banks that generated the securities, and nearly the entire fly by night mortgage brokerage industry. And on this sinking ship are no only the securities that should sink (sleazy sub-prime mortgages), but also other mortgage loans that, all other things being equal, were still good. This is because the financial industry bundeled good loans along with not so good loans, along with crazy bad loans and sold them all mixed together as a good investment. Why would they do this? You might suspect that it was a bit of obfuscation to pass off bad loans with the good, and you might be right, but on paper, it was all insured, so what could go wrong?

Ok, so what’s it going to cost to get US out of this mess, that is, shouldn’t the losses have stopped by now, or at least slowed down? This is where it gets really tricky. You see, the business of converting mortgages into securities, and then insuring them, was so profitable that there weren’t enough mortgages around to meet the demand for these investments, many of which generated well above average returns for investors, such as the many commercial banks who bought CDO’s because of their promise of high returns. No problem, the investment banks started making synthetic CDO’s , that is, new CDO’s that were tied to the value of existing real CDO’s and the mortgages behind them, in a kind of shadow fashion. And so the investment banks went crazy with this (and other similar types of paper-only investments) and generated perhaps ten times as many of these as the originals. In other words, for every mortgage that goes bad, the losses get multiplied by ten times and then transferred to companies like AIG, which we, the taxpayers are now on the hook for. Pretty sweet deal for somebody, no risk investments that, when the whole thing gets too big to fail, the government steps in and picks it all up so that your great grandchildren can pay for it.

The simple fact is that the government doesn’t have the scratch to cover all of this, even with the now proposed record deficit, because the losses are as hidden as the gains were. The whole thing was in effect the biggest Ponzie scheme of all time (forget about $50 billion investment scam artist Bernie Madoff) because Wall street was generating paper that was based on the value of other paper that was based on the value or a much smaller investment market that was being inflated by the reinvestment of all that wealth materializing all over the place. The banks, in fact large parts of our banking system, became victims of this because they were no longer much in the business of making home loans that they held until maturity (and assumed that risk), but in the business of generating returns for shareholders. And so, they gobbled up many of the high return CDO’s and are holding them to this day, waiting for US, you and me the taxpayers, to bail them out.

It should be obvious by now that we are in a much bigger pickle than Washington (Bush or Obama – both administration’s treasury and banking advisors staffed by many of the same insiders who got us into this mess) wants to admit. It also should be obvious that we the taxpayers can’t cover all of these losses, and that we should not have even gone this far. That it should have been possible to separate the necessary insurance functions of AIG from the bogus obligations they had to investors, especially on worthless fake paper, but that is at the heart of the problem.

As a whole, what’s left of the financial industry has yet to come to the point of “truth and reconciliation” for the ongoing financial and now economic genocide that is taking place. That many, if not most of the people in the industry believe that if the government can just back-stop enough of the losses in home mortgages that the bleeding will cease and that they can get back to business as usual., trading shaky or worthless paper for whatever real value is still left in our houses and bank accounts.

I have a different plan, based on the assumption that there is and will continue to be far more losses than we as taxpayers can ever cover, even for several generations, let alone that we shouldn’t have to.

Step one. Declare a limited pre-bankruptcy condition on any bank that is holding any significant exposure to mortgage backed securities, CDO’s, CDS’s and the like. Right now regulators from the FDIC are pouring over the books of all of the major banking institutions in the country and subjecting them to a “stress test” to see if they can withstand more losses or not. Trouble is, they don’t know how much, or how little they should value their suspect investments, and so some people think they are being too optimistic in an effort to save the jobs of high profile (and politically connected) bank CEO’s like Citigroup’s Vikram Pandit. So as a general rule, if there is any exposure to these kinds of investments, or significant loans to other institutions with these kinds of investments, then they should immediately be treated as if they are in receivership and not wait for a bankruptcy filing.

The reason to do this is to stop the domino effect that could cause a collapse of the entire banking system, good banks and all. It’s very simple. You could even do it ahead of time for the whole system. Simply disallow the inter-institution loan rules that allow banks to call each other’s loans when things get shaky (unless they want to voluntarily do so). That way, when the FIDC finishes it’s analysis of the soundness of individual banks, there won’t be a feeding frenzy between banks as they race with each other of get what little they can out of each other’s coffers, collapsing the whole system.

Step two:
Force the mortgage servicing industry to fess up the percentages and investment destinations of bad and soon to fail loans so that CDO’s can be rated fairly, at least relative to current market conditions. Assume that there is no insurance for any of these, and also DO NOT back-stop any of the insurers, even if it means that they fail and that the entire insurance industry has to be reorganized along with the banks (and in the same ways – see below). There is a high likelihood that this will happen anyway, and putting our great grandchildren on the hook for it will not prevent this.

Step three:
Finish the stress tests, noting the percentages of real CDO’s, fake CDO’s, CDS’s (which were also sold off as “investments”), and so on, and the relative quality of them (based on the risk data from the mortgage servicers). Then, as has already been proposed, decide which banks are too far gone to save and liquidate them, which banks can be returned to health, and which banks are sound enough to continue on for better seas on their own. And the liquidations need to be done in the standard way that the FDIC approaches these matters, where they separate the good assets from the bad ones and create a separate resolution holding company to sell of the bad assets for whatever value is left in them. This way we don’t get the kind of special, and never ending, back door bailout deals that keep bleeding taxpayers while not getting rid of the troubled assets. Japan tried that approach in the 1990’s and it dragged down their economy for over ten years.

The government needs to do two things here. The first is assume that there is much too much bad paper floating around to absorb, and secondly get a real estimation of who is healthy and who is not, based on an honest estimation of the likely real value of any and all suspect assets. It’s interesting to note that even in the worst case scenario of all commercial banks in the US failing, the FDIC (and us taxpayers) is on the hook for about $4.5 trillion. While that number sounds enormous, and it is, the value of CDO’s, CDS’s and other “derivative securities”, many of which are bad and or should never have been issued (because there is nothing behind them), has conservatively been estimated to be at least $26 trillion in the US, and many times more than that globally. In short, if the US government continues on in the business of trying to prevent these kinds of losses, the US will become insolvent and the entire global financial system will surely collapse, along with whatever is left of the US and world economies.

All of this brings me back to my original point – that wealth on paper, when enough of it is generated and spread around, is not wealth at all, but a huge macro-economic time bomb. This is simply because there is not enough real wealth, based in the value of things of wealth (houses, cars, factories) to be represented by the paper. In the roaring twenties, it was stocks and bonds that got inflated out of control and then crashed. In the roaring turn of the 21st century, most all of the stocks and bonds (limited by necessary regulations) were eaten up by 401K’s and other private investments, and so with the rise of global hedge funds and the deferred risk “grow or die” culture of Wall Street and the Global finance system, other avenues of investments had to be invented to keep up with demand, or perhaps the whole things would have ground to a screeching halt years ago.

Here’s my general theory. The real growth of an economy is limited by two things, population and its productivity. Along with this, the return that an entire economy can give to investors is equal to the dollar value of real growth and no more. In other words, there is only so much real return to be had from an economy and so in financial markets there are going to be winners and losers. If you imagine that everyone can invest and win, the way hedging and other chains of endlessly growing investments seem to, then you either need to socialize returns in the markets and spread them around evenly (at whatever small percentage of real growth dollars that gets you) or you’re dreaming of something that can never be, and probably building a house of cards that will surely collapse. First the Asian financial collapse of the nineties and now the US / global collapse of `08 attest to this, and it is utter foolishness to continue thinking that this was just a minor glitch in the system, that if we had caught it early could have been avoided. Such thinking will only bring this about again, and drag out the days of financial reckoning that are necessary to move us past our current mess.

This begs the question, how much can Americans invest their way to retirement? The answer is only the percentage that an economy can grow based on real workers’ productivity, minus corporate cash. BUT – some of that productivity has to go directly into the stuff of real wealth owned by the populace, and not into endless chains of worthless investments chasing it’s tail. In other words, if Americans owned the stuff of wealth they produced (and productively produced it themselves), then the amount of money necessary for retirement would be smaller and could be kept in low return savings accounts the way we used to be, thus not demanding more investment return from an economy than it can deliver.

Instead, and as has been observed by others, the real wages of working Americans has been declining for decades now, savings rates have declined into negative numbers, and American households each owe tens of thousands of dollars in consumer debt. At the same time as this has transpired, corporate profits have soared and the darlings of Wall Street have seen double-digit growth, creating an expectation that that kind of return on investment can be had across the board. After that, all it took was a little “financial innovation” and suddenly we could all invest in the massive debt we were creating instead of saving for the future and owning, actually owning, what we could no longer, by and large, afford to own, because large parts of our previous wages are instead billowing up corporate balance sheets, and so looking for returns in the markets.

