The fickleness of the stock market as a predictor of the economy versus just a responder to the economy played out clearly in the past week. On March 5th, CNN reported that the market had broken a five-day losing streak, bouncing off of twelve-year lows. “The markets opened higher and never looked back, following reports that China’s economy may be improving.” Umm. Well, they looked back the very next day and the day after that and the day after that. The price of tea in China was a silly reason for the market to rise in the first place, but we must remember it is overseen by a combination of villains and village idiots.

THE CHINA SYNDROME

When the U.S. stock market leaped like a fish out of water because Beijing promised a $585-billion stimulus plan, I had to wonder that none of the gurus of the market were smart enough to figure out that this plan will help the U.S. In fact, it is far more likely to hurt the U.S. First, the plan will almost certainly focus on hiring millions of unemployed Chinese workers from the 70,000 factories that have closed in this present depression to fix Chinese infrastructure using Chinese natural resources in order to employ as many Chinese people throughout the Chinese economy as possible. That may help sustain some sort of market for American products, but most of what they buy will likely be cheaper Chinese products in order to put still more Chinese people to work. The government has a rural revolution to prevent, and it controls the economy directly.

Second, and more important, 70,000 Chinese factory closures should make it obvious to anyone that China is no longer running a surplus economy, so where is it going to get the $585 billion? The obvious answer is that the obvious source would be cashing in (not rolling over) the hundreds of billions it holds in U.S. Treasury bonds, which it has been tempted to cash out anyway. With little present demand for Chinese products in America, it is certain that China will not be accumulating huge quantities of U.S. dollars that it has to figure out where to park. So, it has no reason to buy treasury bonds. More importantly, it now has no means of buying treasury bonds because it certainly will not have any surplus to invest when it is pouring an extra $585 billion into its own economy.

If China stops buying U.S. bonds, the U.S. bond rate will have to go up to attract other major buyers, and that makes the long-term unsustainable cost of the United State’s own bailout and stimulus plans all the higher. But the market meisters clearly don’t think that many steps ahead. They say, “Oh, China’s going to give birth to a new boom! Have a cigar … made in China!”

China also stated that its manufacturing has gone up for the third straight month. That news does not add up with the 70,000 factory closures. Either the news coming to Americans is vastly out of whack, or the Chinese government is lying about manufacturing going up. We, of course, know that communist countries never lie in order to avoid mass revolts.

The fact is that China’s manufacturing cannot go up because no one is buying. So, unless they are manufacturing just to manufacture, they are lying. Common sense also tells you that, if manufacturing had been on the upswing for three months, China would not be announcing a $585 billion stimulus program to put people back to work. The reason no one on Wall Street can see these facts can be summed up in one word: “denial.” The good ol’ boys are so thirsty for the good ol’ days, they’re seeing mirages in their desert.

JOBS ON THE RUN

On the job front, the news last week was equally conflicting. First, word hit the press that the number of newly unemployed was expected to decrease from 650,000 to 630,000. The next day the Labor Department said that jobs actually fell off by 638,000. So, the market heated up. A day later, the news was that the numbers did just the opposite; they broke old records. One source said the economy had shed almost 700,000 jobs in one month! (The government revised its claims to 651,000, a slight bump up from 650; so who you gonna trust? For December, the government had said 580,000, which they just revised up to 680,000. That’s a clue.) Then the news became even worse. One day unemployment was expected overall to rise to 7.9%, but the next day it actually rose to 8.1%. So, the market plummeted.

Such rapidly rising unemployment raises the question, with the U.S. being China’s largest trading partner, who is it that China is manufacturing for such that it can claim manufacturing is on its third straight month of increase? That the market went up in response to the false claims of Chinese growth and the false claims of diminishing job losses shows that investors are selectively hearing what they want to hear. In a word: “denial.”

THE END IS EVERYWHERE

Elsewhere in the news, big-time bailout beneficiary AIG announced its largest quarterly losses in history, meaning a push to the trough for more government bailout money to follow the previous bad money. Then Fed Chairman Ben BreakTheBanky announced that banks will be needing a lot more bailout money. News also came out that U.S. manufacturing plummeted almost 9% in the fourth quarter to a low it hasn’t seen in over a quarter of a century (and that’s the decline that happened BEFORE a dismal Christmas sales season. One-in-eight houses were now behind on their mortgages or in foreclosure. The almighty Citibank became a penny stock (less than a buck a share), bringing to question the bank’s ability to breath even with the government ventilator that was stuffed down its throat. GM’s auditor produced a life-support report that reiterated GM may cease to be “a going concern.” Ford’s credit rating plunged as it announced it would have to dilute its common stocks by selling new shares to raise money. All bank stocks went down like dead and smelly fish over a waterfall.

By the end of the week, the market went from what was a completely ludicrous rise in the first place to a new tanking low. Someone even rendered a photo of the Merril Lynch bronze bull, long the icon of Wall Street, slumped dead on the sidewalk. Seems there is a lot of bull lying in more ways than one on the sidewalks of Wall Street lately.

Speaking of stock losses, Nestle’s has taken the beef out of its stock while putting the bull back in bouillon, betting that it’s cheap beef bouillon will carry it through the depression when that is all people can afford. While banking stocks are falling off the shelf, food banks are on the rise. Nationwide demand at food banks has increased 30%. If you’re going to buy stock, stock the shelves of food banks. At least, you’ll be helping someone. The silver lining came in the form of news that there is room for a whole new nouveau riche at the Half-price Hamptons where mansions are now renting for fifty cents on the dollar against previous years. And the surest sign of the times was that Starbucks came out last week with instant coffee, putting itself on the same shelf as Sanka.

Overall, the U.S. rate of fall accelerated greatly. Said one U.S. economist, “So much for the surprising strength in U.S. productivity late last year.” He must have been living in an alternate reality because anyone who believed there was surprising strength in U.S. productivity last year is in the same camp as those who readily believe Chinese productivity has risen for the last three months, even though 70,000 factories have closed. Wait until they see what is happening to U.S. productivity as the post-Christmas blues settle in during the first quarter of this year! We won’t even know those numbers until April.

WHERE’S THE BOTTOM?

So long as the rate of fall is accelerating, we’re nowhere near the bottom. A bottom is when the economy starts showing a net increase in jobs, instead of a net loss. We’re still expanding the rate at which we lose them, and, so long as we are seeing a net loss at all, we’ll still be falling. Anyone thinking we’re anywhere near the bottom is a blind fool with his eyes closed under sunglasses in a darkened, sound-proof room.

Finally, this weekend the national debt was set to clear $11 trillion. Ahh, it seems like only yesterday that it cleared $10 trillion. The national debt appears to be climbing faster than the economy is falling. The extra money must be going into bonus checks to reward the architects of our demise. Meanwhile, another $580 billion bailout is already in the works in Congress. This time to be borrowed against the future as money for the FDIC to rescue the customers of failed banks or, more likely, just printed out of thin air. I thought we bailed out the banks to avoid that possibility. No wonder the national debt is climbing at the rate of a trillion dollars a quarter.

On January 30th, Germany’s news publication Spiegel reported, “The bailout packages aimed at shoring up financial markets in Europe are getting increasingly expensive. A creeping depreciation of currency is inevitable and state bankruptcies can no longer be ruled out.” Chancellor Angela Merkel stated, “There is a rumor going around that nations cannot go bankrupt. This rumor is not true.”

CAN NATIONS GO BUST?

Nations go bankrupt when they can no longer service the interest payments on their debt, and the United States is passing perilously close to that possibility. Right now the U.S. debt looks like Dumbo the elephant swallowed a hydrogen tank that’s about to explode inside of him. Abnormally low interest on U.S. bonds is the anti-gas pill that has made it possible to swallow ballooning deficits. The government is inhaling banks that put the meaning in the word “bankruptcy” as if there is no end to the stretch of the government gullet, but there is.

Is it inconceivable that nations like the U.S. could go belly up? Less than a year ago, it was inconceivable to most of the world that Wall Street’s oldest and most respected financial institutions could all go bust. Yet, a year later, their parts are strewn all over the landscape. Since the hydrogen tank blew up inside of Humpty Dumpty, who was sitting on Wall Street, all the king’s men haven’t been able to put Humpty together again. Dumbo may fair no better if he keeps taking on gas. A year ago it was inconceivable that the U.S. would start nationalizing its banks. A year later, it is almost inconceivable if it does not; and, so, a Republican president declared that he had to give up his free market principles. Another inconceivable. The inconceivable is now happening every month.

In less than half a year, the total value of all companies worldwide has dropped by one third. In the U.S. that sifts out as plummeting corporate tax revenue, and lost jobs mean plummeting personal income tax revenue, all while the U.S. government has taken on $10 trillion dollars in bailout liabilities with still no evidence of a bottom being near. (That’s enough to send a check of about $1,500 to every man, woman and child alive on the planet.) Moreover, no one in government seems to know exactly where the money has gone. If all the king’s men couldn’t fix Humpty when Wall Street fell, who’s going to fix the gas-inflated elephant?

WHAT HAPPENS WHEN A NATION GOES BANKRUPT?

Government workers go unpaid. Government programs get slashed or simply fail to deliver anything. Government becomes economically powerless and perhaps has to resort to military force to retain control … so long as it can keep paying its military. Because the government cannot finance its debt, it prints money that is not even offset by I.O.U.’s. The U.S. started doing that earlier this year. World history tells us that nations that rapidly expand their currency supply find their currency becomes valueless. Deflation in the value of money equals inflation in the price of goods. That threat is currently being called “stagflation” because the government loses its ability to maneuver and do anything about the economy. The elephant becomes so inflated, his feet don’t touch the ground.

Inflation from growth in the United State’s ballooning money supply isn’t happening right now because the banks are, as you’ve heard, hoarding it all. In other words, none of that new money has, yet, entered circulation. Therefore, it cannot cause inflation… yet. When the credit ice dam breaks and the money starts to flow, however, is when Dumbo’s gas tank explodes into hyper-inflation. Unfortunately, the more the banks hoard the money, the more of it the government creates out of hot air to pump into the system — only pumping up the pressure for future inflation when the hoarding finally does give way. The king’s men think it is safe to keep pumping their gas-money into Dumbo because the elephant is not showing any signs of inflation. What the gurus of government gas have neglected to realize is that all their pumping hoses go directly into that gas tank inside the elephant. The elephant looks fine, inflation-wise, until the tank explodes.

When governments at the top of the world go bankrupt, their movement is something like plate tectonics on the earth’s crust. The Soviet Union collapsed and was subsumed by the small satellite nations that rose up around it. The collapse of Germany into hyperinflation brought Hitler into power and made the whole earth quake with geographic changes. In short, as economies collapse, revolution rises … and so do the efforts to put revolutions down. Nations rise against nations, as Germany did against the world. The map shows upheaval everywhere when catastrophic forces of that size collide.

Spiegel reported on February 9th that tempers around the world are getting shorter, that the French organized general strikes and sang their favorite revolution songs in the streets of Paris, that Russia was sending troops into the streets, and that Beijing was sitting on what could become a rural revolution. So far, these are just burps, but the pressure keeps building

HOW MUCH GAS CAN AN ELEPHANT EAT?

If you really want to get pumped up, forget Al Gore’s fascinating CO2 chart, and look at the Fed’s money supply chart. The amount of money pumped into the economy by the Fed in the past year has skyrocketed far beyond anything seen in U.S. history. If the U.S. tried to offset that by selling treasury bonds right now, it would have to pay astronomical interest to create that much demand for its bonds. Because it can no longer borrow as much money as it needs, it’s creating money by simply decreeing that it exists.

This is a hydrogen time bomb in that we have inflationary pressures building that are not releasing because all the new money is bottled up in bank tanks; i.e., locked in funds that are not even included in the government’s money count. Since there is no inflation, the government continues to pressurizing the money supply in order to try to break through the ice in the credit system. Since the ice is not just easing out of the way, it could be catastrophic when it finally does break loose.

Look at Zimbabwe, for example, where they have mastered this funny money game. In Zimbabwe a trillion notes now buys you a bottle of water… but only if you can find someone who has a bottle of water. The U.S. has long told other nations they need to bite the bullet and not print their way out of financial disaster, but it turns out we have no taste for bullets when it is our turn to bite.

