There is a huge financial crisis developing and something huge needs to be done, that is correct (see P/S 4 for a hint of the extend).  

But why was the incredible 700 billion dollars gift to Wall Street (more than 6% of GDP) ever proposed? In its initial form, it was like offering a truck full of gasoline to an arsonist, so he could replenish himself.

But let’s hear it from one of the pillars of the democratic establishment. Paul Krugman writes the following in a New York Times editorial (September 26, 2008):

“Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option. Right now, players throughout the system are refusing to lend and hoarding cash — and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression. It’s true that we don’t know for sure that the parallel is a fair one.

Maybe we can let Wall Street implode and Main Street would escape largely unscathed. But that’s not a chance we want to take.”

An amazing quote, word for word straight from the NYT editorial, denoting an astounding view of the world, a total incapability to think out of the Wall Street box. Paul Krugman himself, the self declared “Conscience of a Liberal”, famous economist at Princeton and anti Bush New York Times editorialist of long standing, believes we cannot let “Wall Street implode”.

Really? Why not? Professor Krugman does not explain. He seems at a loss for concepts. No wonder: everything indicates that it’s the other way around. Wall Street is the problem. Why should imploding a big problem be a bigger problem? Keeping on sending money to Wall Street may keep on depriving Main Street of money. Sending money to Wall Street instead of Main Street is exactly what has happened in the last few decades. Maybe it’s time to try something completely different.

At this point, though, the establishment has been working as one. What the establishment, and its associated plutocracy, wants is money from The People. This has long been true, but now that the plutocracy and its associated establishment are in serious financial trouble, the request has become urgent. The plutocracy (and, indirectly the establishment) has been dabbling in FUTURES AND DERIVATIVES. Unregulated all.

The total worth of the world is about 100 trillion dollars, and the total world GDP is not even half that. Nevertheless, the supposed “value” of all derivatives invented by “Wall Street” is in excess of 500 trillion dollars. Yes, you read this correctly: the total value of Wall Street, according to Wall Street, is at least five times the total value of the world. No wonder Wall Street needs help! It has gone completely nuts. But what it needs is not more money: according to itself, it’s worth already five times the planet. What it needs is cognitive therapy.

Many of these futures and derivatives are leveraged out of mortgage-based securities. Most of the money invested in these nonsensical instruments was borrowed by the plutocracy from the banks where The People puts its money. This is the connection, People, that they tried to hid from you! They already took your money where it cannot be seen, and now they want more.

In other words, “Main Street’s” money (that Wall Street found in banks) was lent to hedge funds owned by extremely rich individuals, so they could leverage themselves to make themselves even more fabulously rich. Now that this leverage is working the other way, two things are occurring: the banks can’t be reimbursed, and the hedge fund industry (worth two trillions dollars in the USA) is in danger of being wiped out (bringing many of the hyper rich to ruin). This is probably what is the real reason for the panic of the Bush administration.

The simple solution to all this, for the People at large, for “Main Street”, that is for the real economy, is to nationalize all failing institutions that are necessary for the ongoing functioning of the economy (in the Great Depression, the Fed let thousands of banks necessary to the functioning of the economy close, a horrible mistake). In other words, let the government provide necessary banks with all the capital needed for operations necessary for the ongoing functioning of the economy . Simple. And don’t send the money to the rich: that could cause a new Great Depression.

Why? As we said, and what Professor Krugman does not seem to understand, is that too much money to the extremely rich caused the crisis to start with.

Now we are taking the patient, Main Street, who suffers from dangerous anemia, and draining it of blood some more, to feed the vampire, Wall Street, some more, lest it becomes anemic too.

More seriously, there is only that much money that the economy can create. Too much money sent to Wall Street meant not enough money for Main Street. Otherwise said, people can work only so many hours; if they spend too much time working for Wall Street, they spend not enough time working for main Street. In the end, they literally get depressed. This is no joke: an important factor in the Great Depression was the unwillingness to lend, from sheer depressed spirits, something that has shown up recently, and has an important psychological component. 

Hedge Funds and obscure, unregulated derivatives are unnecessary to “Main Street”. They have actually hindered “Main Street”, by siphoning money away from it, and by building inequalities sky high, to the point where they are damaging the world economy. Let most of the derivatives die. It’s time to do triage.

Nationalizing (hence saving) only functions and/or institutions useful to “Main Street” will save the economy. All “Wall Street” has been doing is destroying the real economy. Time for a change.

But that change will not be easy. Politicians and university professors (the decision makers) are paid very little (say a maximum of 175 K in a country where CEOs can make billions). Their only hope to make it big financially is by pleasing the plutocracy. And if one does not make it big in a plutocracy, one is nothing. That’s one of the main self-reinforcing mechanism of the plutocracy.

Patrice Ayme.

P/S 1: This is a small appetizer of a much longer work that analyzes and compares the present situation with the Great Depression. All this work confirms that there is only one way out, and that making more gifts to Wall Street will only make the situation worse. Coming soon.

P/S 2: Similar crises in Europe were well resolved by nationalizing. That makes sense both in the capitalistic and the socialistic models. Last time this happened on a large scale (5% GDP) was during the Norway-Sweden banking crisis (1992). Resolution by nationalization was highly successful. But Europe does not have the tradition of giving ever more riches to the rich. It is understood in Europe that, when the socioeconomic inequalities become too great, catastrophic consequences are not far behind: mass poverty, strife and war.

P/S 3: The trading of derivatives will have to be severely limited, both in who can trade them (the “commercials”) and by how much (that’s pure mathematics: the greater the order of the derivative, the more it impacts its integrals; so, to prevent astronomical leverage, one has to restrict down to zero the derivatives’ variation as their order goes up; that this is not the law yet was made possible by the lack of intuitive knowledge of infinitesimal calculus by lawmakers).

P/S 4: How big is the lending crisis? It is rumored that the losses to banks would be already around 130 billion dollars. Since banks are allowed by international law to lend a bit more than ten times their capital, this is a loss of 1.5 trillion dollars in lending capacity. Injecting directly 130 billions of dollars from the Treasury (i.e., The People) under the form of capital (hence equity) would recreate directly that capacity. The initial Bush crisis plan did not do that, though.

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    This is some really good writing. Please keep it up.


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