This brings me to my final point. That to sustain wealth in a society means that we have to be productive, and then distribute the products of that productivity far and wide. In a financial sense, this is the only way to create a wealthy nation. As many failed South American countries have demonstrated, you can’t become wealthy by printing money, and yet that is exactly what the global financial system just tried to accomplish by creating hundreds of trillions of dollars worth of securities that had nothing behind them. Printing paper money, the way a government can, and printing an assertion of value on the paper of a security (be it a stock, bond, or CDO,CDS, etc) is fundamentally no different in the sense that both kinds of paper have to represent the real value of something of inherent worth. If you print more money than there is value to be had in the real wealth of an economy, you get out of control inflation. The US knows better than to do this. But what it doesn’t know, or seems to have forgotten, is that if you let banks and corporations find ways of doing the same thing, by issuing securities that have no real direct value behind them, then you will get speculative inflation, bubbles in everything investors can get their hands on, as we have seen, and then the destruction of most all of that fake wealth along with a collapsing of the inflated values of items of real wealth. Sound familiar?

This is a classic economic boom and bust cycle, only this time the bust has to be every destructive because the boom was much too large and it went on for way too long. These kinds of exaggerated economic cycles can be avoided and had been generally avoided for the 25 years following world war two, when there was mostly stable growth and some mild recessions. But in the eighties, when conservative economic policies gained favor, wealth shifted away from working people (the previously broad base of ownership and consumption in the economy) and toward the wealthy and corporations, who found more and more ways to pay fewer and fewer wages, thus lowering the wealth of average people further. The irony is that, for a time, that select group appeared to getting fantastically wealthier, but even they are now imperiled by the catastrophic results of all of this, demonstrating that what appears to benefit some, for a time, if taken to excess (and adopted as cultural norm), will hurt everyone in the long run. It’s time to restore balance to the system, and the way to start is to call junk investments what they are, get rid of them along with the people and mechanisms that created them and start over with a clean slate. Only them can the other stimulus measures proposed by the government take hold and move the middle class back to the center of the US economic engine where they belong. Saving bonus-hog bankers and the financial smoke and mirrors financial types who got us into this will never do that and the more money we waste trying to do that is the more money we will all have to cough up in the long run for our collective mistakes.

I turned on the McLaughlin group, the original – “let’s all yell at the same time because my valuable opinion is better than yours” – news show, just in time to hear Pat Buchanan saying that Barack Obama doesn’t want to offer a solution to the current financial crisis because the crisis is helping his campaign. This is such a non-sequitur, from so many angles, that it’s disheartening to see PBS put on a program where participants, credentialed journalists, resort to irrational rationales to support their substantial and unabashed political bias. Such is the current landscape of commercial (and yes one example of non-commercial) media that in place of hard fact, derived by sound journalism, relatively free of intentional bias and obvious spin, we have come to accept and even enjoy endless media opinion wars where the best slant wins. How did we get to this place?

Perhaps this grows out of politics. As we generally know, the first job of a politician is to convince us, from day one, that they understand the problems at hand and know what to do about them. Rationally, if you look at the fact that many people are elected to sometimes even high public office without substantial experience, understanding, or real ability to do the jobs for which we elect them (beyond talking), then it stands to reason that what we usually are doing is electing them because we don’t really like the last schmuck we elected or the other know-nothing talker, and so hope this one will be better. So our job, the one the constitution gives us, the one we can either do well or poorly, is to take the time to examine the candidates for public office and make a sound decision based on our understanding of their understanding of the issues, and as well, their sincerity, commitment, character, etc.

Many of these aspects of a candidate can be difficult to assess, but especially the first one. This is because we, the voters, have to actually understand the issues well enough to be able to judge whether or not a candidate also does. Since we’re not experts, and the candidates are not experts, we have come, more or less, to rely on the opinion of “experts” to help us know what’s going on. In the case of the current financial (and yes economic) crisis, even the experts are befuddled and so the opinionated talking heads act as intermediaries to the experts (as if they wouldn’t) and add their own spin on top of confusing opinion, and or edit that opinion for us based on their predisposed bias. Walter Cronkite where are you now?

When I was child, back in the hippy sixties, the best journalists of the day, whether in print or on TV, did as little spin, and as much real journalism as was possible to do within the constraints of their respective medium. I suspect, and this is just my opinion here, that the post depression era, post World War Two generation had enough of a sense of truth and integrity that obviously slanted, “yellow” journalism was not only unacceptable to them, they who had scrimped and saved to send their kids through college, and they who had came together as a nation to win a war on multiple fronts (with real personal and collective sacrifices), that such media tactics would have been cause for quickly declining numbers of viewers and readers. Today, we like a good fight, especially in the news, and the more outrageous and opinionated, the better.

The conclusion I have to draw from this is that not only has media changed but that we, those who mostly watch and sometimes read the media, have changed as well.

One of the things I take as a given is that within any society, whether revolutionary America, or Nazi Germany, there is a spectrum of character and integrity in that society and that there will always be some percentage of people, larger or smaller, on either end of that spectrum, but, in general, the average usually resides with those in the middle, that is, everyone else. And so, it is this part of a society that is somewhat malleable to the extremes, and (especially in democratic countries), it is this part of society that largely defines the overall character and integrity of a society. Ghandi or Martin Luther King can sway us one way, or, given enough pressure (either through dis-information or economic hardship), Hitler and Hirohito can sway us another. One of the other things I also take as a given is that without significant constraints and balancing mechanism (separations of powers, as an example within government), some percentage of people always will pursue their own interests up to the point of significantly harming those around them, especially harming those who are more out of sight and or of different station, culture, creed, race or ethnicity. This may all sound a bit cynical, but the revolving doors of human history turn largely on these pivots.

Last night, my son was playing a video game, a nice non-violent one, “Cars”, and I heard his sharp frustration at not being able to win a particular race within that game. I asked him, “how many races have you won in other parts of the game?” He said, “all of them”, whereupon I asked him, “then don’t you think it’s OK if you lose one or two?” Since he’s ten, he didn’t answer.

In the case of present day United States, we as media “consumers” are mostly all, collectively, like ten year olds. We want to win more then we want the truth about anything that is not in line with our own tastes, previous opinions, or self-interest. We are a spoiled nation, and in that way (and I suspect others) we are not the like the generation that came before us. True, those people mostly suffered not by their own doing but at the hands of others – pre-depression era bankers and war-mongering fascist opportunists, but still they learned the lessons that came of that.

One of those lessons is that we are all in this life together and that in order to make things better we have to work together. As a nation, this is not where we have been for the last twenty plus years. Twenty years of ideological media spin has served to make Americans more polarized and divided then ever before. It may just be a coincidence that the stock market is crashing and that people may have to learn to get along more now (if they can), or it may not. The larger point is that pick your flavor of media opinion has made people less informed about the true facts behind events, and it is this obfuscation of fact (lacking real journalism), and the endless interpretations and reinterpretations from it that has divided Americans into armed camps of vastly differing opinions, camps where we can’t even discuss things because we have such divergent sets of underlying “facts” that we end up thinking each other “stupid” instead of examining our own collective stupidity.

The brainless head of that stupidity is the unspoken lessons we’ve learned, not as the “enlightened citizenry” that Thomas Jefferson envisioned (and warned us to be), but as hyper consumers in a material centered, and consumption driven society. This is where, following the abolishment of the media fairness laws (during the Reagan Administration) we now get to choose our flavor of information the way we choose a suit color, and so wear it proudly along with our flag lapel pins. Along with this comes all of the values of misinformation that we’ve grown accustomed to as consumers – promotional hype, advertising spin, mis-information, dis-information, and all other forms of special interest corporate and political propaganda that we’ve come to accept, and even value, in many other areas of American life (out of our own personal self-interest). The last holdout was our beloved, but now forgotten Walter Cronkite, and we are the poorer for our forgetting.

Since this blog is often about economics, and therefore economic policy, a highly specialized and “expert” areas of interest, it bears mention that the new media environment has shaped our views not by educating us with balanced perspectives of differing schools of thought, Friedman versus Kanes, but has, instead, given us only one side – the currently popular conservative side, the winning side, the everything goes because that’s what leads to the biggest trickle down free market side. It’s no wonder that the Republican congressional holdouts to the $700 billion bailout wanted more tax cuts as a cure for the over-speculated, junk-paper economy we’ve constructed. Meantime, the democrats, lacking any more substantial economic insights, pushed for a new deal kind of approach (more correct) but failed to resist the big banker bailout because of the potential political fallout. This is because they know what kind of conservative media spin would go with that – the kind that, given the current taxpayer bile, would hang them out to dry in the coming election.