THE BITE IS ON

As more and more governments around the world increase their deficit spending to bail out their banking systems, the supply of bonds mushrooms. That will inevitably mean those governments have to offer much more interest on those bonds. So long as U.S. bonds look more secure than those of other countries, it will continue to be able to finance its debt at low interest; but, if it begins to lose its credit rating, the elephant is in huge trouble.

The likelihood of world investors, especially sovereign wealth funds, moving away from treasury bonds increases daily. China has been talking for some time about pulling away from U.S. treasury bonds. Now, with a lot less American trade, it has far less American money to store; so, it has far less incentive to buy U.S. treasury bonds. With 70,000 factories closed in the last year, how long will China be able to buy anyone’s bonds when it has no money to invest?

If these two problems (the need to pay high interest to roll over U.S. debt and bottled-up inflationary pressures) give way at the same time, it’s going to be the perfect fart. I think the only thing keeping China from pulling out of U.S. bonds at the moment is fear that the U.S. will pass such gas, which is sure to blow everyone around us away as much as it does us. There won’t be anyone wanting to be in the room with that elephant. But you can’t eat gas-based money forever. Sooner or later, you’ve gotta blow.

Some people keep talking stock, whether they’re right or wrong, and stay with their pollyanna beliefs. Others take stock of their own predictions, ignore what they want to believe, and look at reality square in the face. We’re now at a perfect time for taking stock of some recent predictions.

TALKING STOCK

Two weeks ago I wrote that National Review’s economics editor, Larry Kudlow, must have been on some powerful hallucinogens when he predicted, “The stock market is telling us the economy’s future is a lot brighter than its past.” He based his euphoria on the phantom hope that “the stock market looks ahead,” and the stock market had just turned upward upon hearing a very bad jobs report the same day. Thus, by Larry’s thinking, it must have sensed something the rest of us didn’t know. Larry looked for the silver lining that would explain the sage wisdom of the market in going up when it should have gone down.

If Larry was right that the upturn of the market following a dismal jobs report meant the market knew good times were on the horizon, in spite of the bad news, what does it mean now that the market made a major downturn right after Larry spoke, especially falling after what should have been positive news — that history’s greatest stimulus bill was signed into law? True oracles are not fickle. Clearly the stock market is more reactive than predictive and no wiser than the common masses that create it. If the stock market were our canary in the coal mine, we’d all be dead ahead of the canary.

No sooner had Larry finished his caviar after that last prediction, than GM and Chrysler headed back to the government for another thirty billion because things were far more grim than the needs they had first laid out. Then, barely two weeks past Larry’s forecast of silver linings, Leah Shnurr of Reuters reported, “Stocks slid within striking distance of the November bear-market low on Tuesday, as grim manufacturing data signaled the recession is worsening and warnings on risks facing European banks underscored the continuing toll of the financial crisis.” From the day Larry cooed over the warming of the stock market, stocks have done nothing but taken the polar-bear plunge to new lows.

Even U.S. bank stocks slid much further over the last two weeks, in spite of monumental efforts to shore them up with a 700-billion-dollar bailout that has failed to hold. So, in the last two weeks, the stock market has skidded all over the place, and the credit market remained on ice, in spite of largest stimulus package ever known to mankind. What does that tell you about the kind of speedy recovery Larry crooned about? All the little uptick showed us was that the market was still deep in denial.

The sliding was, in part, due to how faulty the stimulus bill looks and equally due to some major bad manufacturing news that started rolling in (the kind you seen in advance if you’re not blinded by denial). Meanwhile, the SEC reported more massive fraud — this time in Texas at Houston-based Stanford Financial Group. As I have been saying, we are certainly going to continue to find more major fraud. Madoff was the beginning, not the end. Fraud is rot, and it tends gives out under a heavy economic burden. You often don’t see it until it has to bear a load. Only the most obvious fraud shows up at first. Likewise, only the weakest institutions fail at first. So, there will be more fraud to be found and more institutions that were not quite as weak as the first to fold.

One day after Shnurrs article, Pedro Nicolaci da Costa (also of Reuters) reported that, “U.S. unemployment will top 9 percent before the recession is over, according to a Reuters poll of economists that points to a significantly bleaker economic outlook than just one month ago.”

I say Reuters’ selected economists are still too optimistic. We will easily hit double-digit unemployment before the present depression is over. Why? Because our present economic gurus are still basing their figures on what is before them on the immediate horizon, which anyone can see; but they are not factoring in how one domino falls against another. They are looking at only what has fallen and what is clearly likely to fall but not looking at what is going to be hit next by what is clearly likely to fall. Take off the blinders, and you can see what lies in the path of the next thing to fall.

There are, at last, a few voices familiar with the market that have stepped out of denial. Last week Reuters also reported, “Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis. Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.

He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system…. There’s no sign that we are anywhere near a bottom.”
That’s what I said the day Lehman Brothers fell, not just because it was Lehman Brothers, but because of the realities underlying its fall; so now let’s take stock of the things that I’ve predicted. They’ve been in writing in this column. So, they’re not hard to follow. Go back, and you’ll see I leave nothing out in taking stock of my own words.

TAKING STOCK

People need to start listening to different voices than the old gurus. While few if any voices were talking economic depression seriously when I was a year ago, even the White House said unequivocally this week that there is no longer any doubt that this will be, in the very least, the longest economic downturn since the Great Depression. Not all depressions are equally great. That’s why we only call one of them “The Great Depression.” You don’t have to equal The Great Depression to be in a depression. On the other hand, remember, there was a time when we only called one war “The Great War.” Eventually, we had to number them.

Last month, I wrote that sales reports from major retailers would show abysmal drops by the end of January and the first part of February as fourth-quarter results came in. I said that would happen in spite of long lines in stores at Christmas. I said that sales volume was there, but that profits would be seriously lacking. It was the end-of-the-economy’s close-out sale. Not much materialized in January, but the data is now coming in at mid February:

Associated Press’s Stephen Bernard wrote last week, “Disappointing fourth-quarter earnings reports from Lowe’s and J.C. Penney provided new evidence that the recession is taking a heavy toll on U.S. businesses…. Lowe’s said its fourth-quarter profit dropped 60 percent after customers cut back on spending. Lowe’s also provided a 2009 earnings forecast that was short of analysts’ expectations. Department store chain J.C. Penney said its fourth-quarter profit tumbled 51 percent.”

I also predicted last year that the next wave of this economic tsunami that would hit us would be a manufacturing collapse as a result of the retail failure that would roar by in December. Right on schedule this week, due to all the bad news on the manufacturing end, the Dow Jones Industrial stocks broke the bottom of the last bear market and look like they don’t know when they’re going to stop.

NewsMax reported, “The move below [the 2002 bear market] dashed hopes that the doldrums of November would mark the ending point of a long slump in the market, which is now nearly halfway below the peak levels reached in October 2007. The market’s inability to rally signals that investors see no immediate end for the recession, which is already 14 months old and one of the most severe in decades.”

So much for the predictive wisdom of that little blip Larry got excited about. The present scene is less like experiencing the reassuring warmth of a thaw and more like the ice is cracking under our feet… but maybe not because it’s thawing; maybe it’s just moving. Other signs of the downturn in manufacturing: freighters that are now running half-empty are offering to haul cargo for just the cost of their fuel and handling so shipping companies can fill up the remainder of the ship, in essence running with half a payload and then offering sales on the rest of their space at bare cost just to help cover their fuel and get the ship out on time. Half of China’s 9,000 toy exporters have gone bust, mostly since Christmas, as predicted.

The Economist reported this week, “The destructive global power of the financial crisis became clear last year. The immensity of the manufacturing crisis is still sinking in…. In fact manufacturing is also caught up in a global whirlwind…. Industrial production is volatile, but the world has not seen a contraction like this since the first oil shock in the 1970s — and even that was not so widespread. Industry is collapsing in eastern Europe, as it is in Brazil, Malaysia and Turkey. Thousands of factories in southern China are now abandoned. Their workers went home to the countryside for the new year in January. Millions never came back.”

CNN reported last week that 70,000 factories have closed in China and 20-million workers have lost jobs. Some analysts are now suggesting that a rural revolution is imminent because the 20-million workers had migrated into cities from rural areas to get these jobs. This is not just a manufacturing decline. This is a MASSIVE manufacturing collapse.

Paul Volker, renowned for careful, non-alarmist, measured statements, even said with regard to manufacturing last week, “I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.”

If you’ve been following my column, you’ll remember the order I predicted for the waves of the economic tsunami triggered by the housing collapse (triggered by it, but caused by too much debt everywhere): First, a financial market collapse worse than all but the oldest of us have seen; then a few manufacturing failures due to the credit crunch from the financial collapse (which happened with the big-three in the fall); then major retail failure over the holidays due to loss in housing values, the shrinking of credit, and the loss of jobs in banking and at a few major manufacturing closures; then a worldwide manufacturing collapse after Christmas, followed shortly or maybe simultaneously by a commercial real estate collapse (not yet seen but early signs are showing); and then a collapse of commercial banks that are less affected by housing than by commercial real estate, and then minor reverberations from all of that piling up.

Those are the dominoes that take each other out or the waves of the tsunami before this is all over. Four out of the six that I laid out have happened in exact order and on schedule like a train … wreck. Amidst all of that you have the less predictable effects of waves hitting one shore then bouncing off to another that I also spoke of. Thus, we are now seeing Europe crumble to its knees due to the U.S. collapse and not knowing how many ways that will feedback to the U.S. with protectionism, etc.

All of that is why there is still a lot more downtime to come. Stop listening to Lightheaded Larry, and listen to Knave Dave.

We’ve all heard the plan for saving the nation. Create a “Bad Bank.” Deposit all the bad loans in the nation into the bad bank, and flush them away. The bad bank will buy these loans with money that is minty fresh. This magic money will come from the next generation. Our legacy to them will be the world’s worst bank. The beauty of it is, they feel our pain, and we don’t. Their pain, our gain.

WHERE IS THE LYNCH MOB?

The government solution to our over-credited economy is to correct the problem by preventing the correction. Roll it all up for the future so that banks will go back to doing what they were doing — letting out an easy flow of credit from their arteries. After all the billions pumped into them from the government’s donors, U.S. banks still remain effectively insolvent. The federal government could have accomplished more by building 45,000 million-dollar yachts and giving them away as bonuses to all the nation’s bankers. That would, at least, have put a lot of boat builders to work.

In December, Merrill Lynch dispensed $4 Billion in bonuses to its top execs … after receiving bailout money. Bank of America, which acquired Lynch, then became aware that Lynch’s loss of blood was equal to a head injury from falling off its corporate tower. So, it asked the federal government for another twenty-billion-dollar transfusion. If the bonuses had not happened, BofA could have asked for a quart less (or about $16 Billion). While BofA claimed they had no idea that Lynch would have twenty billion in fourth-quarter losses, they certainly knew about the four billion of it that their own people created at the last minute on the way to their Christmas parties. Yet, the government didn’t even blink and handed over the full twenty-billion request. This is the revised theory of trickle-down economics in action. Bail out millionaires, and they will spend their new mint-green money on cars that will put middle-class automakers to work. Or yachts.

So far, the government has transfused its liquid gold into the banks’ main arteries with not much more than a wish and a prayer for recovery. So much money flowing so freely is a situation ripe for abuse. In fact, obtaining interest-free billions in these financially pinched times (if you’re a millionaire) has been easier than getting a small-business loan from the government in plush times. In essence, Bank of America bought Merrill Lynch on loan, and then the government paid off the guaranteed loan with taxpayer money. The bank was supposed to take $45 Billion and use it to make more loans to stimulate the economy. It did not do that at all. Instead, it bought Merrill Lynch. Future tax payers got absolutely nothing for the money we borrowed from them.

Instead of saving BofA with that $45 billion over the last few months, the government could have just bought 45 million thousand-dollar mattresses for us all to hide our money under. We’d, at least, sleep better.

AN INDECENT PROPOSAL

With all the money poured into existing bad banks, the banks still have ice in their veins. The almost free money did not “unthaw the thaw,” as George Bush wanted. Since the old bailout plan accomplished nothing, except easing the landing for millionaires, the new federal government is creating a new monster to solve our problems. It will establish a new bad bank owned by taxpayers to pay real money. It hopes to pump the monster to life with all the bad loans that emerge. Just keep buying them into this gaping black hole, which is a wormhole that comes out somewhere in the future. It’s like putting our diseased loans into a cryogenic tank for the future to figure out how to cure them. Maybe some miracle will be developed by then. If not, that’s the future’s problem. I’m sure they will thank us for this cryogenic pot of festering sores.

