This discussion is drifting sideways...

Of course the one thing that has not been explicitly discussed here is the role of debt and debt to GDP ratios in the existing crisis. In Neo-Classical Economics debt is not a consideration. In the real world it is. The Fed and the ECB are both pursuing policies that are aimed at facilitating the use of bank created debt to extract the last drop of blood from the body economic in their respective areas. This has, in the USA, been accomplished via a giant control fraud where the financial sector first, starting in the '80s, looted and destroyed the Savings and Loan Associations and turned mortgage issuance into a game for commercial banks, the Fed provided increasingly cheap money through low interest rates, anti-regulators were appointed to all significant regulatory bodies and then Congress repealed Glass-Steagall. The result is that money creation came to be a more lucrative for profit exercise by the big banks on Wall Street in conjunction with the shadow banking system.

Finance turned malignant and banks no longer loaned money for productive enterprises. Instead they financed the buy-out of existing productive enterprises and shipped the production to China, etc. Most of the debt they have created through serial bubbles is essentially fraudulent, or counterfeit debt, as Jerome would have it. We are now in the situation that the debt has grown to a point, in 2007, that it could no longer be serviced by borrowing the interests for "interest only" payments and we have entered a deleveraging cycle where the economy is contracting and the overall situation is deflationary.

It is not possible to repay the accumulated debt at this point, nor should most of it be repaid -- except for the unfortunate fact that bogus assets have been sold to all of the pension funds, etc. Given those facts the banks and financial institutions involved should be resolved, the executives prosecuted and what is owed to the banks canceled while what the banks have paid out to officers should be clawed back to pay for the damages.

That is what should be done. Then we could begin to recover from the damage that has been inflicted. We will see what actually happens. Were we to do what needs to be done we could then turn to investing in projects that provide renewable energy and transportation based on that energy. That is truly the vital task, but the ongoing looting is preventing us from getting there. Worse, in the USA and Europe all of the major political parties have bought into the idea that what must be saved is the very financial system that is continuing to suck the life out of the economies.

Two links give a good perspective on these processes:

Steve Keene's AMI Talks at the recent American Monetary Institute in Chicago in FLV format -- the talk by Steve and the talk by Michael Hudson are both worth the effort of watching. Unfortunately transcripts don't seem to be available.

Steve has created stock-flow economic circuit models of economies that actually produce results very similar to the crash we had in 1929 and 2008 and Steve focuses on the role of debt. He talks about "why credit money doesn't have to crash and why it always does." Hint -- it is the motivations of the bankers. He also shows some very elegant dynamic models of the economy based on stock and flow and resolves a dilemma of neo-classical economics, which cannot account for profits! and which is inherently prone to crashes by showing where it goes wrong.

Michael Hudson's talk brings the criminal element into the discussion Steve started. His thesis, well, one of them, is that banking has essentially been turned into a criminal enterprise, but we just are not prosecuting the crime. Hudson provides an insider's view of how all this happened. Very worth while.

The other is Chris Whalen's presentation at an American Enterprise Institute gathering that also included Nouriel Roubini. Several good talks there, but follow the instructions to get to Chris's presentation. He explains why the US TBTFs are going to fail in 2011 and he urges, in effect, new leadership that will repudiate the bogus debt and write it down instead of pretending it is real.

An understanding of these processes and a means of clearly presenting this information to a lay audience has been my goal for a while now.

 

"It is not necessary to have hope in order to persevere."