Are Americans so childish that we believe that we can go on forever borrowing money from the rest of the world to finance our tax cut and spend government, while inept (and economically illiterate) politicians shape policy to suit financial insiders who are robbing us blind? It isn’t childish if your corporate flavor of the week media puts enough spin on it to make it sound like true freedom and democracy.

And yes, we think we know better, because we don’t like the bailout – we knew it was, and is, a pork barrel for billionaires who should take their losses – but we didn’t understand enough about their screwed up banking to talk about alternatives. If we can’t tell the politicians – who had a gun held to their head by the insider George Bush appointed to fix this mess (Treasury secretary Henry Paulson, former head of Goldman-Sachs, claiming the whole economy would collapse without it; and by the whole economy he meant the stock and bond markets that are now collapsing) – what else do we, expressed through our media, expect as a result? And so, lacking any understanding as a better course of action, they (and we by default) committed US to the insane asylum of a former banker giving big money we don’t have, to the same bankers who got us into this mess, all to try and get us out of it. What’s that old definition of insanity: doing the same things over and over again, expecting different results

This of course can and is being shaped to fit with the unspoken neo-conservative message that “greed is good, greed (still) works” (by finding creative ways to blame liberals), because almost no one out there in new media land has a clue as to if and what the proper of limits of greed should be, or the ways in which unfettered self-interest set us up for this fall. That concept has been excluded from the discussion for a long time, and has been replaced with the (again mostly unspoken, but heavily implied) message “that you only have to worry about yourself and shouldn’t have to pay taxes for evil big government to give to lazy people.” What’s really missing from the message – the part that’s truly unspoken and truly missing from the discussion – is where do we come together in our common interest, where do we compromise for the sake of each other, and where do we limit the excesses that are built into human nature – and in what ways? At least if we had a common set of facts to form a basis of discussion, maybe we could start to look at those discarded ideas and talk about them openly.

OK, I caved. I was going to be good and pass the Jack in the Box this morning, what with the Cerretta’s chocolates I grabbed last night at Albertson’s, the Steak I had for lunch yesterday, and the countless other gastronomic indiscretions that have long since passed from memory and elsewhere, but I didn’t. So, as I sat in the drive-thru in my old Honda, searching for change under the seat, I thought – “this would be a dream come true scenario for the starving people of the world. Imagine being able to travel, by swift conveyance, to a whimsical robot food machine, pay tribute to it, and then make off from it like temple bandits”. Two thousand years ago, some of peoples of this earth would have made sacrifices to a Jack in the Box (as if we don’t) had one magically appeared near mount Ararat. The availability of breakfast jacks, double cheese burgers, and triple think shakes (made with real ice cream) would have been proof positive of God’s blessing on his chosen people, or, lacking those, of his sure wrath and indisputable displeasure. On the other hand, we, the modern people who build and operate our fast food society, know better; or do we?

Years ago, I made a similar stop for the exact same meal, but that time, walking inside, I meet the eyes of an attractive woman in her mid thirties who appeared to be the shift manager. Those eyes, I read as single, said to me, “please, PLEASE, take me away from this”. She was in the middle of a morning rush, and I wasn’t dating then, so I passed, but felt her pain, the pain of being trapped in a life not of your own making but built on rules and conditions others had made for you. It’s the same old story.

Before fast food was built on big agribusiness, food was grown and gathered, and a vast majority of people alive did all of the growing and gathering. The only exceptions were the relatively small percentages of the world’s population who lived in cities so large that their lives couldn’t center on agriculture, and this was only possible in the temperate and fertile zones where sufficient food was grown abundantly enough to more than meet the needs of those who grew it. This was the case even until a few hundred years ago, and it didn’t change much until some early mechanization and improved planting and growing methods emerged. With the advent of the beginning of modern agriculture, significant numbers of people were free do other things for a living. The end result is that if you worked hard and had an interest and desire to be, say, a nuclear physicist instead of a farmer, you could go to school and maybe your dreams could come true, maybe. This was especially true in the twentieth century, and more true, then, than at any time in the history of mankind, and perhaps more true then it is now for those of us in the US. You see, what makes it possible for people to do a wide variety of jobs, is a broad and diverse economy, and what makes for a broad and diverse economy, is the availability of a wide variety of jobs. This is the chicken and egg nature of the relationship between wages and economic growth – that is, that they both have to grow at about the same time.

A few years back, I was visiting a factory in the mid-west that made chrome stackable office chairs. What struck me was how frantically the people in the factory were working. The seat cushions were pre-made and shipped in from China, but the steel frames were being made here and the employees were bending and welding that steel like it was the last days of World War Two and the allies were losing. Go figure. In the last twenty years, America has exported millions of manufacturing jobs overseas and it’s a safe guess that the workers in the chair factory knew that if they didn’t outproduce people living halfway around the globe, that they would be flipping burgers instead of assembling furniture.

If you take a step back from the pleading eyes and spattering welding rods of the present American workplace, a sane person might ask, what difference does it make if low skilled, sometimes poorly educated, underemployed people– that is, the vast majority of Americans – make seat cushions or freedom fries?

The difference it makes is not the dignity of the work – working in a factory has always been a trial by fire for those on the floor, and if you go back to the steel mills of earlier times, that was LITERALLY true. The sad fact is that most of the progressive reforms enacted in the twentieth century, to protect worker’s health and safety, were enacted because of that kind of work environment. So what is not greatly at issue is the quality of the work lives of low skilled workers. It’s a given, at least for now, that in order to make things efficiently, repetitive and relatively mindless labor is required. But what is also required are a varying subset of sometimes very specific workplace skills (welding, or example), with the notable commonality being an ability by workers to tolerate repetitive and half-mindless work, all in exchange for a livable paycheck.

So back to the chicken and the egg. A broad and diverse economy creates a broad and diverse variety of jobs. Some people will choose to work in those factories, and it is up to the greater society to enact laws and regulations that protect their health and safety as much as necessary. But, many other people will not be willing or able to participate in that area of a diverse economy, and will go elsewhere. So, as long as those jobs are available, only some fraction of the labor force will choose to work those, and so, based on the laws of supply and demand in labor markets, and for employers to attract and keep good employees, they will have to offer something to them – that something usually comes in the form of wages and benefits.

In other words, by having a diversity of jobs in a broad economy, where some jobs are less desirable then others, coupled with high employment (which happens when other economic factors are favorable), you get relatively high wages for relatively low skilled work – or more specifically – you get relatively high wages for average people who work in jobs that contribute to the overall productivity of the economy. It is precisely that contribution, where people work to produce the goods and services they consume, that makes it possible for them to live well.

The alternative, without that resource of diverse and sometimes undesirable jobs, is that a large pool of low skill people end up competing for a large pool of relatively similar retail and service sector jobs. Only this time, many of the jobs are not as arduous and undesirable as the factory jobs, but simply uninteresting. As well, many of these jobs do not so much require an ability to withstand them (and at the same time be productive) but simply a willingness to put in your time and go with the workflow. In a sense, the low skill jobs of the new economy aren’t as trying (obnoxious customers and bosses aside) as they are stagnating and uninteresting. If the alternative is starvation, the choice is easy enough either way. But, in an economy where a greater diversity of jobs creates a greater diversity of wages – after all, if most all low skill jobs have a commonality of job requirements, then more people are potentially available for each job, and so each job need not pay as much – the aggregate wages paid to low skill workers will slip from the living wages necessary for full participation (as consumers) to those of marginal and more impoverished ways of life. That is where we’ve been going, and that is where we are now.

Is it any wonder that outwardly middle class Americans have run up mountains of credit card debt in the last decade or so, and then refinanced it into their houses? Lately, the blame for this has been heaped on “irresponsible borrowers” for buying the shoddy (and sometimes deceptive) sub-prime mortgages. This last part has been offered as a root cause explanation for the economic collapse that we are now seeing, and not the copious greed of Wall Street or the total government indifference to it.