The plan, however, has this much going for it: if there is anything the government is likely to do well, it’s to create a really, really BAD bank. They’ve got all the right people in place to badly manage it. So, I have no doubt that it will succeed in being bad in more ways than the scriptwriters of The International could imagine. I hesitate to compare to them, however, as their plot about bad banks was, at least, entertaining, and cost me only $9.50.

Of course, no sinister plot can gain broad acceptance without a palatable rationale. The rationalization for the Bad Bank is that, by handing all the bad debts to the future in a single pot of toxic waste, we will resurrect a debt-based economy that is so strong that the next generation will have no problem paying off the debt we hand to them. I think that’s a plot drafted in hell that’s going to exact more than a pound of flesh rom each person in the next generation. In fact, I don’t think it will take even a generation before the bad bank becomes the black hole that eats any recovery it temporarily created.

A DECENT PROPOSAL

Instead of creating one monstrosity of a bad bank, create many little bad banks. Get away from the old theory that gigantism is the ultimate goal in everything. Instead, take all the existing bad banks, and separate out their worst parts, splitting those corporations into the part that may survive and everything that is sure to die. Then transplant all the current CEOs who got the big bonuses in charge into the little leper corporations so the diseased corporations that hold all the bad debt get all the diseased minds that created it. Flush the CEOs out along with the bad debts, and let the little corporations wander off to die. In other words, save what’s worth saving of the mega corporations by downsizing, and let the rest of the mess die on its own — not as a bundled gift to the future. Pay our own pain now. Let the market correct itself, but minimize the harm by by bundling the best parts of each corporation into smaller entities that can survive on their own without any government help. Break down the too-big-to-fails. We have a phrase for this procedure — “structured bankruptcy” or “reorganization.” Face the pain, and stop concocting twilight plans for banking monstrosities deep in the laboratories of the U.S. Treasury.

So far, the government’s inept stumbling around for any plan but the obvious one has only created confusion that has caused investors to pummel companies at the first sign of distress because no one knows what the government will do next as it invents unheard-of pain killers, instead of amputates gangrene. Now, it’s finally ready to amputate the gangrenous members, but only if it can send them down a drive-up vacuum tube to the future.

Why all this madness? No one wants to admit the problem is not lack of credit; it’s abundance of debt from too much credit.

Sometimes you have to take off the gloves in order to knock the empty air out of someone. In his February 6th column, National Review Online’s Economics Editor, Larry Kudlow, pointed out that stocks were trading high that Friday, in spite of a massive plunge in jobs. As one of the gurus of the old economy, Larry explained this disconnect: “The stock market is telling us the economy’s future is a lot brighter than its past. The stock market looks ahead; the employment report looks behind.”

Whatever hallucinogen Larry’s taking must be only available to those who bathe in Perrier because I’ve never found any drug that can make me as delirious as Larry is over the predictive wisdom of the stock market. National economies all over the world just reported their worst contraction in decades, but Larry thinks the second-coming of the economy is here because the stock market went up on Friday. This is what happens when false prophets run up against the reality that the religion they preached has failed. The false prophets of religion look for different scriptures to adjust their dates. The false prophets of false profit look toward any indicator that provides the news they want to hear.

READING PORK BELLIES

The stock market’s incongruity with the job market is best explained, according to Larry, because “mustard seeds planted awhile back are now pointing toward recovery. The huge energy tax cut is one such mustard seed. The related inflation collapse is another…. With zero inflation, that’s a real increase in worker purchasing power.”

You might as well state, Larry, that the thing that profits geese is that elephants don’t eat them. While Larry trips into euphoria over the silver that still lines a darkening purse, he should perhaps preach his dogma to employees at Woolworths in the U.K. Woolworths just locked the doors on the last of its 807 brick-and-mortar stores, ending a hundred-year retail history. The weak go first, so the loss of those jobs and similar jobs among so many other retailers around the world is a shudder the economy hasn’t even felt yet. Tell those newly unemployed that the good news is their purchasing power has increased due to lack of inflation. I’m sure they’ll run right out and buy a drink with the power of their zero paycheck. I don’t think they’ll be raising cheers to the stock market’s wisdom, however; but expect inflation on the price of Guinness in the U.K. as consumption grows faster than yeast. I’d say, go long on beer stock.

Obviously, denial reigns supreme. Who cares that the stock market is in the same drug-induced euphoria as Larry? Since when has it been the oracle of wisdom? If it had been, it would have bet against this economy before the housing collapse. After all, it looks ahead — remember? In its superior wisdom, the stock market has done nothing but lurch downhill after the banks like Jill after Jack. Nevertheless, Wall Street is a religion for some, and people like Kudlow are still believers in its divine wisdom.

OUR FAITH-BASED MONETARY SYSTEM

Larry was also thrilled because “the Federal Reserve has been pumping in money to offset credit and asset deflation.” Credit and asset deflation is exactly the thing that needs to happen, Larry, to a false economy built on nothing but skyward debt. He’s right, of course, that the Fed has been creating lots of money — it’s self-administered narcotic of choice. In just the last few months, the Fed has mainlined $300 billion into the U.S. money supply, meaning it has injected $300,000,000,000 (it helps to see the zeros) more into banks than it has received from the Treasury in revenue. In fact, this figure doesn’t come close to telling the whole story. The Fed stopped publishing its M3 measure of money supply because it tells a horror story. M3 was a count that included money that is tied up in long-term institutional deposits. Those long-term institutional deposits that are not included in the current money count are the kinds banks use to hold their money. That, of course, is where all new money is being hoarded right now. So, inflation is not being felt because most of the new money is not even included in the count and is not flowing through the system … yet.

Most money is not currency. It exists on balance sheets and is as vapid as numbers, but the presses do tend do have to catch up later as the money flows to consumers in the form of credit, and some eventually converts to currency. When the Federal Reserve moves money to the balance sheets of its member banks, the U.S. Treasury usually issues bonds for the same amount as the source of that money, which creates a liability against the supply. That balances the equation. Right now, the Fed is just manufacturing money out of thin air. It’s doing this because it wants to create inflationary forces to prevent further deflation of prices in the housing market. Yet, if prices do not deflate on homes, the only way people can buy them will be to continue to take out far more credit than they can afford, meaning credit must stay deregulated so that it can remain ridiculously perilous.

Larry, however, is excited that we’ve had no inflation because the Fed is doing all it can to create new money to avoid deflation; but, if printing money could save a failing economy, Zimbabwe would be a superpower. Currency in Zimbabwe reached such disastrous overprinting last month that one church received a check for 6,000,000,000,000 Zimbabwe dollars and did not even bother to cash it.

Larry points out that there is generally a lag between the increase in money supply and the actual loaning out of that money — a float of six to twelve months. “Through January,” he states, “we’ve had five months of money stimulus [creating money out of thin air]. So stocks may now be telling us that the gloom and doom crowd [like David Haggith] — and its pessimistic economic prognostications that cover all of 2009 and in some cases 2010 — is about to be proven wrong.”

Larry, Larry, Larry. The market does not tell us anything. The market IS us, all of acting in our own various crazy ways, including the doom-and-gloomers like myself. How the false prophets like to tickle our ears with good news. Larry believes that when banks start giving out loans on freer terms, people will start putting that money into circulation, but he misses the obvious: this same lag he speaks of is exactly why we have not yet seen inflation due to all the new money. It’s still choked at the top. So, if the money does go into circulation quickly, inflation will come quickly. There’s another possibility, though, which I think more likely: banks may start offering loans now that they’re floating on air, but few may be interested in buying. How many jobless consumers want to take on more debt? As for retail picking up so those jobs come back, it’s a long time till Christmas, Larry. Loans will mostly be limited to refinancing, not building new homes; so, they won’t have much stimulus effect.

If I were investing in manufacturing right now, it would be in the manufacturing of printing presses — the kind used by the U.S. mint — because those presses have a lot of catching up to do once that money enters circulation. That, or buy yeast because the unemployed may soon be buying a lot of beer at $300 a pint. Money supply right now is growing at about the same rate as yeast anyway, so yeast growth is probably a better indicator of where the present economy is going than Larry’s mustard seeds.

THE HALLELUJAH CHORUS

In his prophetic ecstasy, this false prophet of the old economy backs himself up with one of the now-renowned Wizards of Wall Street: “Meanwhile, Bank of America CEO Ken Lewis told CNBC on Friday that he can get out from under TARP in three years. There will be no nationalization!”

I had to put the exclamation point on there for you, Larry. I can just hear you saying, “Whoopeee!” Is this the same Ken Lewis who a very short time ago bought Merrill Lynch for lunch and then said he never saw the financial problems Merrill really had? Is this the same beggar who ran to the government with his hand out for another $20,000,000,000 to buy himself a pair of glasses? Is it the same Ken Lewis whose share prices fell over 80% from the time he first announced the acquisition or Merrill Lynch?

I guess it is because Larry adds, “Lewis also said his firm’s acquisition of Merrill Lynch will be successfully executed over time.” Well, hallelujah, Larry! I thought that was what Lewis said the first time. I suppose, with yet another ten to twenty billion in free government money printed from air, it might someday become true. You know the pundits of profits are hurting when they call in the rodeo clowns to prove their point.

“It’s no surprise,” Larry says, “that bank stocks were the leaders in Friday’s huge rally.” At last we agree, Larry. With the government printing so much free money to stuff in the bank coffers, it’s no surprise some people want to invest in the racket. But it won’t save the economy.

Larry believes the growth in money supply will be the dark horse that comes through and saves the economy within the next few months. I think Larry must have received his economic education from the University of Zimbabwe. It may well be that money growth will produce the biggest economic surprise of the year, as Larry says, but it won’t be the surprise Larry is hoping for. So, get out your stein.

At last, in true form, Larry believes the real stimulus will come from the lack of tax increases, as the stimulus package maintains previous tax decreases. Larry, if those tax decreases could save the economy, they would have done so last year when they came into being. They made no difference at all because they do not change the fact that the economy built on endless debt has failed. Keep dreaming, Larry. I think you’ve fallen asleep, counting golden parachutes.

The word “depression,” which I was using a year ago, is the only thing about the economy that is gaining currency. This dismal word has now flopped off the lips of General Electric’s CEO and Great Britain’s Prime Minister like a dead fish. Another D-word, “denial,” still holds the teeth clenched when it comes to speaking the word “depression.” We only speak of that word, looking backward because no one likes to admit they’re currently depressed. It’s fine to talk about later when the wine is pouring.

Our great error right now is to think we are witnessing the burst of a real-estate bubble. We are not. We are witnessing the failure of an entire economic model that dominated for a quarter of a century. The real-estate collapse was just the first thing to go. And that’s why this is a depression. Recessions correct market bubbles. Depressions correct failed economies.

WHAT DOESN’T WORK
When the expansion of debt ends, the economic expansion built on debt ends. You cannot expand the capacity of individuals to increase debt forever just by loosening the terms and freeing up credit. Debt was not a tool in the last twenty-five years. It was the economic foundation, and it has failed. We were fundamentally unsound.

The sooner we recognize that we were chasing a phantom, the sooner we will move toward solid reality. Unfortunately, the new U.S. government talks of change, but it clearly doesn’t know how to change. Most of its recovery plan is aimed at bailing out the old economy to get it to float again. But you cannot bail out a ship that is already in Davy Jones’s locker. We need to build a new economy that is more durable model and let the old ship rest in the sand bars of history.

Instead, the government’s program aims at stimulating debt-based consumption all over again, which merely denies the reality that the economy was leveraged like a pyramid standing on its point. The upside-down pyramid has toppled. Everyone wants to run around and prop it up again, but you cannot solve a fundamental problem of excess debt, by re-expanding credit. That’s so obvious, it shouldn’t need to be said; but many don’t want the mirage of wealth that is really only debt to end.

