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but that can't last - as the headline story shows, the underlying problem is too much debt, and you can't force more debt on an economy that is already choking over - or rather, under - too much leverage

The problem is not debt, the problem is leverage.

The question is, how do we unwind the leverage?

This is especially critical since, like the US in 1929, the financial crisis was one of several shocks. In 1929, the reversal of the large government debt-financed spending program on roads as the 1920's came to an end (often overlooked by those who focus on Federal spending alone, but even today, state and local government expenditure is greater than federal government expenditure, and in the 1920's, the shares were even more heavily weighted to state and local governments), and the ongoing roll-out of protectionist policies as part of the collapse into trade blocs of the first age of globalisation ... the oil price shocks and collapse of the housing bubble preceding the Panic of 2008.

The problem is one of leverage. Useful public investment with a positive return will reduce leverage over the long term ... precisely the kind of spending that the Conservative Movement pays lip service to while devoting quite a lot of time and energy to preventing it from taking place.

And, of course, in the US in the ongoing Stimulus fight, the Republicans are fighting hard to ensure the maximum possible leverage, fighting for tax cuts with long term economic harm more likely than not, tax subsidies for going into debt to buy houses and cars, and with the stripping out of "green" provisions also implying entrenching an obsolete energy economy ... while spending on education is stripped out.

Now, under US political institutions, we have an opportunity to engage in smart investment in the upcoming budget bills, and given the gross inefficiencies built into our economy by decades of welfare for the rich, can do it on a basis that can be passed with 50 votes in the Senate.

The challenge is to come up with a financial system "bail-out" package that has a substantially smaller debt footprint. Given the public outrage over Tarp 1.0 and 2.0, the most politically feasible approach may be one that taxes the wealthy to fund the bail-out.

And ... given PAYGO legislation put into place by the Conservative Movement ... if the bail-out is in a budget bill that taxes the wealthy to fund the bail-out, that only needs 51 Senators to pass ... budget bills are not subject to filibuster, and self-funded bills are not subject to the PAYGO waiver requirement which also has a 3/5 majority required.

So the Conservative Movement with its politically adroit PAYGO legislation, designed to starve public investment in social infrastructure, may well mean that the easiest way to get a "TARP 3.0" through the legislative process is by designing one with the wealthy paying the bill.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Feb 9th, 2009 at 01:46:25 PM EST
The Fed printed money, gave it for free to rich people, who lent it to poor people at at nice profit instead of paying them wages

Regulatory tolerance of highly leveraged speculative activity by organizations and individuals is indeed a problem. However leverage is merely a description of income : debt levels.  Leverage is a substitute for income. Leverage is credit, a measure of debt capacity.

While leverage has enabled some firms to expand the market size and profitability of their operations, their wage and salaried employees have not captured a level of benefits commensurate with increasing productivity (profits). They have not captured profits because firm managers and investors prioritize distributions to themselves. Rather than even retire debts incurred by the firm, managers "roll over" principal by bond issue or worse pass through debt by M&A activity, so maintaining "interest only" fiduciary duties to employees and so-called equity holders.

The moral stands: no-low leverage is the result of no-low debt and retained earnings --which could fund CapEx and wage gains. Sadly, US don't do profit sharing with employees. US do 401(k), "defined contributions" to corporate debt.

Diversity is the key to economic and political evolution.

by Cat on Mon Feb 9th, 2009 at 03:09:15 PM EST
[ Parent ]
leverage is merely a description of income : debt levels

Leverage is a description of income : debt levels ... and that is the core problem, not the debt levels, but the debt/income ratio, since a political economy that rests on an increasing debt/income ratio is a financially unsustainable political economy.

And the ability to take on debt for the purpose of growing real income ... for instance, for the electrification of STRACNET and the reduction of the energy cost of long distance freight transport shifted onto electric rail by over 90% ... is undermined if we permit the deleveraging process to run as a ratchet that reduces the private debt/income ratio at the cost of increasing the income claims of those looking to convert fantasy wealth to real wealth.

However, the 60 vote hurdle in the US Senate has a big hole in it at the point where a budget bill get scored as not requiring a waiver of PAYGO requirements. That is when the US legislative process defaults to the Two Chamber Majority system of its original design.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Feb 9th, 2009 at 03:20:41 PM EST
[ Parent ]
However, the 60 vote hurdle in the US Senate has a big hole in it at the point where a budget bill get scored as not requiring a waiver of PAYGO requirements. That is when the US legislative process defaults to the Two Chamber Majority system of its original design.
This is perhaps the most felicitous unintended consequence in decades.  Hoist on their own petard, indeed!  But that requires that Democrats have the will to seize that opportunity.  I fear that they are so in campaign contribution servitude to wealthy donors that they will be afraid to take advantage of this opportunity.  Perhaps if there is no other way forward and they can disguise what they are doing it might come to pass.  Clinton did get taxes raised on the rich in a party line vote before the '94 mid-term elections.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Feb 10th, 2009 at 01:35:01 AM EST
[ Parent ]
... a result of some ambitious junior members looking to get publicity pushing it and lighting a wildfire ... the House leadership will never go for it unless they are facing a big public furor, of the kind that can get senior members of Congress primaried for being caught on the wrong side.

Maybe Kucinich could be one ... he's always looking to get his face in front of a camera.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Feb 10th, 2009 at 12:33:43 PM EST
[ Parent ]

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