The real story is that Americans are strapped and maxed out on their credit cards, and more than anything else, it’s the dilution and stagnation of the wages of working Americans that’s behind it. What’s behind that (aside from the removal of pro-labor laws) is the export of higher paid manufacturing jobs to places like China. Places that pay workers five or ten percent of what Americans would earn for the same work. The irony is that those workers, and now many American workers, are in the same boat, that is, that there is a significant gap between the wages they earn and the cost of the goods and services they produce – so that they are largely not able to buy what they make (or now sell). In the case of developing economies like China this is part of the growth curve of their economy. It is possible (but not entirely likely) for them to expand their wage base enough to improve the ability of their workers to become (by and large) full participation consumers. What is not possible is that Americans can continue on the track they’re on, where many are becoming marginal, “Dollar Store”, consumers because they don’t earn enough to do otherwise, especially now that their credit wells are running dry. FYI – those credit wells were built by Wall Street on the idea of selling debt to Americans instead of paying them a living wage. This is the final irony. That the overall growth of our economy has been largely the growth of the financial services sector, up from 1% of GDP, in 1960, to almost 20% last year. The fuel for this growth has been partly the wages that have not been paid to American workers, instead going into corporate balance sheets which then flowed into investment banks like the now defunct Bear-Sterns (and many other). This necessitated the creation of easy credit, to keep everyone spending, plus the creation of another mountain of phony securities that investment banks sold to us (and each other) as “investments”.

The current problems in the financial sector, the ones that we as tax payers are being asked to shore up to the tune of king’s ransom (that $700 billion bailout) are the end result of consumers no longer being able to consume based on a lack of real, living, wages. At the same time this, this is complicated by the pernicious effects of too much paper money chasing too little things of value in the real economy – all of the bubbles we’ve seen in housing, food, and energy. Now we are in a position where in order to make things work again, wages have to come up as the economy is collapsing. Macro-economically, it’s a non-starter.

Seventy years ago, what the government did, late after the great depression was to put money in the hands of consumers by creating works projects. Instead of spending upwards of a $1 trillion bailing out the people who got us into this mess. The only sane thing to do now is (or was) a “new deal” kind of government driven employment program, along with some consumer bank guarantees. This could have been used to rebuild the $500 billion in road and other infrastructure improvements that this country desperately needs, or, for investing in and so reinventing our energy infrastructure by moving the US away from the dwindling fossil fuel resources that WILL eventually perpetuate this “downturn” into a long term, worldwide depression (and an endless blood for oil game). Understanding this would be real leadership.

Instead what we have is politicking in the frame of “we know what’s best now, trust us”, where it is, and will become, increasingly obvious that those who got us into this mess are incapable of getting us out. It’s kind of like what Albert Einstein said “We cannot solve our problems with the same thinking we used when we created them”. All the while, people’s eyes are pleading.

In order to better think about the problem at hand, the $700 billion dollar bailout Wall Street wants from you and me, it’s helpful to understand the financial connections between them (ultra fat cat bankers) and the rest of us.

First, some definitions:
Commercial Banks – these are banks that accept deposits from and loan money to everyday people (via personal loans, credit cards, etc.) where they charge anywhere from reasonable to Mafia rates depending on what they can get away with and how good a credit risk / how savvy, you are.
Investment Banks – these are (or were) a combination of investment brokerages (places to buy and sell stocks, bonds, mutual funds, etc.) and banks that invested in businesses and business related activities. Investment banks were who you went to in order to issue your stock if you owned a company, or if you needed to raise money for expanding you business or investment activity.

Not to put to fine a point on it, but there is, or was, a lot of investment activity that went on around these Investment Banks that was centered mostly on making money on money. The lay public likes to think about things like this in terms of stocks and bonds, or in percentages of savings account interest, but those are usually tied to real investments, that is, the bank’s money (from deposits by you and me) goes toward something tangible, a commercial building, a share of stock in a company, that is, something that has some relative real value. But lately, much of the activity of Wall Street Investment banks has been centered around creating investments that are linked to other investments – the “Collateralized Debt Obligatioins” (CDO’s) of the mortgage crisis, and things like “Credit Default Swaps” (CDS’s) that act as insurance policies for those and other risky investments. These are generally referred to as “Derivatives” because they are derived from other existing investments, usually, but not always, leading back to some tangible investment assets.

A little history: back in about 1994, two professors at MIT thought up a system of investing call “hedging” where you could mathematically predict the risk of various investments and then buy new investments (diversify) to offset that risk. In fact, those two guys won a Noble prize in economics for that idea. Must have been a pretty good idea for a Nobel prize, right? Not really. Their idea led to the creation of “hedge funds by the billions, and in fact they, the two MIT professors cofounded one of the first ones, it was called “Long Term Capitol Management”. Trouble is that LTCM went broke in 1998. Ok, maybe they weren’t as good at investing as they were at thinking up investment theories, OR, maybe there’s something fundamentally wrong with the whole idea. By the way, the Swedish Academy praised this “financial innovation” based on the notion that now, finally, financial markets could take the risk and instability out of investment. That is, they assumed, as many since have, that by hedging, you would never lose over the long run. Today, there is $2.6 trillion invested in hedge funds worldwide, even though some have blamed the Asian financial collapse of 1998 partly on hedge fund trading and LTCM.

What all of this has played into is the naive and childish hope that eventually, everyone, everywhere, could sit home and make money on their investments instead of actually doing something for a living. Of course sitting behind a computer screen and trading hedge fund shares does look and feel like you’re doing something, even if what you are doing is of no value to anyone but you.

What has made possible this illusionary world of mindless mega-investing, a world that was greatly expanded and reinvented by Wall Street Investment Banks (with the help of a long series of deregulation and even anti-transparency laws enacted in Washington), was the central idea embedded in hedging, that you can always defer your risk by expanding your investments. It was a dream come true for an industry built not so much on sound investing as copious investment. And, around the start of the new millenium, Wall Street took this idea one step further – they started thinking up ways to get others to assume risk for them.

This came in two parts. The first part was things such as CDS’s where someone else would agree to backstop your risk for a fee. As long as the overall economy was sound, the risk in that was limited to the risk in any one investment, something derivative investors could assess and manage. By the way, Billionaire inverter Warren Buffet has called Credit Default Swaps “financial weapons of mass destruction”. The second way that Wall Street has chosen to forget about risk is through inventing cleaver new securities that pass that risk on to other investors and hide it in the ratings that those securities are measured by. That’s what happened with the CDO’s (collateral debt obligations, a type of investment) that were built on all the sub-prime mortgages issued by shady mortgage lenders.

The reason that shady, and even not so shady, mortgage lenders could write outrageously shaky mortgage loans to marginally and sometimes flatly unqualified applicants was that they, the mortgage writers, didn’t have to be on the hook for those loans if they went south. The reason for that is that all of those loans were then bundled into CDO’s and shipped off to Wall Street to be sold. This had the effect of removing the risk from mortgage lending and passing it off to someone else, somewhere else.

This is the “financial weapons of mass destruction” part of the whole scheme. If anyone is allowed to create an investment instrument, a piece of paper, that they can sell without having to fully describe the risk – and all CDO’s are built of large blocks of mortgages bundled together, some sound and others not – then what incentive do they (people like mortgage lenders) have to adequately and soundly make prudent initial investments? The answer is not much.

The irony is that most of these “opaque risk” financial instruments were sold to other banks, both investment and commercial. Therein lies the problem we face today, that is, that investment banks have been dropping like flies in a snowstorm because no one really knows which CDO’s are sound and which aren’t. The financial culture is (or was) that they borrowed money at low rates, in traditional ways (inter-bank loans), to buy these investments at a ratio of up to thirty to one; so they borrowed thirty dollars for every dollar of their own money they invested in these things.

So now the fear, and it has been glimpsed at in part as financial markets have swung wildly and banks have been afraid to lend between themselves, is that if the government doesn’t step in and take these bad securities off of the hands of banks who don’t want them anymore, that large parts of the entire US banking system, including the commercial banks that have deposits from people like you and me, will go belly up.

Isn’t it a wonderful world we’ve constructed through “financial innovation” and the “I’ll hold your risk and you hold mine, and we’ll both make money” approach that has come from Wall Street and the investment banks?

Now comes the $700 billion. Treasury secretary Henry Paulson has floated a proposal from the Bush Administration that gives HIM, and himself alone, sweeping powers to buy any bad debt that anyone anywhere wants to get rid of, without oversight or accountability. Presumably, this will free up the banks to go back to lending money and everything will be fine, but if the government becomes such a larger player in the home loans gone bad market, two things could scuttle this rosy little cruise.

Firstly, in order to finance the buying of massing quantities of bad housing debt, and the foreclosed houses that stands behind it, our government will have to borrow money from somewhere else in the same fashion that it has been borrowing for the sake of the $9 trillion in national debt that the US has run up, that is from US treasury bills issued to domestic and foreign investors. Since the US already has a massive national debt, another trillion dollars or so would further deflate the US dollar around the world and make the cost of everything we import even more expensive, as well as prolonging our inability to pay off our national debt.