The biggest interest cuts people have ever seen plus hundreds of billions spent on bank bailouts have accomplished nothing. That additional debt is passed to the next generation, but it gives that generation nothing in return for the bill. What does the next generation even care if Citigroup still exists? If not Citi, some other bank will ooze into the gaps. They will still have banks. We’re the only ones hurt by the banking collapse, and we want others to carry the pain. What does the future care if we suffered the pain of our own collapse? Passing our mountain of bad debt into the future may come to be seen as the most selfish act any one generation has foisted upon another, as we try to make the next generation pay the price of our failure so that we don’t have to. To feel good about doing that, we need a lot of denial.

WHAT WORKS

Let’s hope that “the government of change” did not mean putting a little change in people’s pockets with more tax breaks that are just one more bill to hand to the future so that we can avoid suffering our own failure. With jobless claims now at a twenty-six-year high, the government’s stimulus plan should focus entirely on job creation as the path to avoid suffering. “We’re talking years, not months, before we see a decent recovery in the jobs market,” said Sung Won Sohn, an economist at California State University. In a true-wealth economy, wealth is created by good-paying, sustainable jobs that give rise to the ownership of durable goods. Assets are accumulated that can be passed to the next generation, not debt. That’s actual wealth.

Only one kind of enormous deficit spending will not cripple the future — spending money now to build and repair things that the next generation will have to build and repair anyway (the creation of very durable goods). By that path, we hand the next generation the trillion dollar bill, but we also hand them more than a trillion dollars in value-added assets — new rail systems, repaired highways, new schools, etc. The debt handed to the future is offset by the cost savings that generation will experience in not having to build those things. That is the only stimulus that is fair to future generations who get to pay for it.

Both of my parents grew up through the Great Depression. My father to this day raves at how the CCC (Civilian Conservation Corps — one of the WPA-type projects created by Roosevelt) kept him alive with the only sustainable employment he could find. As the next generation, I benefited directly when I attended a high school built under the Works Progress Administration. I traveled over bridges built by my grandfather. I benefited by hiking on trails that were created by my father. The WPA produced over half a billion miles in roads, 125,000 public buildings, 75,000 bridges, 8,000 parks and 800 airports. Most of those things were so well-built they are still in use today. My alma mater was recently renovated into the most modern school I’ve seen because its essential structures were still rock-solid. And, so, it has become an asset handed to yet another generation.

REALITY TODAY

Many economists are predicting February will lose another half a million jobs as January did. I am confident February will be worse as retail and the manufacturing it supports fall apart. At the beginning of January, I predicted that those long lines at Walmart over the Christmas season meant nothing. While sales volume appeared O.K., it was only because goods were being sold at no profit to minimize losses. As soon as those cheap goods were cleared, nothing sold. Data released at the end of January confirmed that the final quarter of 2008 saw a drop in consumption of American goods and services that can only be matched by one other quarter since records began at the end of World War II.

Yet, the “government of change” is putting more of the same old pork fat in its stimulus bill when we need all muscle. Here are some examples: $335 million for sex education. (I don’t think the stimulation here is economic, unless it’s to create jobs in the world’s oldest and most stimulating occupation.) Over half a billion dollars to help people switch to digital T.V. (I suppose with so many people out of work, the government gurus figure there will be a lot of couch potatoes that need public assistance. I’m sure the future will be thrilled to know they bought T.V sets for us.) $70 million to help people quit smoking. (At a time like this, the government should realize that money will need to be spent on drinking problems.)

While some of these may be worthy ideas in good times, they are frivolous additions to a critical bill that should be nothing but lean meat in jobs that produce durable assets. Their inclusion demonstrates that the reality about depression has not sunk in, nor has the reality about the bill we are handing to the future. Some of those future people may wish a few of us had died of smoking.

Today begins the Chinese Year of the Ox. I wasn’t sure how much stock to put in the Chinese Year of the ___ stuff. (Right now I’m not buying stock in anything.) Then I had a brainstorm. I can easily see if there is anything to this Chinese New Year stuff by looking back at what 2008 was the year of.

Hahahahah. The Year of the Rats. Well, 2008 was certainly that with many of them jumping ship with golden parachutes on. (Unfortunately for the rats golden parachutes are not the best life preservers when jumping a sinking ship because they tend to sink faster and entangle more. It would have been a good time for lightweight float. The golden parachutes will entangle some of these guys in 2009. That’s one of my predictions for ’09, die-hard optimist that I am.) There was never a year of more rats than last year. On the other hand.

The Chinese Obviously Do Not Know Their Rats:

According to Chinese mythology, a rat year (like 2008) is a time of hard work, activity and renewal … a time to begin a new job, launch a product or make a fresh start. Hmm. Not exactly a good description of 2008, which was a year of no work for many, and poor work for everyone in the banking industry and anything but renewal. Certainly not a good year to begin a new job.

So it seems on the face of things, but, like so many things, it depends on how you look at it: 2008 was certainly a year in which you should have begun a new job if you were ever going to — the first one that came across your path if you were out of work — because there certainly aren’t going to be many jobs in 2009. (This is the year when bankers start flipping burgers.) And, while 2008 was not a good year to make a fresh start, it certainly forced a lot of fresh starts.

Overall, though, I think the Chinese need to rethink their rats in light of Western experience with the little plaguers. Rather than industrious hard-working creatures that bring renewal, we in the West know that rats lounge at the top of the world banking structure. They tend to eat paper (like money) and build nests for themselves out of it (like golden parachutes). They tend to shred paper (like documents they’d rather not let people see) and build more nests for their families out of it. They tend to leave droppings in their nest for others to have to clean up. And they just don’t smell good.

But the Chinese Haven’t Got it All Wrong:

In the Chinese mythological view the rat is shrewd, inventive, charming and ambitious. That does seem to describe Ben Bernanke and Hank Paulson. Rats are also clever and sociable and readily adapt to changing circumstances to save themselves. Well, they did re-adapt the entire U.S. economy toward socialism in less than half a year because of changing circumstances, and they did it less by the strength of their ideas than by charming Congress into swallowing anything they said (though not exactly with relish any more). And that is somewhat clever, though one doesn’t have to be particularly clever to outwit Congress these days. As for ambitious? What could me more ambitious than the man who goes to Congress and says, “Write me a blank check for $750,000,000,000. And says it with a straight face. And gets it! “Trust me!” What can be more ambitious than a man who helps break the bank at Goldman Sachs and then becomes head of the entire U.S. Treasury? So, that was 2008, the Year of the Rat.

Thus, the more accurate image of the rat comes when you combine the negative Western stigma of the rat with the positive Chinese evaluation of the rats capabilities. That’s when you wind up with a perfect description of the people who transformed the U.S. economy into something that we have not yet even invented a precise word for, except that it seems quite a bit like the economics of the NAZI party. (Maybe not the morals, but certainly the economics)

The Neo-Socialist Conservatives, like George “I-had-to-give-up-my-free-market-principles-to save-the-free-market” Bush, have changed the world in less than a year. Shoot, they did most of it in one quarter!

So, make 2008 the year of the ship-jumping, paper-shredding, shrewd little social creatures that build their nests out of other people’s money, add a pointy nose, and 2008 was definitely the year of the rats.

In which case, what does 2009, The Year of the Ox, hold in store?

The ox is persevering, stable, finds prosperity through fortitude and hard work, and has strong character. Hey, this sounds like my year! It certainly doesn’t describe anyone in the upper echelon of banking these days, but it is definitely the kind of characteristic that it is going to behoove (sorry) all of us to have if we’re going to pull through and get out of this mud hole. Oxen are also noted as loyal and as organizers. (Maybe economic reorganizers.) Oxen are renowned for their patience, but when it reaches its limits, they’re renowned for their temper. Oxen tend to have strong work ethics. Ancient Chinese beliefs aside, this is the kind of year where ONLY people of such description are likely to make it through in good shape. And we need a good dose of vented ire right now, too, to make sure the guys with parachute lines tangled around their legs go straight to the brig … in the sinking ship … at the bottom of the sea … where all low-life should settle in a nest made of whale dung. And the more of us who take on those oxen qualities, the better we will do as families and friends when pulling through tough times. The times will most certainly get tougher; but those who get tougher right along with them will persevere. So, this really is a year for the ox.

I see that Barack Obama is an ox by birth. What could be better than a natural-born ox in a year dedicated to the ox? He will have to persist diligently in order to stabilize things, and that is the ox’s best strength. The ox’s home is said to be his castle, and Obama’s home literally is the U.S. castle, which he acquired in the month the year of Obama began. (I mean “year of the ox.”) Without a doubt, the vast majority of the world is looking upon Obama as the man to pull the world through these deeply mired times.

Don’t underestimate the man. While he’s an extreme liberal in his voting policies when representing a liberal state, he’s also smart enough to know that you have to steer the country toward the center if you want to succeed in U.S. leadership. He’s already shown he’s a man willing to try to listen to both sides and find consensus if it can be found. There’s enough of the practical, shrewd rat in him to know what he needs to do and probably to resist some of his more liberal tendencies in order to stay with the practical and the achievable and not to create more divides at a time when the country is already being torn to shreds. He doesn’t want to end up like Bush, who left the White House with “Good Riddance” written on his helicopter (in the minds of the vast majority of Americans and others).

Pulling Together:

We are asked to pray for our leaders, not to assume they are the antiChrist ahead of the facts. All assumptions prior to Barack Obama about who is the antiChrist have been wrong or remain unproven by real events. Such speculating is almost always useless and should cease. Praying with a generous heart that hopes the best of the man will be what God brings forward in these heavily burdened times certainly has to be what is best for the nation and even the world. It’s the kind of prayer for a new year and a new administration that would seem more likely to be received warmly in heaven than one that too quickly assumes more evil than the facts yet bear just because of partisan divides and political labels.

As the Apostle Paul argued, pray for your leaders that it may go well with you, meaning that, if things go well for the leaders, things go better for everyone. He said that at a time when they often had some truly evil leaders. So, hope and pray for the best. Be slow to slander, quick to praise, strong as an ox in encouraging another who is shouldering the heaviest load a president has shouldered in many decades. Care not whether Left, Right, Democrat or Republican succeeds. Care that good succeeds. Division does not serve well in times of duress. Oxen work as a team and only work well when they pull evenly together. We cannot help the fact that Democrats and Republicans share the yoke. That isn’t going to change. Perseverance is made easier even for an ox, however, by genuine encouragement while putting our own shoulders into the yoke, too.

That doesn’t mean we don’t criticize truly dumb ideas or stand against wrong doing, but we cannot merely stand against what is wrong; we must first and foremost give positive support to what is good and noble and right. Hence, I start this first article of the Chinese New Year on a supportive note, even though the purpose of Downtime is to lampoon the ridiculous that parades as self-important and wise in order to strip away the veils of denial that enabled this economic collapse in the first place. Downtime about getting real. And deeper understanding is not found in labels. Nor is teamwork found in a divided house. This is a time when teamwork is essential for survival — at home, in the neighborhood, and in the Capital.

I was still feeling kind of swishy in my belly this week as I read about various CEOs who brought down fat bonuses by bringing down their banks. And I was thinking, what is it that a top-of-the-line CEO does to bring down one of the world’s largest banks that makes him or her worth a seven-quadrillion-dollar bonus? I mean what particular niche of genius makes these barely-street-legal CEOs better at bringing down their banks than those stock CEOs who only get profit-sharing plans because their little institutions keep humming right along in perfect health?

Naturally, I wondered why the woman who runs a mom-and-pop hardware company for thirty years and stays in business against the likes of Home Depot and Lowe’s is worth less than a man in Giorgio Armani who can crush a colossus bank is six months. That question set in motion certain sparks along my darker synaptic pathways that yielded a bright realization. The real question churning in my belly, as it turned out, needed to be reworded: “What is it that makes a failed bank so valuable that it’s worth paying someone a hefty bonus to get it there?”

With the right question crystallized in front of me, I realized that I was onto something really BIG. It occurred to me that there are some hidden things you can do with a failed major bank that you cannot do with anything else (except maybe a failing major brokerage firm), which make it particularly desirable for a board of directors to hire the man with enough heft to capsize their bank quickly. The core value is this: You can use a failed bank to apply for a $20,000,000,000 interest-free government loan. If you don’t have a failed major bank, you’re not even qualified to be an applicant to this kind of government program. Thus, the faster you can roll your bank over like a porpoise, the faster you can scoop twenty-Bill, off the government pavement.

