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.