This could have additional long-term implications for the overall economy. And it is the strength or weakness of our economy that makes it possible for the government to recover its investments in the bad debt of foreclosed houses. If the economy rebounds as a result of this bailout (doubtful, considering all of the other factors that are ailing it), then the government can resell those houses at only a small loss, perhaps a few hundred billion, and not get the US taxpayer in much deeper. The opposite is more likely. Most of the home loans that went belly up, and that will continue to go bad (it’s estimated that there could be up to $2 tillion worth) were valued in the inflated housing market of the housing bubble. In the post bubble economy that we are now (mostly) living in, real people don’t make enough real wages to be able to afford those homes at those prices and so there will have to be a considerable correction in the cost of housing, before the part of the economy related to housing can recover. Under the Paulson plan, Uncle Sam (and so you and me) will become the unlucky middleman. What this also implies is that we are in for some real deflation, at least in the housing market, if not elsewhere.

A different approach is to take the $700 billion and shore up the homeowners who are still left holding these mortgages. That would stabilize the value of these securities so banks wouldn’t have to take the lasting hits, with their risks of collapses. The worst case estimate is that there are up to 4 million potentially bad loans embedded in all of this, so if you take $700 billion and divide it by 4 million you get $175,000 per loan. What this does for the overall economy isn’t clear. All of those loans would have to be restructured so that home owners could make the payments and still continue to live and work as they are now (and the longer this goes on the less likely it is that that will be possible, as the economy is now clearly contracting, and people are losing those houses, along with jobs and wages). The up side is that if this could be done quickly, our economy might be better off then the depression era scenario of massive numbers of displaced homeless or homeowner less people who further bring down the economy. The downside is that the government losses would not be recoverable, but in the Paulson plan they may not be anyway as the housing market determines that in both cases, and that, is determined by the economy.

Option three is to backstop the commercial, consumer only, banks (and not the remnants of the investment banks, who have lately transformed themselves into purely commercial banks) for their losses so as to keep the economy from freezing up. It will amount to the same price as the Paulson plan’s losses and would have to come with a cut of the profits of sale of the bad debt. What would be different is that would be less chance for abuse then in the Paulson. If a bank is in trouble, it could be subject to additional oversight and regulation as part of a bailout. Another problem is that a chain reaction multi-bank failure is still possible with this, but if a workable plan with forced forbearance is instituted, it could be managed.

Option four – reconstruct the origins of All of the questionable CDO’s so as to know what is sound and what is not. The Investment banks have claimed that this is impossible because of the ways that they were constructed, but I don’t buy it. Mortgage lenders like Countrywide are in the business of collecting payments on the loans that are still good and those payments go into a pool for payments made to the holders of these securities. If a home defaults (and or is written in a risky way) and doesn’t contribute to that pool, it is a known item, and so is subtracted from that revenue, where the costs for foreclosure and administration are put upon someone, mostly likely firms like Countrywide, who know all about it. How complicated would it be (what with computer technology and all) to deconstruct the bad, shady loans from the sound ones and reconstitute those securities with distributed losses that the government could then backstop? It would be time consuming and so might not give the financial world the reassurance it wants right now, but it minimizes both the real losses and the impact of those on the overall economy. If our government is to be in the business of bailing someone out, it has to be able to separate the value from the junk in a way that is efficient and not prone to abuse. The Paulson plan is not that mechanism, and, with its lack of transparency and accountability, is ripe for abuse by the remnants of same people who created this mess in the first place that is, it’s more Bush administration inside deal policy making at its finest.

P.S. The real men of genius on Wall Street have also collateralized just about every other kind of loan there is from credit card debt to auto loans, so whatever plan we arrive at, it had better provide a mechanism for dealing with those, or at least the potential economic impacts of those, as well – my bet is still option four.

Given the chance, a percentage of people in the world will always hope that someday, a hero, a true leader, a messiah, will ride out of the hills, or fall out of the heavens, and come swooping in to rescue them from the wretched state of their lives. This desire, the desire that a more powerful person will help you in your struggles and hardships, is nearly universal, except among those relative few individuals who already have sufficient power and authority not to need help, and not to want someone else whom to be accountable.

In democratic, or near democratic countries, political candidates almost always fill this role, if even unintentionally. To me, the mark of a good potential leader is how much they go out of their way to lead on issues and not exploit the hero fantasy with a shallow persona. I think that in fact, much of the let down that almost always follows a less than perfectly capable leader, once they’re in office, is the realization that they’re not the hero we thought they were, and often, not even close. This is because, the greater the initial fantasy, the worse the fall. Sometimes it can’t be helped.

In nineteen thirty’s Germany, Hitler played the archetypal hero to the max, and a half-starved population bought into it in lieu of bread and cabbage. Desperate populations are vulnerable that way. If people don’t know what to do, they will inevitably follow anyone who claims to, as long as that person looks passionate and idealistic enough to seem heroic.

The worst historical examples of this are, of course, political, but political with a populist ideology to shore them up. Of those, communism is the all time champion. The idea that you can get everyone to work on behalf of everyone else, in a collective super-family, without serious squabbles, inequity, slacking off, and exploitation is absurd. And yet, desperate peoples still buy into it because it sounds good as long as there’s a hero figure (Lenin, and Chairman Mao) to make them believe that the forces of inequity (firmly imbedded in the cells of most all people) can be vanquished once and for all, and for everyone.

Deep down, what all this appeals to is our latent (or not so latent) human sense of dependency. The fact that people stood by communism, for over half a century, is not only a testament to the intractable nature of totalitarian governments (and human resistance to change), but also an illustration of the fact that many people would rather give away some power to a hero-leader, or a even a perceived “heroic” state, then have to assume that responsibility for themselves, in light of their own weakness, uncertainty, and inability. In other words, excessive cultural or societal dependency leads to a noticeable and non-heroic complacency until extreme circumstances prompt people again to act in their own self interest, but only then when a new “ism” and a new hero emerge to prompt them.

Of course, the All-Time super-hero of fostering this tendency, in large groups of people, is religion, especially western religions with their single, supreme, omnipotent, and omniscient God. In all three of the major western religions, God is the super-parent, the ultimate authority, and the last word in human affairs. How could it be otherwise when you fashion a god in your own image? Worse still, Christianity, especially the literalist, fundamentalist, sects, and as well some of its less mainstream offshoots, adhere strongly to the part at the end of the bible that says that Jesus is coming back soon to make all things right. Shiite Muslims, such as in Iran, and now the ruling majority in Iraq, also have a belief that the founder of their branch of Islam is coming to straighten out the affairs of men.

Trouble is that if you think that the day of reckoning is coming in your lifetime, then you might have a tendency not to be as concerned about the affairs and trends of the day, like escalating global conflicts over scarce resources and looming catastrophes like global warming. Instead, you might see those challenges as signs of the coming messianic transformation, and even take actions to hasten that through exaggerations of current antagonisms. In any case, such a world-view is almost always constituted with an “us and them” mentality, but in this instance, the “God-hero” will take care of “them”, so the “us” won’t have to deal with details like figuring out how to get along with your fellow humans.

And that, is my larger point, that excessive dependency on either a political or religious philosophy leads to such complacency and ideological reductionism, in the affairs of men and in our understanding of the complexities human beings, that we will willingly and unquestioningly give away our power to others instead of learning to collectively solve our own problems. In a working democracy, that is what happens by consensus and compromise, debate and discussion, trial and error, and astute observation, both of ourselves, others, and of outcomes. And this is what our founders intended for us, that we become in Jefferson’s word’s, “an educated and enlightened citizenry… indispensable for the proper functioning of a republic””. If America continues to desire an expansion of democracy around the world, it has to realize it that is not only the task of establishing “one man one vote”, but also the real work of lifting people up in a better comprehension of political, economic, and yes, theological systems. Given the exaggerated and obtuse political polarities we’ve been generating here, often for the sake of cheap ideological and personal self-interest, can we hope to counter, by our example, the reactionary ideologies that have has been fomenting in the developing world? It’s a question we need to examine more closely before we further try to fashion that larger world entirely in our own image.

The subtle questions come and go in a flash. Like sub-atomic particles, they pop in and out of existence depending on the energy. What is my longing? That is the galaxy I hold in front of me, not what is my need, what is my whim, or, in nearly all, what is my reflex in opposition. My longing, to write, to muse on that which others grasp, two-handed, and to be heard beneath the molecular noise of those electron currents. My longing is to dissipate the heat in those phase changes, for the solidness of form and the invitation of room temperature. I cannot go too far, as if I ever could, for there, even the lighter elements would surely turn to ice.