That, right there, is an eye-opener that would tell any board of directors, we need to to put this institution on the rocks and get it there NOW before these government loans run out because they’re going fast. (A trillion dollar fund doesn’t last long these days.) I mean, where else can a bank get twenty-billion dollars on a weekend without even filling out a formal application? To pull off a maneuver of that size that quickly takes a CEO who can boldly turn an ocean liner on a dime (or a cork or whatever it is that an ocean liner turns on) and steer it straight into the cliffs of disaster before anyone sees what’s happening.

Let’s look at some of these amazing turn-arounds:

As mentioned last time, Bank of America scooped up Merrill Lynch at a fire sale with the government’s help one day to become the largest thrift bank in the world. Only weeks later, Bank of America, itself, qualified for a twenty-BILLION-dollar free government loan, which it, then, topped with twenty-some-odd billion shortly thereafter in more free money.

Likewise, Wells Fargo nearly choked to death when it tried to swallow Wachovia with the bones still in it, so it received 25,000,000,000 U.S. government dollars — meaning yours and mine.

Do you see the pattern here? I sure do: If you are one of the unlucky few major bankers who is not failing, you can use all your available cash to buy other another failed major bank at great discounts with the government’s help. Then, after you absorb all their losses, you, too, will become a failing bank so you can qualify almost overnight to scoop up yet another ten or twenty billion extra bucks, maybe more if you’re failing big enough. So, the genius behind a CEO whose major bank is not failing is to find the biggest failure can and buy it! Buy it blind if possible. The more hidden problems that you did not know about, the better your position to argue for free government money. Thus, you don’t even need to spend time evaluating the risk, except to hope it is as big as possible.

You say, “Why do you have to have be or buy a failed bank to do that?” Well, I told you this was hidden knowledge, but it’s not hard to sift out: just read between the lines of the record:

Morgan Stanley just paid Citigroup $2.7 Billion to buy its brokerage firm, Smith Barney. “We need a merger partner, or we’re not going to make it,” said John Mack, as he stood at the helm of Stanley and swung his ship for the rocks. On the face of it, you would say that Stanley (and Mack) clearly ate some bad sushi, or they wouldn’t be yelling like Scotty that “she’s not gonna make it.” Thus, you might conclude Mack talked plenty o’ smack, but wasn’t to smart. But that is where you’re not looking to the hidden benefits of eating bad fish: It was only a year ago that these guys received five-billion U.S. dollars in cash from the Chinese government. Of course, the Chinese government had a lot of extra U.S. dollars to get rid of, since everything bought in America is made in China. Where better to burn through that kind of paper than in failing American institutions? Then Mack picked up another $10 Billion from the U.S.

So, how did he swallow up $15,000,000,000 of U.S. and Chinese government money and still wind up in such bad shape that he needed a merger or he wouldn’t make it? Sheer genius. Last time I asked the Chinese government for money,  they wouldn’t even respond to my email. So, clearly one has to be a major failing financial/investment institution to catch the Chinese eye — the kind that even after an influx of $15,000,000,000 can proclaim its foundering and everyone will believe it. I wouldn’t have cost the Chinese a fraction of what they were willing to give to Mr. BIG Mack. So, they weren’t interested. So, herein lies the genius: to get the attention of the Chinese, you have to yell things like “we’re not going to make it!” Nobody expects that from a CEO, so it’s a bold move that grabs attention. And attention — on the order of the Titanic hitting an iceberg — gets governments to rush to indecision. The more they rush, the stupider they act; so, make ‘em rush hard and fast.

In fact, Morgan Stanley’s magnitude of failure was so attention-grabbing that the government of Singapore clamored for the opportunity to give it billions, too. They had to settle for giving their money ($7.5 Billion) to Citigroup.

The biggest money only goes to the biggest losers:

All of that, thrill that it was, was chump change, compared to what the CEO of Citigroup was capable of. Citi’s CEO, Vikram Pandit (with a name like that, you have to be a fighter), made Big Mack’s attack look like fast food. Citigroup, in just one quarter, managed to milk the U.S. government for $45 Billion. That is some serious banking-failure leverage. How did Pandit land it? Here’s a hint: people are speculating that, within a year, Citigroup will no longer exist! You see, it is only if you have a major bank that is least likely to exist within a year that you can attract $45 Billion of free taxpayer money.

I mean, who wants to invest that kind of taxpayer’s wealth into a bank that shows every sign of staying alive? Why make healthy banks healthier when you can sink forty-five billion into something and literally sink it altogether? I say the man who can accomplish all of that in one quarter and stay alive with a name like Vikram Pandit is deserving of any bonus he gets. But it gets even better: all Citigroup had to shell out for this return was $1.77 Million in lobbying fees last quarter all directed at the government’s bailout program. Where else can you find that kind of return on investment if you don’t have a major failed bank and the kind of blustery CEO who knows how to wield that power?

So, now, you can see why it’s worth paying those big bonuses to get a CEO who can turn an institution the size of an ocean liner around from a course of success to an uncharted path of failure in less time than it takes to appoint a senator in the State of Illinois. The buy-word in banking today is that you have to, first, be too big to fail, and then you have to do what you’re too big to do … spectacularly. Failure is its own reward. Any CEO with a notch like that on his belt will find he’s qualified … well, to become Treasurer of the entire United States of America.

Are you seeing how this works? Neither am I, really, but it sure looks like fun!

When the present economic downfall was really getting under way last fall, Ken Lewis, the CEO of Bank of America, was lauded around the world for scooping up Merrill Lynch in a fire sale. What a brilliant man, the world thought, for picking up a Rolls Royce like Merrill Lynch for pennies on the dollar. Later, Lewis scooped up another bargain known as Countrywide, turning Bank of America into the largest Thrift Bank in the U.S.A. And he could well afford to do it, Lewis indicated, because BofA was sitting on a fat cash cushion. The CEO’s stunning brilliance was seen in how he was able to assess a multi-BILLION-dollar purchase over a weekend and snarf it up.

A Belly Full of BofA

But, suddenly, BofA started feeling ill and looking a little peckish. Soon Lewis was seen out in the street, holding out his cash-starved hands for $25 Billion from the public trough. And he got it. After all, how could he have been expected to know that Merrill Lynch would have over $15 Billion in write-offs during the final quarter of 2008? Do we expect these CEO’s to have crystal balls in order to know what is coming? You’d think the fact that Merrill Lynch was being sold in a fire sale might be a pretty good clue that it could have some unknown health issues beyond its stock issues that might not reveal themselves in a weekend of analysis. Today, we learn that Bank of America held its hand out for a second scoop of public charity, and the federal government scooped out another cool $20 Billion. But the cherry on top was bigger than the scoop: the federal government also promised a safety net of yet another $98 Billion for future bad debts, should they happen. (Should they happen? Of course, they will. This is Murphy’s Bailout Bonanza. If bad things can go wrong, they’ll go wrong bigger.)

What I want to know is why do I, the little guy, have to pay higher taxes for the rest of my life to bail out one of the biggest bullies on my own block? This is the bank that beat me centsless. In 2004 Bank of America got the greedy idea of setting their minimum payments on credit cards just low enough that I would pay the minimum payment and find the next month that their next finance charge put my credit card over limit — all by itself – and I was charged an over-limit fee of $39. Each month, I paid the “minimum payment due” on time like a good citizen. Though I made no purchases, the next month BofA’s finance charge put my card over its limit again, and the bank charged another over-limit fee. Caching! Caching! said BofA’s cash register every month, as the bank burped and smiled. I didn’t see it happening until it happened three times because I was not making any purchases to check off. So, I just looked at the “minimum payment due” and sent the money in the mail. When the account went over limit three times, however, that enabled Bank of America to raise my interest from its 3% introductory rate to its penalty interest rate of 30% on the full balance. That’s when the bank really smiled. At that point, they also scarred my credit rating. That’s when I remembered (the hard way) that all the family’s credit cards had clauses that said they could automatically raise their interest to the penalty rate if my credit rating ever changed. Like vultures, all of our family’s credit cards ascended to the maximum penalty interest rate overnight, and we were eaten alive by interest.

That same year, Bank of America found itself on the losing end of a class-action law suit for this unscrupulous practice of setting phony minimum payments. Their multi-million-dollar loss didn’t change the fact that all my other creditors had gone over on me like dominoes and that all of them had begun demanding full payment of our full balance and that no credit companies were sending me those nice introductory rates any more, so there was no opportunity to roll over to different companies. BofA eventually did refund over $600 they had taken from me in fees, penalty interest and compound interest on the fees and penalty interest, but they didn’t restore my credit rating, and it was too late for me, even if they would have.

More recently, BofA adopted the practice of posting their customer’s debits and checks each day in the order of the largest debit first and the smallest debits last, even when the largest debit was the last purchase made. That way the bank can collect $39 overdraft charges on each of the smaller checks or debits that clear that day, instead of only on the big one that actually put the account over limit at the end of the day. Caching! Caching! Caching!

Spreading Toxins Down the Financial Food Chain

I want to know what on earth BofA was doing buying Merrill Lynch and Countrywide in the first place if they can’t absorb the risk? Was it so important to become the colossus that they had to make the choice to make an overnight purchase of institutions riddled with bad debt? What kind of maniacal greed drives one to make purchases that are massive even in banking terms over a weekend? What possible good did it do the U.S. to orchestrate the sale of Merrill Lynch to BofA so that we don’t have to bail out Merrill Lynch only to have to bail out Bank of America for having taken over Merrill?

“They were probably the best bank out there, balance-sheet-wise, until they did the Merrill deal,” said the Chief Investment Officer of Bell Rock Capital in Pennsylvania.

Why take a company like Merrill Lynch that is dying of toxic debt and have a massively strong (albeit naughty) bank like BofA absorb it, only wind up with two financial disasters? That’s our bailout program in action. This was BofA’s first quarterly red blood loss in seventeen years. One ameba eats poison and is about to die, so a bigger ameba eats the ameba that ate the poison, and now it’s got such a stomach ache that it will die without repeat infusions of government fortune. What happens down the road after the federal government eats enough amebas that ate the amebas that ate the poison? Wouldn’t it have been better to let Merrill Lynch die on its own, and have BofA a healthy bank still? How far down the financial food chain do we want to send the toxic debt? Wouldn’t quarantine be the better policy?

Speaking of amebas, Citigroup, which was recently eyeing Morgan Stanley for mutual absorption, now wants to split in two to save itself. It hopes to leave one half with all the toxins to dry up in the sun — or live if its lucky — in order to save the its healthier half. As a former champion of super-conglomeration, is Citi the sign that conglomeration is finally dying of its own obesity as it now parts itself off? Citigroup has already received two bailout infusions of $20 Billion. Seems they’re busting at the seams anyway. Citi has already cut over 50,000 jobs and expects to keep cutting all the way through 2010. BofA reported similar expectations.

Bank of America is Eating America

Apparently Congress believes the bailout program is a smashing success (the operative word being “smashing”)  because they’ve already released the second half of the money — $350 Billion. And it all went to the treasury with no new requirements of oversight. Barney Frank, head of the Senate Finance Committee, sponsored a bill to add some new rules, but the money was already being spent by Hank Paulson, our Bailout Czar, before the new rules were in place.

Similar bailout programs around the world have been so successful that the Managing Director of the International Monetary Fund warned this week that the global financial meltdown will be worse than formerly anticipated. This is the second time in two months that the IMF has lowered its expectations for recovery.

The banks that have gotten the biggest by the most predatory practices are now the ones receiving help from the hundreds of millions of little tax payers whose blood they sucked in usurious fees for so many years. Many times class-action law suits have ruled those fees illegal or unethical. Now the same bully is going to suck all your future blood in higher taxes for the remainder of your life because the bailout isn’t free. You’re the one who is going to pay for it — you and your children for the rest of your lives. Somehow, it’s hard for me to want to feed the company that fed off of me, especially when I am feeding it my own future blood supply.

The Congressional Budget Office recently announced that the United States will be running its first trillion-dollar deficit this year — $1.2 Trillion if we count the pocket change. That’s about three times more than it’s been in any other year. Most Americans seem ready to agree with congress that this is necessary in order to save the economy from becoming totally frozen. After all, George Bush recently explained that he had to give up on free-market principles in order to save the free market because he had been warned by his experts (who never saw any of this coming) that we were facing an economic peril “greater than the Great Depression.”

