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The Great Recession

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"Everyday the bucket go to the well. One day the bottom will drop out" -- Bob Marley

"What we have now is Capitalism on the way up and Socialism on the way down." -- Rep Jeb Hensarling, R-Tex

" . . . there is a huge amount of important thinking in Marx as to what is wrong with Capitalism, but not very much on what to do about it. As such, in figuring out where we go from here, we are really on our own." -- Robert Pollin

"We're all Keynesians now" -- Richard Nixon

By this time, two years from now, Joe the Plumber will be begging for Socialism.

Just in time for Halloween, a specter is once again haunting Europe, not to mention the rest of us. No Virginia, the specter is not Communism, it is the specter of deflation.

While many people have heard of deflation, most of us have never experienced it. I think we're about to. Typically a deflationary cycle is the ugly term that describes the most salient characteristic of an economic depression. Assets lose value, stocks lose value, commodities lose value: Kind of like now. So much value is lost that it becomes a vicious circle -- a negative feedback loop as the economists like to say -- that is extremely difficult for an economy to break out of.

During the Great Depression unemployment went to twenty five percent and GDP fell by half, so Depression is probably not a term to toss around lightly. Let's just call this current downturn, "The Great Recession."

Before we ask, as Lenin so elegantly put it, "what is to be done," a quick description of what brought us to this pass is in order.

As George Soros recently said, the bursting of the US housing bubble had the effect of bursting the larger bubble of leveraged debt that floated the world economy for the past generation. It is the busting of this Sixty trillion dollar debt bubble that is now washing over the world.

What we are witnessing is the collapse of Finance Capitalism, or what the late Marxist economist Ernest Mandel might have called "Late Capitalism." However Capitalism has failed before. You could probably argue that the crash of 1929 brought down the "Free Market" phase of classical Capitalism. Similarly, you could argue that the Arab Oil Embargo of 1973 and the subsequent "stagflation" crisis of the '70's ended the post-War period of Keynesian, "mixed market," government supported, Capitalism.

To end "stagflation," along with it's ruinous inflation rate which peaked at 13.5% in 1981, then Fed Chairman Paul Volcker basically stopped printing money -- or at least so much of it -- and engineered a ruinous recession that drove unemployment to it's highest point since the 30's. However the Volcker recession also brought inflation down to 3.2 percent, and as such was judged a success of monetary policy.

The problem for Volcker's Fed coming out of the '82-'83 recession was that the growth engine of the US economy since the end of WWII had been manufacturing, and manufacturing was in decline. Even so the US was, and indeed remains, the largest consumer economy the world has ever seen.

Volcker's pragmatic solution to the problem of declining production was to free up the administrative, finance and service sectors of the economy: to "commoditize," and take proper competitive advantage of, the vast consumer market itself. They called the regime, "Deregulation."

In the early 80's, manufacturing made up almost 24% of the US economy while the Finance economy -- banks, Wall Street, insurance companies -- made up about 7% of the economy. Twenty-five years later these numbers are pretty much reversed. The finance economy, particularly from the late 80's on, produced an incalculable, staggering mountain of wealth for the US and the world. This wealth, of course, was then redistributed upward in staggeringly disproportionate measure to the already rich, at the expense of a shrinking middle class and an emiserated working class, many of who were forced deeply into debt just to keep up.

As it turned out, it was the accumulation of this massive amount of consumer debt that made the spectacular rise of the finance economy -- and the concomitant rise of the super rich financiers -- possible.

The neo-conservatives, led by former Republican Party Chairman Ken Mehlman, even tried to enshrine this upwards wealth redistribution principle as the ideological cornerstone of the second Bush administration. They called it "the ownership society."

What this meant in practical terms was that anyone who was willing to go so deeply into debt that they would never be able to get out of it, would be able to buy what they wanted in George Bush's America. You could even buy an overpriced house in an exploding, speculative market on credit with nothing down. It was a kind of civic compact.

We can see how that turned out. Now, as they say on the street, the banks have played themselves out of position and some of the great names among them sit squarely on the brink of insolvency.

What is to be done?

Internationally, French President Sarkozy has called for a new Bretton Woods agreement to govern the international financial system. Fed Chairman Ben Bernanke has already signaled that under the next, Obama, Administration, there will have to be a massive monetary stimulus package. There is now a debate among economists about how much this stimulus should be, and what it should consist of.

Nouriel Roubini, who predicted this disaster with amazing prescience, is talking about five hundred billion dollars to be used for infrastructure and support of financially stressed states. Others are talking about refashioning a regime that can regulate and police the markets domestically.

The problem with the proposed solutions however is that it feels a little like putting Humpty Dumpty back together again.

These ideas assume that the collapse of the financial system was a mistake -- letting Lehman Brothers fail, lax regulation and the like -- and not the inevitable result of building an empire on debt, rather than utility.

Structural and moral concerns aside, these ideas also assume that the collapse of the financial system was a "one in a hundred years event" that won't be repeated anytime soon. As economist Jeffery Sachs -- himself a booster of the massive stimulus package -- has said, there is a non-linear nature to busts and crashes that makes them unpredictable; that we should probably expect to be shocked again, possibly by nature itself, as catastrophic climate change really kicks in over the next decade or so.

Recently, former Secretary of Labor Robert Reich asked out loud, if, in allowing banks like Chase and BOFA to buy up smaller failing banks, we weren't just setting the table for more epic collapses of key systemic institutions that really were too big to fail.

Economist Jeff Faux proposed in the Huffington Post, October 10, that one of the banks the Treasury Department is forced to nationalize stays nationalized. The First National Bank would then serve as a model, doing, among other things, the kind of community lending smaller banks used to do before they were knocked out of business by bigger banks.

I would propose that Faux's model be applied across the economy. If the government is forced to bail out -- as seems increasingly likely -- Ford, GM and Chrysler, why not just buy Chrysler (which is looking for a buyer anyway) and use it as a model for what a competitive American car company could be?

The key problems that a new Bretton Woods agreement -- as doubtful as that might be -- or a stimulus package, do not address, are the key problems we face in rebuilding the economy. One, what to do with economies of scale, where there is a irresistible tendency toward capital concentration and monopoly and two, what to do about a system of trade that doesn't factor the real cost of carbon into pricing?

The answer would seem to be a system not rooted so much in Marx as in the US Constitution. We need an economic system of checks and balances where the public sector competes with the private sector and keeps it honest, and vice versa.

The big question is, will President Barack Obama even consider such an outlandish proposal?

The answer is, of course not: At least, not until everything else fails.

In the words of Bob Marley, "You think it's the end, but it's just the beginning."