Since I’m of the minority opinion that commodities markets are greatly effecting oil prices, to the benefit of a few large interests, and to the detriment of the American public and the overall economy, is it any surprise that when I emailed “my” congressman, Representative Trent Franks, (R, AZ), about this subject, I got back a canned, conservative crafted, pro big oil, blame the Arabs, and drill in Alaska response. `No surprise whatsoever. That, I guess, is why we live in a democracy, so next time I can vote this guy out (I didn’t vote him in to begin with). So far it hasn’t worked. But, the larger issue is, of course, who’s more correct on this issue, me or Franks.

In part, it’s a numbers game. That is, I think I might be right on the particulars of this in the short term, and that Rep Trent might actually have a claim to some part of the truth in the long term, his being that global oil demand is out pacing supply. But is that true right now as much as it will be true in the future? At $4 plus a gallon gas, Americans, who use 25% of the world’s oil supply, are simply driving less this summer then in years past. I’ve heard it said (and it’s an easy thing to say) that “the world oil market is so large and complex that it is difficult to accurately know where supply and demand are at any one time”. In other words, you can pick data on oil production and inventories in any part of the globe and extrapolate that particular piece of the puzzle to represent the whole thing. And yet, the global price of oil, set on the NYMEX commodity exchange, is a global price. It seems to me, though I can’t prove it because I don’t have the kind of comprehensive information to do so, that Rep Trent has it wrong now, but is using a not too unreasonable conclusion about our future to justify the excesses of the present.

Trouble with that is that if he’s wrong on the details of this, can he, and the interests and ideologies he’s aligned with, be trusted to get it right in the long run? From my perspective, the answer is most likely no. That if his answer to the problems of the status quo is an expansion of those forces and interests, the ones that have led us to $147 a barrel oil, and a bedraggled economy, will we act soon enough and correctly enough to avoid $200 or even $300 a barrel oil in the not so distant future?

So, in opposition to the canned conservative response, let me start by saying that we need to reform the regulation of commodities markets. A good place to go for information on how to do this is the website of a group called Stop Oil Speculation Now, at www.stopoilspeculationnow.com. They have an email form for legislative agendas and actions that will help curb the ways in which commodity markets can be used to create bubbles, not only in oil and fuel, but also in food and other vital commodities.

This leads to the larger question of how to either expand the global oil supply for the future (the majority conservative view), and or create more efficient use of energy and more sustainable and renewable sources of energy, now and for the long term (the progressive view).

My position is based in two conditions I believe to be fact. The first one is that global warming is a reality, supported by a nearly indisputable majority of scientists and scientific data. And two, that if the world is to grow economically, as is the trend, there will never be enough fossil fuel to power that expansion, in the ways that we currently use energy. The second position, even if you disagree with my first conclusion, should be enough to make you conclude that we need to develop as many sources of sustainable energy as we can, as fast as we can, to avoid the economic squeeze, and international conflicts, that are built into the path we are on now.

Instead, the powers that be are guarding their interests closely, lest other sources of energy and or mass conservation take hold and put a dent in their profit statements. This is where we will have to wait for market forces to put an end to those interests, the way the mortgage crises has put an end to the sale and investment in shoddy mortgages, but look at what that approach has gotten us, hundreds of billion of dollars in losses, and a nearly ruined economy.

The lesson in all this is not just who’s right in particular now, but who’s right in general, in the long run, in the big picture, as to workable solutions. You see, it’s a package deal. In order to correct the problems at hand, and the ones that face us in the near and long term future, you have to start from a position of fairly clear understanding of current circumstances and then proceed to what that, and other information, is telling you about the trends, and only then, can you make reasonable plans to correct them. If you do otherwise, you may be right in particular, but very wrong in general.

At first, I didn’t believe it. The number, $500 trillion dollars, was so large as to defy reason. Let me put it in perspective. The world gross yearly economic output is only $65 trillion (the US part of that is $13 trillion). The value of all of the stock, in all of the companies of the world economy, is only $51 trillion, bonds excluded. If you include bonds, it still is only $141 trillion. And so, when you realize that there is $500 trillion dollars (actually about $520 trillion as of March, 2007) invested in “derivative securities” markets, around the globe, it ought to make you pause and think, where did all that money come from and what is it doing there? First, one more factoid, in case you’re not yet fully impressed by significance of the existence of over half gazillion dollars floating around in the world economy. Here’s another way to look at it. If you take that number (the $520 trillion) and divide it by number of people on the planet (6.3 billion) it represents about $82,539 for every man woman and child on earth. And that doesn’t even include the other global dollars invested in stocks and bonds. If you throw those in, the global value of investment rises to $104,920 per person. What this all means comes in three parts.

Part one, how it got there. In a word, profit. All of the money that exists in financial markets around the world has come from a combination of corporate profit and individual investment. Corporate profit is simple enough. Companies exist to make money, and some of them are extremely good at it. What they do with that money is invest in their own expansion, invest in buying other companies, and, when they don’t have anything else to do with the money, they put it in the bank, that is an investment bank. The purpose of an investment bank is to make a profit by investing money in the creation of other new businesses. When times are good, that’s mostly what they do, and that investment does what all business is supposed to do, create wealth by creating more business, which creates goods, jobs, etc.

That part of this activity also results in the creation of the traditional stocks and bonds that used to make up the bulk of the “securities” that exist in financial markets. Stock in particular are interesting because it represents a share of ownership in a company, and so has a real value, as long as that company (and the economy) is in good shape. It’s important to think about stocks in this way, because so long as they maintain their value, they actually are a “thing” that has value in a similar way to a car or a loaf of bread.
So, when economic activity creates wealth, what it really creates are “things of value”. Bread, grain, and agricultural products, have value because they are innately valuable to human needs. In fact, the value of anything is based on our need or desire for it. A car has a value, as long as you have the means to make use of it, gas, roads, and repair shops. A better example is a house. A roof over your head has great human value even when other things do not – let’s say there were no roads to drive a car on. In that case, a car would not be worth much, but a house still would be. You get the idea, that there are some things that are innately more valuable than others, food and shelter, and the value of those lesser things depends on our ability to make use of them. Of course, there are some who argue that there are material things that humans will always value, gold for example. But, were food to be in very short supply, even gold would be of little value unless you could convince someone who had a lot of food to trade you some of it for your gold.
The basic idea to remember here is that human needs determine the primary value of things, and that our desires and wants and whims can only conjure up the economic worth of lesser things when our basic needs are fairly met, and met in ways that are predictable and sustainable.

Back to the half a gazillion dollars. Another source for the money that is now floating around in world financial markets is the invention of mutual funds and the personal retirement accounts that have greatly fueled them (like the 401K plan in the US). What people used to do was save money for their retirement by budgeting excess income into a savings account at a local bank. These days the personal savings rate for Americans is less than zero, and this has come about for a number of reasons, only a minor part of which is employer funded (or partly funded) 401K contributions. But still, this scheme for retirement saving has greatly increased the amount of money that average Americans have invested in financial markets, even when they don’t own any other stocks or other securities investments.

What all this means is that, up until recently, Wall Street, and the other world financial markets, have been doing a great business. Such a great business in fact that there is more money floating around in all of these markets than there has ever been in the history of the world. Even those Wall Street firms have gotten in on the act, as most of them are publicly traded companies with their own stock and profit margins. All of it is counted in the national and international economic activity numbers, and so the more investment they can generate, the better their profits get and the more, more, more GNP or world economic output there is for everyone.

The one problem in all of this is stocks. For a given amount of economic activity, there is only so much stock to go around, only so many companies, and only so much reasonable value that that can represent. What do you do when you have more profit floating around than you know what to do with, that is, more money that can be invested in things of value, than there are things of value to invest in?

The answer is “financial innovation”. Back in the 1990’s, Wall Street pushed hard, and got, nearly complete governmental deregulation of its activities. What this did was to enable them to create new and innovative forms of investments. Investments that would soak up the growing glut of cash that exists in the world. Most of these investments fall under the heading of “derivative investments”, that is they are derived from other more traditional forms of investment. Simply put, most derivatives are “bets” on the value of other investments. This allowed Wall Street financial firms to offer a way for professional traders to make money in riskier ways, and so possibly with greater returns. At the same time, those traders could assume a portion of the risk that investors in traditional securities faced, so that Wall Street could offer “insurance” to conventional investors. Sounds like a win-win, right? `Only when times are good.

When times are bad, who wants to be assuming the risk for other people’s shaky stocks and bonds? That’s where we are now. All it took was a down turn in the investment value of many of the “sub-prime” mortgages that were converted to securities and sold to investors (another result of the “financial innovation” that came of deregulation). This came about with the realization that many of those mortgages were not worth the paper they were printed on, because the ongoing game of “musical chairs” refinance, that them afloat, could also not continue. What brought that about was that too many homes started going into foreclosure (and house values stopped going up).