Everyone Wanted Good Times, No One Wanted to Pay.

America has enjoyed a long ride on the bull with few interruptions since the Reagan days. But those glory days of high living were mostly because we didn’t pay for most of it as we went. The government learned special charm where it became unnecessary to pay for economic expansion with real money if you endlessly strip those burdensome regulations off of the credit market and free it up to create money. But magic, it turns out, always has a dark side.

The reason Reaganomics, once called voodoo economics by a wiser Bush, worked like a rocket is quite simple: it’s easy to make the good times roll when no one is paying for them. The federal government rolled back taxes and started pushing mountains of debt forward. There is no question that you can put an economy on high throttle by buying much of what you want on credit. Just as households can live high and mighty for awhile that way, so can governments. You can only clear the road ahead so long by pushing a snow drift forward becomes too high and too packed to push, and then you’ve really blocked the road for good. That’s what we did.

The government piled up record drifts of national debt in order to enjoy a time of prosperity at the expense of future generations, while individual households did the same thing. Nearly everyone accepted the mass delusion that housing could go up steeply in price every year forever. Thus, no matter how much debt one took out, one could always sell his home for more than he bought it for and cash out in a personal crisis.  The government fostered this denial of economic reality by constantly cutting back more of the restraints on the credit market so people could keep increasing the drift of debt ahead of their own little plows. Eventually, there was no additional unrestraining that could be done. The little plows all reached their limit, and there was no way to lighten the load, so the prices of homes could not go up any further.

Because people will mortgage their lives to buy a home, the price of houses rose as fast as the government and the banks found ways to raise individual debt ceilings by stripping away the regulations that imposed ceilings. It was a national pyramid scheme where everyone had to know there would be a limit to how much debt each individual could manage and, therefore, how high the price of a house could go. In 2008 we learned where that limit was for individuals. We pushed our little plows ahead until they could push the drift no more. Now we’re in for a loooong, cold winter.

That’s when George Bush made his penetrating observation that “the thaw needed unthawing.” As the credit markets froze up, he did the only thing his gurus knew to do and urged congress to pass the biggest snow-job ever brought upon a nation. The snow job was this: we needed to “unthaw” the frozen credit markets so that people could get more debt by Christmas time in order to keep pushing the snowdrift a little further forward. There’s still a load of denial in there that wants to believe the snowdrift can keep moving forward. People were automatically doing the thing they naturally do when they hit their debt ceiling, they stopped buying and started to hunker down by saving. George Bush wanted to make sure they kept buying so the delusional economy could continue.

The British government came up with its own solution. Since people who were saving were clearly no longer participating in the bubble economy, the government proposed a tax on savings “to force people to spend or invest, rather than just sit on their money.” God forbid that people should stop buying things they really don’t need and often don’t even enjoy all that much.

It also turned out that none of the possessions people had amassed, such as granite countertops, represented an accumulation of wealth because they were all matched by an equal or greater accumulation of debt. Now, if the problem was created by loose credit, how is loosening up credit going to solve the problem? Most of the populace, apparently already in winter hibernation, did not even ask that question.

To unthaw the frozen credit markets in the U.S., the Bush Administration got out the big government plows so we could start really moving some debt. He decided to push all the bad debt of businesses and bankrupt individuals out of the way by nationalizing it. But where does all that debt drift to when you just push it ahead? Obviously, it becomes a greater burden piled into the future. While individuals have found the top of the drift (which you can also translate “bubble” or “pyramid”), government believes that it has not. It maintains the delusion that the laws of economics that the masses have already run up against do not apply to governments.

How long can the government drift?

As if it were an omen, the National Debt Clock in Times Square reached its numeric limit in September of 2008. In order to make room for more debt, the keepers of the clock did what government is doing with the debt. They removed the dollar sign in order to clear room to add another digit to the capacity of the debt clock. When the National Debt Clock was conceived twenty years ago, it was unimagineable that we’d ever get buried this deep in debt. By October the national debt (the amount of money the government owes from all of its combined years of deficit spending) reached $10.2 Trillion. This year’s projected deficit will add another 10% to that. The mountain is piling faster all the time.

Let’s put those numbers in perspective. The interest in the national debt right now is about $412 Billion a year. That’s more than the first phase of the bailout program every year spent just on interest. We have reached the avalanche point where we must borrow the full amount of the interest every year to keep rolling the debt along. There is a heavy cornice of snow right over us, however, that is ready to crash on us: Thanks to the failure of the stock market, U.S. bonds are selling cheap right now than they aver have — at yields of 1-2% interest. People are practically giving their money to the federal government as a place to park it outside of the stock market. If the stock market recovers, however, those rates will have to double or triple to get back to the price the U.S. historically has had to pay to get private investors, corporations and nations to finance the annual overspending. As soon as the interest the government pays returns to its normal levels, the interest on the debt alone will be $1 Trillion a year.

Yet, the situation is even more grim than that. Right now we’re financing a deficit of $438 Billion a year. As we look at tripling that this year, we know we will have to pay higher interest just to sell a much larger supply of bonds. You cannot increase the sales of bonds without creating a matching increase in demand. At the same time, major bond buyers, like China, are talking about running away from U.S. bonds  because the U.S. looks like a stinking bad credit risk.

Snowed Under?

We’re now in a catch-22 situation: if the stock market recovers, the nation will be unable to even finance the interest on its debt. Recovering stocks always result in having to pay higher interest on bonds. If the stock market doesn’t recover, we’re snowed in there, too. We’re no longer plowing against a snowdrift; we’re plowing against an avalanche in motion. That is why Bush has said he had to give up free market principles because the nation was facing an unprecedented economic disaster. Unfortunately, you cannot solve a debt crisis by adding more debt.

And talk of tax cuts to stimulate the economy? I’m afraid you cannot help the morbidly obese by throwing them candy. Tax cuts, in this case, would just accumulate on the mountain of debt that has to be paid off in the future because they’re not going to stimulate the economy and produce more revenue. The last tax cuts barely even nudged the economy, as it is now too fat to roll over.

The time to pay the piper on debt spending has arrived. Most of the government’s efforts are an attempt to correct the problem by postponing the correction. Some of us have been predicting this day when Reagonomics first came into play … if the game of buying on loose credit continued. It was from that time forward that the national debt began to grow out of control. Did Reaganomics create a huge boom? Of course. It is amazing what roaring times a nation can enjoy when not a soul is paying for them. But eventually the play day in the snow is over, and someone’s got to start lifting a shovel and taking down that mountain one shovel at a time so that we can all get back home. The prices on houses need to fall significantly to where people can afford them without taking on absurd debt loads. Consumer spending needs to slow down to where it is not happening all on stacked-up credit cards. All the things government is trying so hard right now to avoid.

In June of 2008, U.S. President George Bush taught us that “one of the things important about history is to remember the true history.” With that as our guide, and this being the final days of a truly historic presidency, I’d like to reflect on the wisdom of the previous year that got us where we are now.

Early in 2008, George Bush calmly proclaimed, “I don’t think we’re headed to a recession.” Later in the year, he clarified his position on the economy when speaking of the frozen credit market: ” This thaw — took a while to thaw, it’s going to take a while to unthaw.” When it became clear that we needed the thaw to unthaw, one of Bush’s appointees, our head treasurer, Henry Paulson, assured us that he had scrutinized the world of finance and had not “seen any scenario where the American taxpayer needs to be stepping in with more taxpayer dollars.” He capped that assurance by stating that the subprime mortgage debacle was “largely contained.” Then The Wall Street Journal wrote, ““Paulson, a former chief executive of Goldman Sachs Group, repeated his view that the U.S. economy is fundamentally on sound footing and would dodge a recession.”

Quick to recognize a trustworthy source, Republican presidential candidate, John McCain, made Paulson’s assurance that the economy was fundamentally his campaign slogan. That chant along with… ” I’m always for less regulation… I am fundamentally a deregulator” didn’t bear a lot of mileage as slogans. Both statements seemed, however, like a good answer to public concern in March when we were all “whining” about the economy. McCain let us know that he had a good grip on these things because he was “chairman of the Commerce Committee that oversights every part of our economy.” Maybe he meant overlooks.

The federal government would later (too much later) discover what I was already saying against these springtime voices: the economy had already been in a recession for a few months. It’s always comforting to know that the president of the most powerful nation on earth along with the leader in charge of that nation’s treasure along with the man who was in charge of overseeing commerce all had no clue whatsoever where the economy actually was. They all predicted it wasn’t going into recession, while it had already been in one for three months. You can’t always blame people for not seeing something coming, but you can certainly blame them for saying it isn’t coming when it already did.

All of that was prelude to the day when Alan Schwartz, the CEO of Bear Sterns, boldly told the world that his company had no liquidity crisis. In fact, he claimed they were sitting on a fat cash cushion. That was easy for him to say because he personally was sitting on a fat cash cushion of a $16 Million bonus from 2007. That was on top of his $35 Million salary. Unfortunately, the corporate cushion turned out to be a whoopy cushion and Schwartz full of gas because Bear Sterns was sold five days later in a fire sale for about a penny on the dollar of its former worth. Schwartz is being very quiet about his cash cushions these days. Nice to know that the overpaid leaders of great companies haven’t got a clue that their companies are already as good as bankrupt or that they walk away from such lies filthy rich. Denial, whether intentional or just idiotic, reigned supreme in 2008.

In July, Chairman Bernanke (I like to call him that, now that he runs one of the organizations in charge of socializing the American economy) told America that Fannie Mae and Freddie Mac were “in no danger of failing.” Two months after his assessment, this same man nationalized Fannie and Freddie because conservative Republican administrations know one thing well: the best-run economies are centrally controlled by government. But liberals had nothing to do with this because they didn’t even know it was happening. So, they had to be innocent. As Congressman Barney Frank said in September, ”

These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems… the less we will see in terms of affordable housing.” Again, it is reassuring to know that a man with keen intuition like Barney was in charge of the House Financial Services Committee.

Getting a true sense of the visual acuity of those in charge of the greenest money on God’s green earth helps us understand why the United States may be facing a failure bigger than the one that hit the Soviet Union in the 80′s.

When September came, however, Secretary Paulson (I like to call him that since he’s in charge of the other organization in charge of socializing America) had a miraculous vision recovery and rang all alarm bells, loudly proclaiming that he had now seen that it was urgent that Congress, without thinking or debating, immediately kick in $700 Billion to bail out the economy that was fundamentally strong. He did this with a straight face, as if his penetrating shortsightedness in former months proved he was a man who could simply be trusted on such propositions. The worst part was that congress with an equally straight face actually gave the money to the man who thought we would dodge a recession three months after we were already in it. Who better to be trusted with an urgent worldwide recovery operation than the man who never saw the problem coming? Paulson not only kept his job, he became Economy Czar overnight of the new U.S. Socialist Republic!

You thought I was only calling him “Czar” in humor, right? ”

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” (the Treasury Department’s proposed Emergency Economic Stabilization Act, September 2008) I guess he thought he was going to EESA thata one righta through congress. Fortunately, they revised that part … but only a little.

And why particularly $700 Billion? Well, according to one Treasury Department spokesperson: “We just wanted to choose a really large number.” OoooKaaay. Why do I feel like I’m watching a bunch of inebriated clowns playing in a sandbox? I guess if you’re going to have absolute power, though, it’s nice to have it over an absolutely large amount of money. While this was the single largest bill ever to be considered by congress, the Bush finance team said it was essential that congress not think about it. Ben Bernanke told congress, “If we don’t do this [as in now], we may not have an economy by Monday.” I think any reasonable person can see that a weekend of deliberation should be sufficient for deciding whether to overturn the entire U.S. economy and pass the largest spending bill in history because the man who never saw the crisis coming wanted “a really large number” to throw around at his own personal discretion.

By November, Secretary Paulson comforted us all again by telling us, “Our major institutions have been stabilized. I believe that very strongly.” Apparently the program was a success. Immediately, the largest bank in America and some of America’s biggest blue-chip manufacturers went bankrupt. Again, I was reassured in knowing that the Economic Czar still had no idea what was happening in the economy and that he felt very strongly about that. Of course, Paulson was also a man sitting on a nice cushion. He had made as much as $50 Million in a bonus one year. That does take the bottom out of a recession. (The reassurance I keep feeling, by the way, is not that the country is strong, but that my own thinking is still clear because I keep watching those I disagree with skid on their faces in spectacular style. The odd thing is how they keep doing it! I would have thought they would have lost face a long time ago.)

As I write this article, I can hardly believe I’m quoting the real world. Yet, just when I thought these dim bulbs would surely brighten up, came a statement that would put a golden smile on the face of the reddest Russian. As we closed out the year, the president of the United States proclaimed, that he had to “abandon free market principles to save the free market system.” Surely, I just slid down Alice’s rabbit hole into Blunderland where everything is backwards, right? Did you ever think the United States could become an entirely different country as fast as the U.S.S.R. did in the 1980′s? Well, you might have thought that; but did you ever think that the whole populace would accept it with hardly a blink?

Must we call ourselves the U.S.S.S.R. just to keep from becoming confused with the other United Soviet Socialist Republic? Ah, but the U.S. is different because that other mob kept a strong military grip on its populace in order to maintain central economic control; whereas, our populace goes along willingly. If you think so, note this: the Phoenix Business Journal recently quoted the U.S. Army War College as stating it is testing the “use of American troops to quell civil unrest brought about by a worsening economic crisis.” On the bright side, this means that part of the government has finally ended its denial and is recognizing that the end of the economic collapse is not in sight: “Economic collapse, terrorism and loss of legal order are among the possible domestic shocks that might require military action with the U.S.”

That bit of news from Phoenix leads me to wonder if Senator McCain is reading the same local papers the rest of his State of Arizona reads. In the end, it turns out Sarah Palin was not only the smartest candidate of the two; she was downright visionary. She was the first to say she could see Russia from her house. Many people laughed. Now all of us who live in these United States understand that we can look out our windows and say the same thing … from any part of the country.

As George Bush said earlier this year, ” I’ll be long gone before some smart person ever figures out what happened inside this Oval Office.” Now, ain’t that the truth about history? I think it was George’s way of telling us what wasn’t on his mind. And, thanks to the dunderheads of economics throughout government, the rest of our heads will be reeling for a long, long time. You see, before we can remember the true history, someone’s gonna have to figure out what actually happened.

“It’s too big to fail, it’s too big to fail,” has been the mantra of the U.S. government bailout program. If crises occur because these organizations are such behemoths that a single institution falling can cripple the economy under it, why have the top gurus in the Bush administration insisted upon making each institution far bigger still in order to save it?

U.S. Addiction to Size Matters

While people focus on the folly of subprime lending and deregulated banking, there is a bigger picture here, against which all of this is strong testimony — GIGANTISM. America is suffering from its addiction to size in everything. Many love power, and size is power. So, American’s conglomerate to where things become so large that, if they do fall, they create a catastrophic tsunami. We are, after all, a conglomeration of semi-sovereign states in the first place. America carries this love of size to extremes in everything.

So, whenever one of our economic titans teetered on the edge of bankruptcy this past year, the peril from its collapse to everything in its shadow pressured the executive branch to create a deal over the weekend before the market opened again on Monday. The masterminds of mayhem rushed in to pump some “good” news into Wall Street ahead of the market opening to avert disaster. At every turn, the government’s answer to the risk of corporate obesity was to take two weak and wobbly mammoths and cobble them together into some bigger and more ungainly creature. Each resulting conglomeration came out looking like Frankenstein’s monster with all its seams showing. Thus, many of the following solutions were amalgamated during midnight hours in the board room laboratories of the Washington Wunderkind:

The Feeding Frenzy

Standalone investment banks, facing a rapid die-off of their kind, ceased to stand alone. Cash-starved institutions sought to feed themselves by eating each other, thus creating a new meaning for the term “consumer bank.”

J.P. Morgan Chase and Company, a name that was already a mouthful of earlier conglomerations, gulped down a belly full of Bear. I guess that would make them the J.P. Morgan, Chase, Bear, Stearns, and Company company. The Federal Reserve helped prepare the Bear to make it more palatable for Morgan to eat. Apparently that role is the meaning behind their nickname “Fed.” Somehow the Fed thought a dying beast fed on Bear would be an improvement on the “too big to fail” scale.

Fat on Bear, you’d think the beast would have been satisfied for a little while, but within a month it felt the need to digest the largest bank failure in world history — Washington Mutual. Again, the Fed. cooked the meal. I won’t even try to squeeze that addition into J.P.’s burgeoning name, except to say that the feeding frenzy was mutual. And with that, J.P and Companies acquired a bank that was even a different breed from itself. An investment bank consumed a consumer bank.

Others jumped in. Barclays, the British bank with an appetite the size of an empire, digested parts of the Lehman Brothers, pulling off an arm and a leg, according to taste. Bank of America, already a Leviathan, swallowed Merrill Lynch whole and became even bigger and sweatier. It also took the leisure to snack on Countrywide Financial Corp. for dessert.

In order to save themselves from extinction, as the rest of their species died off, the only two remaining major investment banks in the U.S., Goldman Sachs and Morgan Stanley, evolved into the most elephantine “bank holding companies” the world has known. That meant they evolved into another species that already existed. That was something new in the cosmos. They became what regulation did not allow — investment banks that can contain entire other banks inside of themselves.

Meanwhile, Well’s Fargo, in a fairly strong position, swallowed the wavering Wachovia. Citigroup, once the largest known corporation in the galaxy by market value, buckled under the strains of the current economic load, and also began looking for meat in order to save its fat and floppy body. Citigroup and Morgan Stanley have been seen eying each other recently as if they want to marry their large mouths by mutually consuming each other — an obese way of saying merger… because they feel they’re just not big enough to survive apart. They were already the biggest artificial creatures in our little neck of the cosmos. For now, they’re just sucking on each other’s thumbs, but each hoping to bite a thumb off in the short term, while still eying each other adoringly for mutual total consumption.

Most of these companies above didn’t make their acquisitions because they were strong companies, seeking to devour weak prey. Their taste for evolving into other species by eating them is something they’ve acquired while drowning in a sea of bad debt or in a sinking stock market. All of these new and bigger beasts have their parts held together by baked clay, and the government is the baker … and the clay.

The Right Recipe?

If these immense institutions were “too big to fail” before — such that tax payers have to pony up for their salvation just to keep their dead weight from crushing us — what are these monstrosities now? It’s not easy for one beast to swallow another whole; so, to make this possible the government had to remove more regulations from a situation where the removal of regulations played a central role in creating the problem. So, likewise, I ask, if deregulation was a big part of the problem, why is final deregulation of the most foundational barriers the ultimate solution?

What we are witnessing in these twilight days is the end of the United States as the money market of the world. It is a colony of gluttonous creatures dying of their own gigantism, who only know how to save themselves by eating more… of their dying colleagues. The mergers we have witnessed in the past few months are different than all others. Because the banking industry has become too big and heavy to lift its own arms in order to save itself, it has begged for the help of government to bring in the food, trim out the spoiled meat, remove the toxins by giving them to the taxpayer to eat, so that these institutions can finally safely swallow each other. Eating has become a medical procedure that needs a third party to remove the risks and carry the load.

This is a solution?

If these institutions are “too big to fail,” then failing is exactly what they needed to do. A new economy of the slim and trim needed to be created to remove the risk of “too big to fail.” Any bonehead could figure that out. In other words, the way to end that risk was to break the fallen giants up and restructure them. We have a word for that process — “bankruptcy.” It’s an organized way of parting out what is salvageable.

During the winter of our discontent, which was January and February of 2008, the Bush administration fiddled as the U.S. was falling. While  the Gurus of Government played happy music on their violins, singing that the economy was “fundamentally sound,” I was telling friends that we had entered a recession that had all the makings of another depression. In the spring of 2008, while the Bush administration and congress were still arguing over whether or not we were about to enter a recession, I was stating that clearly we were already deep into a recession and that a depression was about to inundate us.

The landslide of homes into the sea was already well under way. The question was what economic waves would that landslide create. Suddenly we knew:  the first tsunami wave of our own landslide hit us, for our own shores were closest to the housing collapse. Bear Stearns crashed on our shore. The Wizards of Wall Street, proclaimed  that the fall of Bear Stearns was nothing compared to the failure of savings and loans in 1987. We would weather it fine. The president, in his denial, indicated we had a minor economic jolt. I, on the other hand, began talking in terms of an economic tsunami right then and said that the collapse of Bear Stearns was just the first wave of much greater destruction to come.

The world learned by observation in December of 2004 that physical tsunamis come in multiple waves, not just one big splash. You would think people would realize that’s the way it is with fiscal tsunamis, too; yet friends argued back that the U.S. could not be entering a depression because many elements that had happened in the Great Depression did not happen with the fall of Bear Stearns. I pointed out that the Great Depression did not happen on Black Tuesday in 1929. What happened on Black Tuesday was the first wave of many failures that developed into the Great Depression over a period of many months, and I predicted that’s what we were about to play out right in front of us. To clarify what I meant, I laid out what I now call my economic tsunami warning system.

The first wave that crashed in Knave Dave’s economic tsunami warnings was Bear Stearns. Within the short time it took to wash over us, I predicted that it would push heavily on two or three other core financial institutions, which would also give way. This would cause the crushing of our economic central nervous system in the U.S. and would be the second wave of the Depression.

The second wave happened in far more spectacular fashion that I envisioned. Yes, two institutions went down almost immediately after Bear Stearns. Lehman Brothers and Merrill Lynch both toppled, just as I had predicted (not that I had predicted those specific institutions, but just that two or three of that kind would fall). That was unheard of until the truly unheard of actually happened: In rapid succession Fannie Mae and Freddie Mac also crashed upon the U.S. shore, and then J.P. Morgan and Goldman Sachs and AIG piled on top … and finally Washington Mutual, the behemoth of thrift banks, collapsed of its own Gigantism. The U.S. was awash in a sea of massive failures, and the water had turned to blood! So, the second wave was more spectacularly fierce than I had anticipated. I had anticipated more would would fall after the second two or three, but not that they would all crashed on the shore at nearly the same time. It was a resounding and deafening roar.

The third wave in Knave Dave’s economic tsunami warnings was that the first and second waves that hit U.S. shores would do what tsunamis are well known for doing: they would bounce off and head over to European shores. The failure of U.S. financial institutions would certainly cause the failure of some European banks. Suddenly, even the most highly respected and conservative banks in the world, Swiss banks, took a pounding. One of the largest of all Swiss banks Credit Suisse staggered and almost fell. Several European banks would have fallen if not for massive European bailouts.

The fourth wave in the economic tsunami that I predicted would be the failure of major manufacturers in the U.S. as a result of credit challenges overseas and at home and their own loss of market. In late spring, I predicted that this wave would take a little longer in coming and would not arrive until fall of 2008, but I proclaimed that, by the advent of fall, we would be seeing bank presidents competing for jobs as hamburger flippers. In other words, we would see major increases in unemployment in the fall, starting in top management, as a result of the devastation from the waves before. This rising tide of unemployment would mean that major manufacturers would lose their markets. The manufacturing wave hit in fall, as predicted, when the big-three automakers announced simultaneously that they were on the verge of bankruptcy.

Really, anyone should have seen the fall of the Big-Three coming long ago. I had predicted the demise of that particular group back in 2005. Why? Remember the loans they were making then in order to offload product? They were “selling” their cars at zero down-payment, zero interest, and zero payments for a year, and that was when times were rosy for most in the U.S. “Heck,” I said, “That’s like a free auto lease for one year. What’s their game plan at the end of that? There’s nowhere to go. Everyone who is going to consider buying a new car for the next two or three years is going to jump on this program now, and then there will be no car sales down the road. You can’t keep giving them away forever just to keep that game up.” Meanwhile, they did just give away their cars that year because many of those people would default on those loans when it came time to pay. I said, “Heck, they’ll just consider the car a free loaner, and they won’t care that they default on their loan because they have zero money into the car. They’ll just say, ‘Thanks for the loaner, go ahead and wipe out my credit rating; it’s looking like it’s shot anyway, and come and pick the car up at your own expense.’” It was all done to pump up sales volume and look good for the short term without any regard to an end plan. The profits of 2005 were false profits.