The financial market side of this is that some big Wall Street investment banks, like Bear-Stearns, had a lot of these mortgage back securities and so billions of dollars of their value, and the value of that company’s stock have been lost. This has caused other big banks to tighten up their in their lending practices, and this has lead to a contraction in the easy money that has kept this American economy going great guns for about ten or fifteen years now (with a small down turn in 2000 and 2001).

This hasn’t had too much impact on the stock market yet because much of those investments are from the mutual funds that average Americans own, and so the major investment banks are not the ones pulling out of those markets, and so far, mutual fund managers have not sold short on stocks. This has to do with the fact that, so far, in our mostly service based economy, companies are not reporting huge losses even though we are in a down-turn. Sometimes I wonder if it’s because fund managers know that if they get too cautious, it will start an avalanche that will destroy the real value that still exists in stocks.

The difference between the stock markets and the derivative markets, that loom large behind them (they have sometimes been referred to as the “shadow markets”) is that when stocks lose value, real money is lost. That is, a thing of some assumed value, a share of stock, is now worth less money and the person who owned that share is out real dollars. If economic conditions were to get bad enough, or that particular company were to make bad business decisions in the face of a contracting economy, the value of that share of stock might not ever recover and it may become completely worthless, should the company go out of business. This is the real risk that is inherent in stocks and bonds, one that has been a part of investing since the earliest days.

Derivatives, in contrast, are bets, and so, if one party bets well and the other does not, money can greatly change hands, but no real value is lost. “Great” you say, that means that the half a gazillion dollars is not in danger of disappearing, any time soon. `Yes and no. In one sense, what that half a gazillion dollars represents is money that is stuffed into the mattresses of excess corporate profit that is not, and never has been, able to do any real work in the economy. Instead, it is being used as a mechanism for assuming part of the risk inherent in the real value of things like stocks and bonds, and when it can’t do that, it is a free agent looking for a return.

Part two, what all of this is doing.
Since I’m an average guy, and not a Wall Street insider, I have no way of knowing what the real value of investment in the derivatives markets is right now. It may be up, or it may be down. In many of the fancy risk assumption derivatives, I suspect that the quantity of those investments are way down. What I do know is that in another part of the derivatives market, the commodity futures markets, investments are way up, and so are commodities prices for everything from wheat and rice, to oil, gas, and diesel fuel.

The oldest part of the derivatives markets are the commodities and futures exchanges, such as the New York Mercantile Exchange. This is where the prices of everything that is considered a commodity, mostly agricultural products and energy products, are set and regulated. The way it works is simple. A seller, lets say a wheat farmer in the mid-west, is growing a crop of winter wheat that will be ready to sell in the fall.
He can wait until the wheat is harvested and then sell it at whatever the market price is, or a month or tow ahead of time, he can go to the futures exchange and find someone who will pay him now for his crop. Once again it’s a bet. The investor is betting that wheat will go up in a month, and the farmer may just want to sell now because he needs the money, or because he’s afraid that there will be a bigger supply, or a decreased demand. And so, the farmer thinks, and wants to bet, that the price now is better than it will be later. The result of all this betting is that it sets the daily prices of traded commodities. The prices that wheat and corn, and oil and natural gas, are selling for, today, is the price that these traders are willing to risk money on in their bets. That’s how all of these prices are set.

Enter the half a gazillion dollars. This is money looking for a return in a weakening economy. The best place to make money when things are looking bad is the commodities exchange. It was said that in the week following September 11, 2001, traders on the commodities exchanges made more money in one week then they had all year. In other words, bad news and uncertainty pushes investors into these exchanges, and so what we are in right now is in a speculative bubble in food and fuel prices that is the result of excess investment dollars in the futures markets pushing up prices in hopes of making a return. In the grand scheme of things, it doesn’t take much excess investment to do this. The amount of money that is currently in oil futures is about $250 billion (up from $90 billion in 2000), and so even a relatively small shift in investing in the derivatives markets can create a huge run up in prices. Food and energy prices are up an average of 18% from a year ago, and some insiders are predicting $200 a barrel oil before the end of the summer.

Of course there are those, conservatives, who say, that there is no “speculation” and it is all just supply and demand. But when president Bush went to Saudi Arabia to ask them to increase supply, the Saudi oil minister said what oil insiders knew, that, supply is not the problem, that oils stocks are up and that demand is down. Ironically, a few days later, our Government released a report saying the opposite, but oil market analysts have been saying that it is not a supply problem for months now. Even the head of Exxon Mobile said so, a few months ago, but not last week when he testified before an angry congressional panel. There, the oil company executives changed their story, even though, when asked what they thought the fair market price should be, the answers came back between $35 to $80 a barrel, instead of the $132 that it closed at last week.

Since they are making huge, world record, profits, from all of this, what could they say? I’m surprised that they even admitted that the fair market price should be lower. Now it’s just a game of follow the money.
Oil companies are making enough money that they could be the ones behind the price run up in the commodities markets, or it could be investors in OPEC countries. Or, it simply could be that commodities are hot investments now and given a little initial run up, it didn’t take long for other investors to flood in and create a bubble.

Trouble is that all of this has real world consequences for people around the globe. Food riots have broken out in Asia as a result of rising rice prices, and the Indian Parliament suspended trading on one of the Indian commodities exchanges in an attempt to regain control of prices.

Back in the US, because of rising prices, the economy is slowing down even more than it would have from the credit squeeze that followed the mortgage crises. By the way, that mortgage crises was also a bubble, one that was created in part by too much speculation on the part of investors. Some of these investors were individuals, and some of them were larger financial institutions. In any case, the unreasonable run up in the price of housing created a sense that you no one was going to lose by writing flimsy mortgages or by buying and selling people’s homes. That sense was wrong then, as is the idea that no one will be hurt by rising oil or food prices.

The big picture is the one that is often only seen in retrospect, but is predictable none the less. A continued slow down in the US and world economies has to eventually effect the price and value of stocks in world stock markets. This is inevitable as higher prices mean consumers have less money to spend on goods and services outside of food and fuel. Energy and agricultural stocks may stay up, but most other companies will see losses and so will lose share value. At the same time, they will cut back jobs, wages will not rise, and consumers will continue to have less dollars to spend. In other words, Wall Street will lose out along with everyone else, as a result of this speculation, and real money will be lost by nearly all.

Instead of recognizing this, and taking some collective action to correct it, say, discouraging investors from being in the commodities markets, it was a man at the Wall Street firm Goldman-Sachs who was the one predicting $200 a barrel oil. Go figure. In their mind, any investment is good investment, and catch a rising tide while you can.

This is the kind of insanity that having too much money trying to make money on itself will create. Wealth is created by the creation (and continuous recreation) of things of value, not by making bets on the future. At the same time, in the US, average household wages have been stagnant for over twenty years. In large part, that’s where most of that half a gazillion dollars has come from. It has come from the diminishment of working people’s wages, their savings, and, in the last bubble, the value in their homes (now down to the lowest level since the depression). In other words, when, by and large, average people can’t actually own the things of value that are the substance of real wealth, there will eventually come a point where the value of those things decreases, and so overall wealth will also decrease (regardless of how much paper money is chasing after it). We are quickly coming to that point. The mechanisms for accomplishing this are the speculative bubbles we are seeing. First things shoot up in value, then they crash, and when they crash, people get hurt as much or more than by the initial inflation. This will eventually happen to food and fuel, but it may take awhile.

Part Three, what to do
I’m an advocate of stern measures here. I would suspend trading on the US oil markets. The argument against this is that then oil trading would just move to the European markets, but since Europe is more socialist than the US, they could easily be entreated to act in a similar way. This does set up a war against, and a hop scotching of, financial markets around the globe, and may not be workable for that reason.

A less severe measure would be to have periodic and unannounced releases from the US strategic oil reserves. This might shake up the commodities markets enough to scare away some excess investors, but it is not a certainty. Also ironic here is that, until congress stopped it last week, the Bush administration was instead filling the reserve with ultra high dollar oil, as if that’s any surprise.

In the oil futures markets, it may well be that there is a hope that the US will attack Iran, because this will create an instability in world oil supplies and investors may see huge profits, if they just hang around long enough. Since the Bush Administration has been posturing for this for several months now, this may be a substantive reason for much of the oil speculation. A cure for this would be low-level talks with the Iranians that might lead to some resolution. Since it is part of the indirectly stated objectives of this administration to engage Iran in an armed conflict, this will probably not happen without some substantial congressional pressure.

Agricultural prices are a product of the cost of production, and so as oil prices have risen, so have agricultural commodity prices. Correct oil prices down to where they should be for the existing conditions, and food prices will follow.

As for the half a gazillion dollars that is indirectly causing all these bubbles, it needs real avenues for investment, ones that can give real returns. It would be good if those avenues were productive and beneficial for the world instead of destructive. This is the conundrum that is currently built into the world economy. For the world economy to grow, and for developing nations to take part in that it, the growth that happens has to be sustainable in terms of limited resources such as fuel, water, and the natural environment. What is currently happening is that America and the west are exporting unsustainable agricultural, industrial, and energy systems to developing nations, and there is, and will increasingly be, competition for the limited resources on which these systems depend. So, even if the vast majority of the population of say China, wanted a Big Mac and Wal Mart way of life, it is impossible to give it to them. Hence, it is also impossible to invest the excess global profits in real returns there. Any more substantial attempts to do so will only result in increasing demand on things like oil that will result in real, not speculative rises in price. Our current way of doing things is both economically, and resource limited. And if we try and exceed those limits, we will get problems like what we are seeing now, or worse, more armed conflicts over scarce resources.

The long-term way out of this is to focus on and invest heavily in more sustainable improvements in the ways we currently do things. And also, as we are doing that, focus on what is exportable to developing nations. This is the role of government, and good leadership within and outside of government. Much of what is required, alternative energy development, for example, is in conflict with out existing systems, and their large financial interests. As a democratic country, we do, still, have the power to change that, as long as we have a real understanding of what is happening, and therefore what’s truly required for us to make changes.

If a casual observer of the commodities markets didn’t know better, right now, they would have to conclude that those markets were set up purely so that the participants can make money when times are bad. After all, in less than a years time, the commodities traded there, agricultural and energy commodities such as wheat and crude oil, have risen in price an average of 27%. Of course, what those markets are supposed to do is set the price of those and other commodities in regional and world markets, at the fair market price, based on the laws of supply and demand. And when times are good, commodities markets do a pretty good job of doing just that. But, when times are bad, and especially when times are uncertain, commodities prices fluctuate greatly and so traders in those markets have the possibility of making huge profits, and therein lies the rub.

Right now times are uncertain, bad economic statistics are in the news everyday, and so many more than the usual numbers of investors have poured into the commodities markets and have turned them into a boom market, that is, a boom for anyone who produces things that are traded there. One statistic is that in the year 2000, the average amount of money being invested in the oil futures market (“futures” is the another name for investment in commodities) was about $9 billion, today that number is up to $250 billion. What this means is that investors think that oil prices will only go up, and so they are willing to risk big to cash in.

The net effect of this is two-fold. One, oil (and so fuel) prices have to go up accordingly. The reason for this is mostly NOT “the rising world demand” that you hear about from politicians, even though there is a bit of truth in that, but the rising demand by buyers in the commodities markets. In other words, if you have a lot of buyers (investors) bidding what’s being sold, and only so much oil production to invest in, it becomes a seller’s market. Oil companies reap huge profits, some investors win big, some lose big, and everyone else gets screwed at the gas pump.

Aside from the obvious unfairness of this present situation, because oil and food are such a large part of the overall economic picture, both in the US and in the world, the long term implications of this are dire. As the economy gets worse, rising prices only make the outlook bleaker, and the swings of the economy (in this case downward) worse. This is because it is consumer’s dollars spent on things other than food and gas that keeps other parts of the economy going. If that isn’t happening, or not happening as much, then people get laid off, and the economy stumbles more than it would of, based on the other causes (in this case a mortgage mess, and the resulting credit crunch).

Eventually, prices will fall in the commodities markets because things will get so bad, out in the real world, that demand for the products made from commodities, gas and bread, will fall to such an extent that those markets will have to contract, if not collapse. This may happen tomorrow, or in a year from now, depending on the economic news and how that sways investor confidence in the rising price of oil and other commodities. In the mean time, we’re all just along for the ride.

Because of rising food costs, record numbers of working people are going to food banks for the first time, and straining those already strained safety nets. People slightly higher up the economic scale, are canceling their summer vacation plans because of high fuel prices, and the overall US economy is shedding jobs much faster than it’s creating them. If that sounds bad, how about food riots? That hasn’t happened since the great depression, but in India, the Indian Parliament has suspended trading of agricultural commodities in order to do something to get food into the hands of its people. Critics say that that may not help, but the irony is that, by and large, there is just as much oil and grain out there, as there was three months ago, but it is only the high prices, because of the excessive commodities market speculation, that is keeping limiting demand.

Is there anything that can be done? In the case of oil, the US government has the ability to effect the markets by releasing oil stored in our “strategic oil reserves”, and some people are calling on the federal government to do just that. If the government did so, the most effective way to shake up the commodities markets would be to not announce it ahead of time, but simply to do it. This would have the effect of causing some investors to lose big and so, maybe, scare them out of those markets for awhile. Commodities have always had a reputation as risky investments, and it is only the continuing perception of rising prices that keeps money flowing into these markets. In fact, you can think of it as an “investment bubble” the same way that a large part of the mortgage crisis was built on the mindless expectation of ever increasing home prices.

In the big picture, what all of this points to is a much larger problem in our economy, that is, too much capitol and not enough places for it to go to get a good return. Much of the dollars that are pouring into commodities markets, worldwide, are coming out of the backside of the stock markets, that is “ the derivatives markets” (of which commodities futures is technically a small part). These are another part of the securities industry that looks attractive, when times are good, but turns very unattractive when things get uncertain. Worldwide, derivatives markets have over $500 trillion invested in them, that’s over ten times as much as the value of all stock worldwide, so even a small shift in the outlook in these markets can have a huge economic impact. Some people have called derivatives the “shadow market”, and Billionaire investor Warren Buffet calls derivatives “financial weapons of mass destruction”. They exist because of the market deregulation that has been happening since the middle 1980’s. It’s one more example of the “financial innovation” that has kept the stock market growing big for the last 15 years or so. But just like the mortgage crisis that was created out of these instruments of financial innovation, the effects of these markets can also have unintended consequences for a faltering economy.

In the old days of simple stocks and bonds, there were only so many places to put your money, namely, those two things, or a bank. Most people liked banks, especially after the great depression, and the collapse of the markets that was created by too much investment and not enough real return. But since the 1980’s, supply side economists have asserted that all true economic good comes from the creation of capitol to fuel the growth of the economy. And so, more capitol, pulled mostly from the backs of working people’s wages (which have been flat since the early 1970’s), has required more places to put it, hence “financial innovation” – more kinds of securities and more ways to invest in them.

This is something that Wall Street has been happy about, as it’s fueled a spectacular growth in their operations and profits, “more capitol for everyone”. The trouble with more capitol is that it demands more investments with return. At some point in the cycle, excess capitol can’t do what it’s supposed to, create more jobs and better jobs, because of constraints in the number of people who can be employed, or how much they can actually consume, so instead it goes on a buying spree and creates speculative bubbles as it tries to buy up everything in sight. First it was housing, through real estate investment, and now it’s anything that’s left – things in the commodities market, things on which we, and the overall economy, all depend.

What we are seeing has been described by some economic observers as unprecedented, that is, the mindless escalation of prices in a contracting economy. It is up to the public and our leaders to understand that if this continues, we are not in for a soft landing, but a very hard one. This is because the overall effect of this will be to grossly exaggerate the simple downturn that conservative financial people (mostly Wall Street insiders) claim it is, that is, a downturn that would be over in a few more quarters.

Aside from excess capitol making life hard for everyone, the real underlying structural problem with the US economy is that consumers don’t have enough wages to keep the economy going. This, as I mentioned before, is the result of the stagnant growth of wages, over the last 30 years, relative to the overall growth of the economy and the growth of capitol. In other words, if people had more money to spend, a little more disposable income at the margins, they wouldn’t have had to run up massive credit card debt (from Wall Street banks, thank you) or refinance their houses over and over again, to be able to maintain their spending. Some rich conservative financial types suggest that it is consumer’s excessive spending that has been the cause of all this grief, but how could the economy have grown to the heights it has without that spending? You can’t have it both ways, and now it may be time to pay the piper, the piper of easy credit along the rocky road of stagnant wages and excess, and therefore economically unproductive, and now predatory, capitol. In the end, even the money types will not be not immune, they will lose also, but it probably won’t be weight, or the roof over their heads.

My nare-do-well neighbor,
struggles with his self-importance.
And though I’ve been the recipient of that,
who am I to tell him who he should be?

We have a high government
with a like problem of self-understanding,
but how should we get them to understand us (by firing them)?

Young men work for minimum wage,
when their fathers worked for union scale,
Can we tell them not to expect more?

Who we each are is within us,
but who we add to that, also, is given by others.
How should we work out the surplus, or the deficit?
Only to a balance.