I anticipated that GMAC, General Motors’ finance division, would be in foaming waters when it came time for people to start paying on those loans. Is it any wonder that GMAC is now the whirlpool at the center of General Motors, sucking it under? So, the fourth wave of the economic tsunami hit almost as spectacularly as the second wave had, and it happened with the manufacturers that I was certain must be sitting in a precarious position.

What did Knave Dave say would be the fifth wave of the depression that was sweeping over us? He said that a shocked and reeling public, fearing unemployment, would fail to buy at Christmas time, causing major retail failures. Some will say, “Aha! You were wrong. Sales were not that bad during the holidays.” Ah, but they are wrong. I explained this in December to my friends. “The black lining on this silver cloud,” I said, “is that there are no profits in any of those sales. Just as the Big Three did a few years ago, all the major retailers pumped out their entire inventory at a break-even level just to clear it out and cut their losses.” You see, sales volume can be tabulated right away, so that is the first news we hear; but it takes a month to calculate the profit of the month before after all returns are in. So, the sales volume figures did not look too bad.

Mark my word, though, we are in for some black news when the books are finally closed on December. Actually, it will be more like red news. Before the end of January, you will see major retailers beginning to report that they had no profits at Christmas time or even minor losses. This is major bad news because major retailers make well over sixty percent of their profits for the entire year at Christmas time. You will see Target, Sam’s Club, Walmart and other giants of the retail industry start to announce layoffs before January closes and throughout February.

Already the smaller retailers have begun to go out of business entirely. News came in at the beginning of January that mall vacancies are at a ten-year high. It’s not the big stores that have closed there doors yet, but the smaller retail businesses that have less staying power. Some major malls in retail Meccas, such as Honolulu, are already facing bankruptcy. While 700,000 jobs were lost in the U.S. economy in December alone, this fourth wave is still passing over us, so the bodies cannot yet be counted in its wake. Unemployment hit 7% in December. As the retail body count stacks up over the next couple of months, I predict we will finally enter double-digit unemployment, which we haven’t seen in a quarter of a century.

This adds up to the sixth wave of our plunge into a depression, which is the failure and foreclosure of commercial real estate. The landslide that triggered this whole tsunami, remember, was the failure of residential real estate.  As commercial real estate slides away, the sixth wave is a repeat of everything that happened with the first real-estate failure, possibly on a smaller scale, but still badly damaging.

Office vacancies in the U.S. have already hit 14%, and rents have fallen in 65 of the 79 major U.S. markets. Already 1.5 square miles of office floor space were vacated in 2008. Once you start adding the vacating of retail floor space and more vacating of office floor space, you can see that commercial real estate is already beginning its long slide into the sea.

Great plagues come in sevens, don’t they? So, what will be the seventh wave of this depression? The seventh wave may be a ways off with small reflections of waves 1-6 in the meantime as more foreclosures lead to more unemployment and a few more bank failures. These are the tsunami waves bouncing off shores for the third and fourth times before they finally settle down to where we can start to pull ourselves out. Part of this bouncing will be seeing all the same things happen in countries all over the world, thanks to the U.S. debt addiction.

The seventh wave is the wave of ultimate destruction, and it’s building out at sea right now. It’s a rogue wave, which scientists say forms when large waves pile on top of each other. This rogue is the inability of the U.S. government to finance its debt. Many of us have seen this coming for a long time, but the present scenario makes it almost inevitable that the time is soon upon us, especially with the bailouts. Countries have been talking for the past year or more about moving away from investing in U.S. dollars (i.e., U.S. Treasury notes) because they do not see the U.S. as a secure investment any more. The U.S. has probably permanently lost its financial reputation.

Right now, the U.S. is facing the prospect of trillion-dollar deficits for the next few years, which could double the total U.S. debt in one presidential term. These enormous deficits make it look all the less secure. Right now, the U.S. is selling bonds to finance that debt at about 1-2% interest, the lowest interest it has had to pay ever (because no one wants to buy stocks, so money is pouring into bonds). What happens when the U.S. has to raise those interest rates that it pays out to their norm of 4-5% in order to attract the investment of foreign governments into financing its economy? What happens if that foreign money starts to run away, and the U.S. has to pay 7-8% to attract it to stay? The interest on the national debt alone is about $450 billion a year now. That’s half of the entire proposed bail out, just being paid in interest. Double the interest, and we’re talking adding a whole bailout to the U.S. budget every single year in interest alone.

That’s when total collapse comes, and the “fundamentally sound” little island sinks into the sea, and a whole new world has to begin. And there is already serious planning for that brave new world to form via unified global economic policies and structures. More on that at another time.

How do thousands of the world’s supposedly most brilliant investors fall for a con like Bernard Madoff and lose their shirts and slacks? The puzzle is not to explain how one person can be such a great con. There was nothing genius about his plan. His form of pyramid scheme, known as a Ponzi scheme, is one of the most common financial fiascoes in the world, known to all investors. The puzzle, then, is to figure out how so many experienced, highly credentialed and successful investors could become so utterly conned with such ease? Madoff is just a figurehead for what has happened to the entire planet during the same time frame. The greater puzzle, then, is to discover how a whole world could have become so confounded.

THE EMPEROR’S NEW CLOTHES

The answer for Madoff and his investors lies in the fact that Madoff pulled off his pyramid investment scheme during a boom in which nearly all of the Wall Street insiders and political leaders were willing to believe that vast profits could go on forever by just making credit freer. It was a credit pyramid where eventually the ability to take on more debt had to run out. Making credit freer really translates into printing more cheaper money. That’s what credit does in the Federal banking system. It’s the government’s way of injecting printed money into the monetary system through banking credit.

During normal economic times…. Right away I’m in trouble because most people think “normal economic times” are what we had through most of the last decade. But real normal times are when banks have regulations that require (here’s an old-fashion word) collateral, and… well, we won’t go there just yet. During normal times when banks actually weigh risks with formulas, rather than try to insure it away with odd insurance schemes no one understands … during times such as that … some investors would have been skeptical and wondered what Madoff’s trick was. They would have asked questions and probed. Someone would have seen what was happening and blown a whistle long before Madoff’s pyramid reached such Titanic scale. But, as we roared into the new millennium, Madoff didn’t need to explain to anyone how his investments worked. After all, no one understood how a lot of things worked in the financial markets anymore. It was enough that they were clearly working because people were making big profits off of them.

The Goliath gurus like Madoff and Greenspan were trusted. No one questioned those who appeared to know how to take the hoards to vast and dizzying heights of economic gain. No one wanted to throw cold water all over the party guests. It was fun, the drinks were pouring, why ask tough questions? The world was in a feeding frenzy. Madoff didn’t get away with his scheme for so long because he was bright or because all investors were stupid. He got away with it because no one was paying attention to business. It turned out that the emperor wasn’t the only one with no clothes. All of his advisers were naked and didn’t know it as well. In fact, his whole kingdom was naked because nearly everyone participated by overextending their credit … living off of debt, instead of wealth … leveraging their daily lives.

THE CORE OF THE MELTDOWN

At the bottom of this worldwide meltdown is one simple word: denial. The few voices that spoke about the dangers of economic growth fueled by endlessly cheaper and cheaper credit were not heard. Keeping this pyramid scheme climbing through ever growing consumerism meant the nation had to keep consumers consuming beyond their cash means for consumption indefinitely. Anyone should have seen that was a pyramid that had to eventually reach its pinnacle. Once presidents had built bull markets by deregulated credit, the only way to keep consumers spending was to keep extending their leverage. If they ever stopped increasing their debt, the rate of growth that depended on that constant debt increase would have to stop, too. Denial didn’t want to think about that or even hear it. Denial doesn’t give a second thought to anything that doesn’t fit in its distorted view of reality.

The denial worked because nearly everyone in the world was willing to believe that housing prices would go up forever. If the U.S. government had listened to the what-ifs (what happens if housing prices actually go down for a little while?), then it would have known it had to keep in place the longtime standard regulations on home loans that were based on percentages of income compared to other household expenses, and reasonable down payments, and maybe even non-adjustable interest. All of those rules existed for the sake of avoiding surprises in loans down the road and providing a buffer in case housing values slid a little. Those regulations came into existence precisely to avert the enormous meltdown we are now experiencing.

Denial is what any of us engage in when we decide to have something we want without regard to excess. It’s what we do when we say the extra desserts won’t hurt me, the extra drink won’t affect my driving, the extra-marital affair won’t have any repercussions in my marriage. Denial is what I kept hearing in the financial news months ago when I saw this economic collapse coming and heard others still speculating as to whether or not we were in a recession. Of course we were in a recession! You could feel that in your bones. It’s just that the economic indicators — the gauges on the economy — had gotten a little sticky and were a little slow to respond. By the time the gauges began to move, the U.S. had entered its economic China Syndrome. Denial is what I heard when one of the Goliath gurus said, after the fall of Bear-Stearns and J.P. Morgan, “This is nothing. In 1987 we saw hundreds of financial institutions collapse. This is only two financial institutions.” For a giant, you sure are dumb, I thought, In ’87 we saw hundreds of mom-and-pop savings and loans on the periphery of our economy go bankrupt. That’s like losing fingers. This time we’ve just seen two vertebrae in the center of our economic spine turn to dust.

Denial came in the form of a major presidential candidate telling the nation that its economy was fundamentally sound, when the fundamentals of the economy were the very thing that was least sound of all.

DENIAL DIES HARD

Now that the economic power plant has melted down, the denial is over, right? We’re all looking for straight answers to get us out of this mess, right?

Wrong.

People want the up times back, and there’s no stopping them. No one wants to bear the pain of the kind of correction that could set the world aright again. Therefore, all the governments in the world are looking at essentially fixing the problem by resurrecting it. The primary solution offered to a situation that developed out of cheap and easy credit, which intoxicated consumers and investors to the point of delirium, is to get the cheap-and-easy credit lubricated and flowing like it used to so the good times can roar again. The solution put forward by all the economic giants of government, guided by all the same Wall Street Wonders who created the mess, is to do more of the same — to get consumers who are not spending enough to pump the economy up by buying cars and homes they clearly don’t need. To do that, they have to get people to consume on credit again. That’s Plan A. The other part of that solution is to give consumers a little tax break — Plan B. Even when the government is looking at the most outrageous deficits the world has ever seen any nation take on, the government wants to consumers take on more debt by decreasing its revenue so that consumers will have more money to rev the economy back up. The catch there is that the consumers are still buying everything on credit; it’s just that it’s the government’s debt. None of that’s going to work. That’s why the tax break earlier in 2008 didn’t save us. I said at the time, it was foolhardy and predicted it would scarcely create a bump in the recession, but no one listens to me. (Of course, there was no reason they should because I’m not one of the Goliath gurus.) No one — least of all taxpayers — wanted to hear that the tax breaks wouldn’t work. Taxpayers like breaks like school kids like snow days. Government, on the other hand, had no creativity to offer anything that was not in its standard play book. Yet, old Band-aids aren’t going to work for major spinal injuries.

So, the international effort to prop the economy back up by getting credit flowing as easily as it was (which was the only reason houses were able to climb so far past people’s means in the first place) is just more denial. Denial is like that. It filters what we see so that we can believe the good times will keep rolling and so that we won’t have to deal with down emotions that we don’t want to face.

If the Goliath financial gurus that the world’s mightiest emperors keep listening to weren’t so nakedly wrong, we wouldn’t be in this mess. (Nothing like a world full of naked giants and, even at that size, no one notices they have no clothes.) So, with all of the financial wizards all over the world blatantly and grossly wrong, I decided that being a big name does not give one a clear view of the truth. Since there is no possible way that my observations could be further off than all of the financial behemoths in the world fused into one vast and writhing collective of twisted wisdom, I decided to start a column called “Downtime.” It’s time for this little David, an average guy with some common sense, to pick up a few common stones and start sinking them between the eyes of giants. “Downtime” is going to be a nearly daily combination of financial news and commentary that sees through the huge cloud of denial that is still swirling around the world.

That means it will be for a limited audience because it will be of interest only to those who are willing to see the present downward spiral for what it is and to drop all denial about what works and what doesn’t work for righting so many wrongs. So, if you don’t think an average Joe who is not a plumber could possibly be worth listening to when we clearly need the world’s mightiest minds to stop this juggernaut from eating the earth, go back to your 401K and continue listening to the great gurus that got it where it is today.